Big Profits with No-Frills Mobile

Upstart Dutch wireless carrier KPN is winning over German customers with its simple, inexpensive subscriptions

A few years ago, it looked like Germany might not be big enough for four mobile network operators. Deutsche Telekom's T-Mobile (DT) and Britain's Vodafone (VOD) dominated the market. O2, a subsidiary of Spain's Telefonica (TEF), and E-Plus, owned by the Netherlands' KPN (KPN.AS), fought over the scraps. As the overall market matured, KPN Chief Executive Officer Ad Scheepbouwer fretted that "we would not be growing as fast as the market," he recalls.

But in 2005, KPN imported a brand from Belgium that has shaken up the duopoly in Europe's largest mobile market. Called Base, it appeals to customers confused by the myriad rate plans offered by other operators. It also targets the growing number of customers who no longer have landline phones. KPN's success in Germany shows that, with the right business model, it's possible to gain share even in a mature market.

Cheaper by the Minute

As the name implies, Base is basic. While other carriers supply free or very cheap phones to customers who sign two-year contracts, Base does not give away phones. Instead, it offers lots of cheap calling time. For $108 a month, Base subscribers can make unlimited free calls anywhere in Germany. A comparable offer by Vodafone costs $144. The E-Plus brand, which continues to operate alongside Base, has adopted a similar low-price strategy. For example, it offers a plan under which all calls cost 10 euro-cents per minute, or about $0.14.

Customers love it. E-Plus is gaining market share in Germany, with third-quarter subscriptions up 16% year-on-year, to 14.1 million. More important, E-Plus operating profit rose 79% during the quarter, to $193 million—some 20% of KPN's total operating profit during the period. E-Plus's profit margin is nearly 38%, second-best among German operators after Vodafone, according to KPN figures. "No doubt about it, [the strategy] has really turned around the company entirely," says Dan Bieler, the Munich-based consulting director for European telecom market watcher IDC (IDC). "The margins are really solid in a market that has been very competitive."

Spanish Expansion

Now KPN, the dominant carrier in the Netherlands with worldwide sales of $17 billion, is planning to export the Base business model to Spain early in 2008. The venture marks a resumption of the group's international expansion after its earlier withdrawal from the Czech Republic and from Indonesia, a former Dutch colony. Those ventures led CEO Scheepbouwer to conclude the company's best prospects were close to home. "Europe is our backyard," Scheepbouwer told BusinessWeek over coffee at an Amsterdam hotel. "That's where we do business best."

Spain is a growing but highly competitive market where KPN faces bigger entrenched players including Telefonica, Vodafone, and France Telecom's (FTE) Orange mobile unit. KPN will operate there as a mobile virtual-network operator, or MVNO, renting capacity from an existing provider, probably Orange. But IDC's Bieler thinks the Base brand could carve out a niche in the crowded market. "It's not going to be a walk in the park, but with this kind of strategy they have something new to offer," he says.

Outside its home market, KPN is evolving into primarily a marketing outfit. In Germany, E-Plus has outsourced functions such as network maintenance, which is handled by Alcatel-Lucent (ALU). In addition to Base, E-Plus has a stable of brands in Germany aimed at various groups, such as Ay Yildiz for Turkish-speaking residents. E-Plus is also the service provider behind Aldi Talk, a prepaid mobile service that's sold at Aldi discount stores, which are as ubiquitous in Germany as Wal-Mart (WMT) outlets are in the U.S.

Following Web Developments

Scheepbouwer talks about expanding to other markets such as France, though there are no definite plans. One question, however, is how KPN's no-frills model will fare as consumers increasingly use mobile handsets to download music, watch TV, or find their way around a strange city. As multimedia handsets (BusinessWeek, 5/30/07) such as the Apple (AAPL) iPhone or Nokia (NOK) N95 become commonplace, KPN may need to adjust the model based on cheap talk minutes, IDC's Bieler says. "The focus on the low end of the market might have to be rethought," he says.

E-Plus already offers unlimited mobile Internet service for an extra $36 a month, but KPN says that's not a big part of its business. A major disadvantage for KPN: it doesn't have a Web portal to compete with the likes of Vodafone Live!

For now KPN is keeping a close watch on T-Mobile and Vodafone. "There are two big players who dictate the rules of the market," Scheepbouwer says. "We call ourselves smart followers—we wait to see what happens in the market and follow as closely as we can."

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