Guidance, IT hold back KPN's FTTH ambitions

Wednesday 16 December 2009 | 16:12 CET | Market Commentary
KPN has released the results of its tests of FTTH and FTTC services, which have been running since 2008 in ten cities. The results are encouraging, as the very limited offer (highly asymmetric broadband, high prices) did not prevent the company from reaching a penetration within around nine months of 30 percent in FTTH areas and 22 percent for FTTC. A better services offer and wholesale partners can boost that further. We can assume then that the company will make the FTTH service symmetric and try and find wholesale customers. We can hardly think of a better way to 'pitch' Reggefiber to investors.

Already at its Q3 results presentation, KPN said it was working on an interim strategy (apparently seen by Tele2) to roll out VDSL from the central office. The company also let it be known that a national roll-out was not under consideration and Reggefiber was looking for an external financing partner. In short, the 'fibre update' this week did not provide much more news.

It does the raise question though of how serious KPN is about fibre, that is FTTH? If KPN says it's the medium of the future, then why is the roll-out progressing so slowly? The operator's target of 1.1-1.3 million homes passed by 2012 suggest additions of just 250,000 per year. That is roughly the current roll-out speed at Reggefiber, which has aimed for an acceleration.

KPN is honest enough to admit a reason for the phased roll-out: the IT system is not up to a quicker pace. It also makes no secret of the fact that its 'guidance' is sacred, and the plans have to bend to the targets laid out in early 2008 in the 'Back to Growth' (2008 - 2010) strategy. These include maximum capex of EUR 2 billion and at least EUR 2.4 billion in free cash flow in 2010. We also need to remember that it's Reggefiber, and not KPN, covering most of the costs.

This brings us to the dividend paradox: investors want to hold KPN shares for the dividends (and to profit from the share buyback programme), while they reject the idea of investing extra cash as too risky. This is due to the short-term perspective of most investors (around two years), while KPN says FTTH is a 10-15 year project. It's not surprising then that Reggefiber is not turning to equity investors, but is instead looking for loans from long-term investors such as municipalities, provinces, housing corporations, etc.

The conclusion is that KPN puts the shareholder first. That's completely normal for a listed company. There's not many who turn their backs on shareholders; Google may be one of those few. Google has a whole other priority, which is evident every time it launches a new service with no business model: for Google, customer happiness comes first. And if you do that well, then everything else (such as shareholder value) follows, as the consulting companies like McKinsey teach us. But Google is also a company set up by "nerds", that sees no reason to give any 'guidance' and has a cash position of USD 22 billion with not the slightest need to go to the market for financing. KPN and Reggefiber are dependent on outside financing and also have other priorities. It would take a lot of guts to say: we're dropping the dividend and investing the maximum in our company because we believe in a superior return on our own activities, like FTTH. And now that would really be a pitch for Reggefiber.

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