Daiwa EuroTelcoblog No. 66: Tuesday 10th August, 2004 - Cable VoIP datapoints

Yesterday, in reiterating our UNDERPERFORM rating on Dutch incumbent KPN, we cited our primary concerns as being: 1) mounting competitive pressure in the domestic mobile market; 2) the lack of clarity surrounding the company's position in the various municipal fiber projects underway in the Netherlands and; 3) the VoIP spectre from cablecos. Last night's earnings call from UnitedGlobalCom (NASDAQ: UCOMA), parent company of UPC, gave us a couple of interesting new datapoints to contemplate on the latter point:

UGC yesterday stated that its residential trial of VoIP in Rotterdam had achieved a 22% penetration rate on the service with minimal marketing. Management stated that the strength of the response had encouraged them to accelerate the rollout and expand it to new markets, relegating its switched telephony business to a care and maintenance basis. They also commented that they believe VoIP will enable UPC to be price leaders in both bundled and standalone services. Service launch is set for Q3 (when VoIP will also be launched in Hungary).

Following the encouraging experience in Rotterdam, the company has identified six additional markets for VoIP introduction over the next twelve months. The company hasn't specified which markets these are, but we would guess that good candidates would be markets where the footprint is large and/or multiple service penetration is relatively weak. Our assumption is that these markets will include Austria, France, Sweden, Belgium, Norway, and Czech Republic.

Considering that UPC Netherlands has 2.3m customers and 2.4m two-way homes passed, a 22% level of uptake across its Dutch footprint suggests something like 510k VoIP subs over time. The company has fairly low penetration of both broadband subs (15.2%) and telephony (10.3%) in its Dutch footprint, so the appeal of having a teaser like VoIP to boost multiple service penetration is a compelling one. The ratio of revenue generating units (RGUs) to customers in the Dutch market is only 1.25, versus 1.59 in Austria, where the company acknowledges that its bundling strategy has been most effective. UPC Netherlands targets this level of multiple service uptake, which suggests that in one scenario the telephony subscriber base should in fact triple to around the 510k mark, with the broadband and digital cable subscriber bases each doubling.

Bandwidth and pricing are also issues where the incumbents will come under pressure from UPC. Starting with UPC Netherlands later this year, premium broadband customers will see bandwidth go to 8Mbps (with symmetrical an option at an additional cost), and the company is bundling other services at a discount of EUR8 - 15 depending on the relevant service tier. This sort of discount level is pretty material in light of a broadband ARPU of EUR45 across Europe.

Clearly there are a lot of complex issues relating to each individual market, and the ingredients of success will vary accordingly. However, yesterday's call left little doubt that VoIP is the principal prong in the UPC bundling attack, and is expected to drive significantly higher uptake of other services, as has anecdotally been the case in the earlier deployment from Cablecom in Switzerland. For the incumbents (not just KPN alone), the important message yesterday was that the largest cable player in Europe is bullish on VoIP and believes that the technology plays to its strength in other areas. Other, smaller cable players will be encouraged by this. As we have argued previously, for many telcos, adding the missing piece (video) of their own service bundle may be relatively more costly and time-consuming.