Dutch telecom behemoth KPN lost track of trends in telecom landscape: scraps 5000 jobs (25%) in The Netherlands alone.

The Dutch financial newspaper Financieel Dagblad (www.fd.nl) opened yesterday, March 21 with the news that former state monopolist in the telecom business and current market leader KPN Telecom scraps up to 5000 jobs (link in Dutch) in The Netherlands: 25% of the total amount of personnel. Here are some pertinent snips of the article:

KPN is until 2015 going to scrap 4000 to 5000 jobs, due to unexpected headwinds on the main Dutch telecom markets. These numbers are about 20% to 25% of total personnel in The Netherlands. The stock is currently moving 7.5% lower. The company announced that this morning in a press release. The company also submitted a profit warning: did the company forecast last month that profit for 2011 would amount at least €5.5 bln, now this number is reduced to €5.3 bln. Directly after opening of the AEX (Amsterdam Exchange) the equity dropped 7.5%.

The lowered profit has also to do with necessary new investments of €2 bln, according to KPN. KPN speaks in the press release of ‘accelerated change’ of consumber behavior and of increasing price pressure in the very important business-to- business market.

The growth of communication via social networks, like Facebook and mobile apps, led to a considerable drop of the traditional phone and SMS traffic, according to KPN. The company will compensate this trend by changing their portfolio of subscriptions and by focussing on mobile data traffic. 

“We see negative trends in The Netherlands”, according to CEO Eelco Blok, who took office recently after long-term CEO Ad Scheepbouwer stepped down. But he added that German pricefighter E-Plus, a subsidiary of KPN, is doing fine on the German market. Last month when the devolution took place, Blok stated that he would not make a U-turn with the company, but now he is clearly retracting from this statement. 

The loss of jobs needs to be compensated by large-scale outsourcing and offshoring of support services.

The ebitda  dropped in Q1 with 4.1%, compared to Q1 last year, to a level of €1.269 bln. The turnover dropped with 1.3% to €3.24 bln.…

Yesterday afternoon, it became clear in which way KPN wants to compensate the losses it makes as a result of the social networks: the company wants to charge extra costs for the usage of social networks, like Facebook, Twitter, WhatsApp, Skype and Ping on their mobile internet subscriptions. It does this by putting access to the social networks in a special mobile portfolio.

For people that don’t know the Dutch telecom situation: KPN was a company you loved to hate in the past. It was a state monopolist that didn’t know the word “customer care” and charged ridiculous prices per minute for calling abroad with a fixed phone and for using mobile phones in the nineties. It had the manoeuvrability of a supertanker and the flexibility of a T-beam.

Only after competition was allowed in mobile phone and internet subscriptions (about 1996) from the likes of Vodafone, Orange, Tele2 and T-Mobile, the company started to move. Initially by trying to take-over or squeeze their competition and after that by becoming a little bit more customer friendly.

The company was almost bankrupted in the European UMTS auctions (2^nd generation mobile internet) that took place in the year 2000. KPN paid an excess amount for their concessions in Germany and The Netherlands and were punished for this by almost defaulting.

Under former CEO Ad Scheepbouwer the company recovered some lost ground by rolling out broadband internet in The Netherlands. However, KPN was accused of blocking their internet network for the competion. The company tried to do this by installing glassfiber telecom distribution frames in residential areas in such a way that the service switches of the competition would become useless. This plan failed ultimately.

And now the company pays the price for being too rigid and too much a former monopolist to see that the world around it has changed. I can’t blame the company for trying to outsource and offshore support services to (probably) India, Indonesia and Suriname. This is a sensible thing to do if you want to survive as a company in a low-margin market.

But please don’t try to overcharge the customer for the fact that you – as a company – didn’t see the changes coming in mobile internet and telephone usage. You better think of ways to make honest money with your mobile phones. Otherwise you might be wiped out by the competion.

