PARIS/BRUSSELS The Netherlands could be heading for a mobile phone price war similar to the one that has ravaged industry profits in France, with an auction of wireless licenses next month likely to ramp up competition to market leader KPN (KPN.AS) and its rivals.
The Dutch government has set aside spectrum for new entrants at the October 31 auction in a bid to boost choice and lower prices in a country with 19.6 million mobile phone subscriptions - more than one for every head of population.
While good news for consumers, the arrival of one or more new players is likely to force incumbents KPN, Vodafone (VOD.L) and Deutsche Telekom (DTEGn.DE) to cut tariffs in what is currently one of Europe's most lucrative mobile phone markets.
The experience of the French industry does not bode well.
There, cut-price newcomer Iliad (ILD.PA) grabbed 5.4 percent market share in just six months, launching a price war that has hammered profits at established firms France Telecom FTE.PA, Vivendi's SFR (VIV.PA), and Bouygues Telecom (BOUY.PA).
"Iliad in France has redefined what is possible when you launch in a mature market," said Will Draper, an analyst at Espirito Santo investment bank.
"It almost won't matter whether the new entrant is successful or not, the key thing is that it will create a domino effect, forcing KPN to cut its mobile pricing severely."
Analysts predict mobile profit margins in France will decline from a mid-30s percentage to the mid-20s in the coming years as incumbents battle to compete with Iliad, whose "Free Mobile" service offers lower prices for more generous allotments of texts, calls and mobile Internet.
Potential bidders for the new Dutch licenses are familiar faces in the country: cable companies UPC, owned by Liberty Global (LBTYA.O), and Ziggo ZIGGO.AS - which already have strong shares in broadband and pay-TV - as well as virtual mobile operator Tele2 (TEL2b.ST).
None have detailed their plans because of auction rules that forbid bidders from speaking, but analysts expect there to be at least one new entrant.
Two unidentified companies indicated they would bid on the two blocks of 800 megahertz spectrum reserved for new operators, according to the government agency running the auction.
ING analyst Jeffrey Vonk predicted UPC and Ziggo could team up on a joint bid, but doubted Tele2 would jump in given signals from the group's recent strategic announcements.
"Tele2 wants a number one or number two position in its markets and 35 pct profit margins, and I don't think that's possible in the Netherlands," he said. "UPC and Ziggo have deeper pockets."
How bad the Dutch market gets will largely be determined by how aggressive any new mobile operator is in building a national network and on price at launch sometime next year.
A new entrant would have plenty to aim for.
Dutch consumers pay Europe's second-highest mobile prices after Malta, according to data from the European Commission. The country used to have five mobile operators, but that has consolidated down to three.
An analysis by telecom regulator OPTA found competition from "virtual" operators like Tele2 - which rent capacity rather than owning a network - was insufficient and the risk remained that incumbents could quietly agree to keep prices high.
In the second quarter of 2012, KPN collected 36 euros a month from its Dutch mobile customers on a contract, compared with only 21 euros at its German unit E-Plus.
KPN, a former state monopoly with about 45 percent of the Dutch mobile market, has said little to date about how it plans to cope with fresh competition. The group has already seen mobile profit margins erode by 4 percentage points in the past year as Dutch customers increasingly turn to free software on smartphones to avoid paying for texts and calls.
Some analysts think the group, which is 28 percent owned by Mexican telecoms tycoon Carlos Slim and has seen its shares drop 28 percent this year, could take its cue from the better performing incumbents in France and pre-emptively cut prices and offer unlimited mobile data plans.
"France Telecom did most of this. SFR and Bouygues were very slow, which is why they are suffering more now," said Espirito Santo's Draper.
SFR expects operating profit to fall 12-15 percent this year and is cutting hundreds of jobs to save 500 million euros by the end of 2014. Bouygues is axing 556 jobs to save 300 million.
Antonios Drossos of Rewheel, a consultancy that has advised challenger mobile operators in Britain, Poland and Hungary, agreed that failing to react to the lower prices of a newcomer could prove costly.
"The enterprise value destruction caused by a successful new entrant like Free is far greater than the cost associated with embracing an unlimited mobile internet," he said.
But some industry observers and executives see Iliad as the exception and remain unconvinced that late-arriving players can really make money, pointing to the experience of Hutchison's 3 brand in Britain and Italy, and Spain's Yoigo which spent years to win clients and break even.
(Editing by Mark Potter)