KPN announced that Eelco Blok, currently responsible for its international mobile activities, will succeed Ad Scheepbouwer as the operator's new CEO from next April. Until that time, he will operate under the title COO. The Dutch company's supervisory board has given Blok until June 2011 to come up with a new strategic plan.
The appointment is far from surprising (see our commentary 'KPN supervisors to opt for Blok as new CEO?'). However, there are still a few questions remaining, such as what will Baptiest Coopmans, who currently sits alongside Blok on the board with responsibility for the Dutch activities, do now that he's missed out on the top job? Who will replace Blok at the international mobile division? Will the position of COO remain after Blok becomes CEO? Will the management be expanded with other positions such as CMO (marketing) or CTO (technology)?
More interesting is how Blok will form the company's strategy for the years from 2011 (see our Research Brief 'KPN: looking ahead to new CEO and strategy')? He has said that he will initially continue the current strategy, but how believable is that? Shouldn't KPN be looking elsewhere now that regulations and competition are starting to take their toll?
The challenges for KPN are not small. On the mobile market, prices are under pressure due to regulatory intervention, and over time a convergence around fixed-line levels appears unavoidable. Vodafone, previously a mobile-only service provider, has developed a long-term strategy to deal with this problem. Under the motto 'Total Communications' Vodafone is adding fixed telephony, broadband and last-but-not-least IPTV to its consumer portfolio. On the business market, at least in the Netherlands, the company has also agreed a groundbreaking partnership with Eurofiber (see our Research Brief 'Vodafone hires Eurofiber for business market assault'). This is all to make up for the expected downturn in revenues from mobile telephony.
Such a strategy will hardly work for KPN, as the company is already the incumbent in Vodafone's expansion markets (fixed telephony and broadband, business market), except for IPTV. As a result, KPN can only lose market share. It shouldn't be surprising then that KPN is pinning its hopes on IPTV, as seen by the big ongoing ad campaign for this service. However, the IPTV service has little to distinguish it, certainly when compared to the superior TV offerings on cable networks. KPN is left with little to compete on apart from price, with the result being a worryingly low level of ARPU for TV (EUR 9, although there is hope for a higher figure once digital services find their way to consumers). It's clear we need to talk here about connected TV, a way to boost ARPU which is being embraced by a growing number of operators around the world. KPN will still need to be quick: UPC will launch next year a new-generation set-top box, the Horizon, to enter this new TV market (see for example our Research Brief 'Three reasons for operators to launch OTT services').
The outlook is hardly better on the broadband and fixed telephony markets. Cable is confident after the roll-out of Docsis 3.0 in much of the country, and again KPN is the incumbent that can only lose out. Other elements of KPN's growth strategy (see our Research Brief 'KPN: revenue analysis Q2 2010') include mobile broadband, MVNOs outside the Netherlands and Getronics. KPN will undoubtedly stay focused on these markets, and cost reductions will also continue. However, Blok is likely to be dealing with a company of increasingly small proportions, in terms of revenues and staff numbers, which puts up for question KPN's central target of an annual free cash flow of EUR 2.4 billion. This is especially true given Vodafone's attack on the business market, cable's growing share of the broadband and fixed telephony markets, and the regulators putting the mobile market in a long-term state of decline, both through tariff controls and allowing in newcomers (Tele2 and Ziggo/UPC).
Conclusion: of course Blok will continue Scheepbouwer's strategy but he will also need pull a few new rabbits out of his hat if he wants to stop the erosion in revenues from continuing much longer. Rivals such as Ziggo are already growing sales at around 7 percent (see our Research Brief 'Ziggo review H1 2010: working towards IPO'), while KPN's sales have been falling for years (excluding takeover effects). This is not a healthy situation for any company. In the end, it's questionable how 'smart' being a 'smart follower' is when the competition is ramping up the innovation for an attack on the market.
