20-F 1 b54426_20f.htm

As filed with the Securities and Exchange Commission


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number: 1-13980

Koninklijke KPN N.V.

(Exact name of registrant as specified in its charter)

Royal KPN N.V.

(Translation of Registrant's Name into English)

The Netherlands

(Jurisdiction of incorporation or organization)

Maanplein 55

2516 CK The Hague

The Netherlands

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange

Act of 1934:

 
Title of each class
 Name of each exchange
on which registered
 
 Ordinary Shares
American Depositary Shares
 New York Stock Exchange*
New York Stock Exchange
 

 


*

The Registrant's Ordinary Shares are not listed for trading, but only in connection with the registration of American Depositary Shares ("ADSs") which are evidenced by American Depositary Receipts ("ADRs").

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange

Act of 1934:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934:

None

Number of outstanding shares of each of the Registrant's classes of capital or common stock as of December 31, 2007, the close of the period covered by the annual report:

1,843,482,213 Ordinary Shares

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board x Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x


 



 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

Annual Report and Form 20-F 2007

 


Annual Report and Form 20-F 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This publication is prepared in English comprising the full Annual Report and Form 20-F for 2007 of Koninklijke KPN N.V. This document complies with the applicable Dutch regulations for Dutch statutory purposes. It also forms the 2007 Annual Report and Form 20-F for filing with the Securities and Exchange Commission (SEC) in the United States. Cross-references to Form 20-F are set out at the end of this document.

 

 

 

 

 

   

 

 

 

 


Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profile

2

 

 

 

Mission statement

3

 

 

 

Foreword by the Chairman and CEO

4

 

 

 

Key information

6

 

 

 

Risk factors

10

 

 

 

Risk Management

18

 

 

 

Information about the Company

22

 

 

 

History and developments

22

 

 

 

Organizational structure

23

 

 

 

Business Overview:

24

 

 

 

The Netherlands

25

 

 

 

Mobile International

42

 

 

 

Other activities

46

 

 

 

Property, plant and equipment

47

 

 

 

Research and development

52

 

 

 

Intellectual property

52

 

 

 

Regulatory developments

53

 

 

 

Operating results

 

 

 

 

Consolidated Results of Operations

57

 

 

 

Segmental Results of Operations

62

 

 

 

Liquidity and capital resources

81

 

 

 

Critical accounting policies and estimates

87

 

 

 

Corporate Social Responsibility

92

 

 

 

Corporate Governance

95

 

 

 

Report by the Supervisory Board

104

 

 

 

Remuneration and Organizational Development Report

109

 

 

 

Financial Statements

119

 

 

 

United States Opinion

121

 

 

 

Consolidated Income Statement

123

 

 

 

Consolidated Balance Sheet

124

 

 

 

Consolidated Cash Flow Statement

126

 

 

 

Consolidated Statement of Changes in Group Equity

127

 

 

 

General notes to the Consolidated Financial Statements

129

 

 

 

Notes to the Consolidated Income Statement

138

 

 

 

Notes to the Consolidated Balance Sheet

152

 

 

 

Financial Risk Management

174

 

 

 

Other disclosures

180

 

 

 

Commitments, contingencies and legal proceedings

187

 

 

 

Related party transactions

190

 

 

 

Subsequent events

191

 

 

 

Notes to the Consolidated Cash Flow Statement

192

 

 

 

Segment Reporting

195

 

 

 

Corporate Financial Statements

200

 

 

 

Corporate Income Statement

200

 

 

 

Corporate Balance Sheet

201

 

 

 

General Notes to the Corporate Financial Statements

202

 

 

 

Notes to the Corporate Balance Sheet

203

 

 

 

Other Information

206

 

 

 

Information about the KPN share

208

 

 

 

Additional information for shareholders

212

 

 

 

Glossary of terms

223

 

 

 

Cross-reference to Form 20-F

228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Contents

1

 


Profile

 

 

 

 

KPN is the leading telecommunications and ICT service provider in The Netherlands, offering wireline and wireless telephony, internet and TV to consumers and end-to-end telecommunications and ICT services to business customers. KPN’s subsidiary Getronics operates a global ICT services company with a market leading position in the Benelux, offering end-to-end solutions in infrastructure and network-related IT. In Germany and Belgium, KPN pursues a multi-brand strategy in its mobile operations and holds number three market positions through E-Plus and BASE. KPN provides wholesale network services to third parties and operates an efficient IP-based infrastructure with global scale in international wholesale through iBasis.

At December 31, 2007, KPN served over 35 million customers, of which 27 million in wireless services, 5.4 million in wireline voice, 2.4 million in broadband Internet and 0.5 million in TV. With 25,500 FTEs (43,531 FTEs including Getronics), KPN posted revenues of EUR 12.6 billion in 2007, with an operating profit of EUR 2.5 billion.

KPN was incorporated in 1989 and is listed on the Amsterdam, New York, London and Frankfurt stock exchanges.

27 million
wireless customers

5.4 million
wireline voice customers

2.4 million
internet customers

0.5 million
TV customers

43,531
FTEs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

KPN Annual Report and Form 20-F 2007

 

Profile

 


Mission statement

 

 

 

 

Our customers trust us to provide them with high-quality, reliable services to help them achieve their business and personal goals, and to enrich their work and leisure time. We offer them a range of innovative products which enable them to access information and entertainment, anytime, anywhere, and let them choose how to do that, from, for example, a phone, a computer, a PDA or a television set. We also let them choose from a range of brands which we have designed to suit different needs and niches – from the reliable, high-quality KPN brand, to youth brands such as Hi, or the no-frills brand Simyo.

We believe that satisfied customers form the basis for profitable growth and, as a result, create value for our shareholders. Equally, we believe that our commitment to quality and customer satisfaction can be realized only if our employees are motivated to provide the best possible products and services.

We are equally conscious of our responsibilities to the wider community: it is our policy to use our knowledge and technology to contribute to the well being of all our stakeholders, and take steps to account to them for our environmental performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

     
     

 

 

 

     
     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Mission statement

3

 


Foreword by the Chairman and CEO

 

 

 

 


 

 

Progress in the world of Telecommunications and Information & Communication Technology is relentless. The customer is continuously barraged with new developments. Competition is strong and the battle for the customers’ favor is fiercer than ever. Understandably, we at KPN want to win this battle. In order to maintain our leading position in The Netherlands as well as be the best challenger abroad, we have to keep evolving and embrace market dynamics. At any given moment we must be able to measure up to the best in the market.

Given the various challenges we face in our industry, I am delighted to report that our company had a solid performance in 2007, coming another step closer to our ideal of being a company that can offer customers excellent products and services, one that has the fundamentals and potential to realize profitable growth and be an attractive employer. In the dynamic market in which we operate, shareholder value has been a prime focus of our Board and I am proud that the redevelopment of our company has created such significant value. Since 2001 our net debt has decreased by EUR 13 billion, our equity value has increased tenfold and we have returned nearly EUR 10 billion to shareholders in the form of dividends and share buybacks.

The year started with the integration of our Fixed and Mobile operations in The Netherlands, a change driven by customer’s evolving needs in the business market as they asked for integrated solutions.

Our VoIP product (InternetPlusBellen) proved to be an enormous success at its introduction. Unfortunately though, the success also had a downside and, due to overwhelming initial sales, we were not able to provide the level of customer service we are accustomed to providing. This was a valuable lesson, because it reminded us of the importance of getting the basics right. With the operational issues successfully resolved and behind us, we can fully appreciate that VoIP is an ongoing success, having reached a milestone of 850,000 customers by the end of December 2007.

The agreement that we signed with alternative DSL operators in 2007 to open up our future fiber network to competitors was widely regarded in our industry as groundbreaking and even brave. But we believe that our differentiator will be the quality of our customer focus and service. KPN strongly believes in an open network in order to make The Netherlands ready for the future of communication. Another aim of the new network rollout is to achieve a structurally lower cost base and therefore we are committed to an All-IP rollout in the coming years.

In 2007 overall growth in The Netherlands was flat. Nevertheless, we continued to achieve customer and revenue growth in the Business market, driven especially by an increased usage of data communication services and outsourcing. In the TV market we also showed a growing customer base and by year end we had approximately half a million

 
 
 
 

10 billion

Shareholder return in the form of
dividends and share buybacks since 2001

 

850,000
VoIP customers by December 2007

 

 

 

 

 

 

4

KPN Annual Report and Form 20-F 2007

 

Foreword by the Chairman and CEO

 


 

 

 

 

 

customers. This means that our TV customer base almost doubled in one year, a strong improvement in our position as a multiplayer. Combined with a stabilization in the Consumer net line loss, we maintained our position as market leader in The Netherlands.

Another milestone this year was our acquisition of Getronics. This acquisition will allow us to provide our business customers with fully-managed outsourced ICT solutions in The Netherlands and internationally. We believe that, in general, telecommunications companies are beginning to take necessary steps to become fully integrated ICT-companies and through our acquisition of Getronics we have taken a lead in that market. We have also merged our international wholesale voice business into iBasis, creating one of the three largest carriers of international phone calls in the world.

In our Mobile International business, we delivered solid performance in challenging markets, and enjoyed continued profitable growth despite regulatory tariff cuts. E-Plus is delivering on its service revenue growth and margin objectives and, as a challenger in Germany, has been gaining market share for over two years due to the continued attractiveness of its multi brand offering and the resulting usage growth. In Belgium, the Tele2/Versatel Belgium and Allo Telecom acquisitions were completed, providing a platform for further growth.

The acquisition of Getronics will
allow us to serve our business
customers with fully-managed
outsourced IT solutions.

 

 

 

 

 

The principal goal for KPN
is to go back to growth.

 

For the years ahead, the principal goal for KPN is to ‘go back to growth’, which we believe is an achievable goal. In order to deliver this growth we have to continue growth in our Mobile International business. In The Netherlands we want to make sure our revenue curve reaches inflection, by becoming a leading service provider based on wireless and broadband growth while at the same time, putting a halt to net line loss in the Consumer market. Additionally, we want to acquire sustainable market shares in selected high-value business markets. Last but not least, we intend to create additional growth from recent acquisitions such as Getronics and iBasis.

As I have said, customer focus is key, and therefore ease of use, simplicity and personal service are most essential. We want to connect everyone to the future with straightforward offers, from private individuals to multinationals. A transparent brand portfolio will make this easier and therefore we plan to focus on three key consumer brands in The Netherlands: KPN, Hi and Telfort. This brand strategy will continue to evolve throughout 2008. It will also be important to ensure network transformation, quality improvement and cost reduction within our Dutch business.

 

 

 

 

Achieving all of the above would not be possible without talented staff, therefore our senior management has been incentivized to achieve this growth plan. KPN faces a huge challenge, needing to restructure itself again to best address today’s market, as we have successfully done, before and at the same time attract and retain top quality professionals. Accordingly, we have decided to engage in multiple collective labor agreements, a decision that makes sense in a large company with many different skill-sets and job requirements such as ours. Despite this diversity, we are still one company and together we can make a real difference and be successful. I truly believe this. KPN has over 125 years of experience in establishing contact between people. That is still our strongest asset and where our heart is.

KPN has over 125 years of
experience in establishing
contact between people.

 

Given this background and these facts, I furthermore believe KPN owes it to society to address problems where we, as a telecommunications company, can be of added value. With the start of a new Corporate Social Responsibility program in which we initially focus on offering assistance to chronically sick children and the elderly, we can provide this value and play a positive role in society.

Our prospects for the future are promising and though our plans are challenging in a volatile market, we believe that we can achieve the return to growth because of our staff, our strategy and our track record. I look towards the future with confidence and excitement to ensure our strategy is fully understood, committed to by all and executed. It was when faced with these challenges and opportunities and the attraction of an exciting future that I accepted the Supervisory Board’s request for me to stay on as CEO of KPN for the next four years.

 

 

 

 

 

 

 

 

 

 

 

 

 

Ad Scheepbouwer
Chairman of the Board of Management and CEO

 

 

 

     
     
     
     
     
     
     

 

 

 

 

 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Foreword by the Chairman and CEO

5

 


Key information

 

 

 

 

In this Annual Report and Form 20-F for the year ended December 31, 2007 (referred to hereinafter as the ‘Annual Report’):

 

 

   ‘KPN’ refers to Koninklijke KPN N.V.;

 

 

   ‘we’, ‘us’, ‘our’, the ‘Company’, the ‘Group’ and similar terms refer to KPN and any or all of its subsidiaries, associates and joint ventures as the context requires;

 

 

   ‘E-Plus’ refers to E-Plus Mobilfunk GmbH & Co. KG and E-Plus Mobilfunk Geschäftsführungs GmbH and any or all of their subsidiaries, as the context requires;

 

 

   ‘BASE’ refers to BASE N.V./S.A. and any or all of its subsidiaries, as the context requires;

 

 

   ‘iBasis’ refers to iBasis Inc., a US-based NASDAQ listed company, and any or all of its subsidiaries, as the context requires;

 

 

   ‘Getronics’ refers to Getronics N.V. and any or all of its subsidiaries, as the context requires; and

 

 

   ‘Telfort’ refers to Telfort B.V. and any or all of its subsidiaries, as the context requires.

 

 

For descriptions of abbreviations, please refer to the Glossary of terms.

In compiling the information in this Annual Report, we have used data and projections obtained from industry surveys, market research and other publicly available information. Such data and other publications generally state that the information they contain has been obtained from sources believed to be reliable but that the accuracy and completeness of such information is not guaranteed and that the projections they contain are based on a number of significant assumptions. We have not verified this information independently or determined the reasonableness of such assumptions. As a result, this information may not be accurate, complete, adequate, up-to-date or comprehensive.

Our market share in traditional voice is defined as our share of the total traffic volumes, excluding VoIP. These figures are based on externally available market data, which may not be completely accurate.

Our market share in VoIP is defined as our share of the number of VoIP connections. These figures are based on externally available market data, which may not be completely accurate.

Our market share in consumer broadband is defined as the total number of our ADSL broadband connections as a percentage of total consumer broadband connections, which consist of ADSL competitors and broadband via cable. These figures are based on externally available market data, which may not be completely accurate.

Our net line loss figures are defined as the difference from one period to the other period in PSTN/ISDN lines plus consumer VoIP plus ADSL only and plus Wholesale line rental (WLR).

The customer figures of our mobile network operators consist of the number of registered SIM cards – excluding dual cards but including data-only PC connections and machine-based SIM cards – at the end of each reporting period. The customer base also comprises inactive prepaid users, who have had neither incoming nor outgoing traffic during a three-month period, but have not yet met the disconnection criteria (generally 12 months of inactivity). We define mobile market revenue share as our mobile network operators’ share of the total service revenues of the respective countries’ mobile telephony markets, for a reporting period. These figures are based on externally available market data, which may not be completely accurate.

Other mobile network operators may calculate their number of customers differently than we do, which may affect the comparability and accuracy of data.

Service revenues are defined as the aggregate of connection fees, monthly fixed subscription fees and traffic revenues. ARPU is the quotient of service revenues during a month and the average number of customers during that month.

Our financial statements are prepared in euro. Details of key exchange rates used in the preparation of this Annual Report are given elsewhere in this document together with Noon Buying Rates certified by the Federal Reserve Bank of New York in New York for the equivalent periods.

     
     
     
     
     
     
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

KPN Annual Report and Form 20-F 2007

 

Key information

 


 

 

 

Forward-looking statements

 

Certain of the statements we have made in this Annual Report are ‘forward looking statements’. These statements are based on our beliefs and assumptions and on information currently available to us. They include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance or expense improvements and the effects of future legislation or regulation.

Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words ‘believe’, ‘expect’, ‘plan’, ‘intend’, ‘anticipate’, ‘estimate’, ‘predict’, ‘potential’, ‘continue’, ‘may’, ‘will’, ‘should’, ‘could’, ‘shall’, or the negative of these terms or similar expressions. Examples of forward-looking statements include but are not limited to:

 

 

 

    competitive forces in liberalized markets, including pricing pressures, technological developments, alternative routing developments and our ability to gain or retain market share in the face of competition from existing and new market participants;

    telecommunications usage levels and market conditions, including the number of telephone access lines, traffic patterns (including Internet usage) and development in customer numbers;

    the success and market acceptance of business, strategic, operating and financial initiatives (many of which are untested), the level and timing of the growth and profitability of new products, startup costs associated with entering new markets, the successful deployment of new systems and applications to support new initiatives, efforts at improving customer satisfaction, and local conditions and obstacles;

    any acquisitions, dispositions or mergers we or our subsidiaries may enter into;

    our dependence on and relationship with suppliers;

    Regulatory developments and changes, including with respect to the levels of tariffs, the terms of interconnection, electromagnetic field strengths of mobile transmission equipment, customer access and international settlement arrangements, and legal and regulatory proceedings and investigations;

    our ability to maintain an effective system of internal controls;

    the timing of the rollout of Universal Mobile Telecommunication System (UMTS) and HSDPA networks, the All-IP fixed network and other new, enhanced or upgraded networks, systems, products and services, and their performance and impact on our financial position;

    the amounts of future capital expenditure;

    our ability to attract and retain qualified personnel, particularly in light of our cost reduction efforts;

    risks related to information and communication technology systems generally;

    general economic conditions, government and regulatory policies, and business conditions in the markets we and our affiliates serve;

    the outcome of litigation, disputes and investigations in which we are involved or may become involved;

    the impact of tax rulings, the timing for settlement or applicability of tax losses carried forward and uncertainties regarding future tax liabilities;

    the availability, terms and deployment of capital;

    fluctuations in foreign exchange rates, interest rates and property prices;

    the amount and timing of any potential future impairment charges for our licenses, goodwill or other assets;

    asset retirement obligations;

    the impact of regulatory competitive developments on capital outlays and our ability to achieve cost savings and realize productivity improvements;

    uncertainties associated with developments related to the International Financial Reporting Standards; and

    international political and economic conditions.

 

 

 

 

 

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. No undue reliance should be put on any forward-looking statements. Unless required by applicable law or applicable rules of any stock exchange on which our securities are listed, we have neither the intention nor an obligation to update forward-looking statements after distribution of this Annual Report. For a more detailed description of these risks, see ‘Risk factors’.

 

 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Key information

7

 


Key information

 

 

Key financial figures

 

 

The following tables show our selected historical financial data for the years ended December 31, 2004 through 2007.

Our Consolidated Financial Statements for the years 2007, 2006, 2005 and 2004 have been prepared in accordance with both International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and IFRS as adopted by the European Union.

On April 12, 2005 the SEC adopted amendments to Form 20-F for foreign private issuers related to the first-time adoption of IFRS. This amendment allowed KPN to provide only one year of comparative IFRS figures in the consolidated financial statements over the year 2005. As a result we have not adjusted our 2003 Consolidated Financial Statements for IFRS. Therefore comparative amounts for this year are not available.

On November 15, 2007 the SEC approved rule amendments under which financial statements from foreign private issuers in the United States will be accepted without reconciliation to US GAAP if the financial statements are prepared in accordance with IFRS as issued by the IASB. The new rule is effective for the 2007 fiscal year. As a result, we do not provide a reconciliation to US GAAP.

This table should be read together with ‘Operating results’ and our Consolidated Financial Statements and the Notes thereto, included elsewhere in this Annual Report.

 

Income Statement Data 3

Amounts in millions of euro,
except for shares and per share data

 

As at and for the year ended December 31,

 

 

2007

 

2006

 

2005

 

2004

Revenues

 

12,461

 

11,941

 

11,811

 

11,746

Other income

 

171

 

116

 

125

 

73

Operating profit

 

2,500

 

2,223

 

2,348

 

2,645

Profit before income tax

 

1,941

 

1,710

 

1,814

 

2,057

Profit attributable to equity holders

 

2,652

 

1,583

 

1,437

 

1,707

Earnings per ordinary share and per ADS
(non diluted) 1

 

1.42

 

0.79

 

0.66

 

0.72

Earnings per ordinary share and per ADS
on a fully diluted basis 1

 

1.42

 

0.79

 

0.65

 

0.71

                 

Weighted average number of outstanding ordinary shares

 

1,862,566,702

 

2,005,326,106

 

2,192,232,156

 

2,385,418,773

Weighted average number of outstanding ordinary shares
on a fully diluted basis

 

1,869,925,303

 

2,013,328,345

 

2,197,620,705

 

2,404,343,845

Balance Sheet Data3

 

 

 

 

 

 

 

 

 

 

December 31,
2007

 

December 31,
2006

 

December 31,
2005

 

January 1,
2005 2

Total assets

 

24,797

 

21,258

 

22,702

 

24,230

Non-current liabilities

 

13,702

 

13,213

 

12,191

 

12,297

Provisions

 

3,643

 

3,602

 

3,945

 

4,076

Shareholders’ equity

 

4,490

 

4,195

 

5,076

 

6,266

Group Equity

 

4,518

 

4,196

 

5,104

 

6,411

Share capital (including Share premium)

 

11,563

 

12,563

 

14,634

 

15,866

Number of subscribed shares

 

1,843,482,213

 

1,928,551,326

 

2,151,360,369

 

2,329,399,969

1)

Please refer to Note [8] of the Consolidated Financial Statements for a discussion on the method used to calculate profit or loss per share.

2)

KPN applies IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations as from January 1, 2005. As a result, we report figures as of January 1, 2005 instead of December 31, 2004.

3)

Please note that Income Statement data and Balance sheet data for the year ended December 31, 2003 prepared in accordance with IFRS is not available.

 

 

8

KPN Annual Report and Form 20-F 2007

 

Key information

 


 

 

 

 

 

Per-share information

 

 

Amounts in euro

2007

2006

2005

2004

 

 

Dividend per ordinary share

0.54

0.50

0.45

0.35

 

 

 

 

 

The proposed dividend for 2007 consists of a cash dividend of EUR 0.54 per share of which EUR 0.18 was paid as an interim dividend. For further information about our dividend policy, see ‘Information about the KPN Share’.

