KPN: The interesting case of an Internet Service Provider
Internet Service Providers surely unequivocally benefit from the digitalization trend, right? Not so fast.
KPN is the incumbent player in the Dutch telecommunications industry, offering four key products: fixed telephony, mobile telephony, TV, and internet. Given that it owns the physical network that made the introduction of the internet into the homes of millions of people in the Netherlands possible, it surely is a company that unequivocally benefits from the digitalization trend. Right? Not so fast.
The introduction of the internet
Initially, the commercialization of the internet in the 1990s opened up a significant new product line for KPN, by allowing the company to offer Internet services over the same copper wire it used to provide households with fixed telephony1. In fact, the internet allowed KPN to become a serious competitor to cable TV players in the TV market in the mid-2000s, through offering TV services over the internet (IPTV) – a market it had not been able to meaningfully penetrate until then2. The introduction of the internet and the subsequent ability to offer a competitive TV product enabled KPN to alter its business model and bundle TV services with internet and fixed telephony (called triple play, or 3P)3, which boosted KPN’s performance in a number of ways. A 3P bundle, often priced lower than the sum of the individual packages, incentivized customers to consume all their telecommunication services through KPN, and thus allowed KPN to upsell4. This in turn increased KPN’s share of wallet and increased customer stickiness (i.e. reduced churn) because of increased switching costs5.
Clouds start forming
In the meantime however, cable players were also able develop internet and fixed telephony services and thus to offer a more than competitive triple play package6. In fact, while the limits of internet speed using a copper cable seemed to have been reached, cable technology allows for a much higher theoretical internet speed7. For example, KPN’s fastest copper-wire internet speed package today offer 60 Mbit/s download speed8, whereas the main cable player in the Netherlands offers 300 Mbit/s9. This necessitated KPN to roll out a network based on a new technology, glass fiber, with the potential for much higher internet speeds – resulting in huge capital expenditures to keep up with competition10.
Not only was KPN forced to invest substantially in its network, it also was not able to capture much of the value this offered to “free riders” that rely on the internet infrastructure, but do not pay for it. To make matters worse, these players do not only free-ride on KPN’s infrastructure, but are also eroding its revenues. The rise of Netflix for instance has led some consumers to cancel their TV subscription all together11. Internet telephony services such as Skype eroded fixed and mobile telephony revenues, whereas Whatsapp is largely responsible for the demise of SMS revenues12.
New business & operating models
These market trends led to some tough financial years for KPN (see figure 1).
Figure 1 – EBITDA development13
In an attempt to stay relevant, KPN has chosen a strategy to work together with disruptors rather than fight them, and adopt a reseller business model. For example, it has integrated the Netflix app into its digital TV menu providing direct access through its interface14. Similarly, KPN has included Spotify with its most premium triple play package through a revenue sharing agreement15. It has taken its reseller business model even one step further by reselling home security & automation systems16.
The internet also forced KPN to change its operating model. It has reduced its store footprint and reduced headcount by ~15,000 FTEs since 200517,18. Besides shifting to a leaner operating model, the intensified competition for customers has also forced KPN to shift to a much more customer-centric model focused on creating customer loyalty.19
The way forward
Given that the internet provides the majority of the value consumers derive from the current 3P bundle, KPN should consider reorganizing its product offering mainly around the internet product to better monetize this valuable asset. For instance, bundles can be distinguished around quality of service, such as latency, speed, security, and performance guarantees – all becoming increasingly important given the rising number of devices connected to the internet and their corresponding applications.
In order to be able to cater to this anticipated increase in demand, KPN should also double down on expanding its glass fiber network. It has recently slowed down the roll out, but if it wants to be able to keep up with competition that already offers internet speeds five times KPN’s copper wire network offers, it needs to have a future-proof network.
Lastly, I believe that KPN needs to take a more proactive role in designing Internet of Things solutions. Instead of waiting for the next disruptive product to erode revenues, KPN should proactively participate in designing the future and utilize its core product that makes those innovations possible: the internet.
Word count: 797
1Olsthoorn, P, 2014. “25 jaar internet in Nederland”, Amsterdam Economisch Board: Amsterdam, the Netherlands.
2NU news website, 2004. “KPN introduceert digitale TV”, Available from: http://www.nu.nl/internet/421246/kpn-introduceert-digitale-tv.html, [Accessed: 11/15/2016]
3Trouw newspaper, 2004. “KPN opent aanval op kabelaars”, Available from: http://www.trouw.nl/tr/nl/4324/Nieuws/article/detail/1750251/2004/10/05/KPN-opent-aanval-op-kabelaars.dhtml, [Accessed: 11/15/2016]
4Idem
5Prince, J., Greenstein, S., 2014. “Does Service Bundling Reduce Churn?”, Journal of Economics & Management Strategy, Vol. 23:4, p. 839-875.
