In recent years, TDC and the telecommunications industry have undergone significant changes in terms of technology, competition, customer demand and regulation. TDC has met these changes by transforming into a geographically more focused, significantly more efficient, commercially astute operator with world-class networks, a highly diverse product portfolio, strong positive momentum and a clear strategic vision. While this transformation is still ongoing, we believe TDC is now well-equipped to seize opportunities in the coming years.
In January 2006, Nordic Telephone Company ApS (NTC), a company controlled by investment funds, acquired 87.9% of the shares in TDC. TDC's transformation then picked up speed with the launch of a range of initiatives consisting of:
In December 2010, NTC completed a marketed offering of existing shares to Danish retail and Danish and international institutional investors. With the offering completed, NTC realised a part of its investment in TDC by reducing its ownership to 59.1% and TDC broadened its shareholder base. NTC remains the majority shareholder in TDC after the offering. In connection with the offering, TDC also completed a share buy-back.
TDC has taken a number of steps to change its business from a product/technology-centric to a customer-centric organisation, thereby optimising sales channels and enabling cross-selling and bundling. TDC's business now consists of five business divisions - Consumer, TDC Business, TDC Nordic, Operations & Wholesale and YouSee. In addition, TDC has significantly strengthened its senior management team and upgraded its focus on performance management and introduced incentive programmes to further improve performance.
While TDC's wholly or partly owned European telecommunications subsidiaries and international operations contributed approximately 50% of revenue and 29% of total EBITDA in 2005, they provided no or limited synergies in relation to the core Nordic business. Consequently, in 2006, TDC embarked on a strategy to concentrate on its core markets and become a clear and focused Nordic leader. As such, TDC initiated a process to divest its non-core assets. In parallel, TDC has strengthened its domestic position through in-market consolidation, and has acquired a series of complementary network operators and service providers in Denmark. This has provided TDC with a very strong platform from which to pursue its focused Nordic strategy. By 2010, TDC had completed this process with the divestment of Sunrise in Switzerland, further strengthening TDC's platform and ability to pursue its focused Nordic strategy.
As a result of business activities divested outside the Nordic countries from 2005 to 2010, TDC's revenue decreased to DKK 26.2bn in 2010 from DKK 47.4bn in 2006 .
1 In 2007, HTTC acquired Invitel and Memorex. In 2008, Invitel became the continuing entity.
|Domestic divestments of non-core assets and outsourcing|
|Domestic in-market consolidation|
As part of its strategy, TDC has implemented a detailed value-creation programme to improve operating efficiency and reduce costs. This includes removing duplicate headquarters and business division functions, consolidating call centres from 14 to 4 locations, outsourcing non-core processes such as IT as well as reducing facility costs through physical consolidation and disposal of buildings. These and other initiatives regarding staff, network, IT, marketing and customer service have lowered operating expenses from year-end 2005 to year-end 2010 by an annual compound growth rate of 3.5% and have, in combination with the strategic decision to refocus on core Nordic markets, significantly reduced the number of full-time employee equivalents. In the TDC Group, at year-end 2010, 4,999 fewer FTEs were employed compared with year-end 2005. Over the same period, employee satisfaction has increased from 67/100 to 77/100.
TDC has significantly improved its margins by enhancing high-margin areas while eliminating or de-emphasising a number of low-margin areas, and has improved its return on invested capital. Within the last five years, to further optimise its business, TDC has outsourced its IT operations and the planning, roll-out and operation of its mobile network. Despite high capital expenses governed in a strict prioritisation process, TDC has also improved its equity free cash flow considerably over the past years through EBITDA growth and improvements of net working capital through changes in billing cycles, extended supplier payment terms and improved inventory handling.
Over the past five years, TDC has sought to reclaim commercial leadership and momentum in both the business and residential segments of the domestic market, and has constantly remained at the forefront of technological developments. This includes a shift from a single-brand to multi-brand strategy to leverage the full potential of its consumer brands: TDC, YouSee, Telmore, Fullrate and M1. TDC has also revitalised its main brand.
Through its extensive, fast and reliable infrastructure, TDC has launched innovative and successful products such as the multi-play products HomeDuo and HomeTrio and the flat-rate mobile telephony product 'TDC til TDC' ('TDC to TDC') , which has increased retention and is the best-selling add-on service in TDC's history. Price structures for landline telephony products have been changed to increase transparency and simplicity. The basic subscription now charges DKK 1 for calls of unlimited duration to other landline customers and with 'TDC Fastnet Max', customers can call all mobile and landline customers in Denmark at an attractive flat-rate charge. Cable network provider YouSee has introduced YouSee Clear, which supplies high-quality digital TV to its customers at no additional charge, and YouSee Plus, which gives TV customers add-on digital services. TDC Play/YouSee Play, launched in 2008, is a ground-breaking, award-winning service that gives mobile and broadband customers unlimited access to 10 million music tracks at no additional charge. Web TV, enabling TV viewing and video-on-demand on PCs, has been marketed increasingly in 2010.