 

 

 

 

 

Workforce

 

 

 

 

 

 

2007

2006

2005

2004

 

 

Average number of FTEs in The Netherlands

20,130

19,449

20,590

21,797

 

 

Average number of FTEs outside The Netherlands

9,215

6,838

6,737

7,114

 

 

Average number of FTEs

29,344

26,287

27,327

28,911

 

 

Number of FTEs as of December 31

43,531

25,976

26,598

28,056

 

 

Number of employees as of December 31

~47,000

28,368

29,286

31,116

 

 

The increase in the number of FTEs and employees in 2007 resulted mainly from the acquisition of Getronics.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Key information

9

 


Key information

Risk factors

 

 

 

Our business is subject to various risks relating to changing competitive, economic, political, regulatory, legal, social, industrial, business and financial conditions. Some of these conditions are described below and discussed in greater detail elsewhere in this Annual Report. The following risk factors could harm our business, financial condition and operating results, adversely affect our revenues and profitability, and lead to a drop in the trading price of our shares.

 

 

 

Strategic risks

 

The markets in which we operate are increasingly competitive and our principal businesses face significant competition. If we are unable to achieve our strategic objectives and to compete effectively, this could lead to loss of revenue, reduced margins and loss of market share and adversely affect our financial position.

We face increasing competition from various competitors in each market in which we operate. This increased competition has and could lead to loss of revenue, reduced margins and loss of market share and could have a material impact on our profitability. Furthermore, if we fail to achieve our strategic objectives, this could also lead to loss of revenue, reduced margins and loss of market share and adversely affect our financial position.

A number of factors serve to increase our competitive risks, including: competitors that may have greater capital and other resources including larger research, marketing and engineering staff, consolidation between some of our competitors, and some of our competitors may achieve better time to market with new products and services and thereby gain larger market share.

Consumer Segment

The competitive landscape in The Netherlands is changing rapidly and is one of the most dynamic and competitive in Europe. Combined with the fact that the Dutch broadband acceleration is unrivalled and the level of penetration of broadband in Dutch households is the highest in Europe, this changing competitive landscape in The Netherlands may result in accelerated contraction of fixed-line subscriptions and traditional traffic volumes and price declines of broadband and VoIP, which would adversely affect our revenues, margins and financial position. The traditional voice market continues to contract, while the VoIP penetration is accelerating as cable and ADSL operators are active in this voice market, offering multiplay solutions such as Television, Internet and Telephony combined. Meanwhile, mobile operators are pushing for fixed-to-mobile substitution and non-telecommunications service providers (like MSN, Google, IBM) have started offering voice as an integral service.

In addition, our current designation as operator with significant market power in the retail fixed telephony market limits our flexibility in terms of pricing and sales incentives and bundling. If we are not able to lower our costs in light of the continuing pressure for lower prices, our financial results will be adversely affected. Our mobile business in The Netherlands is subject to many of the same risks as described below under ‘Mobile International’.

Business Segment and Getronics Segment

In our business market, ICT is increasingly important. There also is an increased demand for managed services and a continuing shift in focus from network technology towards functionality of applications. New communication services are IP-based and data access has become independent of hardware devices. Because of these developments, IT and system integrators such as Cap Gemini, Accenture and IBM, among others, are moving down the value chain and may gain market share at our expense. In addition, global telecommunications solution providers are increasingly penetrating our national corporate markets. As customers increasingly search for global network solutions, KPN’s strategy in the business market is aimed at grasping the opportunity to shift from decreasing traditional communication services towards services in the larger and growing market for ICT services, especially application hosting, workspace management and outsourcing.

In line with this strategy, KPN acquired Getronics in October 2007. In the ICT services market, competitors are numerous and vary widely in market position, size and resources. Competitors differ significantly depending upon the market, clients, services offered, and geographic area served and include a broad spectrum of ICT services companies, ranging from systems integrators to outsourcing providers and consulting companies. We also face competition from smaller ICT companies that have a particular service niche or have been able to develop strong local or regional client bases.

The ICT services industry has recently experienced consolidation. We expect consolidation within the ICT services industry to continue, which may create additional or stronger competitors and may intensify competition.

Additionally, since a substantial portion of Getronics’ contracts are subject to relatively frequent periodic renewal, the increasing competition we face in our markets subjects us to the possibility that such contracts may not be renewed or extended, or, if they are renewed or extended, may be done so on less favorable terms.

 

 

10

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

 


 

 

 

 

 

Our current designation as operator with significant market power in the retail fixed telephony market has the same risks as mentioned under the Consumer Segment.

 

 

Wholesale & Operations Segment

Our national wholesale business – for the greater part of the services regulated by OPTA – reflects the effects of a rapidly changing landscape from both a competitive and a technological perspective. Increasing competition in telecommunications has resulted in increasing wholesale activities and the development of new wholesale offerings, like Wholesale Line Rental and Wholesale Broadband Access. Technological developments show a shifting market demand from traditional services to new technology, such as VoIP. This shift has an impact on our technical infrastructure. In the changing telecommunications market, we currently face competition from cable companies with respect to telephone, Internet and TV services as well as new emerging, non-telecommunications parties, such as Skype and Google.

If the Consumer and/or Business Segments are not able to retain their market positions or gain shares in existing and new markets, this will directly and adversely affect Wholesale & Operations’ performance adversely. Moreover, our leading position in the national wholesale business for traditional services limits our flexibility in terms of pricing, sales incentives and bundling. Most importantly, if we are unable to reduce network and operational costs in light of the ongoing price pressure, our financial position could be adversely affected. As the national mobile wholesale business is performed by the Mobile International Segment, please see that section for risks related to that activity.

In our international wholesale voice business, we compete on the basis of quality of service and price. In recent years, prices for long distance telephone services have been declining as a result of increased competition as well as deregulation. We face competition from major telecommunications carriers such as AT&T and Verizon Communications as well as new emerging carriers. We also compete with VoIP service providers who route traffic to destinations worldwide. VoIP service providers that presently focus on retail customers may in the future enter the wholesale market and compete with us. If we cannot offer competitive prices and quality of service, our business could be adversely affected.

Mobile International: E-Plus Segment and BASE Segment

Our Mobile International business faces intense competitive pressure from existing as well as new market participants in all our markets. We compete with the largest international groups and alliances of mobile operators, such as Vodafone and T-Mobile. Competition based on price, subscription options offered, coverage and service quality remains intense and we expect ongoing pressure on calling rates as we compete with other operators for market share. Our mobile markets for voice have become increasingly saturated and the market for mobile data is picking up slower than expected. As a result, the focus of competition is shifting towards brand and distribution power and also from customer acquisition to customer retention and satisfaction efforts. Substantial expenses are required for customer retention and satisfaction efforts. Significant customer defections would have an adverse effect on our financial position.

In this market, we face competition from a variety of competitors, including fixed and mobile network operators, operators offering new mobile network services such as wireless fidelity services (WiFi) and WiMAX and providers of higher speed xDSL and glass fiber services. Some of these competitors are smaller and may be more flexible and responsive than we are. Both E-Plus in Germany and BASE in Belgium, our mobile subsidiaries, compete in their respective markets with the respective top two operators that have significantly higher market shares and thus an ability to exert significant influence over the market. As a result, our subsidiaries may be at a competitive disadvantage and could rapidly lose market share, which could harm our financial results.

If we fail to introduce new or enhanced products and services successfully or with shorter time-to-market than our competitors, our revenues and margins could be lower than expected and our financial position could deteriorate.

Part of our overall business strategy is based on the introduction of new or enhanced products and services, such as VoIP and WLR, Interactive IPTV formats, integrated communication and messaging clients, content and entertainment services, new mobile data services and machine-to-machine services. Any of the new or enhanced products or services we introduce may encounter technical difficulties or fail to achieve market acceptance. Alternatively, new or enhanced products or services introduced by our competitors may be more appealing to customers. If our new and enhanced products and services are not successful or are delayed, our customers may decide to discontinue using our services and choose other telecommunications providers. In addition, the introduction of new products and services such as IPTV, VoIP and ICT solutions results in additional costs and puts pressure on our existing operating structure. Our upcoming migration to an All-IP network should reduce costs in the long term, but requires additional capital expenditures in the short to mid-term. In order to cope with the anticipated pressure on our revenues and,

     

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

11

 


Key information

Risk factors

 

 

 

consequently, the risk of decreased profitability, we have set up a restructuring and cost saving program. While our aim is to reduce around 10,000 FTEs (expected to be substantially completed by 2010), we may not be successful in these efforts, and as a consequence, our financial position could deteriorate. Our restructuring and cost saving program also may result in one-time special charges and costs, and may have other adverse consequences on our organization and business.

In addition, our operations in The Netherlands may not successfully fulfill the need to move from our traditional services to services based on our new All-IP network which could adversely affect our financial position.

If we fail to integrate businesses we acquire our business may suffer and profitability could be negatively impacted.

In 2007, we acquired Getronics, 51% of iBasis, Tiscali in The Netherlands and Tele2/Versatel in Belgium. The transition of these businesses, and other businesses we may acquire in the future, and our ability to successfully execute our proposed business plans with respect to those businesses, will present significant challenges to our management and risks to our existing business. We may not be able to successfully integrate acquired businesses, and the combined company may not perform according to our plans. We may not achieve the desired profitability and synergies that we anticipate from these acquired businesses, and such failure could adversely affect our existing business and results of operation. Our acquisition of these businesses involves numerous risks, including:

 

 

   difficulties in the integration of the assets and operations of each of the acquired businesses with our existing operations;

   higher than expected or unanticipated costs to implement our business plan and to operate the combined business;

   inadequate resources to implement our business plan and to operate the combined business;

   difficulties retaining key employees;

   the failure to identify and realize synergies and cost savings;

   difficulties in coordinating corporate and administrative functions;

   the influence of minority shareholders;

   unexpected changes in trade barriers;

   foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, to the extent incurred in a foreign currency;

   exposure to liability under the U.S. Foreign Corrupt Practices Act and similar laws in other jurisdictions; and

   seizure of property by foreign governments and regulatory restrictions applicable to foreign companies.

 

 

As a result, we may not achieve our projected combined financial results in the time anticipated, or at all. In such cases, our results of operations and profitability would be adversely affected.

Industry risks

 

The industry in which we operate is subject to rapid technological changes and we may not successfully make the substantial investments on an on-going basis required to remain competitive.

 

 

 

Our industry is undergoing rapid technological change, and our future success depends, in part, on our ability to anticipate and adapt in a timely and effective manner to those technological changes. To remain competitive, we must continuously improve the speed and features of our existing products and services, develop attractive new products and services for our customers and maintain a quick time-to-market for these products and services. As a consequence, we have to make substantial investments in our business on an ongoing basis to remain competitive. New communication services are more and more IP-based and, especially in the fixed business, are less dependent on underlying hardware. As a consequence, new global competitors are entering the market and competition is increasing in all areas of our business. This may be disadvantageous for us and may lead to a decline in our operating results.

 

 

Technologies for mobile services include EDGE, UMTS among others, and the enablers for data services (such as content downloads and location based services). New licensed and unlicensed spectra may become available in the future, posing a constant threat to our mobile business based on GSM, UMTS and WiFi technologies, as the additional spectrum facilitates the entry of new competitors providing new entrants to wireless and mobile communications services.

 

 

Within our operations in The Netherlands, our strategy to migrate to an All-IP network operator and service provider is the basis for our new service portfolio and our planned cost reductions. The technical rollout of our All-IP network, which is currently in a piloting phase,

     
     
     

 

12

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

 


 

 

 

 

 

is expected to take several years. We may not be successful in the timely rollout of such a network and, as a consequence, our main competitors may gain market share at our expense. In addition, our strategy for migrating our customers towards IP-based solutions could be less effective and efficient than we anticipate. Furthermore, our investments in new IP-based services and solutions could prove to be more time consuming and more expensive than we had estimated, all of which could adversely affect our financial position.

 

 

In general, we may not succeed in developing, introducing or improving technological innovations in an economical or timely manner, or at all. Our competitors may be able to improve existing products and services or develop and introduce new products and services faster than we are able to. The changes require substantial ongoing investments if we are to achieve organic growth and remain competitive. We must also correctly estimate customer demand, and there is the risk that customers will prefer the new products and services introduced by competitors over our new products and services. This could adversely affect our financial position.

 

 

As defined in the amended Telecommunications Act, the obligation for landlords to allow cables that are part of a public electronic communications network on their property terminates as soon as those cables have been idle for a continuous period of 10 years. In that situation, a public electronic communications network supplier is required to remove cables upon the request of a landlord. Since many factors are currently unpredictable and uncertain, we are not able to estimate the potential impact of this risk. Costs or expenses associated with the removal of these cables, however, could adversely affect our financial position.

 

 

As we are drastically changing our technical infrastructure, we may not be able to succeed in meeting the high quality standards we delivered in the past with our traditional product portfolio. This may have a negative effect on the value of our brands in the various markets in which we operate and adversely affect our financial position.

 

 

We depend on our relationships with various partners and suppliers and any disruption in these relationships may adversely affect our business.

 

 

Our business depends upon our ability to obtain adequate supplies of telecommunications equipment, related software and IT services, our contractors’ ability to build and rollout telecommunications networks on schedule, and our suppliers’ ability to deliver dependable technical support. Due to downturns in economic conditions or other market developments, some of our suppliers may cease to do business. We cannot be certain that we will be able to obtain quality telecommunications equipment and support from alternative suppliers, particularly in relation to new technologies, on a timely basis if our existing suppliers are unable to satisfy our requirements. This could lead to an interruption in the operation and build-out of our networks, which may adversely affect our financial position and results of operations. We depend on our relationships with these suppliers for the continuation of these services, some of which are vital to our business.

 

 

In addition, in those markets in which we have a limited or no presence, we depend on our ability to find and work with local service partners to meet our clients’ needs. An inability to find adequate service partners may place us at a competitive disadvantage and result in a loss of business. Moreover, the failure of any such service partners to provide service of an appropriate standard could adversely affect our reputation, lead to claims and limit our ability to procure further business.

Regulatory and compliance risks

 

We operate in heavily regulated markets and are subject to regulatory decisions and changes in the regulatory environment that could adversely affect our business.

 

 

 

 

Most of our network activities are monitored by regulatory bodies, such as OPTA in The Netherlands, BNetzA in Germany, BiPT in Belgium and the European Commission generally in Europe. These authorities regulate, among other things, the prices we may charge for many of our services and the extent to which we have to provide services to our competitors. In recent years, these authorities have compelled us to reduce some of our prices. Regulatory authorities may increase the severity of pricing controls, extend the range of services to which regulations apply (including any new services that we may offer in the future), and extend the services that we have to provide to our competitors. Regulatory decisions could also influence the rollout planning of the All-IP network and the conditions under which we are allowed to migrate to an All-IP network operator such as the deferment of the dismantling of the MDF locations or the imposition of new access obligations. These and other regulatory actions may adversely impact our financial position, increase the severity of competition and decrease our profitability. In addition, there is an increasing risk of non-compliance associated with the increasing complexity of regulation.

 

We have to comply with an extensive range of requirements regarding the licensing, construction and operation of our networks and services. Decisions by regulators regarding the granting, amendment or renewal of licenses, to us or to third parties, could adversely affect our future operations.

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

13

 


Key information

Risk factors

 

 

 

Governments in the countries in which we operate may issue telecommunications licenses to new operators whose services will compete with ours. In addition, other changes in the regulatory environment concerning the use of mobile phones may lead to a reduction in the usage of mobile phones or otherwise adversely affect us. In the countries in which we operate, mobile terminating tariffs are regulated. Tariffs for mobile roaming services are now regulated by EU regulation by which obligations were imposed by the EU on all mobile operators to reduce wholesale and retail roaming tariffs. Such regulatory intervention will likely increase the pressure on our pricing and could negatively affect our financial position.

Our business may be hampered because of more stringent regulation of the exposure of the public to electromagnetic fields of base stations.

Our businesses may increasingly be subject to more stringent regulation of exposure to electromagnetic fields of mobile transmission equipment. Health risks perceived by public opinion may cause national and local governments to further impose restrictions on the construction of base station towers, the upgrade of networks and the replacement of existing antennae and other related infrastructure. As a result, we are experiencing difficulties and delays in obtaining building permits for our mobile transmission equipment. This may prevent us from completing the further build-out of our mobile networks, providing new services and fulfilling UMTS license terms. In addition, it may become more difficult to renew leases for existing base stations and other equipment, with the cost of such leases increasing. Any of these factors could adversely affect our business and financial position.

Although various scientific reports have denied that certain radio frequency emissions from wireless handsets and mobile base stations pose health risks, local and national governments have begun to regulate the emission of electromagnetic fields as an environmental threat. We cannot rule out that exposure to electromagnetic fields from mobile base stations will be identified as an environmental issue and potential health risk in the future. Any perceived health risks associated with mobile communication equipment may lead to a more restrictive approach towards building permissions for base stations and could result in a radio network of insufficient quality. A reduction in network quality may result in a lower number of customers and a reduced usage per customer.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent or detect fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.

Effective internal controls are necessary for us to provide reliable financial reports and prevent or detect significant fraud. If we cannot provide reliable financial reports or prevent fraud, our financial results could be adversely affected. Fraud could also result in loss of assets and additional costs as well as claims and lawsuits.

We devote significant attention to establishing and maintaining effective internal controls over financial reporting. Implementing any appropriate changes to our internal controls may require additional compliance training of our directors, officers and employees, entail substantial costs to modify our existing systems and take a significant period of time to complete.

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements in our financial reporting, as defined under Section 404 of the Sarbanes-Oxley Act of 2002, will not be prevented or detected on a timely basis by internal control. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could adversely affect our business and financial position or cause us to fail to meet our reporting obligations. Any such failure could also adversely affect our assessment of the effectiveness of our internal control over financial reporting. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have an adverse effect on the market price of our securities. Non-compliance with the rules set under the Telecommunications Act as a result of a failure of our internal controls may lead to the incurrence of an administrative fine, as well as claims for damage.

     
     

 

 

 

 

 

14

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

 


 

 

 

Operational risks

 

We have made substantial investments in UMTS licenses in our core markets. We may not generate a sufficient return on these investments.

We have made substantial investments in UMTS licenses in our core markets of The Netherlands, Germany and Belgium. The size of the market for these products and services is unknown and may fall short of our expectations if UMTS technology proves not to be superior to existing or other future technologies. We cannot be certain that the demand for UMTS services will justify the related costs. In some locations, the investments, although required under the licenses, may not be commercially desirable or may not be justified given the level of customer demand. In addition, our competitors may be able to build out their UMTS networks more economically or quickly than us. This could place us at a competitive disadvantage in providing UMTS services in the relevant market. In connection with providing UMTS services, we acquired the right to use 900 MHz frequencies in Germany; however, we could be legally forced to share these frequencies. Deutsche Bahn and Airdata have challenged our acquisition of the 900 MHz frequencies. For further information, see ‘Regulatory developments’. If our strategy with respect to UMTS licenses is not successful, our business and financial position may be adversely affected.

 
 
 
 

 

 

Based on regulatory requirements, we expect to incur additional substantial capital expenditures for the rollout of our UMTS networks. In addition, we expect to incur significant marketing and other costs in relation to the further rollout of our UMTS services. As a result, our net income can be expected to decrease, except to the extent enhanced earnings from UMTS networks offset such charges.

In Belgium, a further rollout of our UMTS network started in 2004 in order to comply with the license requirements of at least 40% population coverage by the end of 2006 and 50% by the end of 2007. The Belgian regulator BiPT carried out measurements in 2007 and concluded that BASE complied with the 40% requirement as of the end of 2006. Non-compliance with the license obligations may lead to the incurrence of an administrative fine and may ultimately result in the loss or suspension of the UMTS license of BASE. For further information, see ‘Regulatory developments’.

We depend on major and long-term outsourcing contracts, which could later turn out to be commercially unattractive and have a material adverse effect on our margins and financial condition.

A significant proportion of our Getronics Segment business is performed under outsourcing contracts from customers. The structuring of an outsourcing contract requires considerable skills, particularly in evaluating, amongst others, (i) whether the services can be performed remotely, (ii) the quality and future costs of any personnel taken over from the customer, many of whom need to be retrained or reassigned by Getronics to make the project cost effective and (iii) the economic viability of the customer. If, and to the extent that Getronics has entered into or enters into a major and long-term outsourcing project on terms which later would turn out to be commercially unattractive, this could have a material adverse effect on our margins and financial condition. In the Business Segment we have similar outsourcing contracts from customers with similar risks.

We depend on our current personnel and may have difficulty attracting and retaining the skilled employees we need to execute our business plans.

Competition for highly skilled personnel is intense in the markets in which we operate. We depend, to a significant extent, on the continued services of key management, technical, sales and research and development employees. Because there is strong competition for qualified personnel in our industry, the limited availability of qualified individuals could become an issue in the future. The loss of key management or our inability to identify, attract and retain other necessary qualified personnel could adversely affect our business and financial position. Our growth and future success will depend in large part on our ability to attract, motivate and retain highly qualified employees.

Network interruptions or service slowdowns caused by local or global system failures and misuse of our network and related applications as a result of inadequate security, may result in reduced user traffic, reduced revenue and harm to our reputation and business operations.

Our ability to operate our business depends significantly upon the performance of our technical infrastructure. Failures in power supply by power companies could occur and may harm our technical infrastructure. Although our critical infrastructure equipment has power interruption backup facilities, these facilities may prove not to be adequate during a prolonged or extensive interruption. Our technical infrastructure is also vulnerable to damage or interruption by floods, fires, telecommunications failures and other similar events. It also may be subject to break-ins, sabotage, terrorism, vandalism and similar misconduct. Furthermore, the security of our network and related applications may be inadequate, which may result in access and misuse by hackers and other unauthorized users and may adversely affect our

 

 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

15

 


Key information

Risk factors

 

 

 

operations. The occurrence of a natural disaster, other unanticipated problems at our facilities or any other damage to, or misuse or failure of our systems could result in interruptions in our service. System failures, including failure of our network and the networks used by our suppliers, and hardware or software failures or computer viruses, could also affect the quality of our services and cause temporary service interruptions, resulting in customer dissatisfaction, penalties and reduced traffic volumes and revenue. Any of these factors could adversely affect our business and financial position.

Moreover, our reputation and public image is important to our sales, marketing and customer relations efforts. Any damage to our reputation or image as a result of the above failures or breaches, corporate actions, developments of particular business units or otherwise, could adversely affect our business, financial position and market position.