Happy easter holidays…

Mortgage Interest Deduction revisited: letter from a reader

Today I received a letter from a reader. ‘Anna’, who works for the German-French TV-station Arte writes the following. My answers are put between the italic questions:

I am a journalist working for the french-german public cultural TV station "Arte". For our program, called "the blogger", we concentrate on socio-political topics. We show how people live in other european countries, what shapes their daily lives and how their cultures are different. This week, we are preparing a reportage about housing problems and answers in Europe. In this context, we will come to the Netherlands to investigate two questions:96% of all house-owners in the Netherlands are paying a mortgage and deduct this from tax. Is this policy of the government sensible, or is the next real-estate bubble preparing? What is the IMF-warning all about?

This is a very good question. The mortgage interest deduction was (in a different) form invented in 1893 and went since then through some changes. I think that the mortgage interest deduction especially made sense in the difficult years after World War II when the Dutch people were relatively poor and a lot of homes had been destroyed. With this deduction they were able to receive a higher mortgage and this enabled them to buy a better home.

But like a lot of political decisions that were made with good intensions, it has some nasty side effects. I can show this with an example:

Someone with an average income can pay €700 interest per month for a house (no amortization). When the interest is 5% and cannot be deducted, the maximum that this person can borrow = € 168,000. Hence, the price of an average house for people with his kind of income will be around €160,000 - € 170,000.

But now this person can deduct 40% of his interest from his income. Suddenly this person cannot pay €700, but €1166 (0.6 * €1166 = €700) per month for his house. But as this person still has an average income, the price for an average house will be around €270,000 - € 280,000. This is because the people have not become richer, compared to others, but can only borrow more money. This proves that the mortgage interest deduction is a very inflatory force.

Two other nasty side-effects are:

• People don’t want to amortize their mortgage amount in order to keep their maximum mortgage interest deduction. This happened with the amortization-free loan.
  
• Once you have started with this system, it is almost impossible to get rid off: people have too high loans and can’t possibly pay those without mortgage interest deduction

In my opinion the next real-estate bubble is not preparing: it is already fully there. Look at the ridiculous average housing prices, compared to Germany, Belgium and France. And look at the fact that nobody wants to sell their houses for a lower price although the housing market is totally locked-up. This is because their current high mortgage is hanging around their neck like a millstone. But in the end something ‘s got to give and then the Dutch housing market will blow up skyhigh. This is what the IMF’s warning was all about.

The Netherlands have a very long-standing tradition of social housing, and have the best-developed social housing system in the world. This is put in danger now, with buildings being demolished and access being limited for people who earn more than 33.000 per year. What does this mean for the country?

The populist-rightwing cabinet that we currently have tries to maintain the status quo on the private housing market, especially for the wealthy part of the population. This is the reason they don’t want to get rid of the mortgage interest deduction (MID).The richest people can deduct the most interest as their tax rate is higher than for not so wealthy people (50% vs. 40-30%). So every Euro of mortgage interest returns 50 cent in tax deduction,

Social housing is often seen by the liberal VVD as a leftwing hobby that needs to be battled. The rightwing approach is that everybody needs to own their house, instead of renting it. Renting would only remain for the poorest people. Hence: the maximum income of €33,000. But they forget that with the current housing prices someone with an income of €35,000 can hardly buy a single-family dwelling.

I am not aware that a lot of social housing is demolished currently. In my opinion the only buildings that are demolished are long-term vacant company buildings and buildings in depressed urban areas. That is not necessary a bad thing, as long as affordable renting / private-owned houses do return at the same spot and not expensive houses for yuppies and dinks (double-income no kids). But maybe I am wrong in this matter.

I read several articles on your blog that relate to these problems, most of all mortgages and prices being too high. You seem to know a lot about this subject and tell things very competently! Since I am a bit handicapped by not speaking dutch, I wanted to ask you if you could point out the main actors in this theater to me:  Is there someone who is advocating upholding the state-subsidies for mortgages? 

Yes, there is. The main advocates for this subsidy are:

• Vereniging Eigen Huis (www.veh.nl; homeowner association): Spokesman Hans André de la Porte 
• Nederlandse Vereniging van Makelaars NVM (www.nvm.nl; realtors association). Spokesman: Roeland Kimman 
• VVD (political party) 
• CDA (political party) 

Is there someone famous in public life or an association or movement against the deductibility of mortgages?

