The Dutch telecom sector may be set for radical changes after the ACM's latest decision on regulation of the fixed broadband market. The decision could also influence other markets with a strong cable presence, such as Germany and Poland. However, the arrival of the first resellers taking advantage of open cable networks could take years, and VodafoneZiggo is likely to fight back the same as KPN with a low-cost brand. The threat of a structural margin squeeze is real and presents a serious obstacle to potential challengers.
The ACM's decision to open up the cable network to other providers is based on a determination of joint dominance by two significant market powers: KPN, which was already regulated, and VodafoneZiggo, which was not. The European Commission supported the ACM's market analysis, allowing the new wholesale access regulations to take effect from 01 October. The decision covers all forms of wholesale fixed access at both operators, including VULA (virtual unbundling for copper and fibre) and WBA (resale by smaller players and on the cable network).
Regulated tariffs still possible
VodafoneZiggo has three months to prepare and publish its reference wholesale offer, which must be non-discriminatory (treating other providers the same as its own retail services) and transparent. The potential customers will then have six months to negotiate on the price and conditions. If no agreement is reached (i.e. wholesale prices are too high), then the ACM can step in and set a price ceiling. This gives the ACM the tools to prevent discrimination, margin squeeze and exorbitant wholesale prices.
Notably the ACM said it did not see a risk of a margin squeeze from the dominant operators lowering their retail prices. The joint dominance of KPN and VodafoneZiggo does not give the operators any incentive to lower prices; if anything, it drives them to raise prices. However, the market picture is somewhat different if we look at sub-brands like KPN's Telfort, which are used to capture lower segments of the market. This puts the ACM in a difficult position. By settling on the joint dominance analysis, the regulator can only fight the margin squeeze by intervening on wholesale prices, while (too) low retail prices also play a role.
The issue is less of a problem for KPN, as the challengers on its network already have existing commercial contracts. After the ACM's previous analysis of the market in 2015, Tele2, T-Mobile and M7 Group negotiated commercial network access deals with KPN, which are valid for seven years. The alternative operators can choose to negotiate new deals over the next six months, and if unsuccessful, call on the ACM, but the regulator has said they will see little difference in terms under the new decision. KPN already presented a new voluntary wholesale offer earlier this year, but the challengers indicated in the ACM's public consultation that they were not pleased with the terms. This means the eventual terms of network access are still an open question.
A new type of provider
The regulation will create a new category of service provider, cable resellers, alongside VodafoneZiggo, KPN and the current wholesale customers on the KPN networks. This will lead to a new phase of price pressure, which KPN cannot escape. Budget brands like Telfort and probably also Vodafone's Hollandsnieuwe will be deployed to counter-act T-Mobile/Tele2 and eventual other players.
As for what the Dutch decision means for other European markets, the joint dominance concept could gain traction in other markets facing cable consolidation. This is relevant particularly in Germany and Poland, where open cable regulation could be used as a remedy in the proposed mergers of Vodafone/Unitymedia and Multimedia/Vectra.
KPN: wholesale monopolist
KPN's opposition to the regulation is weak. There is a clear duopoly in the market, based on their market shares, the annual price increases and the increasing importance of fixed-mobile convergence on the Dutch market. Trying to hide behind 'commercial agreements' for wholesale access doesn't work: without open cable, there is no competition on the wholesale market and the challengers are left with their backs against the wall. They are forced to make a deal with KPN Wholesale or put the continuity of their business at risk. Deregulation is simply not an option.
The hope is that a competitive wholesale market will emerge. The mobile market already serves as an example. Large MVNOs can play the network operators off each other in order to secure better rates and conditions. The independent MVNOs already have 17 percent of the mobile market, a level that can serve as a benchmark for the fixed market.
KPN uses its budget brands, especially Telfort, to compete with the challengers. This leads to a margin squeeze, something neither the previous nor the current regulation can do much about. The ACM can provide little answer to this; start-up losses are part of the game, and telecom is in the end a scale business. The alternative operators are forced to accept a significant challenge to break-even. They need a good brand, quality service and innovation to make it work, but the situation is complicated by physical access practically disappearing from the Dutch market. The challengers are to a large extent dependent on KPN and will be even more so with VodafoneZiggo, which will offer only wholesale broadband access and not virtual access. Only tariff regulation can improve the situation.
VodafoneZiggo: delays and a budget brand
VodafoneZiggo has refused to accept the decision and decided instead to delay the process by filing a legal appeal. A different stance could be expected from a reputable company, but the path to the corporate appeals court is now open. In practice, this means that cable resellers probably won't reach the market until 2020. In the mean time, VodafoneZiggo will likely follow KPN's strategy and introduce its own budget brand, perhaps using the Hollandsnieuwe name already present in the mobile market, in order to fight off the challengers, if not completely cut them off at the path.