6Totaalwijzer website, “Bellen via het internet (VoIP)”, Available from: https://www.totaalwijzer.nl/artikelen/bellen-via-het-internet-voip, [Accessed: 11/16/2016]
7Columbia Telecommunications Corporation, 2014. “The State of the Art and Evolution of Cable Television and Broadband Technology”, CTC: Kensington, MD, USA.
8KPN website, “Alles-in-1 pakketten”, Available from: https://bestellen.kpn.com/, [Accessed: 11/16/2016]
9Ziggo website, “Alles-in-1”, Available from: https://www.ziggo.nl/alles-in-1/, [Accessed: 11/16/2016]
10KPN, 2009. “KPN consumentenstrategie: regionale uitrol glasvezel én sneller bestaand netwerk”, Available from: http://corporate.kpn.com/pers/persberichten/kpn-consumentenstrategie-regionale-uitrol-glasvezel-en-sneller-bestaand-netwerk.htm, [Accessed: 11/16/2016]
11The Economist, 2016. “Cutting the cord”, Available from: http://www.economist.com/news/business/21702177-television-last-having-its-digital-revolution-moment-cutting-cord, [Accessed: 11/16/2016]
12Boogert, E., 2011. “Veranderend klantgedrag kost KPN 18 miljoen omzet”, Available from: http://www.emerce.nl/nieuws/veranderend-klantgedrag-kost-kpn-18-miljoen-omzet, [Accessed: 11/16/2016]
13KPN 2013 annual report
14KPN website, Available from: https://www.kpn.com/televisie/diensten/netflix.htm, [Accessed: 11/16/2016]
15Peters, S., 2014. “De telecomsector haalt alles uit de kast”, Available from: https://insights.abnamro.nl/2014/07/de-telecomsector-haalt-alles-uit-de-kast/, [Accessed: 11/16/2016]
16KPN website, Available from: https://www.kpn.com/smartlife.htm, [Accessed: 11/16/2016]
17Retailnews website, “KPN sluit alle vestigingen van HI”, Available from: http://www.retailnews.nl/nieuws/1tlDR8uKRya6bu73kq_vGw-0/kpn-sluit-alle-vestigingen-van-hi.html, [Accessed: 11/16/2016]
18AD Newspaper, 2011. “Duizenden ontslagen bij KPN: Vervelende maatregel hoort erbij”, Available from: http://www.ad.nl/economie/duizenden-ontslagen-bij-kpn-vervelende-maatregel-hoort-erbij~ae504566/, [Accessed: 11/16/2016]
19KPN investor presentation November 2016
I would be very hesitant to continue to roll out network improvements if I were KPN. With the ruling last December that the internet should be regulated like a utility (https://www.cadc.uscourts.gov/internet/opinions.nsf/3F95E49183E6F8AF85257FD200505A3A/%24file/15-1063-1619173.pdf) , spending money on network improvements may turn out to be an expense that will never be recouped. Until the regulatory environment is settled, it may be in KPN and other internet providers best interests to slow their expansion plans and wait for clarity.
Thanks, environmentalist. I was super excited to see this blog post having worked for Google Fiber, Alphabet’s project in building and deploying a fiber optic internet network in several US cities. The increasing popularity of Netflix and the Net Neutrality discussions have brought up really interesting questions about the Internet as a utility. And I completely agree with you, that we can’t automatically assume that ISPs will benefit from digitization (perhaps a tech conglomerate like Google would, but not really pure ISPs).
We’ve seen that Google Fiber has been much slower than expected to roll out its fiber backbone. The time that it takes to build infrastructure is so long that although gigabit-speed internet was intended to prepare for the future of tech, technology needs could quickly outpace the infrastructure. My concern for KPN would be that it’s a huge undertaking for a corporate to take on renewal of infrastructure on its own. Max points out that with government’s role in infrastructure, it would be a risky endeavor for KPN to pursue. While you could argue that Google Fiber did make a material impact as it’s spurred existing ISP incumbents like AT&T, Verizon, etc, to roll out gigabit-speed or higher-speed options, I wonder how this would play out in a country like the Netherlands. In the US, the ISP industry has been highly oligopolistic and even monopolistic on a market-by-market basis, so I’m curious what ISPs are like abroad. In countries like South Korea and Singapore, I believe it was government who supported the build-out of fiber-optic Internet; I’d advocate that in order for countries to remain competitive, government should assist such buildout.