 

Financial risks

 

 

Changes in markets, our strategy, business plans and network infrastructure and the relevant valuation methodologies have resulted, and may in the future result, in substantial write-downs of the carrying value of our assets.

Our regular review of the carrying value of our assets (including goodwill, other intangibles, tangibles and financial fixed assets) has resulted in significant impairments in the past, and we may in the future be required to recognize additional impairment charges. Events in the technology and telecommunications markets, including significantly reduced share prices, market capitalizations and credit ratings for other participants, as well as the ongoing review and refinement of our business plans and network infrastructure and changes in the valuation methodologies applied and the underlying assumptions, have resulted, and may in the future result, in substantial impairments of our intangibles or other assets. In addition, we have recognized, and may be required in the future to recognize, increased depreciation and amortization charges if we deem the useful lives of our non-current assets to be shorter than originally expected.

We have liabilities with respect to our pension plans and the actual cost of our pension plan obligations could exceed current estimates. Any pension funding obligations may impact our financial position.

As of December 31, 2007, we recognized pension provisions of EUR 1.0 billion as a result of defined benefit plans. The recognition of the pension provision is subject to actuarial and financial assumptions, which are management estimates of, among other things, future salary increases, discount rates, expected indexation of the benefits and return on assets. These determine the costs and cash flows of providing the post-employment benefits. Changes in assumptions can result in changes of the pension obligation and the related pension costs as well as the contributions to the pension funds. Adjustments required to be made to our recorded provision for these benefits may have an adverse effect on our results of operations and financial position, and cash payments to fund these plans could have an adverse effect on our cash flows.

Our share price has been, and may continue to be, volatile.

World stock markets have always experienced volatility that has affected the market prices of equity securities, including those of telecommunications companies and our company. This has led to large swings in trading prices in short periods of time and has not always been related to the operating performance of the companies concerned.

The factors that have caused, and may cause in the future, fluctuations in our share price, many of which are beyond our control, include the following:

   the general state of the securities markets, with particular emphasis on the European telecommunications sector;

   competition, regulatory conditions and the status of telecommunications liberalization in Europe;

   the build-out of our networks (such as UMTS and All-IP), the development of compatible handsets, delays in the rollout of UMTS services and networks and associated costs;

   competitors’ positions in the market and ongoing consolidation in the telecommunications industry;

   changes in the financial estimates by securities analysts;

   our earnings releases and the earnings releases of our competitors;

   the outcome of legal proceedings;

   fluctuations in foreign exchange rates, interest rates and property prices;

   international political and economic conditions and any acts of terrorism; and

   economic weakness, including inflation and political instability.

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 

 

 

16

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

 


 

 

 

 

 

We are involved in several legal proceedings. Such proceedings could eventually lead to payments of claims and damages or otherwise harm us.

 

 

We are a party to several legal proceedings of a regulatory and other nature. The proceedings themselves could divert management attention and capacity from our core business and could harm our public image. If we lose our cases, we could be forced to reduce our tariffs, make payments of claims and damages and suffer other disadvantages which would adversely affect our business and financial position.

For a discussion of material current legal proceedings, see ‘Commitments, contingencies and legal proceedings’ in our Consolidated Financial Statements, and ‘Regulatory developments’.

 

 

We may be subject to additional tax liabilities in the future, including changes of tax laws, loss of net operating loss carry-forwards and as a result of audits of our tax returns.

 

 

Given the changing nature of laws, rules and regulations, in the future we could be subject to additional tax liabilities.

 

 

A reduction or expiration of net operating loss carry forwards could increase the corporate income tax payments and impact our deferred tax position. Furthermore, tax authorities may audit our tax returns and may disagree with the positions taken in those returns.

 

 

An adverse outcome resulting from any settlement or future examination of our tax returns may subject us to additional tax liabilities and may adversely affect our liquidity and annual effective income tax rate. In addition, any examination by the tax authorities could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

 

 

We may need to incur additional debt or issue new equity to fund our operations, to finance strategic and technological investments and to refinance debt.

 

 

International credit and money markets faced ongoing bouts of turbulence through the latter half of 2007 due to the deepening U.S. residential housing slump and crisis in securitized credit and sub-prime mortgage markets. Financing and refinancing conditions will largely depend on future market conditions, the effects on European markets of the U.S. market volatility, our credit ratings, the telecommunications industry ratings, and our results of operations and future prospects, and we cannot be certain that financing will be available to us on favorable terms, or at all. Our credit rating may be impacted by the rapid technological and industry developments, our operational performance and our competitive and financial position going forward. If we cannot raise new funding, we may be unable to pursue growth opportunities or to refinance our existing indebtedness. Liquidity problems in the capital market may affect our ability to raise new funding on favorable terms.

 

 

We are exposed to a variety of financial risks as a result of the use of financial instruments including: credit risk, liquidity risk and market risk, which may have an adverse effect on our profit development.

 

 

We are aware of the unpredictability of financial markets and seek to minimize potential adverse effects on our financial performance. We use derivative financial instruments to hedge certain risk exposures. We have exposure to the following risks from the use of financial assets and liabilities:

 

 

   credit risk that arises from the possibility of asset impairment due to counterparties that are not able to meet their obligations in transactions involving financial instruments;

 

 

   liquidity risk that arises from not being able to meet the financial obligations associated with financial instruments as they fall due. Prudent liquidity risk management implies ‘maintaining sufficient cash and the availability of financing sources’ at ‘reasonable capital resource covenants’. For a discussion of these sources, see ‘Liquidity and capital resources’; and

 

 

   market risk that arises from movements in:

 

 

  foreign currency exchange rates;

 

 

  interest rates; and

 

 

  other market prices.

     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk factors

17

 


Key information

Risk management

 

 

 

Risk management is a basic element of good governance. Risk management applies to the identification and analysis of potential risks, which could influence the achievement of our strategic, operational, financial, compliance and financial reporting objectives, as well as the adequate control of these risks to an acceptable level.

 

 

 

Internal risk management
and control system

 

We have combined elements of our existing internal risk management and control system into an overall control framework, which satisfies the relevant criteria for financial procedures as set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Some key components are:

 

 

   Code of Conduct;

 

 

   business planning and review cycles;

 

 

   risk analyses;

 

 

   financial risk management;

 

 

   internal audit function;

 

 

   internal control over financial reporting;

 

 

   Disclosure committee; and

 

 

   regulatory compliance measures.

 

 

 

 

 

These key components are explained in further detail below.

 

 

Our internal risk management and control system is designed to manage rather than eliminate the risks associated with the realization of our strategic, operational and financial objectives. It only provides reasonable and not absolute assurance against material misstatement or loss. Additionally, we may face certain delays in effectively implementing or integrating our control framework and regulatory compliance measures in our recent acquisitions such as Getronics and iBasis, and achieving conformity with our existing businesses.

 

 

Our internal risk management and control system was discussed in the Audit Committee and Supervisory Board. For more information about the Audit Committee and Supervisory Board, see ‘Report by the Supervisory Board’.

 

 

Code of Conduct

 

 

We are conscious of our social and ethical responsibilities and we wish to ensure that work practices across the Company are in strict compliance with the law and consistent with social and ethical norms. To this end, we work in accordance with a Code of Conduct, which sets out our key values: personal, trust and simplicity. We can be held accountable for our performance in this regard by all of our stakeholders (customers, shareholders, employees, business associates, competitors, environmental organizations, international business relations and the community in the broadest sense). The Code of Conduct is available on our website (www.kpn.com).

 

 

To translate the Code of Conduct into practical terms for employees, we have introduced a number of separate codes to clarify our internal rules. These separate codes are bundled into four clusters: 1) integrity, 2) competition and telecommunications law, 3) insider trading and 4) information security. The integrity cluster contains rules with respect to secondary employment outside KPN and also with respect to business transactions and business gifts. This cluster also contains our Code of Ethics for our financial management, which sets rules to protect the integrity of our financial management. It applies to our CEO, CFO, the director of our Corporate Control Department and all other financial managers. The competition and telecommunications law cluster contains rules with respect to the use of customer information, anti-trust issues, retail offerings and wholesale issues. The insider trading cluster contains rules to prevent insider trading. The information security cluster contains rules with respect to the use of information regarding our Company and the use of information and communication tools provided to our employees.

 

 

To complement the rules in the separate codes we have introduced three general guidelines: the whistleblower policy, the fraud policy and the protocol on integrity investigations. The whistleblower policy allows employees to report questionable accounting or auditing matters or fraud to the Chairman of the Audit Committee. Any reports or complaints by employees under this code will be dealt with in strictest confidence and investigated promptly by management or the Chairman of the Audit Committee, as the case may be. In order to simplify the reporting process, we have introduced a telephonic reporting system where employees can report issues. As the system is operated by an independent third party, anonymity of the employee is, if desired by the employee, guaranteed.

 

 

Our current fraud policy has been in place since 2005. We promote consistent organizational behavior by providing guidelines and assigning responsibility for the development of controls that will aid in the detection and prevention of financial and telecommunications fraud against KPN and other inappropriate misconduct. Since 2002, the protocol on integrity investigations has been implemented. The purpose of this protocol is to create the framework to prove or rule out the involvement of employees and/or third

     
     

 

 

18

KPN Annual Report and Form 20-F 2007

 

Key information/Risk management

 


 

 

 

 

 

parties connected to KPN in violating internal or legal rules. We encourage our employees to actively report any suspected breach of the Code of Conduct or the separate codes. Our internal Security department plays a key role in this by offering support via a helpdesk, where employees can anonymously report such breaches and also obtain information regarding the principles underlying the codes. In the event a breach is reported, our Security department conducts an investigation on a strictly confidential basis. The outcome of the investigation is reported to local management and, in relevant cases, to the Audit Committee.

Throughout 2007, we continued our efforts to effectively communicate our Code of Conduct and compliance policies including through an e-learning course explaining the Code of Conduct.

 

 

Business planning and review cycles

 

 

In order to fulfill our strategy, the Board of Management and the management of the various Segments discuss and define the targets and objectives. The targets and objectives are detailed in operational plans by Segment. The operational plans are the basis for the business plan, which covers three years, and the annual plans. Progress and performance on these plans are reported by the Segments to the Board of Management. Management of the Segments also provides the Board of Management with a letter of representation regarding the accuracy of the reporting and compliance with prescribed policies. On a monthly basis, management of each Segment discusses the performance of the Segment with the relevant member of the Board of Management as well as our CEO and CFO.

 

 

Risk analyses

 

 

KPN developed an internal method to carry out and document risk management in a structured way. The method consists of the following steps: identify risks based on targets and objectives, identify countermeasures to mitigate those risks, draw up action plans and establish improvements and secure those improvements within the organization.

Periodically, the various Segments perform a business risk assessment in which the main risks and countermeasures are identified. The assessment is discussed in the Board of Management, which leads to action plans and those are monitored during the reviews.

 

 

Financial risk management

 

 

The financial risks associated with the use of financial instruments as discussed in ‘Risk factors’ are managed by our Treasury department under policies approved by the Board of Management. These policies are established to identify and analyze the financial risks faced by the group, to set appropriate risk limits and controls, and to monitor adherence to those limits. Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating entities. The Board of Management provides written policies covering specific areas such as currency risks, interest rate risks, credit risks and liquidity risks.

 

 

Internal audit function

 

 

The Internal Audit function plays an important role in assessing the quality and effectiveness of KPN’s internal risk management and control system. The Internal Audit function conducted systematic and ad hoc financial, IT and operational audits for management of the Segments and the Board of Management. The audit findings are discussed with applicable management and every quarter the main findings are reported to the Board of Management and the Audit Committee.

 

 

Internal control over financial reporting

 

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Therefore, KPN has implemented controls to assure that financial reporting is reliable. Those controls are tested and assessed on effectiveness by dedicated personnel. For further information, see ‘Controls and procedures statement under the Sarbanes-Oxley Act’.

 

 

Disclosure Committee

 

 

Our Disclosure Committee evaluates disclosure and internal control procedures to ensure that relevant information on the Company is brought to the attention of the Board of Management and the Supervisory Board. This Committee also examines reports and other materials that are to be issued externally to ensure that they are accurate, timely and complete. The Disclosure Committee advises the Board of Management, the Audit Committee and the Supervisory Board. In 2007 the committee consisted of the directors of Corporate Control, Corporate Treasury and M&A, Internal Audit, Corporate Legal, Corporate Communication,

     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk management

19

 


Key information

Risk management

 

 

 

Investor Relations, the Secretary to the Board of Management and the finance directors of the Segments, amongst others. The Committee met periodically in 2007 and reviewed disclosure controls and procedures and proposed public disclosures.

Regulatory compliance measures

Compliance Risk Assessment

In 2007 we started a Compliance Risk Assessment project in The Netherlands (excluding acquisitions in 2007) in which we define, on a top-down, risk based basis the relevant inherent risks from the Dutch Telecommunications Act and subsequently define the required processes and controls to cover such risks. The first phase of the project is focused on the rules set forth under the Telecommunications Act for KPN on the basis of its designation as a party with significant market power in the voice market. These rules concern, among others, pricing, bundling and rebates.

Training

In 2007, we continued to organize training sessions on competition and telecommunications law for our employees. The objective of the training program is to increase the awareness and the knowledge of employees regarding competition and telecommunications law. The training program consists of workshops, in-house designed and tailor-made e-learning tools and e-tests. In addition, several ‘tone at the top’ meetings have been held to discuss business ethics. We also continued to develop e-learning training for employees covering our business control policies.

Compliance organization

During 2007 we further strengthened our compliance organization to reflect the importance of compliance within our company. The compliance organization consists of a central Group Compliance Office, which is supported by Business Compliance Officers in relevant parts of the business, Compliance Specialists with specific knowledge of certain compliance topics and a Compliance Advisory Committee, consisting of senior members of relevant staff departments. The Group Compliance Officer reports to the CEO and the Chairman of the Audit Committee.

Compliance with the Dutch
Corporate Governance Code

 

The Board of Management, to the best of its knowledge, believes that KPN complies with the requirements of recommendation II.1.4 of the Dutch Corporate Governance Code and the recommendations of the Corporate Governance Code Monitoring Committee on the application thereof, by:

   the description of our strategic, industry, regulatory and compliance, operational and financial risks. See ‘Risk factors’;

   the description of our internal risk management and control system; and

   the management’s report on Internal Control Over Financial Reporting to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. See ‘Controls and Procedures statement under the Sarbanes-Oxley Act’.

 

 

 

 

 

 

 

 

 

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

 

 

 

 

 

20

KPN Annual Report and Form 20-F 2007

 

Key information/Risk management

 


 

 

 

Controls and procedures
statement under the
Sarbanes-Oxley Act

 

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, KPN’s management (with the participation of its CEO and CFO) conducted an evaluation pursuant to Rule 13a-15 promulgated under the US Securities Exchange Act of 1934, as amended (the Exchange Act), of the effectiveness of the design and operation of KPN’s disclosure controls and procedures. Based on this evaluation, KPN’s CEO and CFO concluded that, as of the end of the period covered by this report, such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by KPN in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

 

 

Management’s Report on Internal Control Over Financial Reporting

As of the end of 2006, the Company must comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires the Company to include in the annual report an internal control report, containing management’s assessment on the effectiveness of the internal controls over financial reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007. There were no changes to our internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management has excluded Getronics from its assessment of internal control over financial reporting as of December 31, 2007 because Getronics was acquired in a purchase business combination by the Company in 2007. Management concludes that this exclusion meets the criteria of the SEC’s allowed exclusion. Total assets and total liabilities of Getronics represented approximately 6% and 5% respectively, of the Company’s consolidated assets and liabilities as of December 31, 2007; and 4% and 0%, respectively, of consolidated revenues and other income and pretax income for the year then ended.

PricewaterhouseCoopers Accountants N.V., the registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. The Accountant’s attestation report is presented on pages 121-122.

 

 

KPN Annual Report and Form 20-F 2007

 

Key information/Risk management

21

 


Information about the company

History and developments

 

 

 

KPN is the leading telecommunications and ICT service provider in The Netherlands, offering wireline and wireless telephony, internet and TV to consumers and end-to-end telecom and ICT services to business customers. KPN’s subsidiary Getronics operates a global ICT services company with a market leading position in the Benelux, offering end-to-end solutions in infrastructure and network-related IT. In Germany and Belgium, KPN pursues a multi-brand strategy in its mobile operations and holds number three market positions through E-Plus and BASE. KPN provides wholesale network services to third parties and operates an efficient IP-based infrastructure with global scale in international wholesale through iBasis.

Koninklijke KPN N.V. was incorporated under the laws of The Netherlands on January 1, 1989. On June 28, 1998 our name was changed from Koninklijke PTT Nederland N.V. to Koninklijke KPN N.V. We have our corporate seat in The Hague, The Netherlands. We are registered under number 02045200 at the Commercial Register of the Chamber of Commerce, The Hague, The Netherlands, and our executive offices are located at Maanplein 55, 2516 CK The Hague, The Netherlands. Our telephone number is +31 (0)70 4460986.

Our main objectives, as described in article 4 of our Articles of Association, are to participate in and to manage other enterprises and companies, including companies that operate in the field of the transmitting, storing and converting of information, as well as to manage and dispose of information and to let our subsidiaries carry out the concessions or licenses that are granted by the government in the field mentioned above. Our Articles of Association are accessible at the Chamber of Commerce and filed with the SEC as an exhibit to this Annual Report on Form 20-F.

KPN was incorporated with two main subsidiaries: PTT Telecom B.V., offering telecommunications services, and PTT Post B.V., serving as the primary postal company in The Netherlands. In the period from incorporation until the listing of our shares on Euronext Amsterdam in June 1994, the State of The Netherlands was our sole shareholder. As of the end of 2006, the State held no interest in our outstanding shares, down from a 7.76% interest as of the end of 2005.

The demerger of our mail, express and logistics business operations to TNT Post Group was completed in 1998. In November 1999, we transferred our mobile business to a separately incorporated subsidiary, KPN Mobile N.V. KPN Mobile issued new shares to NTT DoCoMo in August 2000, as a result of which NTT DoCoMo held a 15% interest in KPN Mobile. In connection with a financial restructuring of KPN Mobile in December 2002, NTT DoCoMo elected not to exercise its anti-dilution rights, resulting in a decrease of its interest to 2.16%. In October 2005, we purchased NTT DoCoMo’s remaining interest in KPN Mobile N.V.

In the period from 2000 to 2002, we acquired E-Plus and BASE, mobile network operators in Germany and Belgium, respectively. Following these acquisitions and the purchase of UMTS licenses, KPN initiated a refinancing program. The refinancing included share offerings in 2000 and 2001 and the sale of certain non-core assets.

In October 2005 we acquired Telfort, a Dutch mobile network operator. In March 2006, we acquired Nozema, a Dutch broadcast services company. In September 2006, KPN reached an agreement with Tiscali SpA regarding the acquisition of their Dutch operations. In June 2007 the deal was finalized for consideration of EUR 236 million.

KPN agreed to merge its international voice wholesale business into iBasis, a VoIP and international wholesale provider. In October 2007 KPN acquired 51% of iBasis, in exchange for the KPN Global Carrier Services business unit and USD 55 million in cash. In October 2007, KPN acquired Getronics, an international provider of ICT services and solutions, based in The Netherlands. Furthermore, KPN acquired Tele2/Versatel, a Belgium service provider for voice, internet and data to residential, business and carrier customers.

Over the last several years, KPN has also disposed of a number of businesses; please see ‘Other Consolidated Results of Operations’ for more information.

     
     
     

 

 

22

KPN Annual Report and Form 20-F 2007

 

Information about the company/History and developments

 


Information about the company

Organizational structure 2007

 

 

 

In January 2007, KPN announced a new organizational structure in The Netherlands built around customer segments rather than products, creating a customer centric organization. KPN’s former Fixed division (Fixed) and KPN Mobile The Netherlands (Mobile) were reorganized into Consumer, Business and Wholesale & Operations Segments. Consequently, KPN’s financial reporting changed to reflect the new organizational structure and provides the comparative financials for the years 2005 and 2006.

 

 

The organizational integration is a further evolution of KPN’s strategy to increase customer focus in a telecommunications world in which distinctions between technologies are fading rapidly and in which customers increasingly are looking for integrated propositions. The new organizational structure in The Netherlands provides us with the opportunity for an integrated customer approach. We can offer integrated services, both as a multimedia company in the Consumer market (fixed, mobile, TV and Internet) and as a managed ICT company in the Business market. KPN is one of the first in the market with such an integrated approach. We expect this will contribute to further profitable market share and revenue growth.

The acquisition of Getronics strengthens KPN’s ICT strategy in the Business market. In 2007 we defined Getronics as a separate segment within The Netherlands on the same reporting level as the Business segment. Getronics has international operations which are managed from its headquarters in Amsterdam, The Netherlands. In 2008 we expect further integration between Getronics and the Business segment and the disposal of certain non-core Getronics activities.

KPN’s international voice wholesale business, which is included in the Wholesale & Operations segment, merged into iBasis in 2007. KPN has a 51% equity interest in iBasis. iBasis’ results of operations are consolidated in the Wholesale & Operations segment.

     

New organization

 

KPN’s new integrated organization in The Netherlands consists of five segments: Consumer, Business, Getronics, Wholesale & Operations and Other activities including IT The Netherlands. The Segments for Consumer, Business and Getronics operate with a strong market and customer focus, whereas the Wholesale & Operations Segment provides network services to both internal KPN segments and external wholesale customers with a strong emphasis on operational excellence.

Outside The Netherlands, the Mobile International division contains the subsidiaries E-Plus in Germany, BASE and Tele2/Versatel in Belgium and, given the similar nature of the business, our Dutch mobile wholesale activities.

The overview below reflects our organizational structure as of December 31, 2007.

 

   

For more information, see ‘Legal structure’, under ‘Additional information for shareholders’.

     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Organizational structure 2007

23

 


Information about the company

Business overview

 

 

 

Over the past five years, KPN has made significant strategic progress. Between 2002 and 2004, KPN achieved a successful turnaround of the business with strong focus on cash flow. In 2005, KPN entered its next phase with the announcement of its ‘Attack-Defend-Exploit’ strategy for The Netherlands and the challenger strategy at E-Plus. Since then, market shares have grown in nearly all segments and cost reductions are well on track. In addition, KPN made strategic acquisitions with significant value-creation opportunities, most notably Telfort, Getronics and iBasis.

