KPN Keeps Taking Share From VodafoneZiggo in Large Urban Areas; Maintaining EUR 3.20 Fair Value

Equity Analyst

Javier Correonero

KPN is the incumbent telecom operator in the Netherlands, operating in the fixed-line and mobile markets. It has maintained a stable market share during the past decade in broadband, where it shares leadership with peer VodafoneZiggo (40% each). We believe the Dutch broadband market to be a rational oligopoly where both players prefer not to engage in aggressive market share shifts but rather maintain stable positions, executing slight price increases each year. The mobile market, where KPN has a 20% share, has three major operators (KPN, VodafoneZiggo, and Odido, previously T-Mobile Netherlands), which allows for overall market stability.

KPN has been one of the European laggards in deploying fiber-to-the-home because, until 2019, it opted to upgrade its copper network to VDSL technology. Although, for several years this has been enough to satisfy customers’ demands, the inevitable need for more speed made KPN step up its fiber investments. KPN now expects to have 80% of the Dutch market covered with FTTH by 2026, something we believe is necessary to match VodafoneZiggo’s hybrid fiber-coaxial network. KPN is steadily taking market share from VodafoneZiggo as it commenced FTTH deployment in large urban areas in 2023, a market segment that was traditionally VodafoneZiggo's stronghold. We believe that KPN could acquire other local fiber networks in the country, favoring further consolidation, which we see as positive.

KPN has done a very good job of keeping costs under control during the past 10 years, streamlining its operations by significantly reducing personnel, marketing, and IT expenses, which has resulted in significant margin expansion despite revenue pressures. We expect the company to keep offsetting any moderate revenue declines with cost controls, although there is a limit to which it can cut costs. Capital expenditure should also gradually decline as the deployment of FTTH advances, positively affecting free cash flow generation and the continuation of the dividend.

Business Strategy & Outlook

We rate KPN as a narrow-moat company underpinned by efficient scale. KPN (copper/fiber network) and VodafoneZiggo (cable network) control 80% of the Dutch broadband market together, with other smaller fiber operators competing locally. We believe the Dutch broadband market to be a rational oligopoly, where both companies prefer not to do massive attacks on the other’s subscriber base, as this could trigger an unhealthy market environment. We believe this is reflected in the gradual price increases both companies have historically executed in their broadband plans. Although Ziggo’s and KPN’s networks compete nationally, the overlap with local operators tends to be low, which we believe prevents capital destruction. Although we like the Dutch regulatory environment, with fewer price controls and less intervention than other countries, we don’t grant KPN an intangible asset moat source as we don’t have full certainty that this situation will remain for at least 10 years.

In general, mobile and fixed-line telecom services in developed countries are commodity products with little differentiation. As a result, it is unlikely that new entrants will be willing to deal with the massive upfront investments and regulatory requirements required to join a commoditized market. That's why most new entrants begin as resellers or mobile virtual network operators (without their own network) and then gradually transition to mobile operators (with their own network). Developed telecom markets are mature, with almost zero growth, which also keeps new entrants at bay, as the profit pool is stable or declining. New entrants know incumbents have high barriers to exit (network access is considered an essential service in many countries), so even if they can disrupt the market for some time, they know competitors will not easily leave. Old “national champions” usually have advantageous positions compared with alternative operators as they already have infrastructure in place and have long-standing relationships with the government.

Although both fixed-line and wireless markets present efficient scale characteristics, we believe this moat source is stronger in fixed networks, though these networks are increasingly interconnected. Developing underground channels for fixed-line cables is costly and complicated, as new lines may affect entire neighborhoods or traffic flows or coincide with other underground infrastructure. As a result, the rationale for duplicating capacities is low.

One of the main features of wireless networks is that they require spectrum licenses to operate, a unique and scarce resource that governments periodically auction off, with bidders required to meet certain requirements. Mobile network operators (which own the spectrum) can serve their mobile customers directly or rent out their networks to other competitors (mobile virtual network operators, which don’t own the spectrum). Mobile networks rely on spectrum, towers, antennas, and other equipment to operate, but they also need a backbone of fixed-line infrastructure. If an operator does not own fixed infrastructure, it will have to rent access from another competitor. In addition, fixed infrastructure is not only used to support mobile communications but also to deliver services to customers, such as broadband internet. 