To improve its end-to-end customer experience, TDC has initiated 'TAK', a comprehensive customer-centric programme. Customer lifecycle management and churn-prevention practices have been upgraded, including special programmes to contain PSTN churn and revitalise key sales channels and the existing TDC Shops have been refurbished and accompanied by new shops, with more due to open in 2011.
TDC's infrastructure and coverage are best in class, and within the past five years, capex has consistently been maintained at 14%-15% of revenue. TDC has also continued to expand its widespread infrastructure on all platforms - copper, coax, fibre, GSM and UMTS.
Since 2006, TDC's copper network has been enhanced to increase coverage and expand bandwidths to deliver more advanced services such as VoIP, TV and multi-play. As a result, TDC's broadband population coverage is now the highest among European incumbents.
YouSee provided TV signals to 41% of Danish homes at the end of 2005. This penetration has increased over the past five years to 46% at year-end 2010. The coverage of the cable infrastructure has increased to 56% of Danish homes. In addition, DOCSIS 3.0 upgrade investments have improved capacity and enhanced services. By year-end 2010, 73% of homes passed by the cable network were able to receive speeds of 50 Mbps and even 100 Mbps. The cable network infrastructure is now fully upgraded and digitalised and almost all YouSee customers have transitioned to digital TV . During 2010, the cable network has been strengthened considerably to accommodate increasing demand for on-demand services.
TDC operates the largest fibre network in Denmark due to heavy investment in previous years. By year-end 2010, the fibre network encompassed approximately 21,000 km of backbone fibre and 18,500 km of access fibre. This puts TDC in a very strong position to address the future high-speed broadband and data market.
Over the past five years, outdoor 2G (GSM) population coverage has been close to 100% while indoor coverage has been 86%. In order to increase coverage and expand its mobile broadband customer base, TDC has extended its mobile network roll-out in Denmark. By year-end 2010, 94% of the population had 3G (UMTS) access, allowing customers with laptops, 3G mobile phones or smartphones to surf the internet. While coverage is constantly being increased, capacity and available data speeds will be continuously upgraded to match customer expectations. Turbo 3G was launched in January 2008 and was based on HSDPA technology to provide customers with high-bandwidth broadband access via the mobile network. In May 2010, TDC acquired a 2.5GHz licence to be used for rolling out 4G (LTE), the next generation of mobile network technology. By year-end 2010, 4G was present in the six largest cities in Denmark with the commercial launch of products and services to follow in the first half of 2011.
In a rapidly changing telecommunications industry with major technological developments, TDC has maintained or improved its market-leading positions across its major product segments. This has been achieved through a range of strong domestic brands covering all customer segments, channels and product categories in the residential and business markets, and through TDC's undisputed position as the leading provider of technology platforms and infrastructure across all the major access technologies.
While the traditional landline telephony market has decreased over the past five years, this has been more than compensated for by customers migrating to VoIP and mobile telephony. However, as ARPU on mobile voice and VoIP are lower than ARPU on PSTN/ISDN, this has put pressure on revenue. TDC has managed to adapt to the changing markets, maintaining a solid approximately 81% market share of traditional landline telephony (PSTN/ISDN) from year-end 2005 to year-end 2010. With a market-leading 56% share of the VoIP market gained during the past five years, TDC's strong performance is supported by the positive impact of its multi-brand strategy featuring the TDC, Fullrate and YouSee brands. In the mobile voice market, TDC has succeeded in maintaining its leading market share at approximately 42%.
The broadband market has grown significantly over the last five years but is now nearing saturation. However, TDC has increased its share of the total broadband market from 58% at year-end 2005 to 61% at year-end 2010. These market shares, which are the result of heavy infrastructure investments in xDSL, cable and fibre, allow TDC to fully benefit from further broadband market growth, both landline and mobile.
In 2005, multi-play was in its early stages. Today, the fast landline broadband speeds, combined with the intensifying competition in the telecommunications industry, are prompting an increasing number of providers to attract and retain customers by offering bundled services or dual-/triple-play on TV, broadband and IP or mobile telephony. TDC introduced the attractive multi-play packages TDC HomeDuo and TDC HomeTrio on various commercial platforms in 2009 and the acquired subsidiary, Fullrate, supplies a dual-play package. Since then, the number of full-bundle TDC customers has soared from zero to 420,000. Interest in TDC Home Duo/Trio has been significant, and with a 63% share, TDC has established itself as the clear leader in the triple-play market. TDC plans to launch a quadruple-play product, also including mobile telephony, in 2011.