Growth will be the result of The Netherlands reaching inflection, continued growth at Mobile International and additional growth from recent acquisitions, as will be achieved with Getronics and iBasis. Growth is set to be achieved in the face of regulatory tariff reductions and the impact of shrinking traditional wireline services in The Netherlands. Key components of the strategy are the ramping up of new services launched in recent years and cost reductions. A new incentive scheme for senior management has been implemented reflecting the objectives.

In the period to 2010 The Netherlands business will undergo a radical transformation. The All-IP network announced in March 2005 will move into its final phase with the implementation of a new access network. In addition, KPN will pursue a radical simplification of its business, both at the front-end in retail segments and at the back-end in network operations. The significant cost reductions that will be generated by this simplification will be used firstly for re-investment in revenue growth, leading to an acceleration of recent growth initiatives, such as broadband and TV in Consumer and IP-based services in Business. Secondly, cost reductions will lead to improvements of our margins. Operating profit inflection is expected to be reached after 2008, followed by revenue inflection the latest in 2010.

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

 

 

24

KPN Annual Report and Form 20-F 2007

 

Information about the company/Business overview

 


Information about the company

Business overview – The Netherlands

 

Consumer segment

 

The Consumer Segment comprises the following activities: Voice Wireline, Wireless Services, Internet Services and Other, which includes TV and Media, KPN Retail, KPN.com and our Call Centers.

 

 

 

Strategy

 

 

In 2007 we continued to execute our ‘attack-defend-exploit’ strategy in our Consumer segment. Using our broad portfolio, strong brands and our experience in Customer Lifecycle Management techniques, we offered propositions tailored to consumer needs. In addition, we expanded the number of our retail shops to increase the possibilities of our multi-channel strategy. These important instruments helped us to ‘attack’ by driving new revenue streams, ‘defend’ by maintaining share in traditional markets and to ‘exploit’ by achieving a structurally lower cost base.

‘Attack’

With VoIP as one of the leading broadband based applications and the spread of Internet applications to mobile, the importance of maintaining high, leading market shares is crucial for our future growth. In 2007, we remained the market leader in our core markets. Our broadband market share increased to 43.9% (compared to 40.9% in 2006) and in the VoIP market to approximately 39% (compared to 36% in 2006). By acquiring Tiscali’s Dutch subsidiary, we were able to strengthen our position, adding 3.8% market share.

We showed continued strength in wireless services, with growth figures in all brands and covering all key segments. We started to act with challenging fixed-mobile propositions (‘MobielThuis’).

By continuously improving our post paid offerings, we succeeded to grow our most profitable customer base. At the same time, the ‘mobile web’ started to surge in 2007 as could be seen in an accelerating growth of the number of active customers and traffic. Our flat fee offerings proved to be very popular. With these packages we offer our customers an easy and cost-effective entry into Internet.

We attacked on TV by reshaping our portfolio and business model, leading to an accelerated growth in subscriber numbers, market share and revenues. From August 2007 we decreased the monthly subscription fees for Digitenne, offering the customer a large discount to comparable cable packages. We extended the reach of the Digitenne service to approximately 75% of Dutch households at December 2007.

Also in August, we re-branded our IPTV service ‘Mine’ to ‘Interactieve TV’ with a new, lower price for a basic package. As a result, our market share in the Dutch digital TV market increased from approximately 13% in 2006 to approximately 18% in 2007, illustrating the rapidly growing foothold we have in this important market.

‘Defend’

In our traditional voice market we were operationally challenged by the trend towards VoIP and the introduction of wholesale line retail (WLR). A large decline in traffic minutes and PSTN/ ISDN connection lines affected our 2007 results, however every quarter of 2007 showed a lower decline in our net line loss. In this shrinking market, we effectively defended our position by promoting attractive retention and loyalty offerings for traditional voice. In addition, we introduced a much simpler subscription portfolio with clear per minute-use propositions.

‘Exploit’

In 2007, we aimed our marketing activities on cross- and upselling to our large customer base through attractive TV and mobile offerings. In particular, combined mobile/ADSL-only offers and combined broadband/TV offers were successful.

In terms of profitability, wireless had one of his strongest years. This favorable development reflects in particular our success to lower SAC/SRC levels, down 19% in 2007 compared to 2006.

We decided to close the shops with the Kral and KPN Klick formulas to reduce the number of retail formulas we deploy in The Netherlands in order to better align our high street presence with our existing brands. This was done to increase our distribution power and to reduce costs.

 

 

Brand strategy

 

 

Backed by a complete portfolio of offerings and solutions, we launched a portfolio rationalization program whereby we focused on our key retail brands: KPN, Hi and Telfort. The KPN brand is used for our regular offerings, Telfort is our challenger brand and Hi focuses on youngsters.

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Business overview – The Netherlands

25

 


Information about the company

Business overview – The Netherlands

 

 

 

In the second half of 2007, we successfully expanded the Telfort brand as a fixed-mobile challenger brand to drive further growth. With low-cost, no-frills Telfort offerings (such as fast broadband at a competitive rate) we effectively countered competitive offerings. Starting in the fourth quarter of 2007 we rebranded our Tiscali brand and Speedlinq brand to our Telfort brand.

 

 

Strategy going forward; 2008-2010

 

 

In the Consumer Segment, KPN has the ambition to strengthen its position as a leading service provider, both in terms of market share and customer perception. We envisage that a strong customer focus will further drive subscriber and ARPU growth.

We maintain our multi-branding strategy, however, with our new approach we want to bring more focus on simplifying our brand portfolio and operations to build a better consumer business. Our new approach focuses, among others, on one innovation roadmap, one distribution management and one Customer Lifecycle Management system.

In wireless services, KPN intends to consolidate its position as ‘best-in-class’ mobile operator in The Netherlands. Revenue growth will come from focusing on the most profitable customers, leveraging distribution and brands, and growth in voice minutes. Wireless data will also be an important source of growth (e.g. from HSDPA offerings supporting higher bandwidths and from TV on wireless handhelds (DVB-H)). Operating profit will also grow as a result of ongoing SAC/SRC reductions, simplified processes and benefits from further Telfort network integration.

The focus in wireline is on stopping line loss and enhancing KPN’s leading position in the voice and broadband segments. KPN will have a strong focus on dual play offerings. KPN will upsell PSTN customers with broadband to retain customer value and cross-sell to KPN VoIP as a retention offer. The Telfort brand is used to address the value-for-money market segment in broadband and VoIP, in addition to the premium KPN brand.

In the TV segment, KPN will further step up its efforts for its value-for-money DVB-T product Digitenne. IPTV is positioned as a premium TV proposition and the IPTV platform is the stepping stone for TV in the fiber rollout as of 2008.

KPN will start the mass roll-out for its All-IP access network in early 2008. In this rollout, KPN will deploy a mix of Fiber-to-the-Curb (FttC, based on VDSL) and Fiber-to-the-Home (FttH). FttC provides a superior offer compared to offers currently available in the market and offers full triple play capabilities with bandwidths of up to 50 Mb/s. KPN also engages in selected FttH initiatives partnering with building corporations and municipalities, like in Almere en Enschede. FttH offers up to 100 Mb/s with voice, broadband, multiroom TV and HDTV.

At the same time, the Consumer Segment will improve customer services by radically simplifying operations and improving the percentage of ‘First time right’. For example, the Consumer Segment plans to cut back from ten brands to three (KPN, Hi and Telfort), from eight portfolios to one and from eight helpdesks to one. This will also result in substantial cost reductions which will be partly reinvested in revenue growth and partly allocated for improving margins to ‘best-in-class’.

 

 

Products and services, tariffs and competition

 

 

Voice wireline

Products and services

Our Voice Wireline portfolio is based on telephony access services over PSTN and ISDN lines. The revenues from this access portfolio consist of subscription fees charged to our residential customers on a bimonthly basis.

The traffic portfolio consists of local, national long-distance and international call services as well as calls to mobiles and internet service providers (dial-up access). The revenues from these traffic services consist of minute-based fees, also charged bimonthly. Flat fee based offerings have become more important.

During 2007, we put more emphasize on retention and loyalty offerings for minimizing churn and traditional line loss.

Tariffs

Our tariffs for national voice telephony are subject to regulatory approval.

Since January 2007, our traditional voice portfolio has been considerably simplified from over 100 tariff schemes down to three tariff schemes. Our customers can choose among three simple subscription plans. Weekend calls to fixed numbers are free. At attractive rates this offering can be extended to evening hours or to a complete flat fee package.

Competition

We are the largest provider in the traditional voice wireline market. In particular, the wide scale move to VoIP enables a large shrink of the traditional voice market in terms of connections, traffic and turnover. In this shrinking market, we effectively defended our

     
     

 

 

26

KPN Annual Report and Form 20-F 2007

 

Information about the company/Business overview – The Netherlands

 


 

 

 

 

 

position against cable and other operators and CPS providers. The result was an increase in our traditional voice market share from over 65% in December 2006 to approximately 75% in December 2007.

Wireless services

Products and services

Our regular product portfolio consists of a variety of call bundles (traditional subscriptions, voice and/or voice-data bundles), SIM-only subscriptions, prepay products, SMS/MMS offerings and a range of value added services such as voice mail and call waiting. With mobile penetration already high we continued to focus on attempting to increase revenue per user and reduce churn, effectively using our three brands KPN, Hi and Telfort.

In the first quarter of 2007 we launched our first combined fixed-mobile proposition, ‘MobielThuis’. In this home-zoning product, mobile calls around customer’s home are billed at attractive fixed-line rates. ‘MobielThuis’ proved to be a valuable extension of our portfolio.

The customer base for our Telfort brand continued to show healthy growth figures. Telfort proves to be more and more attractive for cost conscious customers. Through our promotions we focused on the low minute price (such as with ‘Telfort unlimited’) compared to offerings from competitors.

We promoted wireless Internet by introducing new flat fee offerings: ‘KPN Surf & Mail Totaal’, ‘Hi Eindeloos Online’, ‘Surf & Mail Unlimited’ (from Telfort) and ‘Telfort Mobiel Internet Unlimited’ (a service tailored to laptop users).

In the second half of 2007 we launched ‘MobielTV’ (Mobile TV) a new value added service. Subscribers to this new KPN service can receive up to 11 TV channels on their mobile phone using our 3G network.

Tariffs

Tariffs and conditions vary by brand; the higher the bundle, the cheaper the calling and the SMS tariffs. Discounts are given when people subscribe via Internet.

In August 2007 we lowered our MTA rates followed by a cut in roaming rates in September 2007. The new prices for calls while travelling in the EU are in line with the regulatory price caps. See ‘Regulatory Developments’.

In all our brands we introduced and extended the possibilities for an easy and cost-effective entry into Internet. In particular, the flat fee offerings are popular.

Competition

Our wireless services market is characterized by strong competition, helped by the existence of numerous mobile virtual network operators which provide significant competition to the existing mobile network operators. With the acquisition of the telecommunications company Orange The Netherlands (‘Orange’) by T-Mobile The Netherlands (‘T-Mobile’), only three operators are left in the Dutch market: KPN, T-Mobile by Deutsche Telekom and Vodafone.

Internet wireline

Products and Services

Our VoIP portfolio consists of a limited number of products, offering broadband Internet access at different speeds combined with attractively priced telephone facilities. Our InternetPlusBellen offering, one bundle for VoIP and broadband Internet, led the market. As of December 2007, approximately 0.85 million customers subscribed to one of our regular dual-play VoIP offerings or to one of the VoIP products of our newly acquired ISP’s Speedlinq and Tiscali.

In addition to these dual-play options, we continued to promote our single play broadband portfolio, supplemented by a variety of value added services such as virus scanners and firewalls.

We offer customers broadband access through our KPN Internet organization, ‘KPN Direct ADSL’, which offers a direct ADSL connection without using an ISP. Planet, Het Net, Speedlinq, Tiscali and XS4ALL are the brands under which we sell our range of broadband products. In the second half of 2007, we expanded the Telfort brand from just mobile to include broadband and VoIP as well.

Tariffs

Internet customer growth was driven by the increasing popularity of bundled packages (VoIP in particular) and supported by our different product combinations, each with varying features at different price points. Our broadband services are delivered at different speeds and are offered at lower prices to customers willing to accept longer contract periods. In addition, customer acquisition is boosted by supplementary promotions such as free wireless routers with certain packages. KPN broadband subscribers receive additional savings on premium services, such as ‘Service at home’, web hosting and PC-safety, and have access to specific broadband services or packages such as the combination of broadband/VoIP and Digitenne or broadband/VoIP and Interactieve TV. These additional services and

     
     

 

 

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promotions differ by brand. Subscriptions at introductory discounts are offered in order to gain market share. Our ADSL-only offerings (sometimes packaged with a mobile subscription) have shown a steady increase in popularity.

Competition

We faced strong competition in the market for Internet services especially with respect to prices, and more specifically in the market for broadband internet access, reflecting the development of cable operators, of unbundling, and the emergence of FttH offerings. In the Internet wireline segment, we noticed a trend of consolidation in the market around a few major players that offer multiplay (Internet, VoIP, TV).

In 2007, we took full advantage of the shift towards broadband-centric services, such as VoIP. The VoIP issues encountered in the first half of 2007 were solved fully by the third quarter, after which VoIP advertising and order intake resumed. As a result, we strengthened our position as VoIP market leader, targeting effectively specific segments through our strong brands. Also our broadband market share increased, mainly as a result of the acquisition of Tiscali.

Other

Products and services

A large part of our remaining business consists of TV offerings. Other business entities are Media, KPN Contact and KPN Retail. Media is responsible for our media related business activities. KPN Contact is the in-house call center of KPN. In addition to The Netherlands, KPN Contact also exploits its call center business in Belgium and Germany. KPN Retail manages our retail formulas.

Our TV product Digitenne (DVB-T based) offers access to popular digital terrestrial TV and radio channels. Our new IPTV offer ‘Interactieve TV’ (previously called ‘Mine’) is positioned as a premium offer compared to our Digitenne product and has the option to add supplementary services and packages (such as video on demand).

The TV customer can subscribe to several additional packages, such as the ‘Planet Pluspakket’ with various theme channels and the ‘Tele2 Eredivisie’ football package with access to dedicated football channels.

Tariffs

In the course of 2007, we improved the business model and pricing schemes for TV to create a solid foothold in the Dutch TV market.

With the newly priced Digitenne package we are substantially lower in price than the average cable offer. We have priced our new ‘Interactieve TV’ offer at a highly competitive rate in order to grow more rapidly in the emerging Dutch IPTV market.

Competition

Our TV offers compete with the offerings from cable operators, from suppliers of satellite TV and from the IPTV services from DSL operators.

As mentioned above, we have reinforced our efforts in the TV market. We want to gain a significant part of the Dutch TV market from the cable operators and the price decreases are part of this strategy. On the one hand we want to be prepared for the increasingly integrated voice, Internet and television markets (to a greater extent serviced by multi-play offerings), on the other hand, we want to strengthen our portfolio to effectively compete against the integrating Dutch cable sector.

In 2007, The Netherlands Competition Authority (NMa) cleared the proposed merger of the cable operators Casema and Essent Kabelcom. The two companies were acquired by the same private equity investors and will be merged with the smaller rival Multikabel. We estimate that together the three operators serve between 45% and 50% of all Dutch TV connections, and between 20% and 25% of all broadband internet connections in The Netherlands.

 

 

Distribution

 

 

Different retail store outlet chains support our marketing philosophy with ‘Primafoon’ and ‘KPN.com’ as our mainstream outlets, with ‘Hi’ retail stores aimed at the youth market and our new ‘Telfort’ stores supporting our challenging role in the market. During 2007, we discontinued several trials with other distribution concepts (such as the Kral and KPN Klick formulas) and instead focused on a limited number of outlet brands serving target groups with a distinctive marketing philosophy. The shops sell a wide variety of communication, information and entertainment solutions, fixed and mobile, and include a wide variety of devices. For more information on Business Centers, we refer to ‘Distribution and Seasonality’ of the Business Segment.

     
     
     
     
     

 

 

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Besides our own channel retail stores, we make use of several independent retail mobile stores as a distribution and sales point, such as ‘T for Telecom’, ‘The Phone House’ and ‘Debitel’. To increase revenues and to strengthen customer relations, we continue to look for new initiatives and partnerships. A successful example is Telfort’s initiative to team with ‘The Phone House’ to sell its mobile internet product. At the same time, Telfort also expanded its sales channels with mobile booths that set up in markets and fairs in larger Dutch cities.

To promote our TV portfolio we also used several well known retail chains, such as BCC, Expert and MediaMarkt.

 

Business Segment

 

The Business Segment comprises the following activities: Voice Wireline, Network Services, Wireless Services, Application Services and Corporate Solutions.

 

 

 

Strategy

 

 

The Dutch ICT market is benefiting from economic growth and major demographic trends. Businesses innovate processes, services and business models, in which fast, secure access to information is becoming more important. ICT is vital in this process and as a result, ICT budgets are increasing.

In the corporate market segment, we see a growing amount of converged IT/Telecom deals with a clear trend towards outsourced service provisioning. There are market opportunities for workspace and application outsourcing in particular, traditionally the domain of large outsourcers and system integrators.

The markets for application management and hosting are growing fastest. Business continuity regulation (SOx, Basel II) and digital processes and information drive the demand for storage capacity. Software as a Service (software hosted in cyber centers, accessible via internet) is still a relatively small business, but growing at high speed and expected to fundamentally change the software industry.

The infrastructure market is still characterized by fierce competition of national and international telecommunications providers as well as cable companies. Price competition continues, since basic telecommunications services have become commodity services. Decline in the fixed voice market continues, mainly driven by the uptake of IP voice and substitution by mobile and data.

Major providers are moving towards next generation networks and services. New communication services are IP-based and access to information is possible through various kinds of hardware devices. Fixed and mobile services are being increasingly packaged and/ or converged. This is also reflected in the continuing consolidation of fixed and mobile communication providers.

An important business trend is mobility: working any time any place is important for employers as well as employees, as it improves productivity as well as work-life balance. Adoption of mobile data services is still relatively small, but is expected to increase rapidly, both as a result of technological development (of devices and networks) and targeted marketing activities.

‘Attack’

Implementing KPN’s strategy in the business market was aimed at grasping the opportunity to shift from decreasing traditional communication services towards services in the larger and growing market for end-to-end managed ICT Services. We are the preferred supplier for IP-VPN, Ethernet VPN (E-VPN), IP-PBX, DSL Access services and POTS (traditional telephony services) in The Netherlands.

Implementing our strategy, we have taken a number of initiatives to establish KPN as a provider of managed ICT services, both through autonomous growth as well as through acquisitions and partnerships.

 

 

   Creation of the business unit ‘ICT Services’

In September 2007, KPN started with the new Business Unit ‘KPN ICT Services’. All KPN ICT services related activities and acquisitions are grouped together in this new business unit (including Software Online, Cyber Center services and Enterprise Solutions). With the creation of this unit KPN aims to meet the growing need in the business market for integrated, managed ICT solutions. Combined with the acquisition of Getronics in 2007, KPN has the requisite skills and the portfolio of products (both online and on site) to become the prime contractor for ICT services in The Benelux.

   Expansion of the Software Online portfolio (formerly ‘Applications Online’)

In 2007 KPN established a footprint in the small and medium sized segment of the Dutch market for online applications, backed-up by marketing campaigns centered around online applications for internet security and mobile e-mail. We have also initiated sales of prepackaged versions of Software Online through large retail outlets, (including KPN’s own business outlets) as well as through other third parties (e.g. Sony). In addition, we have started a pilot for remote and on-site IT support in order to establish more revenue

     
     
     

 

 

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streams from service and support to small and medium enterprises and to improve customer satisfaction. By taking the lead in the Dutch market, KPN is, as one of the first operators in the world, able to sell managed online ICT services in the business market.

   Consolidation of Narrowcasting services

In 2007 we merged NN Solutions, QBIX and eYe-display (all acquired in 2006) into KPN Narrowcasting, a company with the trade name QYN, in which KPN holds a majority stake. QYN provides end-to-end managed narrowcasting solutions towards an increasing number of customers. Additionally, in 2007, ON (KPN’s joint venture with Heineken) has become the largest narrowcasting network by number of sites in The Netherlands. ON has evolved towards a cross media company using narrowcasting, internet and mobile to target the age group of 18-35 for its customers like KLM, Nationale Nederlanden and Seat.

   Expansion of Healthcare solutions

In 2007, KPN initiated the largest remote E-Healthcare pilot ever held in The Netherlands. In the pilot, a group of up to 1000 people are being monitored with telemedicine solutions, via a cooperation among hospitals, a large homecare organization and a number of general practitioners. It enables patients to talk to a medical call center or to consult their doctor via video, using their TV set in combination with a DSL connection. Being able to see and speak with patients remotely and monitor their physical condition, healthcare professionals save travel time and avoid spending additional time on patients who do not require an in-person consultation. This increases the time they can spend with other patients, thereby increasing their efficiency. E-health envisages to make healthcare in The Netherlands more affordable and to keep it accessible to everybody. The pilot will continue to be evaluated in 2008. Furthermore, KPN has actively extended its ZorgConnect network (initially between hospitals, pharmacists and general practitioners) with connections to homecare organizations, nursing homes and mental institutions. With ZorgConnect, KPN provides a secure backbone for the entire healthcare chain, over which healthcare providers can securely share patient information. KPN ZorgConnect was the first network in The Netherlands to be certified by the government as a secure Healthcare Service Provider.

   Successful introduction of ICT services for education

KPN is continuously expanding its School Online portfolio (consisting of free internet, managed ICT services and digital educational content). KPN acquired a minority stake in Station to Station in 2007, which provides desktop management services to more than 800 primary schools in The Netherlands. Additionally, KPN has developed ROCtv, an integrated narrowcasting solution for the ROCs (Regionale Opleidings Centra). ROCtv is a co-production of a group of 5 five ROCs, NCRV (a Dutch broadcasting company) and KPN. After a successful pilot in June 2007, KPN and NCRV are further investigating commercial introduction of this new service.

