Deutsche Telekom – future strategy lies in convergence
The declining net profit of Deutsche Telekom (DT) since 2005 has obliged it to pursue a more aggressive approach to competition in its domestic markets, with price cuts, bundled products and innovations. The same strategy has been deployed in its mobile division, with T-Mobile launching simplified bundled packages, and driving down the price of voice calls. In the fixed-line sector, too, the loss of lines from T-Com to its competitors has encouraged it to develop offers geared towards bundled products and aimed at customers considering changing to the bundled offers of competing network operators.
These measures were never likely to be enough.
Firstly, DT has continued to haemorrhage fixed-line subscribers, which it turn reduces its ability to make money from fixed-line and broadband services. Secondly, DT faces stiffening competition from alternative operators which are growing in size and competence every year. Arcor, a leading fixed-line carrier in Germany, has the backing of its parent Vodafone – a company neither short of liquidity nor of productive ideas on converging its operations. The freenet Group has also expanded in recent years, having bought out mobilcom and, in July 2008, debitel, in the process creating Germany’s largest network-independent telecoms and Internet company, having some 19 million mobile subscribers and one of the strongest distribution channels for telecoms and Internet products.
For many years DT failed to address its underlying structural problems, which has hampered its ability to compete with these competitive threats. That the company has resorted to establishing new monopolies or semi-monopolies (its much criticized three-year VDSL regulatory holiday) in a bid to move forward brought it into conflict with a determined EC and its own regulator. This harmed the company’s image both nationally and internationally (and also contributed to the replacement of the CEO Kai-Uwe Ricke with René Obermann, formerly CEO of T-Mobile International). In addition, while it doggedly defended its case it sat by and witnessed a number of alternative operators and municipalities build independent networks, so locking it out from subscribers and line rental revenue. By these means DT failed to embrace the future, and wasted valuable time in its efforts to position itself as a leading operator in the emerging Internet economy.
The company has tried to extricate itself from its financial and operational doldrums, in part by mirroring the attempts of other incumbents (notably BT and France Telecom). The company’s Telekom 2010 initiative, introduced in 2008, outlined a number of measures aimed at reducing overlapping responsibilities, which has hampered its marketing strategy in its home market, but did not sufficiently address the required structural changes. The penalty paid by the company and its shareholders is evident in its latest results: a Euro1.124 billion net loss for the first quarter of 2009 (compared to a net profit of Euro924 million a year earlier) and (excluding data from the recently purchased OTE) a 4.8% fall in EBITDA.
As early as 2006 BuddeComm assessed that to succeed DT had to carry out further restructuring, bring its infrastructure (fixed and wireless) together into one infrastructure company, and make that infrastructure available to the thousands of digital media companies that will retail the vast range of services and applications.
This assessment has now been brought closer to fruition. In March 2009 DT’s CEO announced to shareholders a radical restructuring plan which would see the company bundle its fixed-line network operations with T-Mobile, and so increase convergence between its fixed and mobile operations. The plan first called for T-Mobile International to be merged into DT (making T-Mobile Deutschland a direct subsidiary of DT). In a second stage, the T-Home and T-Mobile Deutschland units would be combined into a single wholly-owned subsidiary of DT. And so in future a single business would plan and manage all mobile and fixed-network services.
This makes greater sense from a cost basis, but also from the perspective of consumers. For a growing number of them the distinction between fixed-line and mobile is already anachronistic. Many households have a number of devices which can receive and send digital data regardless of the medium. Given that this degree of convergence is a technological reality, it is only appropriate that providers should update their operations to meet customer expectations.
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