Belgacom Catches the Scarlet Pimpernel

| Feb 19, 2008 | Consumer Broadband Services - Europe | Competitive Intelligence Report

| Analyst: Ben Tudor

Current Perspective: Positive/Neutral
Vendor Importance: Very High
Market Impact: Very High

Event Summary

February 15, 2008 -- Belgian incumbent Belgacom has announced it will buy Scarlet Telecom, a fixed-line alternative service provider covering Belgium, the Netherlands and the Dutch Antilles. The deal is subject to regulatory approval, which is a key issue, as Belgacom is the Belgian incumbent and Scarlet one of the more prominent altnets in the region.

Analytical Summary

• Current Perspective: Positive on Belgacom’s expected acquisition of Scarlet Telecom, as the deal gives the Belgian incumbent access to new market sectors both in Belgium and in the Dutch market. Scarlet acquired much of KPN’s infrastructure in Belgium in the early years of the new century, including 1,300 km of fibre, and it plans to offer ADSL 2+ to 75% of the Belgian population. Scarlet is a solid company at present, with diverse products and bundled offerings, including mobile and fixed telephony and data and TV products. Belgacom dwarfs Scarlet in terms of staff; the former boasts over 17,000 employees, while Scarlet is far leaner at 550 staff as of summer 2007.

• Vendor Importance: Very high to Belgacom, as the purchase of Scarlet will allow it to plug a gap in its consumer product set as well as win the firm more customers outside its core market in Belgium, something the company needs to do. The deal is also significant because it will attract the attention of the EU’s competition regulators; it marks the first time since Viviane Reding’s critical report published last year that an incumbent has purchased a competitor. The outcome will signal whether incumbents can acquire when competing against diversified players and companies from different market sectors.

• Market Impact: Very high on the service provider market in the Benelux, as the deal could have far-reaching effects on pricing and competition in the region. While KPN has moved to separate its infrastructure and access businesses in the same way that BT has separated Openreach from the rest of its UK operations, Belgacom has made no such move, giving it both an edge over the competition and a big red target for regulators to aim at.

Recommended Competitor Actions

• Through its Tele2 broadband subsidiary in Belgium, KPN should lodge an objection with the relevant competition authorities in an attempt to block the move. Scarlet is a tough competitor at the moment; a combination of it and the incumbent will be even trickier to handle.

• Versatel should seek to boost its TV offering and build out the bundled products it sells. The company should look to other cable operators in Europe, notably Virgin in the UK, for ideas on how to compete with incumbents in all sectors.

• Mobile operators in Belgium, notably BASE, should attempt to enter the broadband market directly, perhaps working with Belgian cable operators such as Telenet. Both BASE and Orange Netherlands could produce strong competitors to Scarlet, which currently relies on both for mobile connectivity.

• Business competitors, namely COLT, BT and KPN, should lodge objections with the relevant regulators. At the very least, this will cause both Belgacom and Scarlet to lose time and effort from other activities while they counter these actions.

• Consumer competitors, including KPN and Versatel, should seek to merge or acquire to meet the threat. This move may also be eminently defensible with regulators as a counter to monopolization.

• Vendors looking to buy infrastructure – which might include mobile operator BASE – should pressure Belgacom to sell off Scarlet’s infrastructure to preserve competition and avoid angering regulators.

Recommended End User / Customer Actions

• Consumers should be on the lookout for price competition, or, in the absence of that, evidence of monopolistic behaviour.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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