 

 

‘Defend’

KPN Business Segment defended market shares in its very competitive telecommunications market. Our proven services are a vital part of the solution for current communication needs of our business customers. They are also the stepping stone for migration to IP based and ICT services. The combination of telephony, internet, mobile and content services provides excellent opportunities to exploit our reputation as a reliable and innovative partner for telecommunications services.

In 2007, we combined the business customer activities of KPN’s former KPN Mobile The Netherlands and Fixed division resulting in one single new segment, serving all business customers in The Netherlands, with both fixed and mobile services. With this integration, we have been able to enrich our position with packaged offerings, exploit cross and upsell opportunities and to pursue selected cost synergies. KPN Business Segment aims for ‘best-in-class’ customer services, around customer focused processes, systems and employees.

 

 

Our brands and marketing

 

 

For business customers in The Netherlands, KPN is the primary brand for both voice wireline, Internet/broadband and data network services. KPN also owns Infonet Netherlands, which offers data networking services, as an exclusive distributor of Infonet Inc. in the Dutch Market. In 2006, KPN’s marketing further refocused from a product to a market orientation for both consumer and business customers. For small and medium enterprises as well as large enterprises, our major goal has been to offer our customers a range of services and easy-to-use solutions based on their business needs. To meet this goal we often successfully play the role of ICT advisor. Providing advice to the customers is also a part of the continuous improvement in our customer service and satisfaction. Examples of advising customers are ‘ZekerWeten’ (a fixed-mobile campaign emphasizing our advisory capabilities based on innovative advisory tools), ‘Telecomscan’ (an online advisory tool for SMEs to identify the best possible communications mix, taking into account a company’s mobile and voice wireline usage) and the Business Continuity Quick Scan, a tool which enables large enterprises to gain insight in the continuity of their business processes in case of a crisis.

     
     
     

 

 

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We have increased our sales of broadband (Office DSL), IP-VPN and E-VPN network solutions, nationally as well as internationally. During 2007 we continued offering managed services that optimize business processes and contribute to business continuity and ultimately cost savings. In the SME market KPN has strengthened its position with intensified marketing campaigns for KPN’s DSL offering and KPN’s new product line up.

 

 

Strategy going forward; 2008-2010

 

 

KPN will continue to move up the value chain towards managed ICT services. Based on a strong customer focus, KPN intends to be the preferred supplier for business customers. KPN has the ambition to be the leading end-to-end ICT service provider in The Netherlands by 2010 and have strong market positions in Infrastructure Services, Application Management and Outsourcing.

In Infrastructure Services, Wireless Services will continue to be a growth business, despite regulatory tariff cuts in MTA and roaming. More specifically, further revenue growth will come from data services, such as laptop data cards, Blackberry, PDA and Machine to Machine. Furthermore, KPN operates a superior 3G network based on HSDPA, offering higher bandwidths and higher population coverage than its competitors.

In Wireline Services KPN is pro actively migrating its business customers to IP-based services. In 2007, the Frame Relay and FlexiStream platforms were switched off, while other legacy services are gradually phased out. The move towards a narrower range of IP-based platforms allows a radical simplification of the business and substantial cost reductions.

The demand for higher bandwidths is addressed with a step up in Fiber-to-the-Office (FttO) initiatives started in 2007. These initiatives will continue in the coming years.

Fixed-Mobile Integration opportunities will be stepped up in coming years, following successful introduction of for example ‘ONE’, a fully integrated Fixed-Mobile offer with a continuously expanding range of services.

In 2007, KPN set a major step in moving up the ICT value chain through the Getronics acquisition. It provided KPN with a leading position in Workspace and related IT-services. Next steps in unfolding its online applications portfolio and housing and hosting initiatives lie ahead.

 

 

Products and services, tariffs and competition

 

 

The Business segment primarily generates revenues from the following portfolio clusters: Voice wireline, Network services, Wireless services, Application services and Corporate Solutions.

 

 

Voice wireline

Products

KPN offers fixed-line telephony access services over analog lines (PSTN), digital lines (ISDN) and increasingly over IP-based connectivity (VoIP). The revenues from traditional access services consist principally of subscription fees charged to our customers on a bimonthly basis. Total net sales from connections, for which we charge a one-off connection fee, and subscriptions, depend on the number of new connections and customer lines, the mix of the customer base (fees for digital lines are higher than for analog lines) and fees charged for our services.

KPN offers national and international access through a number of different offerings. The revenues from these traditional traffic services consist of minute-based fees charged bimonthly. The minute-based fee differs per proposition.

By designing smart migration plans in cooperation with our customers, we strive for an optimal balance between traditional voice wireline services and new IP-based voice services in our service offering. Additional online services such as product or rate plan advisory have been implemented to increase customer satisfaction.

Tariffs

Our tariffs for fixed-line national voice telephony services are subject to regulatory approval. Under the regulatory framework that applies to the Dutch telecommunications sector, these tariffs will continue to be subject to regulation for as long as the Dutch regulator designates us as having significant market power. However, since January 1, 2006, we were granted more flexibility to maneuver in our pricing strategy, leading to a number of new tariff differentiated propositions for specific customer groups, such as Corporate Voice XL (introduced in 2007).

With the additional pricing strategy flexibility and the tariff differentiated propositions we were able to stabilize our market share in the fixed-line voice telephony market.

As of January 1, 2006, international calls are no longer subject to OPTA regulation. As a result, we are free to compete on international calls.

The tariff of ‘Zakelijk InternetPlusBellen’ consists of a DSL subscription fee and a voice subscription fee. Voice calls over the DSL connection are included in the subscription fee, except for international and fixed-to-mobile calls (which are charged per minute). Our VoIP Connect offering is based on a license fee per user combined with an IP solution of

     
     

 

 

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the customer. Traffic fees are charged per minute. Our VoIP tariffs are also subject to OPTA regulation.

 

 

Competition

 

 

In the traditional voice access market we are the largest provider. We experience continued competitive pressure from Direct Access and Carrier Select and Carrier Pre Select competitors, including Tele2/Versatel The Netherlands, BT Worldwide, Verizon, Esprit Telecom, Colt, Essent and Priority. Additionally, traditional voice services are threatened when migrated to another provider. Another threat is substitution by mobile telephony as well as the migration to VoIP services.

In the corporate market traditional voice telephony is being replaced by broadband and IP-VPN solutions, which increasingly are being equipped to provide inter-company voice traffic (without call charges).

Increasing broadband penetration in the small business market threatens our traditional voice access services (PSTN and ISDN), where we encounter competition from cable operators offering VoIP solutions bundled with broadband Internet.

 

 

Network services

 

 

Products

 

 

We offer a range of data communication services for our business customers. We are the leading provider of these services in the Dutch business market both in terms of revenues and in terms of number of connections. In addition, we offer data services in Europe through our KPN EuroRings network as well as worldwide through our partners. The telecommunications solutions based on data/IP services we offer include:

 

 

  National data services

KPN offers an extensive portfolio of data services ranging from traditional Transmission Services such as leased lines and broadband services to Network Services such as IP-VPN, Ethernet VPN services and Internet Access Services. KPN is the leading provider of Internet Access Services in The Netherlands. Both xDSL (e.g. ADSL, SDSL) access technology and optical fiber access technology are supported. These services are targeted at business customers and at ISPs.

  International data services

Through our KPN EuroRings network we provide international connectivity services in Europe. The international services also vary from transmission services such as international leased lines to network services such as IP-VPN and E-VPN services. Furthermore, for worldwide solutions we work with partners like SingTel, Telefónica and Sprint. This is complemented with substantial participations in various sea cables.

 

 

 

 

In 2007 we emphasized the migration of customers from traditional to IP based services as well as the upgrade from unmanaged to managed solutions. In addition, Economy IP-VPN was introduced in the SME market and we addressed the rollout of Fiber To The Office more intensely in order to meet customer demand. We have been able to significantly increase the number of connections by the migration of customers, the introduction of new services and the autonomous growth of our DSL and Ethernet portfolio.

 

 

Tariffs

 

 

Pricing of KPN data services, Internet access services and integrated and managed solutions is largely based on recurring monthly subscription fees. The pricing depends on the bandwidth, the quality level and the functionality provided. The pricing of leased lines also depends on the geographical distance. Some services have an additional volume-based pricing component. Customers are typically billed on a monthly basis. Data services are partly regulated. The service fees of regulated services are therefore based on prescribed cost-based calculations as stipulated by OPTA.

The price levels of data and Internet access services are declining. This is the result of a combination of intense competition, overcapacity of bandwidth and the migration from traditional services with higher prices to next generation services with lower prices.

 

 

Competition

 

 

We have many competitors in the data communications services market, such as BT Global Services, MCI, IBM, Colt, Essent, Tele2/Versatel The Netherlands, Global Switch, TNF Network Factory and BBNed. Our competitors invest in the construction of backbone infrastructures in The Netherlands and in local networks in large Dutch cities, comparable to our CityRings network. Local government fiber initiatives also increased the competitive pressure within The Netherlands and introduced new competitors.

     
     
     

 

 

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Wireless services

 

 

Products and services

 

 

KPN offers a wide range of mobile communications solutions to our customers. Under the KPN brand we provide mobile voice, data and internet services. KPN’s international mobile service provider, Sympac, offers customized mobile communication solutions for multinational companies.

Demand for mobile data services continues to grow strongly. Customers are especially interested in wireless e-mail solutions (Blackberry, Windows Mobile) and in Mobile Internet Cards.

In 2007, KPN introduced the Push to Talk service. With this service customers can use their mobile telephone as a walkie-talkie and can make group calls from a phone or a central dispatcher through the push of a button.

Furthermore, KPN improved the performance of its data network, both in terms of coverage and capacity. We have also improved our online customer self care service environment, providing customers with improved transparency to their mobile phone expenses.

 

 

Tariffs

 

 

The services KPN offers in the business market mainly have a postpaid structure, combining monthly subscription fees with traffic-based pricing. In response to regulatory requirements, KPN reduced its MTA tariffs in July 2007 and its international roaming tariffs in September 2007. For further information see ‘Regulatory Developments’.

 

 

Competition

 

 

The main competitors of KPN in the business market are Vodafone and T-Mobile (including Orange which was acquired by T-Mobile in September 2007).

 

 

Application Services – Enterprise Communications Solutions

 

 

Products

 

 

KPN designs, delivers, integrates, services and manages unified, voice and data communication solutions at customer premises, such as PBX and Local Area Networks. Anticipating fixed and mobile communication convergence, we offer combined solutions to meet customer demand in new areas and for selected market segments, such as:

 

 

    high end communication solutions, on demand IVR integration between Contact Center applications, CRM application and Voice Response Applications;

    high end communication solutions for trading rooms; and

    video surveillance, internet security and healthcare solutions. We work closely with high-quality partners to enable us to acquire specialist knowledge in these areas.

 

 

Customers are increasingly demanding managed or outsourced solutions. KPN provides outsourcing solutions for all or part of the telecommunications operations and infrastructure of companies, increasingly focusing on the integration of fixed, mobile and data communication. We offer the know-how of our consultants, project and implementation managers and specialists in telecommunications management and technology. Forrester research shows that KPN is the number three managed services provider of all managed service providers in the EMEA region (source: Forrester, European Telecom Operator Managed Services Deals Survey 2006).

 

 

In order to further strengthen our position in the field of enterprise communications in general, we acquired three companies in 2006: Newtel Essence, CSS Telecom and Siemens Enterprise Networks. During 2007, we integrated these companies into our business in order to create synergies:

 

 

    Siemens Enterprise Networks was integrated with CSS Telecom; and

    Newtel Essence combined with the former KPN onsite call center business and online 0800/0900 business and is now able to offer businesses a full range of solutions for interaction between businesses and their customers.

 

 

The three acquired companies performed according to expectations in 2007 and their 2007 results were comparable to the original business estimates made prior to their acquisition.

 

 

In 2007, we were one of the first worldwide operators to participate in the Microsoft Voice Partner Programme. We are also actively working with other leading vendors to develop innovative propositions in the field of unified communications.

     
     

 

 

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Tariffs

 

 

We offer competitive tariffs for our products, service contracts, managed services and other services due to our supplier relations, scale, knowledge of communication solutions and the use of technology (such as service on line) for servicing and managing the products. Revenues from equipment and voice and data solutions are moving from one-off revenues to recurring revenues (for example Managed IP Telephony ‘tariff per seat’ and ‘tariff per functionality’).

 

 

Competition

 

 

Our competitors are numerous and vary in size and expertise. Our main competitors are Imtech and Dimension Data. Increasingly we encounter other international operators like BT and Colt, mainly in the area of managed services. We maintain our leading position with high success rates and high customer satisfaction. Clients have chosen KPN increasingly for our end-to-end full service provisioning, our large and highly skilled field force (local presence) and fixed and mobile convergence as well as our innovative solutions.

 

 

Software Online

 

 

Products

 

 

Software Online consists of a range of online application services for small and medium enterprises, introduced by KPN in 2006. Software Online enables companies to access software and content via the Internet. The applications are hosted in KPN cyber centers, safe and secure, relieving companies from the installation and management of applications on servers on their premises. Employees can log on to the applications from any location through a PDA, a private PC or a laptop, enabling them to work anytime, anyplace.

In 2007, KPN continued to expand the portfolio of online application services, which currently includes, among others, Exchange Online, Back-up Online, CRM Online, Workspace Online, Extra Harde Schijf Online and Document Sharing Online and ‘Internet Safety Pack’. At the end of 2007, we had approximately 23,000 users for Software Online. In order to handle the large number of orders, we have implemented an automated order, delivery and invoicing process, fully managed and monitored to ensure quick and smooth access to the service.

 

 

Tariffs

 

 

For Software Online, we follow a premium pricing strategy, based on fixed price per month per user. In 2007, we won several ‘best value’ awards, for services such as ‘Backup Online’ and ‘Exchange Online’, demonstrating that KPN is able to lead the market with a good balance between functionality and price.

 

 

Competition

 

 

We currently encounter competition from small, niche and/or start-up companies. Customers are particularly attracted by KPN’s offerings based on brand perception and secure and high quality service. We foresee intensive competition from large companies like Microsoft and Google in the future, but expect to be able to leverage our sound position in the Dutch market and small and medium sized Dutch companies’ preference for providers with local Dutch support.

 

 

Application Management Systems

 

 

Products

 

 

KPN’s offering of Application Management Systems ranges from relatively basic housing services to state-of-the art business continuity and SAP hosting services.

 

 

Demand for housing and hosting services is fuelled by online applications and large enterprises’ need for data storage. In 2007, we expanded our capacity for housing services by approximately 40% through a partnership with Siennax for sharing infrastructure in cyber centers. We established contracts with numerous large customers to deliver SAP hosting, storage and backup services and application hosting. In order to improve our SAP offerings, we introduced Remote SAP management, where customers have the ability to make use of our intensive knowledge on SAP and business continuity without making instantly drastic changes in their infrastructure. We also provide messaging services to retail and governmental organisations.

 

 

Tariffs

 

 

With our state-of-the art Application Management services we are able to maintain a premium price strategy, although we encounter strong price competition in the market. By innovating and improving our operational efficiency we expect to maintain our margins.

 

 

Competition

 

 

Our competitors are numerous and vary in size. For SAP hosting, we mainly encounter SAP specialist companies like Ctac. In order to maintain our market position we have established strong partnerships with other ICT providers and with business consultancy firms, leading to a number of successful deals in 2007. For our SAP hosting and business continuity solutions we maintain high customer satisfaction levels. Our customers choose us for our

     
     

 

 

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excellent cyber centers, which provide customers the ability to tailor solutions based on their specific needs.

Corporate Solutions

In the corporate market, we face competition from international companies offering managed ICT services (e.g. system integrators), as well as from niche players in specific (vertical) market segments. The convergence of IT and telecommunications is increasingly reflected in requests for end-to-end ICT service delivery. In many cases, large companies contract one single provider for the overall integration of all (own or third party) underlying services.

Corporate Solutions – Integration and Outsourcing services

In 2007 Corporate Solutions further transformed from a telecommunications provider to an ICT solutions provider. We deliver managed services up to fully outsourced solutions for integrated data, voice and mobile as well as workspace management.

Outsourced solutions

KPN designs, delivers, integrates and insources ICT solutions. In addition, we offer communication solutions for special events, call centers, video surveillance, security, dynamic instore marketing (narrow casting) and healthcare in close cooperation with partners that are specialized in the respective subject. We also offer the know-how of our consultants, project and implementation managers and specialists in ICT management and technology.

Workspace management

In 2007, KPN started the desktop outsourcing activities which resulted in obtaining new customers representing 1500 workspaces. The desktop proposition is offered in three varieties:

   online takeover of an existing desktop/PC environment based on ASP tooling;

   new online technology: virtual online desktop including all ICT infrastructure and full virtualization of ICT applications (including Voice IPBX); and

   ICT outsourcing based on third generation modelling, an end-to-end managerial approach based on subcontracting or outsourcing of existing contracts/parties/solutions.

KPN intends to expand and differentiate its capabilities in terms of online workspace environment solutions towards a market-driven set of solutions which will meet the demands of different customers.

Business Mobile Solutions

In 2007 the Private Mobile Radio organization was transformed into a knowledge driven company, BMS, which offers mission critical communication and mobile solutions. BMS offers communication solutions at airports, in harbours and on trains, but also personal mission critical communication for police forces, fire brigades and ambulance personnel. Also a new portfolio for fleet management was introduced with functionalities like tracking, tracing, navigation and order dispatch. BMS is focused on selling, marketing and managing the projects to implement the solution we design and finally service and manage it for our customers.

Public Sector Solutions

In 2007, we completed the integration of Gemnet (acquired in 2006) and successfully started to implement our strategy of providing value added ICT services to municipalities, waterboards and provinces in The Netherlands. In 2007, Gemnet expanded its position as a provider of managed ICT services in the local public sector. Almost all municipalities have signed a multi year contract for broadband connectivity over the Gemnet platform, a secure data network between municipalities and major central governmental departments. In addition to connectivity, Gemnet started to sell value added services to municipalities and third parties.

Tariffs

We believe we are able to offer competitive prices for our products, service contracts and other services due to our excellent supplier relations, extensive knowledge of communication solutions and the use of technology (such as service on line) for servicing the products.

By offering more and more end-to-end services to our customers, revenues from equipment and voice and data solutions move increasingly from one-off revenues to recurring revenues (for example from ‘price per minute’ in managed voice solutions to ‘price per seat’ for desktop management services).

     
     

 

 

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Competition

Our competitors are numerous and vary in size, depending on the type of required solution as well as the branches in which we are acting. Our main competitors are BT Global Services, Verizon, Orange Business, AT&T and Colt (international managed data networks), Vodafone (international mobile phone services), Imtech and Dimension Data (managed ICT services).

We maintain our leading position with high success rates and high customer satisfaction. Customers have chosen KPN increasingly for our end-to-end full service provisioning and fixed and mobile convergence as well as our innovative solutions.

Distribution and seasonality

KPN has a wide range of channels available for its business customers.

Small and medium-sized businesses can reach us for sales and service by phone, they can visit a shop (e.g. Business Center) or by logging on to www.kpn.com, the internet channel of KPN. In addition, KPN works, in this part of the market, with a nationwide network of ICT and telecommunications resellers who sell KPN portfolio and complement this with value added services such as consultancy. This allows our customers to buy turn-key ICT solutions at a familiar address, whilst KPN takes care of the ICT network facilities.

In 2008, KPN will start a new channel formula for small and medium-sized businesses. New business shops will open to replace the former 17 Business Centers. These new shops will offer custom made ICT solutions.

For enterprise customers ICT is strongly linked with the strategic business processes of our customers. Therefore KPN serves these customers with strategic account managers who work closely with portfolio consultants and with other channels for an optimal service-delivery and customer experience.

In the case of integrated managed solutions KPN works in accordance with the Service Management method, using its own service components or components purchased from third parties. A program manager is, for a specific customer, responsible for the optimal performance of the KPN integrated solution and can rely on a team of permanent staff and a pro-active service organization.

Seasonality

Seasonality in revenue-streams is mainly caused by holidays in the third quarter. Holidays have a slightly negative effect on the project-driven part of total revenues of Corporate Solutions and Application Services. Furthermore, traffic revenues of Voice Services and Wireless Services are somewhat lower during holidays. This effect is partly offset by higher Wireless Services revenues from roaming.

Getronics Segment

 

KPN completed the acquisition of Getronics in October 2007. Integration of Getronics with KPN commenced immediately. KPN will integrate its ICT Services and Corporate Solutions businesses into Getronics and will continue to run the Getronics business as a separate IT company, given the fact that dynamics of this market are different from the telecommunications business.

Strategy

Getronics has strong competencies in workspace management and application services. Therefore, the acquisition of Getronics reinforced the ICT strategy of KPN and further transforms KPN from a communication service provider to provider of ICT services. More and more companies are recognizing the continued convergence of telecommunications and IT, achieving significant benefits by sourcing all related services from a single vendor. Combining Getronics’ business with KPN will transform our existing ICT business by giving us critical mass and expertise and enhancing our opportunity to become the ICT partner for our widened client base in our key territories. Some key benefits of combining Getronics with KPN are:

   the combined business becomes the prime contractor to provide integrated ICT services, with enhanced time-to-market and product development capabilities;

   cross and upselling opportunities to one another’s client bases; and

   platform to benefit from the relatively untapped and fast growing small and medium enterprises’ market segment, leveraging the KPN sales force.

 

 

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Strategy going forward; 2008-2010

In the Benelux region, Getronics is strengthening its market leadership position in infrastructure and network-related IT services and consulting. Getronics will offer end-to-end solutions with workspace management at the center, which is one of the key strengths of the Getronics business. Other services offered are data center and hosting services, connectivity solutions and Software as a Service. The services are complemented by independent consulting and professional services through the separate label Getronics Consulting.

In the global workspace management business, Getronics intends to expand and strengthen its global delivery capability. This delivery capability is based on own operations in countries with sufficient scale and on partnerships in other countries.

The launch of a new workspace management solution ‘Future Ready Workspace 2.0’ in the second quarter of 2008 will support the global delivery capability for serving international clients and drive profitability. Future Ready Workspace 2.0 is an integrated solution covering a large part of our service portfolio.

