Market Insight

Vodafone and Liberty combine to create Netherlands quad play giant

February 16, 2016

Martyn Hannant Martyn Hannant Manager – Research and Analysis, Service Providers & Platforms

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Vodafone and Liberty Global have agreed terms for a merger of their Netherlands businesses, creating a powerful new multiplay entity capable of taking on incumbent KPN at its own game.

The deal will see Vodafone pay €1 billion ($1.1 billion) cash to Liberty to equalise their stakes in the joint venture (JV). The companies say the Dutch JV would have had 2015 sales of €4.41 billion ($4.89 billion) and operating profit of roughly €1.9 billion ($2.1 billion).

Vodafone and Liberty Global expect to generate savings of some €280 million ($311 million) per year after five years, and the deal is to be approved before the end of 2016.

Our Analysis

UK mobile giant Vodafone and pan-European cable operator Liberty Global confirmed they were in talks to combine their Netherlands operations at the start of February 2016. Vodafone had some 5.1 million mobile subscriptions in the country at the end of September 2015, translating to a market share of 28%. The operator has a triple-play offering of fixed voice, broadband and IPTV known as Vodafone Thuis, but since its launch the service has failed to gain any significant market share in the face of strong competition, counting just 73,000 broadband customers at the end of September 2015, a market share of barely 1%. Conversely, Liberty’s Ziggo held subscription market shares of 37% of fixed voice, 44% of broadband, and 54% of pay TV. Ziggo does currently operate an MVNO using Vodafone’s network, reporting 186,800 subscriptions at the end of December 2015 – again translating to a market share of barely 1%. Vodafone and Ziggo are now combining their respective mobile and fixed-line strengths to take on the market dominance of KPN.

Incumbent KPN held subscriber market shares of 52% of mobile, 50% of fixed voice, 40% of broadband, and 23% of pay TV at the end of September 2015. Far from declining, KPN’s voice and broadband shares have been relatively stable for the past few years, while the operator has increased its share of mobile and pay TV by two and three percentage points respectively in the past year (to end-September 2015). Its main competition in the triple-play business is Ziggo, but KPN has launched a number of successful bundled offerings in the past couple of years, and has seen triple-play packages sold increase 18% year-on-year (y/y) to 1.6 million at the end of 2015, while quad-play bundles jumped 72% y/y to 615,000. While Ziggo has seen an increase in MVNO subscriptions, its mobile market share is minimal, while Vodafone’s fixed business is failing to compete – something which it is blaming on KPN.

Vodafone filed a lawsuit against KPN at the end of 2015, seeking €115 million ($126 million) in damages over alleged anticompetitive behaviour, claiming that its rival delayed the introduction of Vodafone's competing suite of triple-play services in the Netherlands by three years. Vodafone claims that KPN has repeatedly failed to fulfil promises to deliver technology that would have allowed Vodafone to roll out its fixed bundles, at a key time when bundled services in the Netherlands were taking off. However, take-up of quad-play across Europe has not been as spectacular as had been hoped, due to a number of consumer barriers including many customers being used to having two providers, as fixed services are household subscriptions whereas mobile is traditionally an individual subscription.

In the pay TV market, KPN once again proved a formidable competitor against Ziggo and Vodafone, with the operator gaining 265,000 net IPTV additions over 2015. Ziggo’s TV subscriber base was down 200,900 on year-end 2014, which Liberty has stated was due to challenges faced in integrating Ziggo with its legacy UPC service, as well as the strong competition it has faced. Q4 2015 proved weaker for Ziggo in comparison to the same quarter in 2015, with TV losses at 51,300 as compared to 44,800 in Q4 2014. Ziggo’s TV losses were not limited to basic TV services – the number of subscribers taking digital TV services above Ziggo’s standard unencrypted channel offering decreased 2% year-on-year compared to the end of 2014.

According to Ziggo, single-play TV churn was responsible for over 90% of its total RGU (revenue generating unit) attrition in 2015, which declined from 9,931,400 at Q4 2014 to 9,728,200 at Q4 2015. Liberty’s joint venture with Vodafone will allow the operator to focus further on growing its bundled offerings, whilst giving Vodafone the opportunity to reap the benefits of Ziggo’s network. In Germany, where Vodafone purchased cable service Kabel Deutschland, the merger has resulted in Vodafone migrating its existing IPTV subscribers to the cable platform. Currently, however, Vodafone has not stated any intention to cease offering Vodafone Thuis.

The merger of Vodafone and Ziggo follows talks during 2015 about a wider tie-up between the UK operator and Liberty Global, which ultimately came to nothing. Vodafone CEO Vittorio Colao has played down suggestions that the latest agreement is the beginning of further co-operation between the two, saying the Dutch JV isn't necessarily a model for bigger shared markets like the UK and Germany. Colao added that “Every country is different, and the competitors are different… sometimes [we] acquire assets, sometimes we accept partners. There is no such thing as a blueprint”. However, the Netherlands deal builds on an ongoing strategy from Vodafone of expansion into the fixed-line sector in a number of European markets, mainly through acquisition, with the operator buying Kabel Deutschland in Germany, Ono in Spain, and Hellas Online (HOL) in Greece, in order to expand into multiplay while boosting its mobile backhaul capacity. Conversely, Liberty Global has also signalled it is open to building it mobile business piecemeal, buying BASE in Belgium from KPN in April 2015. Vodafone and Liberty Global both operate in the UK, Ireland, Germany, Netherlands, Czech Republic, Hungary, and Romania, but each market has its own levels of competition, regulation, and distribution of market share, and there would be significant regulatory hurdles to overcome in the countries where both companies have significant market power. 

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