The Netherlands has several fixed-line infrastructures:

(1) Cable infrastructure, mainly owned by VodafoneZiggo, with close to 90% of homes passed.

(2) KPN’s infrastructure (around 50% FTTH homes passed in 2023, with 80% FTTH coverage expected by 2026; all the country is passed by copper too).

(3) Other smaller local fiber operators, with the largest being Delta Fiber and Open Dutch Fiber.

VodafoneZiggo and KPN jointly have an 80% share (40% each) of the Dutch broadband market. Dutch regulators have so far opted for a free-market structure where players have freedom in their decisions on where to build networks. In 2018, the Authority for Consumers & Markets obliged KPN and VodafoneZiggo to open their networks and provide wholesale access to other players. KPN had already been doing this historically, whereas VodafoneZiggo’s cable network was closed. After the initial ruling, both companies appealed to a higher court, which overturned the ACM’s decision. VodafoneZiggo immediately closed any wholesale negotiations, keeping its network closed, whereas KPN said it would continue to provide wholesale access to other players voluntarily. We are almost certain that KPN will continue to provide wholesale access (as it has historically done) to avoid new regulation; however, prices are not set by the regulator, which we see as positive.

Overall, we like the Dutch regulatory environment, which imposes fewer obligations and is less interventionist, allowing for natural competition or consolidation. The ACM continuously keeps an eye on the Dutch wholesale broadband market, but even if it imposes more obligations on KPN, we believe these could take years to be implemented as the company can appeal to courts and it can take time to set any price mechanism.

Municipalities generally allow free competition in infrastructure. Although this may initially seem uneconomical, players are trying to avoid construction overlaps. Many smaller competitors have withdrawn their rollout plans in certain locations once they discovered KPN would also roll out there. However, if two fiber networks are built in the same area, we believe KPN has the winning hand as it already has a copper customer base while competitors have to build it from scratch. In addition, in the few areas where KPN relies on a local provider network to provide its services, it usually has the option to buy the network at the end of the agreement, which will lead to gradual consolidation. Even the largest secondary fiber networks will aim to build in areas where KPN is not present, and some of them, as Primevest Capital Partners did in 2023, can end up merging with KPN, favoring further consolidation.

VodafoneZiggo, the main cable provider in the Netherlands, is KPN's main competitor. One advantage VodafoneZiggo has over KPN is that it can keep its network closed. Even if it is obliged to provide wholesale access in the future, it could be years until the cable network is ready and competition starts to heat up. Hybrid coaxial cable can provide similar speeds to fiber, but the upgrade to cable technology Docsis 3.1 is much faster and cheaper than deploying fiber. VodafoneZiggo has a high proportion of converged customers thanks to its TV sports rights (close to 60%% triple-play customers compared with KPN’s 30%), which allows higher average selling prices. Notwithstanding, KPN has kept its subscriber base stable and has also been able to slightly raise its broadband prices in past years. In our opinion, VodafoneZiggo has contributed to a stable competitive environment in the Netherlands, as companies that are part of the Liberty Global group have usually shown rational behavior, which we like. We expect both players to maintain rational behavior to keep their leading positions in the market, with smaller players competing locally or being acquired.

The mobile Dutch market is relatively stable. After the merger of Tele2 Netherlands with Deutsche Telekom Netherlands in 2018, the Dutch mobile market went from four mobile network operators to three, which is usually preferable. Although this transaction slightly softened the market, T-Mobile, now Odido, continued to win market share thanks to its lower pricing and more flexible terms. KPN has the fastest mobile network in the Netherlands, according to network diagnostics company Ookla. The number-one position was held by T-Mobile Netherlands for many years, but KPN’s investments in its mobile sites have paid off. However, this has not resulted in higher average revenue per user, as since 2017, Odido has been reducing prices, offering more data for less money, and eliminating contracts with time commitments. This has put pressure on VodafoneZiggo and KPN, which have been obliged to improve either the conditions or their prices.

Narrow

Economic Moat

Koninklijke KPN NV

Royal KPN NV engages in the provision of telecommunications and information technology services. It offers fixed and mobile telephony, fixed and mobile broadband internet, and television to retail and business consumers. It operates through the following segments: Consumer, Business, Wholesale, Network, Operations, and Information Technology, and Other. The Other segment consists of KPN Holding, Corporate Center, and eliminations. The company was founded in 1852 and is headquartered in Rotterdam, the Netherlands.

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