Going forward, Getronics will focus on its core operations, where Getronics will continue to operate the activities in network-related IT services and connectivity. Activities further up the value chain such as Business Process Outsourcing and Business Applications are considered to be non-core.

Accordingly, Getronics is considering the divestment of a number of strong businesses, either in part or in full in the Benelux and globally. In the Netherlands in particular, Getronics is considering the divestment of several non-core businesses with strong operating profit margins, being Business Applications Services and Business Solutions for local governments and healthcare. A final decision will be made depending on interest from potential buyers and the detailed carve-out plan. The divestment of these non-core assets will allow KPN to recoup part of the acquisition consideration.

Brand strategy

The Getronics’ brand is promoted in over 25 countries as part of the Getronics’ brand strategy. In addition, Getronics’ strategic partners, alliances and service partners also help to support the Getronics’ brand on a global scale. In 2007, Getronics’ brand strategy was focused on increasing industry recognition as the workspace management company with global delivery capabilities. Getronics go-to-market model is centered around the following proposition: ‘Enabling the High- Performance Workforce’. Getronics fulfils this proposition by providing its clients’ end-users high quality services, real-time infrastructures, optimized business applications and collaborative people. The Future-Ready Workspace is one of Getronics’ most important products and combines in a modular and standardized approach with components of the whole Getronics portfolio. This has significantly increased the brand recognition of Getronics and has improved the visibility of Getronics amongst industry analysts, consultants and clients.

Products and services, tariffs and competition

Products and services

We define this business into three main areas: Workspace Management (exemplified by the Future-Ready Workspace), Application and Integration Management, and Consulting and Transformation.

Workspace Management

Workspace management expertise and focus is encapsulated in its Future-Ready Workspace. The Future-Ready Workspace has been developed to give the workforce constant and reliable access to relevant information and to help people connect across the enterprise. In a single physical and virtual environment, it gives the workforce access to all the applications and infrastructure. It is secure, scalable and simple to maintain. With the Future-Ready Workspace, innovations and upgrades are provided as required, and Getronics’ remote management services ensure that all systems operate with efficiency. The Future-Ready Workspace also integrates technologies through alliances with Cisco and Microsoft.

Application and Integration Management

Minimizing cost and adding value are essential objectives for both workspace and application management. Getronics is delivering expertise to its clients through three broad areas of activity:

   the integration of new and existing business applications;

   application maintenance and evolution, ranging from patching through to major replatforming projects; and

   full application management, where we assume complete responsibility as an outsourced applications service provider.

 

 

 

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As an applications partner in specialist areas such as retail banking, insurance, healthcare and government, our applications expertise is particularly focused on the way applications help clients establish intimacy with their own customers. This can be at the physical point of contact in a branch or through virtual channels such as customer contact centers.

Consulting and Transformation

We provide clients with guidance and analysis of issues around effectively maintaining current ICT investments, introducing new technology, leveraging industry standards for predictable performance, introducing continuous improvement programs, addressing security shortcomings, and transforming existing environments. With our clients, we develop proposals and also implements those proposals. In total, Getronics has over 1,500 workspace and application management architects and consultants.

The three broad go-to-market offers described above have been built around Getronics’ core strengths and are built on the global portfolio of services which covers workspace management, applications, technology transformation, communications, and security.

Tariffs

Pricing of our services varies in function of many parameters, such as the scope, the requested service level, and the geographic spread. In general, the tariffs in managed services (including outsourcing contracts) tend to suffer from rate discounts in most renewal and competitive bidding situations. This goes together with continued reductions in the cost associated with delivering these services, in particular by reducing the labor component and increasing automation. The professional services markets (including consulting and transformation services and application services) are benefiting from increases of hourly rates and tariffs, however, some of these increases also reflect upward pressure on employee compensation due to the scarcity of skilled and experienced ICT professionals, particular in Europe.

Competition

The ongoing trend in the ICT industry towards globalization has resulted in, among other things, consolidation within the ICT industry. Notwithstanding this consolidation, the ICT industry in Europe remains fragmented. The markets in which Getronics operates are intensely competitive and undergo continuous change. The competitors can differ significantly depending upon the market, client and geographic area and include a broad spectrum of ICT services companies, ranging from systems integrators to outsourcing providers and consulting companies, such as IBM, Atos Origin and CapGemini.

Distribution and seasonality

Getronics investment in its global service delivery organization and tools has significantly increased the proportion of services that Getronics provides from centralized and remote locations. This is particularly true for workspace management, including security and communication services. At the same time, consulting and transformation services require large numbers of skilled and certified ICT professionals on-site. The sales approach depends mainly on the size and type of the client. Getronics has established dedicated international sales and account management for the large multinational clients, whereas local market opportunities are targeted by country teams. Large national accounts also have dedicated sales and account management, but these are organized on a local level. In addition to the direct sales organization, Getronics has a global channel sales organization. This global channel organization distributes selective parts of the Getronics portfolio in geographic areas in which a direct sales force is not present. This organization also includes partners who sell our portfolio together with their own (e.g. OEM’s, Telecommunications and other System Integrators).

Getronics’ revenue and operating profit show a strong seasonal pattern with revenue and operating profit significantly higher in the second and fourth quarters than the first and third quarters In particular, the fourth quarter is much stronger because of a seasonal pattern in activity levels within consulting and transformation services as well as a strong end of the year uplift in the application services business for the public sector as a result of the usual budgetary spending by government clients.

     
     
     

 

 

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Wholesale & Operations
Segment

 

The Wholesale & Operations (W&O) Segment’s activities comprise two main activities: the operation of KPN’s networks (whether telephony, DSL, mobile, TV or All-IP networks) and the wholesale of network capacity to external parties. Besides serving the internal KPN market with all kinds of telecommunications services, W&O’s main external businesses concern national wholesale (like Internet, voice and TV services) and international wholesale, such as global carrier services through iBasis.

 

 

Strategy

 

The telecommunications industry is faced with two fundamental challenges: on the one hand, the declining costs of bandwidth making it easier for new entrants to enter the market, and, on the other, the convergence of infrastructure into a single IP protocol causing formerly separate infrastructures, such as cable, to become more competitive. In order to rise to the challenge of increasing competition (both from new entrants as well as other infrastructures), KPN is making sure that its infrastructure is competitive from a cost perspective, its execution outperforms that of the other market parties.

In view of being the most cost-efficient operator, KPN wants to make sure that its scale on the infrastructure side translates into a cost advantage. This means that KPN invested in implementing the newest technologies (All-IP technology, fiber networks, etc.) to ascertain that old infrastructures can be terminated and KPN can get to the lowest cost point. Moreover, it is KPN’s opinion that execution is key to surviving in an increasingly competitive market. Finally, a fundamental belief of KPN is that if ownership or control over infrastructure is less of a barrier to entry, KPN must ensure that new entrants will use KPN’s infrastructure by focusing on obtaining a fair share of the wholesale market.

The wholesale market shows an increasing demand for bandwidth and new services (mainly IP and mobile based), whereas revenues from traditional services (ISDN/PSTN and switched Internet) decline. Due to this shift in demand, KPN observes growth in its wholesale volumes, as cable and ADSL operators are entering the retail voice market via VoIP.

Internationally, KPN notices a trend in international consolidation and strategic alliances with, consequently, a downward pressure on tariffs only partly offset by increasing volumes. To address this challenge, KPN merged its global carrier services activities into US-based iBasis, Inc. in 2007. The merged entity (51% owned by KPN) presides over KPN’s wholesale voice network in Europe and Asia and iBasis’ footprint in the Americas and Asia. The acquisition of iBasis contributes to the growth of KPN’s activities by increasing the share of IP-based services in KPN’s portfolio.

‘Attack’

Services are increasingly becoming infrastructure independent. KPN pro actively migrated traditional services to IP-based services (e.g. VoIP), while broadband services were extended with value-added services. The continuing launch of new services, both retail and wholesale, took place to achieve scale advantages.

As part of its strategy to grab a big portion of the wholesale market, Wholesale & Operations continued to search for new wholesale opportunities. In 2005, it introduced Wholesale Broadband Access (WBA) in addition to Local-Loop Unbundling (LLU), enabling ISPs and other operators to add ISP-specific value (such as spam and virus filters, firewalls and email services) without the need to invest in DSL networks. As part of its plan to roll out an All-IP network, in 2007 KPN reached agreements with alternative DSL providers on the future use of MDF co-locations. The agreements contain alternative access possibilities (e.g., access to core locations via WBA and access to street cabinets through SDF Access).

‘Defend’

KPN continued to search for possibilities to maintain or even increase the profitability of traditional services by leveraging scale advantages, improving the execution of such services and responding to consumers’ desire for choice via wholesale offerings in addition to KPN-branded retail products and services.

KPN’s All-IP objectives support its defending strategy by maximizing the position in traditional services prior to migration to IP-based services and phase-out. KPN delivers an IP-based open access model with unbundlers as resellers on KPN’s infrastructure.

‘Exploit’

As explained before, KPN strongly believes its infrastructure has to be the most competitive infrastructure from a cost point of view. To achieve that, several cost savings programs have been initiated (mainly aiming at staff levels, traditional IT systems and infrastructure), the fixed and mobile organizations have been integrated, while all network assets were centralized to increase efficiency. The switch to an All-IP network will further contribute to reducing KPN’s cost base.

     

 

 

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Strategy going forward; 2008-2010

 

 

In the International Wholesale voice market KPN has become a top four player through the combination of KPN Global Carrier Services and iBasis. The companies are, to a large extent, complementary. KPN is strong in Europe and routing mobile traffic, whereas iBasis is strong in the Americas and in routing fixed traffic and VoIP. The combined company is a solid base for further growth.

In the national wholesale market Wholesale & Operations has the ambition to remain a highly efficient and ‘best-in-class’ network operator through a radical simplification of the business. The implementation of the All-IP access network creates an opportunity to redesign the whole front-end and back-end of the business, including service platforms, IT and services. The simplification process enables KPN to further reduce its workforce.

The All-IP access network will consist of a mix of Fiber to the Curb/VDSL and Fiber to the Home/Offices (FttH/FttO). KPN will engage in selected initiatives with partners to rollout FttH and FttO as described in the strategy update for the Consumer and Business Segments. The network is open for service providers and allows them to offer their services through a highly efficient IP-network. The KPN All-IP network will be open for service providers through Wholesale Broadband Access (WBA) and access to street cabinets (SDF), allowing them to offer their services to their customers.

 

 

Products and services and tariffs

 

 

National wholesale services

The national wholesale services offered by W&O can be divided into wholesale services and local-loop services. Through wholesale services, KPN supplies a comprehensive range of services providing other telecommunications companies with access to W&O’s fixed and mobile networks. These services include:

   terminating services, allowing customers from other operators to reach KPN’s customers through terminating access to end users connected to KPN’s fixed and mobile networks;

   voice-originating services, offering other operators (such as Carrier (Pre)Select operators and MVNOs) access to calls originating on KPN’s fixed and mobile networks and offering KPN’s customers interconnection with so-called premium numbers (0800/0900 prefixes), pagers and VPNs;

   Internet-originating services, offering ISPs the opportunity to directly bill their customers for Internet usage through special dial-in numbers (0676 prefix); and

   transit services, offering other telecommunications operators routing of incoming and outgoing national and international calls between other operators’ networks through KPN’s fixed and mobile networks.

In 2007 as well as in 2006, traffic volumes in the fixed network decreased for originating and terminating voice services due to strong competition in the national voice market by competitors like Tele2/Versatel The Netherlands, Verizon and BT. Also, competition from cable operators with VoIP offerings increased significantly during 2006 and 2007. In addition, fixed-mobile substitution contributed to a further decrease of the fixed network’s traffic volumes. Traffic volumes in KPN’s mobile network, on the other hand, showed an increase, although not strong enough to compensate for the loss of fixed network traffic volumes. Due to the substitution from Internet dial-in to broadband Internet access, volumes of Internet-originating services saw a substantial decline in 2007 and 2006.

Due to the end-user migration from fixed to mobile services adding to a growing VoIP market, the transit market increases. KPN faces ongoing fierce competition in this market from direct interconnection as well as competitors (like Orange and BT). Despite the competition, KPN has been successful in defending its market share by increasing traffic volumes for transit voice services; the main driver behind this growth being the continuing growth in mobile-to-mobile voice traffic.

Through national local-loop services, KPN offers access services to the ‘last mile’ of its network. These services include:

   MDF access, offering physical connection of other operators’ networks to KPN’s local-loop network, offering other operators direct access to the homes and offices of their customers;

   MDF co-location, providing other operators the possibility to install their equipment in or alongside KPN’s switches to connect their networks to KPN’s by offering other operators direct access to KPN’s local-loop network;

   WLR, enabling other operators offering Carrier (Pre)Select services to sell PSTN/ISDN connections. In combination with WLR, they can offer complete subscription and traffic services to their customers;

   SDF access: as of October 2006, SDF access services are available as part of KPN’s All-IP program;

     
     

 

 

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   WBA, consisting of Bitstream access (offering operators and ISPs the possibility to develop individual DSL-based services) and Wholesale ADSL (a value-added service on top of LLU); and

   ILL, offering a connection between end-user locations and an operator’s transmission network.

Continuing the trend seen in 2006, ISDN/PSTN connections continued to decline throughout 2007. On the other hand, MDF access increased due to introducing end-user services like VoIP, Tele2 Compleet (by Tele2/Versatel The Netherlands) and Livebox (by Orange). Thanks to current developments in the broadband market, WBA showed a growth in both 2006 and 2007.

International wholesale services

The international wholesale services offered by KPN consist of voice and data services. Data services are primarily handled by the Business segment (KPN EuroRings). International voice services carry international voice traffic originating outside or inside The Netherlands to any place in the world and include:

   International Premium Services, offering worldwide access through KPN’s high-quality voice network in Europe and the international access points in Hong Kong, Miami, New York and Singapore;

   International Wholesale Services, offering worldwide voice termination services at competitive prices;

   mobile operator solutions, offering data services for SMS, MMS and mobile Internet besides voice termination services; and

   ISP solutions, offering voice services by connecting VoIP traffic to switched networks internationally.

As of October, 2007, KPN merged its international wholesale voice business into US-based iBasis Inc.

The ‘new iBasis’ combination has strongholds in two of the fastest growing segments of global telecommunications: mobile services and consumer VoIP. Furthermore, the combination resulted in complementary geographic coverage by bringing together KPN’s extensive footprint in Europe, the Middle East and Africa with iBasis’ strong presence in the Americas and Asia. KPN also added an established business in mobile services (including a reliable and high-quality product portfolio and relationships with over 100 mobile operators) as well as international traffic from KPN’s Dutch, German and Belgian operations. iBasis contributed a global VoIP network comprising over 1,000 points of presence in more than 100 countries and interconnections with more than 600 carriers worldwide.

The transaction also enhanced the iBasis product portfolio by adding feature-rich voice and data offerings for mobile operators and combining other products to meet the needs of customers in every market segment. The new iBasis serves approximately 1,000 customers including national operators, wholesale carriers, calling-card operators, mobile operators, fixed-retail business, cable multi-service operators and voice over broadband service providers. iBasis remains a stand-alone, publicly traded company, headquartered in Burlington, MA, USA, while it gained a significant operation in The Hague and additional sales offices throughout the world.

Tariffs

KPN’s national fixed-telephony wholesale tariffs and tariffs for Wholesale ULL services are subject to regulatory approval. As a result of the market analysis by the Dutch telecommunications regulator OPTA in 2005, KPN’s transit services have been subject to regulation since January 1, 2006. Therefore, regulatory obligations like non-discriminatory access apply. KPN’s tariffs for transit, originating and terminating services are comprised of a call set-up fee plus a charge per minute. For local loop services, KPN charges a one-off connection fee plus monthly subscription fees.

Ongoing liberalization and growing international competition due to EU regulation puts continuing pressure on international tariffs. In September 2006, OPTA published the directive on wholesale price caps for a three-year period starting April 1, 2006; wholesale tariffs for regulated voice services remained unchanged while wholesale tariffs for other regulated services were reduced. In 2007, the EU roaming regulation was published, which became effective June 30, 2007. The regulation was directly applicable in all 27 EU Member States. Retail roaming tariffs for calls are capped for incoming calls when customers are abroad within the EU. Average wholesale tariffs for roaming on EU networks have also been capped as of August 30, 2007.

     
     
     
     

 

 

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Information about the company

Business overview – Mobile International

 

 

 

In addition to The Netherlands, KPN is a provider of mobile telecommunications services in Western Europe with a particular focus on Germany and Belgium. KPN delivers mobile telecommunications services ranging from standard voice and value-added services (call waiting, call forwarding, voicemail and message services like text messages and MMS) to advanced data services (mobile broadband Internet).

 

 

KPN expects person-to-person communication services (voice, text messaging, e-mail) to remain the main source of revenues for mobile operators in the coming years, with advanced data services becoming increasingly important. In addition, the large number of mobile-only users reflects the trend towards growing use of mobile networks at the expense of fixed networks. Mobile International comprises the mobile wholesale activities in The Netherlands and all other mobile services outside The Netherlands.

UMTS was introduced in Germany in 2004. UMTS enhances the functionality of mobile data services (e.g. mobile Internet) by adding video and increased transmission speeds. KPN expects the introduction of UMTS-based services to accelerate the use of advanced data services in the coming years.

 

 

Strategy

 

 

It is Mobile International’s objective to expand and continue growth in the European mobile business, despite regulatory tariff cuts and competition. Thereto, it will continue its successful challenger strategy.

Mobile International will further exploit synergies in wholesale between The Netherlands, Belgium and Germany, and leverage wholesale partnerships on each of our networks in the current footprint. Mobile International also aims to expand the business model into other Western European countries exemplified by the announcement in January 2008 of our MVNO launch in Spain.

For details on how customer data are calculated, please see ‘Key Information’.

     

E-Plus Segment

 

We are active in the German mobile telecommunications market through our mobile network operator E-Plus. During 2007, E-Plus’ customer base increased to 14.8 million customers. In a competitive German mobile market, we succeeded in expanding our service revenue market share by over a full percentage point to approximately 14.0% (2006: 12.9%).

 

 

Strategy

 

 

The strategy revision was aimed at accelerating growth and to put E-Plus on a solid path to profitability. The strategy centered on a number of initiatives:

   E-Plus moved away from a ‘push’ (reliance on handset and dealer subsidies) to a ‘pull’ strategy (attractive and simple tariffs inciting the prospective customer to ask for our products rather than rely on the reseller’s advice). E-Plus’ new brands ‘BASE’ (flat fee), ‘Simyo’ (Internet only) and ‘Ay Yildiz’ (Turkish community) are delivering significantly improved AMPUs and ARPUs in comparison to the E-Plus brand. Also for the ‘E-Plus’ brand, handset subsidies were tightened;

   MVNO-type contracts were signed and implemented with well-known German partners such as Medion (Aldi Talk), Freenet and Conrad to focus on new distribution channels besides captive channels; and

   we are expanding our captive distribution, with 251 stores at the end of 2007 compared to 197 at the end of 2006.

With the growth strategy the focus is on increasing our customer base, revenues and market share on the one hand and profitability on the other. We succeeded in 2007 in attracting more than 2.1 million new customers. Our focus on partnerships such as with Medion meant that a large share of this growth was with prepaid customers. The number of postpaid customers as of December 31, 2007 was 6.3 million representing a 43% share of our customer base (2006: 47%), whereas we served 8.5 million prepaid customers as of December 31, 2007.

 

 

Strategy going forward; 2008-2010

 

 

E-Plus aims to outperform the competition in a growing German market. To that end, E-Plus will focus on mid/high value customers and increase data revenues share, now that the demand is growing. It will also exploit its customer base via cross/upselling and value added services.

     
     

 

 

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Products and services, tariffs and competition

 

 

Under the ‘E-Plus’ brand, we offer a range of propositions to the business and consumer markets. These propositions include bundled packages for consumers, such as ‘Time & More’ or with minimum monthly commitment as ‘Zehnsation Classic’ and for the business market ‘Professional’ (S, M, L, XL) and ‘Free & Easy’ prepaid packages. In addition to standard mobile services, we also offer under the ‘E-Plus’ brand a wide range of value-added voice and data services, such as SMS, GPRS, UMTS.

In 2005, E-Plus embarked on its multi-brand strategy with the launch of new brands featuring innovative tariff structures: ‘BASE’ offered the first flat-fee package on the German mobile market, ‘Simyo’ was the first web-only prepaid mobile operator, ‘Ay Yildiz’ the first tailor-made offering for Turkish-speaking people. Besides that, E-Plus has closed a co-operation with Universal Music Deutschland and launched VybeMobile for the music and SMS affine youth.

We offer wholesale solutions for an increasing number of partners which act as branded resellers, including Blau and MTV, as well as via MVNOs like Versatel or Netcologne.

As of December 31, 2007, we offered customers the possibility to use mobile telecommunications services outside Germany in approximately 170 countries through international roaming agreements.

 

 

Tariffs

We offer a variety of tariff structures for postpaid and prepaid customers. Bundled minutes at discounted rates per minute, tariff with minimum fee without subscription fee and flat fees are being offered with simple tariff structures. These offers aim at capturing a larger share of the total voice market. We also offer flat fees in the data segment.

The ‘BASE’ brand offers flat fee variants or minimum fee with simple tariff structure. ‘Simyo’ also offers a simple tariff structure with one tariff for every call regardless of the time of the day. ‘Ay Yildiz’ offers a simple tariff structure for Turkish-speaking people.

As a reaction to E-Plus’ challenge, our competitors have also introduced a variety of new tariffs and brands.

The German regulator Bundesnetzagentur (BnetzA, the former RegTP) ordered the German mobile network operators to reduce their MTA tariffs in four steps, the first two steps became effective on December 15, 2004 and 2005, respectively. The third consecutive reduction was announced on August 30, 2006 and became effective as of November 23, 2006. The fourth consecutive reduction was announced on November 30, 2007 and became effective as of December 1, 2007. For further information, see ‘Regulatory Developments’.

Competition

Four mobile network operators, all holding GSM & UMTS licenses, are currently active in the German mobile telecommunications market: T-Mobile, Vodafone, E-Plus and O2. The two largest mobile telecommunications providers, T-Mobile and Vodafone, hold an estimated combined service revenue market share of 71% (2006: 73%). In the past years, E-Plus has been successful in growing its service revenue market share.

