Deutsche Telekom’s announcement that it will combine its fixed and mobile divisions marks a significant shift towards converged services strategies in the German telecoms market. But the powerful incumbent faces fierce competition at home from some big European counterparts including Vodafone and Telefonica, as well as cable companies, and that is leading to severe pressure on tariffs and therefore ARPUs.
“There is definitely a change in the marketplace [away from] the standalone pitch,” says Dan Bieler, consulting director, European telecommunications and networking, IDC Germany. “If you look at other fixed-line players—Versatel, NetCologne—they have all teamed up with an MVNO. There is a long way to go for Deutsche Telekom, but potentially it could have a very big impact if they come up with some real convergence offerings and push applications.”
Vodafone also presented a converged story at CeBit last month, having last year acquired the remaining 26.4% stake it did not own in fixed player Arcor for E474 million. At the show Vodafone Germany launched a business version of its combined DSL and UMTS service, MoreConnect, which has been offered to consumers in Europe since last year. The new service, providing fixed and mobile broadband in a single bundle and a single device, will target SMEs.
There has also been renewed speculation that Telefonica will buy German broadband company Hansenet from Telecom Italia, and that Telefonica and Vodafone could look to regional cable assets to strengthen their convergence push. Currently, Telefonica provides mobile services in Germany under the O2 brand and some retail DSL services: at the end of the third quarter of 2008, O2 said it had 189,070 retail DSL lines. But its principal fixed activities are providing national wholesale DSL to other carriers under the Telefonica brand. At the end of September last year, Telefonica Deutschland had unbundled 1.2 million lines.
Hansenet could give Telefonica/O2 a more credible converged story, and certainly analysts suggest it needs to bolster its German operations. “O2 is drifting; it has no strategy. It struggles with IT integration and many issues,” says Bieler.
Current Analysis analysts in a research note say: “Telefonica O2 Germany needs to better leverage Telefonica Deutschland’s national wholesale ADSL2+ network (reaching around half of German households and used by competitors such as Freenet and United Internet) to grow its own residential ADSL customer base.”
The moves towards convergence by German operators are in part a reaction to growing competition from multi-play cable operators. Kabel Deutschland had 11.4 million total subscribers by the end of last year, and as Total Telecom went to press was rumoured to be on the verge of a deal with O2 to add mobile to its services on top of television, fixed-line and broadband. Meanwhile Unitymedia has about 4.7 million customers for its triple-play cable services in the regions of North Rhine-Westphalia and Hesse, and according to Telegeography served over 8.7 million homes at the end of last year.
As in other European countries, operators in Germany are racing to offer the fattest bundle to tie consumers into as many services as possible, while attempting to reduce their own operational expenditure. “In the future we will focus even more heavily on combined product development and product innovation,” said Rene Obermann, the CEO of Deutsche Telekom, speaking at the company’s annual results conference in relation to the fixed-mobile tie-up. “Centralised management in the areas of procurement and network and IT management will help us reduce costs.” Obermann says the company “will go live from summer” with the new strategy.
It has to do something: in its home market it is facing ever stronger competition, although currently it is holding its ground. Vodafone Germany posted a 6.5% increase in mobile customers to 36.17 million at the end of 2008, and a 20.9% increase in DSL customers to just over 3 million. By comparison, Deutsche Telekom’s mobile subscribers grew 8.8% to reach 39.1 million, while O2 Germany’s mobile contract subscribers grew 11.7% to 7 million at the end of last year. Deutsche Telekom has an estimated 46% share of the retail broadband market, according to Current Analysis, and posted a 45% share of DSL net additions in 2008 finishing the year with 10.6 million retail broadband customers. But fixed lines declined by 8% to 28.561 million.
Pyramid Research in a new report forecasts a decline in both circuit-switched voice revenues, from $18.7 billion in 2008 to $14.4 billion in 2013, and mobile voice revenues, from $23.2 billion to $20.6 billion over the same period. “Despite market liberalisation, Deutsche Telekom still dominates the local loop,” says analyst and report author Andrei Tchadliev. “Nonetheless, vigorous competition has developed in the long-distance voice market and in the broadband market, reflecting tougher regulation and cable operators’ heavy investments in their networks.” Pyramid says the German communications market, including traditional pay-TV, generated $66.6 billion in service revenues in 2008.
Already pricing pressure means that service providers are starting to suffer. Vodafone’s full-year service revenues were down 1.4% to €2.268 billion, compared to the previous year, and overall ARPU fell 9.4% during 2008. O2’s total blended ARPU fell just under 15% during the year to E17.4, according to Current Analysis. As for Deutsche Telekom, both broadband and mobile revenues in its home market are in decline. Its total domestic revenues fell 5.9% year-on-year from E30.69 billion to E28.88 billion at the end of 2008, while domestic mobile revenues fell 2.8% to €7.8 billion, despite a 6% rise in minutes of use, the company says (see table p.16).
Further falls in consumer spending are likely this year. “The credit crunch will drive down [overall communications] pricing…Triple-play is cheaper than double-play…There will be a drive for consolidation per household,” says Thomas Grota, managing consultant, strategic technology, at Detecon International, a consulting business owned by Deutsche Telekom. “Hansenet is offering SIM cards for free if you sign up. From the consumer standpoint it has to be quad-play.”
Certainly, mobile revenues are under increasing pressure in Germany as network operators and MVNOs compete to offer the lowest tariffs. Vodafone signed up almost 250,000 subscribers to its “super-flat” tariff in the last quarter of 2008, or approximately half of all new contracts. The service is priced between E4.95 per month for on-net weekend calls through to E59.95 per month for all calls to any network.
