Some would say that Deutsche Telekom is in a real mess. The fixed line operator that was once touted as the likely sole survivor of the European fixed line market is losing fixed line telephony customers at an alarming rate, has external French and Spanish ISP businesses that are too small to scale and which are leaking money, and has just lost one CEO, and has recently scaled back its ambition in its home broadband line market, dropping VDSL2 in favor of the slower and less expensive ADSL2+.
The results from DT last week underscored all of this and threw in a profit warning for good measure, cutting its EBITDA (earnings before income tax, depreciation and amortization) by €800 million (just shy of $1 billion), in its Broadband/Fixed Network during 2007. The EBITDA projection fell to €19 billion, but don’t think for a moment that all that is surplus, and the company only had €5.5 billion in free cash flow this year, and that before it pays $ billions for the T-Mobile spectrum which it bought in the US.
New CEO Ren’ Obermann also said that T-Mobile Germany has decreased prices by 11% during 2006 and that this price erosion would continue, costing the company €200 million in revenue in the coming year.
Shares initially fell dramatically on the back of the announcement, recovering later as the company blamed fierce price competition in Germany and a strong Euro for the damage.
Already speculation is rising about whether DT should continue with its ambitions to build broadband presence, and eventually a hybrid quadruple play, in both France and Spain.
This is the universal conundrum for a modern telco. It has lost 2.3 million fixed lines this year, and yet converted more than 3 million of its existing fixed lines to broadband. Part of the problem is that the fixed lines would go anyway to VoIP and mobile substitution customers, so it has deliberately cannibalized many of those customers with a T-Mobile offering designed to simply move the revenue from its fixed line box into its mobile box, which was taken last year by 1.1 million customers.
But previous CEO Kai Uwe-Ricke, has pinned the hopes of the company on a variety of double and triple plays, and later DT will have to extend these to include bundles with T-Mobile.
In Germany it finally launched its delayed IPTV service early this year with the availability of HD set tops, and now it can look for 3 revenues for each fixed line, instead of two (internet access and fixed voice). Obermann, reported that for last year 2.4 million customers had taken some form of double play.
There is also evidence of a huge push towards eliminating unbundled DSL lines from other suppliers, over its own network, and DT said that the proportion of broadband lines sold under its T-Com brand was as high as 64% in the fourth quarter compared to 19% in the third quarter, bringing in some 563,000 new broadband retail customers.
There has to be question marks here. DT has been in constant wars with its regulator and the European Commission over unbundled lines, and while it may have spent more on marketing and better bundles, DT could just as easily have achieved some of this by dragging its heels on unbundled and wholesale DSL installation.
In total, including wholesale, DSL lines went up by 878,000 to 10.3 million, but outside of Germany, where it relies on unbundling lines, T-Com has doubled its lines 1.4 million this year, still nowhere near its intended level.
Back in May last year DT commissioned Cisco and its IPTV set top subsidiary Kiss, to build a hybrid IPTV service for broadband customers that could be sold both in Germany and in France and Spain, offering VoD alongside local digital terrestrial set tops using DVB-T, marketed as T-Home. These are already supposed to be live in Germany, France and Spain, so this is just like the two pronged IPTV service attack of AT&T in the US with its U-Verse and Homezone product lines. No figures for triple play customers were released by DT regarding these external operations and now analysts are expecting the French and Spanish ISP services to be sold.
Back in mid-2005 T-Online acquired Spanish network operator Albura also known as Red El’ctrica Telecomunicationes, from the Spanish group Red El’ctrica de Espana, paying €61.5 million ($73.5 million) and the deal included 7,500 kilometers of fiber, and 160 unbundled DSLAMs and a long term usage agreement with Red El’ctrica for access to its core infrastructure throughout Spain.
In summer 2006 T-Online France began its own triple play trading as Club Internet, using Microsoft’s IPTV in a hybrid service with digital terrestrial TV, and a VoD library of 1,000 films.
At the time T-Online was thinking in terms of a 15 % market share across Europe for broadband. But it doesn’t look like this is viable, and other operators, notably Telecom Italia and Vodafone are building up challenges on its home soil, and the Alice Home Telecom Italia service also offers a triple play through its Hansenet in Germany.
Elsewhere Deutsche Telekom has holdings in Croatia, Slovakia, and Hungary, and these have all also launched IPTV services during the past year in the hope that fixed line churn can be halted.
One strategy that has been suggested for DT is not to sell off any of its overseas operations, but to partner or buy more assets and Tiscali and even Cable and Wireless have both been mentioned this week by analysts trying to think up ideas for the DT management to follow.
The DT supervisory board holds a meeting at the end of February when the new CEO Obermann will present his thoughts on how to turn the German giant around.
Today the backbone of DT is T-Mobile, which now has 106 million accounts globally, adding 746,000 in the fourth quarter, without which the company would be shrinking.