In addition, numerous independent service providers in Germany package and sell products and services from various network operators under either the network operators’ brand or private labels. Some of these service providers operate exclusively with one network operator, while others offer competing products and services. In all cases, service providers sell to both business and private customers. The main German service providers are Debitel, Victor Vox and MobilCom. Service provider customers constitute approximately 13% of our total customer base.

 

 

Brand strategy

 

 

During 2007, E-Plus continued to pursue its multi-brand strategy with tailor-made offers to well-defined customer groups concentrating on customer needs, such as voice telephony and simple services.

 

 

Distribution

 

 

We offer our products and services through our own chain of 251 shops as well as E-Plus’ website and exclusive partner shops. Apart from these channels, we offer our services through resellers, MVNOs and service providers that may repackage our offers, tailoring them to their customers’ needs. For the business market segment, we also use these sales channels in addition to a direct sales force.

     
     

 

 

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Information about the company

Business overview – Mobile International

 

BASE segment

 

In Belgium, BASE is the number-three mobile telecommunications provider by revenue and number of customers, serving 2.9 million customers as of December 31, 2007 (2006: 2.4 million), with an estimated service revenue market share of around 16% (2006: 15%). Through our policy of combining distinctive and simple offers with tailor-made propositions for specific market niches, we have achieved a solid growth in our customer base, revenues and market share since the fourth quarter of 2003.

 

 

Strategy

 

 

In Belgium, BASE aims to reignite growth in its business with a broader scope. BASE will launch new commercial propositions and further strengthen its distribution capabilities. It will engage in regionalized marketing in areas with low market shares and exploit the acquisitions of Allo Telecom and Tele2/Versatel Belgium to increase market share in those markets.

 

 

Products and services, tariffs and competition

 

 

We offer a portfolio of voice and data products and services directed at ease of use and supported by a clear tariff structure. We also offer products and services focused on specific market segments. Examples thereof are the ‘Ay Yildiz’ brand (targeted at the Turkish community), our low-cost ‘Simyo’ brand and the recently introduced products ‘Zoniq’ (focusing on expatriates and people with high international calling profiles) and ‘Jim Mobile’ (focusing on the youth segment and replacing the previous TMF offer).

As of December 31, 2007, our customers could use mobile telecommunications services outside Belgium in approximately 200 countries via international roaming agreements.

Tariffs

We offer a range of prepaid and postpaid propositions, including various plans tailored for the SoHo/SME market. Our plans are characterized by simple tariff structures and bundles of free minutes. The past year was dominated by the introduction of flat rate products. With the introduction of BASE 3, customers can call up to 3 hours a day on-net for a fixed fee. BASE 3+ gives them the opportunity to call 3 hours a day on-net or to fixed lines for a flat monthly fee.

Similar products were introduced for the business market, such as BASE Business and Business + (99 hours a month for a fixed fee).

With the introduction of BASE Platinum and BASE Gold, BASE was a pioneer in the Belgian market by offering its clients flat fee tariff plans based on the ‘any time, any network’ principle. BASE Platinum is the first subscription allowing customers to make unlimited calls to all national mobile and fixed networks for a fixed monthly fee.

For information regarding MTA, we refer to ‘Regulatory Developments’.

Competition

Our mobile operator competitors in Belgium are Proximus and Mobistar. Proximus is a wholly-owned mobile subsidiary of Belgacom, the incumbent telecommunications provider in Belgium. Orange holds a 50.17% equity interest in Mobistar. Proximus is the obvious market leader in Belgium with over half of the market’s revenues – with Mobistar as the runner-up at a clear distance. BASE, the third-largest provider, is the challenger in the Belgian mobile market.

During the year competition increased which resulted in heavy price competition, increased competition on the wholesale market.

 

 

Brand strategy

 

 

We have positioned BASE by distinguishing ourselves from the competition by ‘doing things differently’. Furthermore we introduced a multi-brand strategy to better tailor our services to specific customer segments. For certain segments, we have teamed up with partners and branded resellers.

 

 

Distribution and sales

 

 

Our products and services are available at well-known nation-wide retail chains as well as

at our 51 BASE shops and via the internet. We also offer our services through branded-resellers, service providers, and MVNO’s that may repackage our offers and tailor them to their customers’ needs. In 2007, BASE increased its position in the wholesale market by further expansion of wholesale partnerships.

In order to strengthen our distribution channel and to create a platform for further profitable growth, we acquired Allo Telecom in August 2007, a distribution chain operating 51 stores with a strong presence in the southern part of Belgium, a region in which we were traditionally underrepresented.

     
     

 

 

44

KPN Annual Report and Form 20-F 2007

 

Information about the company/Business overview – Mobile International

 


 

 

 

Mobile Wholesale
The Netherlands segment

 

 

Mobile Wholesale The Netherlands contains the mobile wholesale business of former KPN Mobile The Netherlands. Our approach to mobile wholesale is based on leveraging the capabilities of KPN to the benefit of our partners, customizing our services to their specific needs and exploring opportunities within KPN’s footprint.

 

 

 

Our goal is to make our wholesale partners successful as mobile virtual network operators (MVNO). Our flexible customized platforms ensure that partners can successfully introduce their own mobile proposition in the market, irrespective of their background as a mobile provider. It results in the optimal end user experience for the customers of our partners. Over 1.8 million end-users are connected to the KPN network via our mobile wholesale partners, an increase of more than 20% compared to the end of 2006.

 

 

Strategy

 

 

Mobile Wholesale The Netherlands will further exploit synergies in wholesale between The Netherlands, Belgium and Germany such as expertise and branding, and leverage wholesale partnerships on each of our networks in the current footprint.

 

 

Brand strategy

 

 

Mobile Wholesale The Netherlands allows service providers and MVNO’s to develop and market their own brand and proposition for the niche markets in which they choose to operate. Increasingly service providers and MVNO’s leverage their brand and proposition across countries through KPN’s international networks.

 

 

Distribution and sales

 

 

Mobile Wholesale The Netherlands provides partners access to the best mobile network in The Netherlands. While adapting our business model to suit our partner’s proposition best, Mobile Wholesale The Netherlands delivers thorough commercial and operational support through marketing, sales and product management.

 

 

Products and services, tariffs and competition

 

 

Mobile Wholesale The Netherlands makes its network available to partners that wish to offer mobile telecommunications under a private label. These partners are offered a range of standard and value-added mobile voice and data services, both prepaid and postpaid. An increasing amount of service providers have added UMTS/HSDPA services to their portfolio.

 

 

Tariffs

Mobile Wholesale The Netherlands offers both prepaid and postpaid to its partners. A wide range of business models is used in order to suit our wholesale partners propositions and allow them to be competitive in the market in which they operate.

In response to regulatory requirements, we reduced our MTA tariffs in August 2007 and plan to reduce them further in 2008 and 2009. For further information, see ‘Regulatory Developments’. Also EU roaming tariffs have been reduced in order to comply to EU regulation.

Competition

KPN’s competitors in the Dutch mobile market are Vodafone and T-Mobile (after the acquisition of Orange The Netherlands by T-Mobile), both of which offer mobile wholesale to (potential) partners. During the last two years, a growing number of MVNOs and service providers entered the Dutch market; most of these resellers offer private-label mobile services. Some of these resellers have a direct contractual relationship with the customer, while other resellers act as an intermediary for the operators. As a result of the Telfort acquisition, KPN’s revenue share generated through MVNOs and service providers increased.

 

Mobile International
Other Segment

 

 

This segment includes Ay Yildiz, Simyo and the recently acquired Tele2/Versatel Belgium business. Furthermore Mobile International aims to expand the wholesale business model into other Western European countries. In January 2008, we launched a MVNO under the Simyo brand in Spain.

 
 

 

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Business overview – Mobile International

45

 


Information about the company

Other activities

 

 

 

During the year under review, our other activities included our Corporate Center (support functions), KPN Holding and KPN Mobile Holding. Our Corporate Center mainly provide group internal services.

As a result of our reorganization as of January 1, 2007, KPN Retail (Primafoon stores and Business Centers) and KPN Sales (KPN’s own personal sales force) have been allocated to the Consumer Segment and the Business Segment, respectively.

In the beginning of 2006, KPN and Telstra sold their total holdings in Xantic B.V. (a satellite communications provider) to the Canadian Stratos Global Corporation.

 

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

 

 

46

KPN Annual Report and Form 20-F 2007

 

Information about the company/Other activities

 


Information about the company

Property, plant and equipment

 

The Netherlands

 

Telecommunications services depend on a core network for the transfer of data or voice information. The ongoing growth in bandwidth and services requires continuous development in design and capabilities. KPN’s existing fixed and mobile infrastructures and its future plans are described hereafter.

Fixed Infrastructure

 

 

Access networks

KPN’s access network in The Netherlands basically consists of twisted pair copper reaching nearly all of the eight million Dutch households with two pairs of copper wires in the access network.

Despite the continuing migration to mobile-only solutions, over 60% of Dutch households were actively connected to KPN’s access network as of December 31, 2007.

On December 31, 2007, 251 CityRing areas (in 107 concentration points) and about 794 other access areas form KPN’s fiber access network. Fiber access permits transmission rates in excess of 155 Mb/s. KPN’s fiber network is partly upgraded to 1 Gb/s and 10 Gb/s C/DWDM/Ethernet technology in order to offer services to large enterprises.

In certain cases, wireless transmission systems are used in KPN’s access network (as back-up or if fiber access is not available). At HotSpot locations, broadband Internet access is provided through WiFi. By the end of 2007, over 900 HotSpot locations were operational in The Netherlands. In co-operation with NS (Dutch Railways), KPN operates WiFi HotSpots in major railway stations. In 2006, KPN HotSpots acquired Attingo B.V., the only provider of public Internet and business communications services at Amsterdam Airport Schiphol. With the acquisition of Enertel in 2006, KPN also acquired Enertel Wireless B.V. Enertel Wireless, operating 150 HotSpots and fully integrated it into KPN’s HotSpots network in 2007.

Backbone networks

KPN’s backbone networks support voice, video and data traffic between access points. The backbone networks can be divided in the ‘Lambda’ dense wavelength division multiplexing network (fiber optic backbone), the ‘Hirka’ synchronous digital hierarchy network (traditional backbone), dedicated service-related networks and several long-distance CityRings (fiber).

The average usage levels of these networks are summarized in the following table:

 

 

Average usage level

2007

2006

2005

 

 

Lambda DWDM

86%

85%

72%

 

 

Hirka SDH

70%

68%

69%

 

 

CityRings

20%

20%

18%

 

 



The traditional backbone has a maximum network capacity of 155 Mb/s. To accommodate the fast growing demand for high-speed transmission (defined as 155 Mb/s and up), KPN built the fiber-optic “Lambda” network with SDH and DWDM-based transmission technology. This fiber optic network became operational in 2000. By the end of 2007, about 220 locations were interconnected by 10 Gb/s transmission routers and 740 locations by 2.5 Gb/s transmission routers. Each of the access areas is connected to the transmission backbone network at two separate locations to ensure continuity.

The development and rollout of cost-efficient networks relies on the technically advanced multi-protocol label switching (MPLS) infrastructure, which is based on fiber techniques and suitable for advanced DSL and IPTV services. This MPLS infrastructure is fully integrated in KPN’s Ethernet network and builds upon the Lambda network, interconnecting various MetroRings across the country using 1 Gb/s and 10 Gb/s fiber-optic infrastructures. Moreover, this core infrastructure is used to interconnect regional Ethernet and IP access nodes.

Service layers of the fixed infrastructure

   

The service layers built on KPN’s core infrastructure networks in The Netherlands comprise switched voice, video and data network services. Service edges connect the access network to KPN’s backbone networks.

Voice networks

KPN’s public switched telephony network (PSTN) and ISDN networks in The Netherlands consist of approximately 1,328 local exchanges and 2 x 20 trunk exchanges connected by a long-distance transmission network. KPN’s network is also connected to other operators’ networks. The telephony networks are designed and engineered to have general availability with internal blocking and outages during peak hours below 1% end-to-end, measured on a yearly basis.

Data networks

The switched data networks consist of frame relay (FR) and asynchronous transfer mode (ATM) networks and of Ethernet.

     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Property, plant and equipment

47


Information about the company

Property, plant and equipment

 

 

 

FR/ATM networks

KPN operates the ‘Natvan’ FR network to provide large numbers of data services for:

   the backbone infrastructure supporting KPN’s dial-in network from 20 dial-in points of presence to the ISPs;

   Local Area Network (LAN) interconnect services for corporate customers;

   the backbone infrastructure that enables bulk transport of X.25 services through leased lines as well as ISDN channels; and

   native FR (64 Kb/s through 2 Mb/s) VPNs.

KPN’s ATM network is used for flexible leased-line services, as a carrier network for its FR network and to connect xDSL customers to KPN’s data/IP services backbone.

Ethernet

Ethernet is the most recent national network currently deployed in The Netherlands. This advanced network is based on a switched native Ethernet infrastructure, using either dark fiber or C/DWDM as underlying infrastructures. Within this network, Ethernet interfaces up to 10Gb/s are in use. The Ethernet is fully integrated with KPN’s new national core MPLS infrastructure.

DVB-T and DVB-H networks

In March 2006, KPN acquired Nozema Services, which provides analog radio (AM/FM/SW), Digital Radio (T-DAB) and Digital TV (DVB-T) services to broadcasters. Prime customers for these services include national broadcasters, various commercial radio stations and Digitenne. Since the acquisition of Nozema Services, KPN has launched a full DVB-T rollout.

The DVB-T rollout is on track with 69% indoor coverage and the introduction of two football TV channels, new multiplex equipment, new DVB-T sites and frequency changes. Regarding DVB-H, first steps have been taken. Discussions on the DVB-H technology to be applied have had a delaying effect on the availability of handsets for the Dutch market. Mobile operators have been requested to indicate the right moment for the industry launch; depending on their reactions, it will be decided when to commercially launch DVB-H in The Netherlands.

Developments

As part of KPN’s strategy to achieve a leading position in the broadband market and develop new communication services, it rolls out services and networks based on IP and broadband. KPN expects IP and broadband to become dominant and mainstream within the industry and to take over all current services and networks. KPN develops and upgrades its networks to enable the introduction of new IP and broadband services.

In addition to the traditional SDH and ATM networks, KPN introduced high-capacity transmission networks over the last several years. The C/DWDM fiber backbone has been recently upgraded and will be extended to more nodes in KPN’s network. The IP-MPLS and Ethernet data networks, primarily used for business connectivity services, is becoming the new high-capacity network. Ethernet has been rolled out to more than half of The Netherlands to support new consumer broadband services like IPTV. In the coming years, Ethernet will replace the SDH and ATM networks, whilst IP-MPLS will replace traditional FR data networks. This will contribute to KPN’s ability to offer new broadband services and simultaneously reduce the operational costs of its transmission networks.

With the introduction of VoIP and IPTV, KPN implemented two new IP-services networks: the IMS platform and TV Middleware. These service platforms are independent of the underlying transmission and access networks and will in the mid-term melt together into one new services environment. This provides KPN with the opportunity to offer converged services: fixed-mobile, voice-TV-Internet and new business applications, like security and a national victim tracking system.

KPN upgraded its DSL network to ADSL2+ in 79% of The Netherlands through which it can offer Internet access services of up to 12 Mb/s. In addition, KPN increasingly deploys FttO in the business market.

In 2007, KPN started rolling out FttH in newly built areas, providing bandwidth of up to 100 Mb/s. It also started extensive pilots with state-of-the-art access technologies supporting both broadband services (like VDSL2 and providing capacities up to 50 Mb/s) and narrowband services (like PSTN and ISDN). If these pilots prove to be successful, KPN will be able to replace its current broadband nodes and telephony switches during the coming years. This will lead to new services being offered and a streamlining of KPN’s access and backbone networks.

     
     
     
     
     

 

 

48

KPN Annual Report and Form 20-F 2007

 

Information about the company/Property, plant and equipment

 


 

 

 

 

 

Since telephony traffic in the fixed network is declining due to mobile-only and VoIP, KPN is minimizing its investments in the telephony network. If the aforementioned pilots prove to be successful, KPN plans to transfer its remaining telephony customers from traditional telephony switches to new multi-service access nodes over the next few years.

Mobile infrastructure

In addition to the current second-generation (2G) GSM network and the third-generation (3G) UMTS network currently being deployed, an entire range of mobile data technologies is emerging to support the need for mobile and online usage. KPN’s strategy is to benefit from the increasing demand for mobile data services, offering its customers secure mobile data services solutions regardless of the access technologies applied. KPN will continue to invest in its 2.5G-enabled GSM network to maintain and even improve quality and coverage, while providing sufficient voice and data capacity.

Mobile broadband technologies (e.g., UMTS) offer three advantages over narrowband technologies that we expect will be crucial for KPN’s future success:

   increased speed, enriching KPN’s current services and making these more user friendly;

   larger data volumes, enhancing the number and types of services (e.g., pictures, clips, ringtones, music, radio) and rendering them more useful (applications for business users); and

   improved service quality, enabling guaranteed throughput and quality rather than ‘best-effort’ services.

KPN’s end-user oriented strategy is to be ‘always best connected’, meaning it wishes to provide customers with the best available network capability for the specific services requested in the most cost-efficient way. Boundaries between networks blur: most of KPN’s services (voice and messaging) will run with nationwide coverage on any technology, although some (e.g., video telephony) depend on real-time high speeds and therefore will only work in geographic areas equipped with broadband networks. When all technologies are available in a certain geographic area, KPN makes every effort to use network capacity as efficiently as possible to keep investments and operational costs down. KPN expects this will allow competitive retail pricing.

Rollout

The current network rollout is focused on achieving maximum synergies among GSM/GPRS and UMTS with respect to infrastructure and transmission for example. Re-utilization of 2.5G-enabled infrastructure in certain areas may provide a substantial part of the basic infrastructure. Ericsson and Huawei are KPN’s mobile network suppliers in The Netherlands.

KPN surpasses the rollout requirements in terms of in-house coverage and available speed.

Networks

KPN’s 2.5G-enabled network consistently scores high on quality, reliability and coverage. KPN began to roll out its UMTS network in 2003 and commercially launched UMTS services in the second half of 2004. By the end of 2007, KPN had over 3,100 UMTS sites covering 500 cities with over 5,000 inhabitants, or more than 95% of the population. Moreover, KPN upgraded its entire UMTS network to HSDPA in 2006, thereby offering the most extensive HSDPA coverage in The Netherlands. At year-end 2007, over 95% of the Dutch population was able to use the mobile broadband Internet services.

Upon the Telfort acquisition in 2005, KPN owned and operated two 2.5G networks and one 3G network. As operational cost synergies were an important feature of Telfort’s acquisition, KPN integrated both 2.5G networks by switching off Telfort’s 2.5G radio network in 2007 and transferring all traffic to KPN’s radio network. At a later stage – mid to end 2008 – both operators’ core networks will be replaced by a new, integrated core network.

     
     
     
     
     
     
     
     
     
     
     
     
     

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Property, plant and equipment

49


Information about the company

Property, plant and equipment

 

International

 

Fixed infrastructure

 

 

KPN’s international infrastructure comprises two major voice and data transmission networks.

Voice networks

For the provision of international wholesale voice services, KPN operates an international transmission network (in consort) including land and submarine cables as well as satellite transmission systems, which directly connects approximately 400 telecommunications operators worldwide. The network is partly circuit switched and partly based on IP trunking technology with a flexible capacity. Its main international switches are located in The Netherlands. In addition, KPN has eleven European points of presence (Brussels, Copenhagen, Frankfurt, Lisbon, London, Madrid, Milan, Paris, Vienna, Warsaw and Zurich) and four further points of presence outside Europe (Hong Kong, Miami, Singapore and an exchange in New York).

Data networks (EuroRings)

KPN’s EuroRings transmission backbone is based on KPN-owned fibers equipped with SDH and C/DWDM technology in The Netherlands, Germany, France, Belgium, United States (New York) and United Kingdom. In addition, KPN has provided access nodes over 22 European countries using leased infrastructures based on either wavelength rings or protected SDH circuits. For access in these countries, KPN uses DSL, Ethernet, lease-line and fiber technology. Other regions are connected and served via the use of trusted partners. KPN’s services on these networks include MPLS-VPN, ATM, Ethernet, IPT, IPLC, SDH, wavelength, dark fiber and fiber channel.

IP/MPLS

KPN operates a European IP backbone, using more than 200 IP/MPLS devices and making this infrastructure one of the largest IP infrastructures in Europe. It covers all major business centers and international Internet exchanges and assures quick access to the United States via multiple dedicated high-speed connections. The KPN EuroRings MPLS-VPN service offers an industry-leading network solution for corporate clients, providing a reliable and secure environment with guaranteed quality.

In 2004, KPN and Singapore Telecommunications (SingTel), one of Asia’s leading carriers, announced a significant expansion of their IP-VPN MPLS network coverage through a partnership. The interconnection of both carriers’ IP-VPN MPLS networks enables SingTel and KPN to leverage each other’s extensive networks in their respective markets in Asia Pacific and Europe.

In 2005, KPN and Telefónica signed an agreement to enable the interconnection of their IP-VPN MPLS networks. This agreement enables KPN to extend international coverage to most of Latin America. The services offered will range from a fully managed solution to basic bandwidth services. In addition, KPN expects to offer services like remote access, security solutions, housing and hosting. Access to the MPLS-VPN service is provided using DSL, lease-line and Ethernet technologies.

Ethernet VPN

International Ethernet VPN is part of KPN’s All-IP strategy with one international MPLS network for all VPN-type of services. The International Ethernet VPN service provides Ethernet connectivity between two or more locations nationally and internationally. It is a fully managed, end-to-end service including local access, offering high-quality, high-speed, flexible services with scalable bandwidth access. Ethernet will also offer multiple service classes and integration to a single platform. It is based on existing Ethernet technology enabling point-to-point and any-to-any connectivity. Ethernet technology was originally used for LANs and has been extended to WANs. KPN’s international Ethernet service is available in The Netherlands, Belgium, United Kingdom, France and Germany with further extensions planned in over 20 countries.