Yes, there is too:

• Kees de Kort, blogger and macroeconomist with a daily column on Business News Radio (www.bnr.nl). He is the strongest advocate against this mortgage interest deduction
• Arnold Heertje. Macroeconomist and former professor University of Amsterdam.
• D66. Political party
• PvdA. Political party
• GroenLinks. Political Party
• Ernst Labruyère (just joking) 

Is there someone who is warning about a real-estate bubble that could burst soon?

• Kees de Kort again.
• Ernst Labruyère too.

It is not only to be joking that I mention my own name, but a lot of famous / well-known people are really afraid to get rid of the MID and they don’t want to hear about a housing bubble. Instead they give you at least five excuses why the houses in The Netherlands are in reality not too expensive. But believe me: they are!

I am very interested in the documentary that Arte will come up with.

The European Union (2): Will there be a lost generation of youngsters in the EU ?

Yesterday the news was on Dutch Business News Radio station BNR (www.bnr.nl) that unemployment under the Spanish youth has risen to a staggering 43,2%. That means that from every five youngsters in Spain at least two are unemployed. These are really depressing figures and it doesn’t stop there:

Country	Youth Unemployment
Netherlands	8.5%
Germany	8.5%
United Kingdom	20%
Portugal	23%
Belgium	25%
France	25%
Italy	26.2%
Greece	39%
Spain	43.2%

Notice that Germany and The Netherlands are rarities here. I can explain the Dutch situation only by taking three circumstances into account:

• The Netherlands had the parttime Unemployment Benefit (a 50% government subsidy on the salary of workers that temporarily had not enough work in a company). This enabled companies to keep personnel that they otherwise should have fired. Although I was against it (I still am), it might have worked quite well in some companies that suffered from a temporary setback, due to the credit crisis.
  
• Quite a lot Dutch youngsters in technical professions (carpenters, construction workers or plumbers) and ICT personnel have become freelancers. When they lose their job/assignment, this doesn’t count in the unemployment statistics. So there might be some hidden unemployment
  
• The Netherlands and Germany have their exports soaring currently (to the southern European countries) and this might help to prevent a strong growth of youth unemployment.

Further the figures for youth unemployment are ranging from bad (United Kingdom) up to disastrous (Spain and Greece) and this indeed raises the question whether you could talk of a ‘lost generation’?! This doesn’t have to be true yet, but it is about time for the European Governments to take combined, decisive action to fight youth unemployment. If they won’t, there will be a lost generation indeed.

The problem in situations like these is that companies when they hire workers, want two kinds of workers:

• Young workers that require little salary and that are able to learn their new jobs ‘on the job’
•  Experienced, older workers that can start at full speed from the beginning and don’t have to learn their jobs anymore.

Companies are not pleased when jobseekers are older (30+), but don’t have any job experience or an education that can make the difference for them. When the current generation of 15-24 remains unemployed for the coming 5-10 years there IS a lost generation.

Therefore the European Governments should do a number things to prevent a lost generation from arising under the current 15-24 youngsters:

• Start educational projects that raise the level of knowledge under the youngsters.
• Start (subsidized) projects to train youngsters ‘on the job’, possibly in combination with extra education one or two days per week.
• Give unemployed youngsters a small bonus when they start working in heavy or dirty hands-on jobs: in the greenhouses, factories, distribution centers, medical centers and all other companies and institutions where personnel is still scarce in spite of the bad economic times.

But what especially the south of Europe needs to do, is to develop their own industries and services organizations and become less dependent on German and Dutch imports. Their industrial and services economy needs to become more competitive to win the battle against the West-European countries. The Dutch and German export surplus is their import surplus.

Whatever you say: 40% youth unemployment is a disgrace and it is something that the Spanish and Greek governments should be ashamed about. No more blubberers’ stories, but a Marshall plan for the economy is what those countries need. And the EU should help them enabling these Marshall plans.