NFV Strategies

Can KPN Complete a Turnaround?

Sensing that it was about to get caught in a traditional telco death spiral, Dutch incumbent KPN embarked several years ago on a transformation strategy -- cutting costs, investing in networks, identifying new non-circuit-switched voice revenue streams and selling international operations/stakes -- in an effort to save itself. (See EU to Bless Liberty Deal for KPN Belgian Biz – Report, Eurobites: KPN Cashes In Its German Stake and KPN to Cut More Jobs After Profits Shrink.)

The initial phase of that turnaround process is coming to an end, even if the top line numbers for 2016 might not suggest much in the way of progress. For the full year 2016, KPN's revenues were down nearly 3% at €6.8 billion (US$7.34 billion) but its operating profit was up by 25% to €884 million ($954 million) and full-year capex was down by more than 8% to €1.2 billion ($1.3 billion).

The operator believes it has its consumer proposition in the right place: "Our relentless efforts to innovate and deliver a unique fixed-mobile experience in the consumer market have resulted in increasingly satisfied customers, who are taking more and more services from KPN … our Simplification program [is] delivering an improved digital experience for our retail customers and a meaningfully lower cost base."

Now it plans to focus on the enterprise market:

    In 2016, KPN has taken important steps to address the challenges in the business market and expand its position as the leading Business ICT service provider by building a strengthened portfolio in the areas of cloud, workspace and security. We still see challenges ahead as the migration away from legacy services to integrated solutions will continue to impact our revenues in the short term. However, we are confident that we will benefit from cross-sell opportunities, supported by our reinvigorated sales force. The strong improvement in customer satisfaction, accelerated uptake of multi play and higher order intake in the fourth quarter illustrate that we are on the right track.

To achieve its goals in the business services sector, it is shifting its investment focus. KPN notes that its 2016 capex shrunk by more than 8% "following a period of elevated investment levels" -- in other words, it has been investing more in its networks in recent years in the hope of spending less from hereon in.

That doesn't mean it's not spending in 2017 and beyond, though its capex plan for 2017 is for another year-on-year reduction (to €1.15 billion/$1.24 billion) -- instead, the focus of its investments is shifting from the physical network (access, transport) to the supporting IT infrastructure (cloud, virtualization).

    We are now starting the second wave focused on streamlining the network related IT and further simplification of our organization, which will deliver at least another €300 million run-rate savings by end-2019. Our elevated investment levels in recent years mean that our integrated networks now consist largely of fiber, which puts us in an excellent position to benefit from innovative technologies. Capital intensity will continue to decline, notwithstanding ongoing investments to further streamline our operations and in network capacity to deliver the highest quality of service.

What it doesn't intend to splash out on is content. (See DT, KPN, Vodafone Unenthused by Content Ownership.)

KPN, then, looks like it's closing in on being a fiber-rich (in the access network) operator that is now investing in telco cloud capabilities that will ultimately support all manner of services, including IoT, enhanced security, smart home and m-health services, and prepare it for the 5G era. And while its revenues may have dipped in 2016, it is still profitable and therefore has its head above water. (See KPN to Include LTE-M in IoT Mix in 2017 and KPN Is DT Qivicon Partner in Netherlands.)

So what next? Clearly KPN will use its assets to develop a broader range of cloud, video and digital services for consumers and enterprises. But, as a company now focused on the Dutch market and with a more simplified corporate structure, it seems almost inevitable that, as long as it's not beset by disaster in the next 12-18 months, it will become part of a larger communications services and networking empire where economies of scale will increasingly come into play. The same is true, of course, of its neighbor Proximus in Belgium. (The two have often been linked as potential merger partners, it should be noted.)

Regional regulation might stand in the way of such moves, of course, so KPN will need a structure that will help it survive -- at least in the medium term -- as a single-market business with annual turnover in the region of €6 billion ($6.5 billion). But that doesn't look like a long-term position.

The good news, of course, is that KPN did something about its predicament and it's still solvent in 2017. Let's see which of Europe's national telcos are still standing by 2020.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

James_B_Crawshaw 2/2/2017 | 6:43:12 AM
Re: Consolidation will happen one way or another KPN's share price is getting close to America Movil's 2013 bid of EUR2.40 per share again. I think they still have a 21% stake though they had been hoping to sell it after the Dutch blocked the takeover attempt.

AMX reduced its stake in Telekom Austria from 59% to 51% last July though this is still enough to give them control of the company and allow them to use it as an acquisition vehicle. However, a tie up between TKA and KPN does not seem very synergistic to me.  
[email protected] 2/1/2017 | 10:04:11 AM
Consolidation will happen one way or another Whether the regulators like it or not, the number of infrastructure-based service providers in Europe will have to drop, whether that's through M&A or, perish the thought, financial collapse followed by asset stripping.

There can be competition, increasingly so as the virtual service provider model becomes more economic as a result of virtual EPC, cloud billing etc but the number of operators owning and running network assets will, I predict, decline during the next 5 years. 
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