To match customer demand for flexibility and constant connection, TDC launched its mobile broadband offering in July 2008 . During 2010, TDC overtook its competitors on the Danish mobile broadband market  with a market-leading share of 33%. The mobile broadband market is expected to increase significantly in the future in both the business and residential segments.
The Pay-TV market has grown considerably over the past five-year period, and household penetration had reached 89% in Denmark by the end of 2010. TDC offers TVoIP, Web-TV and traditional cable TV (YouSee). Over the past five years, TDC's market share of the Pay-TV market increased slightly to the current level of 55%. The number of providers and TV packages available expanded significantly. TDC's TV customers (including YouSee) have access to the most popular Danish and international channels, video-on-demand and archive functionalities, and benefit from one of the most attractive offerings and value propositions in the market. YouSee provides almost all of its TV customers with free access to digital TV in HD  and hosts add-on and on-demand services.
The separate business division TDC Nordic aims to attack local incumbents on their home turf by primarily providing telecommunications solutions for businesses in the Nordic region outside Denmark. Its products include landline telephony, IP-VPN and internet access on its pan-Nordic network. In the mobile market, TDC Nordic operates as an MVNO or service provider pursuant to agreements with local mobile network operators. TDC Nordic also offers communication integration services and, through TDC Hosting, provides hosting solutions and information technology outsourcing throughout the Nordic region. TDC Nordic and TDC Business benefit from sharing customer relationships, products and services. During 2010, TDC Nordic has contributed strongly to TDC's revenue growth by recording a 16% increase in revenue compared with 2009, driven primarily, besides forex effects, by mobile voice and hosting activities. TDC Nordic has managed to attract a number of large accounts in 2010, with notable wins in e.g. the public sector and the banking industry.
During the last decade, TDC has experienced a continuous net line loss on the copper network. This has resulted from the migration from PSTN to mobile only, and the appearance of and increase in competing infrastructure such as fibre and coax. However, TDC has been a major beneficiary of the migration away from copper, due to the flow into TDC's own mobile-only customer base and YouSee's cable customer base.
TDC's copper line losses have been decreasing since H1 2009. This has been achieved through a strengthened and continuous focus on customer retention of PSTN lines and the successful launch of the HomeDuo and HomeTrio multi-play offers specifically designed to boost customer retention.
In addition to the copper line loss, the total number of RGUs on the copper network has also decreased in recent years. However, the RGU-per-line ratio has been slightly increasing since 2008, reflecting TDC's ability to increase the number of customer relationships with the average customer, due primarily to the success of the multi-play bundles.
As the leading player in most telecommunications market segments in Denmark, TDC has been subject to extensive regulation in its sector, such as the obligation to offer many wholesale products on regulated terms, including price regulation. The scope of regulation has increased extensively over time and most recently in 2009 and 2010 was expanded to include an obligation to offer wholesale access to broadband (Bit Stream Access) through TDC's cable TV network and through fibre, in addition to the existing obligation to offer wholesale access through copper.
TDC has experienced increasing pressure on its wholesale prices over the years due to the applied price regulation, including the special EU regulation of international roaming prices. Moreover, TDC's wholesale prices have been increasingly regulated over time by use of the LRAIC pricing method. The table lists a representative selection of regulated prices that have had a considerable negative impact on TDC's revenue and earnings. Further, price reductions of wholesale prices, especially prices of landline network and mobile termination (which will also encompass SMS), must be expected due to the ongoing alterations of the LRAIC model used to price the LRAIC regulated wholesale products.
|Price development on regulated prices, DKK excluding VAT|
|Local access, landline, peak hour, per minute||0.0301||0.0164||(46%)|
|Local termination, landline, peak hour, per minute||0.0257||0.0140||(46%)|
|Raw copper, annual price per unit||770||820||6%|
|Bit Stream Access 2 Mbps, average per year||960||817||(15%)|
|Bit Stream Access 4 Mbps, average per year||1,300||896||(31%)|
|Bit Stream Access 8 Mbps, average per year||1,700||973||(43%)|
|Mobile termination, price per minute1||0.84||0.33||(61%)|
|Roaming, EU prices|
|Inbound roaming voice, wholesale, per minute||5.37||1.64||(70%)|
|Outbound roaming voice, retail, per minute||6.75||2.90||(57%)|
|Outbound receiving calls, retail, per minute||2.32||1.12||(52%)|