ATM/Frame Relay

The KPN-owned and managed EuroRings ATM network provides a secure private network with the highest guaranteed level of service covering all major European business centers. The EuroRings network is designed to meet the most demanding requirements for flexible but secure networking, offers both ATM and FR access, can provide integrated access to the Internet, while providing the technology to support voice, data, multimedia and IP applications in a single network infrastructure.

 

 

50

KPN Annual Report and Form 20-F 2007

 

Information about the company/Property, plant and equipment

 


 

 

 

 

 

Mobile infrastructure

Rollout

The current network rollout is focused on achieving maximum synergies among GSM/GPRS and UMTS, with respect to infrastructure and transmission for example. Re-utilization of 2.5G-enabled infrastructure in certain areas may provide a substantial part of the basic infrastructure. Ericsson and Huawei are KPN’s mobile network suppliers in Belgium. In Germany the mobile network suppliers are Ericsson and Nokia.

In Belgium, a further rollout of our UMTS network started in 2004 in order to comply with the license requirements of at least 40% population coverage by the end of 2006 and 50% by the end of 2007. The Belgian regulator BiPT carried out measures in 2007 and concluded that BASE complied with the 40% requirement as of the end of 2006. Non-compliance with the license obligations may lead to the incurrence of an administrative fine and may ultimately result in the loss or suspension of the UMTS license of BASE. Please see ‘Risk Factors’ and ‘Regulatory Developments’.

Germany

During recent years, we have directed our efforts at increasing the quality and coverage of the GSM/GPRS network. In 2006, we additionally obtained 900 MHz E-GSM frequencies, enabling us to further improve the quality of our network. An independent report by ‘Connect’ concluded that with request to ‘voice quality’ E-Plus is more or less on par with T-Mobile and Vodafone.

On January 31, 2007 an outsourcing contract containing network roll-out and operations between E-Plus and Alcatel Lucent was signed.

Belgium

During 2007, we further increased the quality and coverage of our 2.5G-enabled network by adding approximately 259 GSM base stations.

Facts and figures – mobile infrastructure

The tables below show the number of active base stations, the average network usage as well as the coverage ratios of our networks each as of December 31, 2007:

 

 

Active base stations

Germany

The Netherlands1

Belgium1,2

 

 

2.5G sites

17,947

4,543

2,707

 

 

3G sites

5,821

2,729

276

 

 

Total sites

23,768

7,272

2,983

 

 

 

 

 

 

 

 

Average network usage

Germany

The Netherlands1

Belgium1,2

 

 

Usage – as %

58% (GSM)

93% (GSM)

37% (GSM)

 

 

 

 

 

 

 

 

Network coverage ratios

Germany

The Netherlands1

Belgium1,2

 

 

2.5G network

 

 

 

 

 

Outdoor – as % of population

99.6%

99.9%

>99%

 

 

Outdoor – as % of area

98.7%

98.7%

98%

 

 

Indoor – as % of population

82%

98.5%

98%

 

 

 

 

 

 

 

 

3G network

 

 

 

 

 

Outdoor – as % of population

62%

95.2%

>50%3

 

 

1) GSM and UMTS antennae in the same location are counted as separate sites.

2) Though BASE invested in 3G assets, no 3G sites became active during 2007 as the UMTS network has not been commercially launched yet.

3) License coverage only, not commercially available.

Properties

 

KPN owns 1,804 buildings as of December 31, 2007; the majority of which are freehold and located in The Netherlands. Almost all of KPN’s buildings form part of the transmission network equipment and cannot readily be adapted to alternative uses. The remainder of the properties comprises offices, shops, storage facilities, residential properties and buildings for other miscellaneous uses. KPN sold real estate in 2007 and intends to sell parts of its real estate portfolio in the coming years.

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Property, plant and equipment

51

 


Information about the company

Research and development

 

 

 

On January 1, 2003, the Dutch Organization for Applied Scientific Research (TNO) acquired the research and development (R&D) activities of KPN and placed it with TNO Informatie- en Communicatietechnologie (TNO-IC). TNO-IC and KPN entered into a cooperation agreement, under which we have agreed to annual purchase commitments.

We intend to continue to benefit from the telecommunications and technology expertise of TNO-IC in order to support the technological innovations required for our business. Measures have been taken to obtain the critical mass for mid and long-term projects carried out by TNO-IC. In 2007, we extended the cooperation agreement with TNO for one year until December 31, 2011. The total remaining commitments until December 31, 2011 amount to EUR 48 million.

Our research and development expenditures with TNO-IC in 2007 totaled EUR 16 million as compared to EUR 17 million in 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intellectual property

 

 

 

Our current portfolio of intellectual property consists of approximately 25 registered core trademarks and 400 patent families. We continue to invest in the growth of our intellectual property portfolio, among others through our targeted long term R&D program. This R&D program runs in close cooperation with TNO-IC and comprises about 7% of our research spending.

We take the necessary steps to protect the intellectual property rights which we create and we generate value from these rights where appropriate. In order to protect these rights, we currently rely on a combination of patents, trademarks, service marks, trade secrets, copyrights, database protection, confidentiality agreements with our employees and third parties and protective contractual provisions. Approximately 15 of the patents that we own are essential for the commercial exploitation of telecommunications technology and services. A number of suppliers have entered into license agreements with us related to these and other of our patents.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

KPN Annual Report and Form 20-F 2007

 

Information about the company/Research and development/Intellectual property

 


Information about the company

Regulatory developments

 

 

 

Telecommunications regulations are, to a large extent, based on EU regulations, but the application is national and our position in the national markets is different for The Netherlands, Germany and Belgium.

For our mobile activities in these countries three issues were of specific interest in 2007: the new EU Roaming Regulation, decisions and procedures in relation to our frequencies and the (further) national market analysis decisions in relation to mobile call termination. For our fixed telecommunications activities in The Netherlands the issues of specific interest were the continued discussion in relation to our All-IP strategy, the unequal regulatory treatment between the cable operators and the telecom operators, and the outcome of legal proceedings in relation to the market analysis decisions for the fixed markets.

The current rules which govern the telecommunications sector in the EU were agreed in 2002. In November 2007, the European Commission adopted review proposals which will bring the rules up to date. While the reform will tackle some areas where the current rules have still not opened the market to competition, the Commission recognized that the rules have worked in other areas. Therefore, it proposes to remove the requirements for ex ante regulation in major parts of the telecommunications sector including most retail markets. Once adopted at the EU level, the revised rules have to be incorporated into national law. The new framework is expected to be implemented in the next few years.

 

 

 

All-IP

 

In 2007, KPN concluded Memorandums of Understanding (MOU’s) with six (out of ten) alternative DSL operators and continued negotiations with the others for the future use of MDF locations. The MOUs allow KPN to proceed with its All-IP program in line with earlier announced principles, costs and timelines and allow the alternative DSL operators the continued delivery of unbundled access with own network infrastructure at their current MDF locations at least until mid 2010. KPN and the alternative DSL operators have also agreed on the principle for various alternative access methods such as continued delivery of unbundled access on 196 so called mini MDF locations, wholesale broadband access, and access to street cabinets based on SDF access. The principles laid down in the MOUs will be worked out in the first half of 2008. These developments induc ed OPTA to defer the review of the wholesale unbundled access market and, at the request of alternative DSL operators, the wholesale broadband access market. OPTA did continue the analysis regarding SDF backhaul, however, because no one has taken up KPN’s voluntary offer for this service. OPTA published a draft decision for consultation amending the December 21, 2005 decision on the wholesale unbundled access market, in which it is established that SDF backhaul is an associated facility of local sub loop unbundling. If the draft decision takes effect after the consultation period, sometime during the spring of 2008, then we will be required to provide SDF backhaul under non discriminatory and transparent terms and at cost oriented rates.

 

 

 

 

Unequal regulatory treatment

 

Both cable and telecommunications operators offer television, internet and telephony services. While the telecommunications sector is subject to stringent regulation, the cable sector is hardly regulated. In 2007 we continued our fight for equal regulatory treatment between the cable operators and the telecommunications operators, pleading for the imposition of an obligation on the cable companies to offer a package of sound or television broadcasting content for reselling by KPN and the withdrawal of the obligations imposed on KPN in the retail markets for fixed telephony. Concrete results have not been achieved. On July 24, 2007, the Trade and Industry Appeals Tribunal (Tribunal) rejected our appeal against OPTA’s decisions on the cable TV markets, arguing that there is no need to impose symmetric obligations due to the level of competition on the cable TV markets. The Tribunal also ruled that there is no need to impose an obligation on the cable companies to offer content packages for reselling by KPN. We will get a fresh chance in 2008, when OPTA will review its market review decisions.

 

 

 

 

Market analysis decisions fixed
markets (The Netherlands)

 

The implementation of the current regulatory framework was finalized on January 1, 2006, the day on which OPTA’s December 21, 2005 decisions for the markets for fixed telephony, leased lines and broadband entered into force. From the market analysis procedures carried out by OPTA it was concluded that KPN had ‘significant market power’ in a number of wholesale and retail markets and that OPTA would impose several obligations on KPN in order to remedy the competition problems identified. The following table provides a list of all markets on which KPN was found to have significant market power and the obligations imposed on KPN on each of these markets.

 

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Regulatory developments

53

 


Information about the company

Regulatory developments

 

Fixed telephony

 

Retail markets

 

Low and high capacity access; local and national calls, fixed-to-mobile calls, dial-up Internet calls

 

 

 

 

Obligations: non discrimination, transparency, price control by way of both a price cap (initially set at the then current level) and a price floor. From the moment our wholesale line rental (WLR) offer was accepted by OPTA (January 2007), we were allowed to raise our access tariffs in line with inflation correction.

OPTA has ruled that price floor regulation should also apply to KPN’s retail Voice over Broadband, but no price cap regulation.

 

 

Wholesale markets

 

Low capacity access

 

 

 

 

OPTA requires KPN to allow Carrier Pre-Select (CPS) providers to rent telephone access lines (PSTN and ISDN-2) on wholesale terms from KPN and resell the lines to customers, providing a single bill that covers both line rental and telephone calls. This is also known as wholesale line rental (WLR). The WLR tariff is to be based on a retail minus rule meaning that the tariff of WLR will be based on the retail tariffs of KPN’s PSTN and ISDN1 and -2 service minus certain retail marketing costs of KPN. The minus has been set by OPTA at 15.6% for PSTN services and 14.4% for ISDN services. However, OPTA must take a new decision on that taking into account the ruling of the Trade and Industry Appeals Tribunal that OPTA should allow KPN a return on sales based on KPN’s actual retail costs rather than on a normative return on sales.

       

Call origination for Carrier (Pre)Selection and for calls to 067(60), 0800/090x and 082 numbers

 

 

 

 

Obligations: access, price regulation by way of a wholesale price cap, non discrimination, reference offer, accounting separation. We are only required to provide Carrier (Pre)Selection call origination for calls based on Voice over Broadband in response to a reasonable request to that effect.

 

 

 

 

Local-tandem transit

 

 

 

 

Obligations: access, price regulation by way of a wholesale price cap, non-discrimination, reference offer, accounting separation.

 

 

 

 

Transit services

 

 

 

 

Obligations: prohibition to charge discriminatory rates (such as volume discounts), non- discrimination, reference offer.

 

 

 

 

Call termination for calls to geographic numbers, 084/087 and 088 numbers and 112

 

 

 

 

Obligations: access, price regulation by way of a wholesale price cap, non-discrimination, reference offer, accounting separation.

Leased lines

 

Retail markets

 

Analog Leased Lines (national)

 

 

 

 

Obligation: to supply on reasonable request on non discriminatory and transparent terms; price regulation by way of a price cap (the prices are allowed to raise only by the rate of inflation subject to a carry over of one year), a prohibition to give long term discounts.

 

 

 

 

Leased Lines < 2 Mbs (national)

 

 

 

 

Obligation: to supply on reasonable request on non discriminatory and transparent terms; price regulation by way of a price cap (the prices are allowed to raise only by the rate of inflation subject to a carry over of one year), a prohibition to give long term discounts.

 

 

 

 

Analog Leased Lines (international)

 

 

 

 

Obligation: to supply on reasonable request.

 

 

Wholesale markets

 

Interconnecting Leased Lines < 2 Mbs and 2 Mbs

 

 

 

 

Obligations: access (< 2 Mbs: at regional handover points; 2 Mbs: at local and regional handover points), price regulation by way of a wholesale price cap, non discrimination, reference offer, accounting separation.

Unbundled Access

 

Wholesale market

 

Wholesale unbundled access (including shared access) to metallic loops and sub loops

 

 

 

 

Obligations: access, price regulation by way of a wholesale price cap, non-discrimination, reference offer, accounting separation.

Wholesale Broadband Access

 

Wholesale market

 

High quality wholesale broadband access (with booking ratios of 1:1 up to and including 1:20)

 

 

 

 

Obligations: access, non-discrimination, reference offer.

 

 

 

All of the above market review decisions will be reviewed in 2008. OPTA has to decide whether to maintain, amend or withdraw these obligations no later than December 31, 2008.

 

 

54

KPN Annual Report and Form 20-F 2007

 

Information about the company/Regulatory developments


 

 

 

Market analysis decisions
mobile markets (mobile call
termination)

 

In Germany, Belgium and The Netherlands we have been designated as having ‘significant market power’ on the markets for call termination on our individual mobile networks. The following table provides details of the current status of the decisions by the three relevant regulatory authorities:

         

The Netherlands

 

OPTA decision as of July 30, 2007 (appeals pending)

 

Obligations for KPN (including Telfort): non-discrimination, transparency, price control by way of a defined glide path and the obligation to offer direct interconnection upon reasonable request. The tariff reductions by the mobile operators as tariff remedy, have to follow this glide path:

     

 

 

In EUR/minute

15/8/2007

1/7/2008

1/4/2009

1/7/2009

 

 

KPN

10.0 ct

9.0 ct

8.0 ct

7.0 ct

 

 

Vodafone/Tele2Versatel

10.0 ct

9.0 ct

9.0 ct

7.0 ct

 

 

Orange/T-Mobile

11.4 ct

10.4 ct

10.4 ct

8.1 ct

 

 

 

Germany

 

BNetzA decision
as of
November 30, 2007

 

In Germany, there is no glide path.

 

 

 

 

 

In EUR/minute

1/12/2006 – 30/11/2007

1/12/2007 – 30/03/2009

 

 

T-Mobile

8.78 ct

7.92 ct

 

 

Vodafone

8.78 ct

7.92 ct

 

 

E-Plus

9.94 ct

8.80 ct

 

 

O2 (Germany)

9.94 ct

8.80 ct

 

 

 

Belgium

 

BiPT decision as of
August 11, 2006
(appeals pending)

 

Obligations for BASE: external non-discrimination, transparency, price control by way of a defined glide path and the obligation to offer direct interconnection upon reasonable request. In accordance with the tariff reductions by the mobile operators as tariff remedy, BiPT decided on the following glide path (starting November 1, 2006) :

 

 

In EUR/minute

1/11/2006

1/5/2007

1/1/2008

1/7/2008

 

 

BASE

15.81 ct

12.76 ct

11.82 ct

10.41 ct

 

 

Proximus

10.13 ct

8.09 ct

7.48 ct

6.56 ct

 

 

Mobistar

12.75 ct

10.16 ct

9.38 ct

8.21 ct

 

 

On December 18, 2007, BiPT has issued a decision to further reduce the average MTA of BASE and Mobistar and to increase the average MTA of Proximus as of February 1, 2008 in comparison with BiPT’s initial decision of August 6, 2006. This decision also includes an extension of the glide path until the end of 2009. The new glide path looks as follows:

 

 

In EUR/minute

1/1/2008

1/7/2008

1/1/2009

1/7/2009

 

 

Proximus

8.02 ct

7.96 ct

7.85 ct

7.73 ct

 

 

Mobistar

8.84 ct

7.96 ct

7.85 ct

7.73 ct

 

 

BASE

10.36 ct

8.75 ct

8.62 ct

8.49 ct

 

 

According to BiPT, the MTA-levels as from July 1, 2008 are to be considered as indicative pending the official publication by the ERG workgroup of a common position in relation to symmetric versus asymmetric termination rates. Depending on the outcome of the ERG workgroup, BiPT may decide to revise its decision. BASE will launch both suspension and annulment proceedings against BiPT’s new decision.

 

 

 

International roaming
on mobile networks

 

After a lengthy rule-making process, the EU roaming regulation came into force on June 30, 2007. Retail roaming tariffs for calls within the EU are capped at EUR 0.49 (excluding VAT), decreasing to EUR 0.46 and 0.43 after 14 and 26 months respectively for mobile outgoing calls, and to EUR 0.24, 0.22 and 0.19 for incoming calls while abroad in EU countries (all minute tariffs). Average wholesale roaming tariffs will be capped at EUR 0.30, 0.28 and 0.26 as of August 30, 2007, August 30, 2008 and August 30, 2009, respectively. Based on the regulation, our customers have been offered such a ‘Euro tariff’ prior to July 30, 2007, implemented after one month upon request. Customers that did not opt in to a specific roaming tariff prior to the regulation were automatically switched to the Euro tariff two months after the Euro tariffs were being offered. The European Commission and the national regulatory authorities of the member states actively monitor the implementation of the regulation.

 

 

 

KPN Annual Report and Form 20-F 2007

 

Information about the company/Regulatory developments

55

 


Information about the company

Regulatory developments

 

Licenses for mobile
communications
(The Netherlands)

 

In The Netherlands KPN holds licenses for GSM 900, DCS 1800 and UMTS. The GSM 900 licenses of KPN and Vodafone were to expire on April 1, 2010, but in 2007 the Minister of Economic Affairs extended the duration of this license from April 1, 2010 to February 25, 2013. For the extension KPN is due to pay an additional license fee of approximately EUR 40 million. As a result, all GSM 900 and DCS 1800 licenses in The Netherlands will expire on the same date (February 26, 2013).

In January 2007, the E-GSM frequencies that were part of Telfort’s license were sold and transferred to T-Mobile, upon approval of the Minister of Economic Affairs.

The Dutch telecommunications agency (‘Agentschap Telecom’) of the Ministry of Economic Affairs has published a control system for verifying the roll-out obligations of the UMTS licenses. Agentschap Telecom announced actual control of the roll-out as of September 2007. The roll-out will be measured at 300 random locations within the area that should be covered. If the license requirements are not met, operators will be given a timeframe to remedy, and will also be subject to fines, which will be determined based on the significance of the difference between the actual and required level of compliance.

Auctions for frequency licenses are expected in 2008 for T-DAB (broadcasting) and in the 2.6 GHz band (mobile communications).

Orange instituted civil proceedings against the State of The Netherlands and KPN claiming damages in relation to the DCS 1800 licensing, for which Orange paid approximately EUR 270 million in an auction. According to Orange, the State allowed the creation of an uneven playing field in the Dutch mobile market, because KPN and Vodafone were not required to pay fees for their GSM 900 frequencies. These claims were rejected in the first instance in 2001, but Orange has lodged an appeal, which is still pending.

 

 

 

 

 

Licenses for mobile
communications (Germany)

 

In Germany, the regulator BNetzA offered to sign a contract with E-Plus under which the regulator would be obliged to allocate the right to use the GSM frequencies currently used by E-Plus from December 31, 2012 to December 31, 2016. E-Plus signed the contract in May 2007.

Already last year, BNetzA had allocated further frequencies from the GSM extension band to E-Plus (and O2). This allocation has been challenged in court by Deutsche Bahn and Airdata. On November 30, 2007 the regional court of Cologne rejected the complaints of Deutsche Bahn and Airdata. Accordingly, the frequency allocations are valid in their initial form and E-Plus may further use the E-GSM 900 frequencies. However, it remains unclear whether Deutsche Bahn and Airdata will appeal the decision of the court of first instance.

According to the list of markets which might be subject to ex-ante regulation, the German regulator analyzed the mobile market for call origination (market 15). The German regulator concluded that in this market 15 no mobile operator has significant market power. In the notification procedure of market 15 the European Commission asked the German regulator to elaborate on the service provider obligation in the GSM licenses of T-Mobile, Vodafone and E-Plus, which might run counter to EC law.

In 2007, the regulator started a consultation on the allocation of frequencies in the 1.8 GHz, 2 GHz and 2.6 GHz band. Although most of the frequencies are the subjects of legal proceedings, the regulator intends to auction those frequencies in 2008.

 

 

 

 

 

Licenses for mobile
communications (Belgium)

 

In Belgium, under BASE’s UMTS license, BASE is required to deploy a UMTS network covering 40% of the Belgian population by December 31, 2006 and 50% by December 31, 2007. Following a verification, BiPT confirmed on July 2, 2007 BASE’s UMTS network covers more than 40% of the Belgian population. On May 11, 2007, the Royal Decree authorizing the use of 900 MHz frequencies for UMTS services was published in the Belgian Official Journal. Under the Royal Decree, the 2G holders of frequencies in the 880-915 MHz and 925-960 MHz bands can use the GSM 900 frequencies for UMTS services as of July 1, 2008. The right to use such 900 MHz frequencies for UMTS is not subject to the imposition of any additional license fee. Because BASE does not have the same number of radio channels in the GSM 900 band as its competitors, BASE has appealed the Royal Decree at the State Council.

 

 

 

 

 

Licenses for broadcasting
services (The Netherlands)

 

The license of Digitenne for DVB-T and DVB-H has been amended (between August 2006 and January 2007) in relation to the allocated frequencies, to allow nation wide coverage in The Netherlands. Objections of third parties thereto have been rejected by the Minister of Economic Affairs, but this decision is under appeal before the court of Rotterdam. Annulment of the decision could potentially endanger further rollout.

 
 

 

 

 

56

KPN Annual Report and Form 20-F 2007

 

Information about the company/Regulatory developments

 


Operating results

Consolidated results of operations

 

 

 

Our Financial Statements have been prepared in accordance with both International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and IFRS as adopted by the European Union. The following discussion includes various forward-looking statements. Please see ‘Forward-Looking Statements’ as well as ‘Risk Factors’ for a description of certain factors, that may affect our operating results. For additional information about how we calculate customer data, including ARPU, see ‘Presentation of Financial and Other Information’.

 

 

 

 

 

 

 

 

In millions of euro

2007

2006

2005

 

 

Revenues

12,461

11,941