Vodafone NL and Ziggo merger aimed at cost savings, dividends

Friday 19 February 2016 | 16:14 CET | Market Commentary
Vodafone Netherlands and Ziggo are doing their best to emphasize that nothing will change on the Dutch market after their planned merger. KPN gave a brave face and said it didn't fear the new company either. This raises the question, if nothing changes, then why do it? A closer look shows it's mainly about cost savings and dividends. 


The main aim of Vodafone NL and Ziggo is convergence: they want to offer a complete package of telecom services to the entire market. That doesn't necessarily have to be a quad-play (triple play + mobile), but could be any combination of fixed (broadband, TV and/or fixed telephony) and mobile.

Don't they do that already? The Vodafone Thuis offer already competes with Ziggo (and the other triple-play providers), and Ziggo Mobiel compete against Vodafone (and the other mobile providers). This brings us to the second goal: offering services on-net in order to save on wholesale costs. Vodafone Thuis pays a monthly fee per line to KPN, plus costs for support services. Let's say that costs in total around EUR 20 per month. This means a lot of savings, given the retail price for a Vodafone Thuis triple-play is EUR 50-60. There is also the advantage of eliminating two competitors from the market: Vodafone Thuis and Ziggo Mobiel. Ziggo Mobile is not impacted as much by the wholesale costs, as it already uses Vodafone's network. Ziggo Mobiel could just continue as a sub-brand of the joint venture.


Vodafone NL and Ziggo's merger plan is supported by the expected cost savings in wholesale and in the 'back office', estimated at a total EUR 280 million per year (we estimated previously this is around 12 percent of annual costs). The additional savings come from areas such as backbones, IT, marketing, administration, offices and staff.

What will they do with the cost savings? KPN's right not to be afraid as the savings are unlikely to go to price cuts. The two already have significant market shares and have no interest in leading a race to the bottom in order to add more share. The savings don't appear to be destined for network investments either. Investments will continue as usual, with no talk of accelerating for example the roll-out of LTE-Advanced Pro or Docsis 3.1, not to mention FTTH. That leaves one thing over: paying dividends to the two parent companies. It's not surprising that the share prices of both companies are up since the announced agreement.


As we've written already, regulation is not likely to change at first, as the joint venture's shares of the relevant markets won't be much different from its predecessors. However much one may regret seeing Vodafone Thuis exit the market, there's little to be done about it. Vodafone is creating new competition on an international scale, thanks to its own IPTV platform and FTTH. It's likely to shut down the IPTV platform, even after acquiring Wiericke and failing to get KPN to build it (something Vodafone is suing KPN over). In countries without cable networks, such as Italy, Vodafone is active in FTTH, and the Vodafone Group has publicly come out for fibre. However, none of this holds in countries where Vodafone owns cable companies, such as Spain and Germany. In those countries, the operator is much more pragmatic and a 'great believer in HFC', even if HFC (hybrid fibre coaxial) is just as much a copper network as the very comparable VDSL networks of KPN and BT. 

We expect that the competition, except for KPN, will be left far behind. Players like Tele2 lack the economies of scale of KPN and Ziggo/Vodafone, have much smaller margins (because they have to pay wholesale costs) and must compete on price. If these smaller players also give up, the Dutch market will be severely hollowed out. A healthy wholesale market is needed to prevent that from happening. 


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