Tele2 NL's path to break-even: a la Iliad, VodafoneZiggo or Tele2 Kazakhstan? Or on its own?

Tuesday 25 April 2017 | 11:34 CET | Market Commentary

Tele2 has introduced a new categorisation of its country operations, terming Sweden and the Baltics 'challengers' and the Netherlands and Kazakhstan, where it's still expanding its networks, as 'investment markets'. For the Netherlands, it's a notable designation, as it's questionable whether the country is really so far behind Tele2 markets like Latvia. The change suggests the company could be considering a joint venture for the Netherlands, the same as Kazakhstan.


Previously Sweden and the Netherlands were its most important markets, considered home territory. The company now appears to be distancing itself somewhat from the Netherlands. At the start of the mobile network roll-out, Tele2 Netherlands emphasized its challenger position, and now that description applies only to Sweden and the Baltic states. That the Netherlands is proving harder to conquer than originally thought is underlined by the large number of management changes there since 2011 (CEOs include Gunther Vogelpoel, Ernst Jan van Rooijen a.i., Jeff Dodds, Malin Holmberg, Jon James) as well as the big writedown of the Dutch activities last year.

The main reason for the disappointing growth is easy to spot: competition. KPN is defending its position as market leader, and VodafoneZiggo was formed to try and take the top spot and grow its market share through cross-selling. T-Mobile is trying to re-invent itself and also take a bigger market share. Add to all that regulation, which is affecting all the operators, such as roam like home in the EU and the new consumer finance regulations for handset sales in the Netherlands. 


The outlook is not good. The perceived market opportunity in the Netherlands is less evident as the intensified competition has grabbed the wind from Tele2's sales before it has barely launched services on its own network. T-Mobile has positioned itself as an aggressive challenger. Tele2 points to the fact that it has no legacy in the form of a 3G network, but the legacy of a 3G customer base weighs just as much. To avoid cannibalisation, Tele2 has taken a conservative commercial strategy. The company is far from T-Mobile's daring, not to mention the daring of other newcomers such as Iliad/Free. The group's ambition does not seem to extend very far, given the hardly inspiring opening statement from the CEO at its latest quarterly results: At Tele2, we aim to fearlessly liberate people to live a more connected life. We do this by being the customer champion of connectivity, etc. etc.



Tele2 group targets EBITDA breakeven within three years of launching its own network in a country and an eventual EBITDA margin of 35 percent. However, these targets have not been applied specifically to Tele2 Netherlands, which started using its mobile network in early 2015. The unit has had negative EBITDA since it first acquired mobile spectrum in 2012. While the operator has shown some improvement in the past few quarters, it's questionable whether it can reach breakeven in the next year. Sales growth and migration to its own network should help. Migration will help reduce wholesale costs further, but growth will be more difficult given the competition and saturated mobile market. Could a more daring approach, as Iliad has done in France and will undoubtedly show in Italy, be the answer? Another way would be à la VodafoneZiggo: the convergence and cross-selling path, as opposed to Tele2's unrelenting focus on mobile. 

A merger of Tele2 and T-Mobile Netherlands, which is facing a sharply falling margin, cannot be ruled out. This would re-open the regulatory debate over whether three or four mobile operators is enough. Which party would take the upper hand could be decided later if the companies do indeed decide to follow the joint venture path of VodafoneZiggo or Tele2 Kazakhstan.

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