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Tuesday, 19 July 2011

Dutch telecom behemoth KPN Telecom listens to its customers… and raises prices for mobile internet and smartphones.

Two months ago, I wrote an article on the vanishing earnings models for the modern telecom behemoths, as a consequence of the widespread usage of smartphones and mobile internet: the unbearable heaviness of being…. Here are the pertinent snips of this article:

As a CEO of a large mobile phone company you suffer from the fact that: 
 ·         Skype took away your expensive paid-per-minute phone calls (about €0.15 per minute) inside your own country and network
·         Skype took away your extremely expensive paid-per-minute roaming phone calls (about €0.50 - €1.00+ per minute) for calling abroad in and outside the European Union
·         Twitter / Whatsapp / Ping took away your even more expensive Short Message Service (SMS): €0.20 for sending 250 bytes(!) of information.
·         Youtube and other streaming video applications are sucking up your bandwidth, while your customers are complaining about the slowliness of your services. 
·         You were so stupid to offer your customers unlimited bandwidth usage on their smartphone, if they would sign a 2-yr contract and buy an Apple iPhone for a lousy €150 and €29.95 per month
·         Everybody is angry with you, when you pinch off Twitter / Whatsapp / Skype and Youtube from your mobile internet access.
·         Your shareholders ‘smell’ that your earnings model is under heavy pressure from these developments and they are fearing a losing investment if they keep your stock.
The aforementioned ´free´ services, like Twitter, Skype, Ping and Whatsapp were strong competitors for the telecom company´s own dearly paid services:
·         normal mobile phone calls;
·         roaming phone calls (calls from and to a foreign country);
·         SMS´s.

You could say, these free services took away the telecom company´s cash cows. Therefore two large phone companies in The Netherlands, Vodafone and KPN Telecom, threatened to pinch these services off their mobile internet.

However, today the news came out that  the Dutch telecom behemoth KPN decided to listen to its customers after all: It doesn´t  pinch off these free internet services or any other internet services.

But there is a price to be paid for the flexibility of KPN:
·       all different services like phone calls, SMS´s and mobile internet are now packed together in one package, instead of being calculated separately.
·       the price of this total package is going up (substantially)
·       the prices for smartphones that are purchased at KPN, will rise substantially too, probably up to 40-60% of the gross sales price (i.e. the price without a subscription at a phone company).
o    Now a smartphone is sold for ´free´ or for a token price, in combination with a one or two year subscription at a telecom provider.

The Dutch financial newspaper Het Financieele Dagblad ( writes about this subject: KPN raises prices mobile internet (link in Dutch). Here are the pertinent snips:

Royal KPN NV (KPN.AE) raises its rates for the usage of mobile internet. This was published on Tuesday July 19th, before opening of the stock exchange. 
According to KPN, the traditional subscription varieties are insufficient for its customers and for the telecom provider itself, especially due to the more intensified usage of social media and mobile apps for communication, like Skype.  
Mainly due to this intensified usage, the revenues of KPN in Q1 dropped by 8.1%, causing the company to issue a profit warning. 
Earlier plans to separately charge the usage of Skype, were blocked by the Dutch Second Chamber of Parliament. In June, this Chamber approved of a change of the Telecom law, making it impossible for mobile internet providers to block, curtail or separately charge the usage of social media and mobile apps.  
The new rates for the usage of mobile internet are introduced on September 5th  and are applicable to all new customers and existing customers that roll over their contract. 
Marco Visser, who is responsible for the Dutch consumer market within KPN, stated on Tuesday that the company will also reduce the discounts on smartphones.
I can imagine that KPN takes this measures to save something of their earnings model. But both solutions – raising the price of their mobile services and raising the price of the smartphones that are sold– seem to be doomed.

Concerning the sale of smarthphones: only for the Apple iPhones, I see a possibility to increase the prices, as these are sold exclusively by the large mobile providers, via their flagship stores.

Other popular brands like Samsung, HTC, Blackberry and Nokia are sold at every department store and obscure phone shop and both with or without a subscription. It is impossible to raise these prices, in my opinion.

And concerning the subscription prices for mobile packages? The higher KPN´s prices get, the easier it gets for KPN´s competitors to sell mobile internet for more competitive prices, unless…

The reason for this last word ´unless´ is the long Dutch tradition of (illegal) syndication in all kind of industries. Most Dutch markets and industries are too small to really hurt your competitors without future consequences, as you will meet them again in a different situation very soon. And today´s enemy might be tomorrow´s friend and vice versa. Therefore competitors in various industries drink a good cup of coffee together and make a deal that is not written on paper.

This is the reason that I would not be surprised when T-Mobile and Vodafone in a few weeks will announce ´out of the blue´ that they also will raise the prices for mobile internet and for smartphone sales. But, please don´t call this a cartel! I also don´t do that.

But these presumed actions won´t change the fact that the time of the excess profits for the telecom companies seem to be over for good. So if you have shares in telecom companies, you might take a good look at them.

Disclaimer: don’t treat this as an investment advice, as I decline any responsibility on this advice.

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