Market Insight

Vodafone, KDG wedding signals future of platform pay TV?

September 12, 2013

James Allison James Allison Principal Analyst, Consumer Devices

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The path looks increasingly clear for Vodafone's ambitious takeover of German cable giant KDG after the mobile group cleared the 75 per cent threshold for shareholder acceptance for its takeover of Kabel Deutschland. The €7.7 billion ($10.2 billion ) takeover of Kabel Deutschland had looked to be on shaky ground after Vodafone gained less than 20 percent of Kabel Deutschland shares shortly before the deadline.

There are two aspects to this deal. On the face of it, this is about fixed-line access and multi-play. Vodafone will strengthen its position in multi-play markets in Germany with a greater residential fixed-line network to market multi-play services to. The combined German entity will have market shares of 16.09 percent in voice, 17.8 percent in broadband, 28.8 percent in mobile, and 34.5 percent in pay TV. Prior to the deal, Vodafone offered all four services: mobile, fixed voice and broadband and pay TV, but its legacy acquisition Acor's fixed voice and broadband services were primarily focussed on the corporate segment and its pay TV operations were also small-scale with a paltry 150,000 revenue generating units (RGUs) at the end of 2012.

The KDG deal therefore gives Vodafone much greater scale and ability to cross-sell and bundle services to the household segment. At the end of 2012, KDG had 8.1 million TV revenue generating units (RGUs) plus 1.75 million  telephony and 1.74 million  fixed broadband subscriptions: even within KD's current footprint there is much potential for greater bundled penetration.

No other acquisition target would have provided Vodafone similar scale: United Internet has 3.4 million fixed broadband subscriptions but no pay TV offering. Deutsche Telekom does not provide quad-play bundles, but has succeeded in cross-selling mobile into its household customers.

The other aspect of the deal is looking towards the future of entertainment. With typically superior consumer downstream speeds, cable infrastructure is better suited to delivering entertainment content than Vodafone's DSL or LTE networks, allowing for a more compelling quad-play offer to be provided. Without wired infrastructure, Vodafone would have struggled to participate fully in the entertainment landscape of tomorrow. But further ahead, as entertainment delivery becomes increasingly cloud-based, the value of LTE combined with broadband cable infrastructure becomes much more attractive.  Cable operators, too, are well versed in the development and sale of multi-product bundles, tying together a diverse range of entertainment and communications services that will be increasingly important to the future entertainment bundle.

The next step for the deal will be gaining approval from the regulatory authorities, which IHS expects to be forthcoming as the impact individual markets will be minimal. Looking at the market as a whole the deal has negative implications for O2 and E-Plus, with Deutsche Telekom and Vodafone set collectively to control market share of greater than 50 per cent in the voice, broadband, and mobile sectors. This will undoubtedly increases the pressure on the proposed merger of O2 and E-Plus to succeed, to provide the combined entity with greater scale to compete effectively with Vodafone and Deutsche Telekom.

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