KPN Telecom NV (NYSE: KPN) admitted to VOIP service problems caused by a high level of demand as it reported its first quarter results today. (See KPN Reports Q1.)

The Dutch incumbent has been promoting its VOIP service, called InternetPlusBellen, throughout the Netherlands since February 2006 as it competes against the IP telephony offers from its cable operator rivals and continues its migration to an all IP network. (See KPN Goes National With VOIP, VOIP Peering Bypasses KPN, and KPN Lays Out IP Migration Plan.)

But the carrier, which still has more than 4 million fixed line customers in its domestic market, wasn't prepared for the massive uptake it experienced in late 2006, when it added 247,000 new VOIP subscribers in the fourth quarter. That level of uptake, the operator admitted today, "stretched KPN beyond its delivery capabilities resulting in serious quality issues and congestion in KPN call centers."

The carrier says the problems weren't related to the network, but to installation issues and service interruptions caused by other services. Spokesman Marinus Potman says about 5 percent of VOIP users were having difficulties, "and that meant thousands of customers."

He says the VOIP service has been difficult to install in homes connected with an ISDN line, and that some customers experienced interference with the security alarm service that runs over their copper telephone line. In addition, he says many customers found the do-it-yourself VOIP installation kits, which had been requested by 70 percent of subscribers, too hard to install, so KPN had to source and issue a new modem that makes home tests easier. [Ed. note: In consumer technology, "self-install" is usually a euphemism for "this will take all weekend and still won't work."]

KPN cut back on the number of new orders it processed during the first quarter, throttled back its VOIP service marketing, boosted its squad of VOIP-savvy engineers by about 200, and added more resources to its call centers and help desks as it tried to redress the situation, all of which added an unspecified amount to its first quarter operating expenses.

As a result, the number of VOIP additions in the first quarter dropped dramatically to 133,000, taking KPN's total VOIP subscriber base to 650,000, or 37 percent of the Dutch fixed IP telephony market. That represents a 1 percent sequential market share increase, way down on the 11 percent, 6 percent, and 5 percent quarter-on-quarter gains of the previous three reported periods.

Another impact was that KPN lost more phone line connections than it had hoped while it dealt with its problems, as customers migrated away to the cable operators or became mobile-only users. The carrier's net line loss in the first quarter was 140,000, worse than the 130,000 reduction in the fourth quarter of 2006.

KPN says it has addressed the "root causes" of the service quality problems, and is now contacting all VOIP users who had registered a complaint to make sure they're happy with the service.

It needs to address the situation quickly and hang on to as many customers as possible, as Dutch households are abandoning traditional telephony services in their droves. KPN now has 4.25 million wireline voice connections, but that's down from 4.88 million a year ago, with its PSTN connections dropping by more than 1 million in the past 12 months. (See table.)

Table 1: KPN Voice Connections Fall Away

KPN's strategy is to add value to its broadband service to retain as many of those customers as possible. It currently has 2.23 million DSL customers, giving it a 41 percent share of the retail broadband market, with 650,000 of those broadband customers (about 30 percent) using the VOIP service.

Now KPN has another value-added broadband service to offer in the form of IPTV. Following a soft launch last year of its Mine broadband TV service, the carrier finally began its full service offering in February this year. (See Siemens Touts Dutch IPTV.)

With fierce competition in fixed and wireless in its domestic market, KPN's revenues from its Netherlands operations declined 2.5 percent compared with a year earlier to €2.07 billion ($2.8 billion) from €2.12 billion ($2.87 billion), and operating profits fell nearly 19 percent to €416 million ($564 million).

Better news came from its international mobile operations (Belgium and Germany), where revenues increased 7 percent to €935 million ($1.27 billion) and operating profit jumped nearly threefold to €128 million ($174 million).

Overall, however, total revenues were flat at €2.9 billion ($3.9 billion), and net income fell more than 18 percent to €313 million ($424 million). KPN's share price fell nearly 3 percent to €12.25 on the Amsterdam Stock Exchange.

— Ray Le Maistre, International News Editor, Light Reading