“In 2009 we expect mobile pricing to fall further as competitors push each other ever lower,” says Emma Mohr-McClune, principal analyst, wireless services Europe, at Current Analysis. The other mobile player, KPN’s E-Plus, has created an array of brands and pricing policies to attack its competitors. “KPN’s E-Plus is attacking the super-flat tariff from as many different angles as it can,” says Mohr-McClune.
The fierce competition is why operators now are stepping up convergence. Vodafone is expected to announce a service first launched in Italy last year, Vodafone Station, which combines an ADSL gateway and an HSPA key. Vodafone Station enables customers to use a new broadband service via HSPA while waiting for a line to be unbundled, and to use the HSPA key to access the Internet when away from the home DSL network. “Deutsche Telekom needs to incorporate advances in the FMC space in order to stabilise its voice market share and recapture the national mobile market, where it is strongly challenged by Vodafone,” says Current Analysis. “Deutsche Telekom needs to re-evaluate…the interplay between its disparate fixed and mobile divisions if it is to have a hope of remaining on par with competitors looking to attack this market segment.”
The move to fixed-mobile convergence coincides with another important change: agreements between the incumbent and alternative operators to share access to their fibre networks. If converged content services are going to take off, high-speed infrastructure will need to be in place.
Deutsche Telekom last month agreed to share investment in VDSL networks in Augsburg with M-Net of Munich. The agreement will give each company reciprocal access to their fibre networks. That follows a similar agreement by Telekom with Vodafone Germany to give access to each other’s VDSL networks in Heilbronn and Würzburg. In January, Deutsche Telekom also announced a deal with utilities provider EWE to work jointly on expanding fibre optic networks to nine cities in north-west Germany. Telekom is also expected to make an announcement with NetCologne.
For now, Deutsche Telekom wants to charge alternative operators approximately E30 per line for wholesale access to its networks where deals have not been struck, but prices would fall as more operators join, said Timotheus Hoettges, member of the board of management at Deutsche Telekom responsible for finance and controlling, speaking at CeBit. Vodafone Germany CEO, Friedrich Joussen, told reporters attending CeBit that although he considers E30 per line too high, he does not necessarily want the regulator to set the price.
In fact, analysts do not expect the regulator, BNetzA, to take a strong line on enforcing open, price-regulated access to VDSL infrastructure. “The regulator’s approach is to say nothing,” says Bieler at IDC. “It partly seems to support the EU’s decision to want to take the German government to court over the right to keep [new VDSL infrastructure] exclusive, [but] Deutsche Telekom will find a compromise and the regulator is not strong enough to take any decision.”
Part of the impetus for sharing VDSL networks is a German federal government broadband initiative to ensure that 75% of households have access to broadband speeds of at least 50 megabits per second by 2014, with all homes accessing at least 1 Mbps by 2010. Deutsche Telekom has said it will need to share investment to build high-speed broadband networks of such scale, and has called for light regulation.
“Neither DT nor the others can invest in high-speed [networks] on their own,” says Grota at Detecon. “It’s the same issue for cable operators. There are city by city partnerships.” According to Hoettges, Deutsche Telekom will invest some E300 million in its broadband infrastructure in 2009.
Last month the federal government published a directive to free up digital dividend spectrum in the 790 MHz and 862 MHz bands to provide wireless broadband services in rural regions. “To achieve the German government’s goal we need a better regulatory environment that encourages investment and ensures the risk of major investments is shared among market players in the long term,” said Obermann.
As well as freeing up frequency to offer broadband services in rural areas, the German government says it will focus on regulation that encourages investment rather than plough in huge sums of public money. But it will part-finance, to the tune of E180 million, infrastructure in geographies where full private investment is economically unviable.
But some analysts argue that mobile pricing and mobile broadband uptake will play the greatest role in shaping price competition and convergence this year, particularly as femtocell technology starts to find its way into German homes. “There are lots of [femtocell] trials and there will be lots of announcements later this year,” says Bieler. “This will be FMC. This might change the landscape in the positioning of mobile. It will provide a real incentive to move to mobile devices at home and embedded laptops.”
Ian Kemp contributed to this article
DRIVING IPTV GROWTH
Operators such as Deutsche Telekom are building high-speed fibre networks because they have greater service ambitions, such as creating large-scale IPTV and video on demand businesses, and delivering converged services.
“VDSL will drive IPTV uptake; you need 60 Mbps,” says Detecon’s Grota. “If there is high-speed broadband everything will follow.” Detecon estimates there will be 5 million IPTV subscribers in Germany by 2013, and claims by the end of last year Deutsche Telekom had 500,000 IPTV customers. Last month the company made a new push for subscribers when it reduced the price of its Entertain package by 10% to a starting price of E44.95 and it now says it hopes to gain a further 500,000 customers in 2009. Hansenet, by comparison, says it had 30,000 subscribers by last month, and Arcor has a similar number according to Detecon.
Detecon’s forecast is based on the assumption that subscribers will be drawn to the interactive features of IPTV and—as technology and services evolve—a triple-screen service that will enable customers to switch seamlessly between different devices when watching a programme. But other analysts are less convinced the German market will see strong IPTV subscriber growth. “I’m still not sure there is a big demand for IPTV,” says IDC’s Bieler. “We have 35 free channels and the cable offerings are really cheap—around 7-8 euros per month.” Bieler adds that for many households the cable subscription is included in the rent. In addition, cable operators in Germany have upgraded their networks to add broadband and telephony to their TV services.
“Cable [companies] have come in with telephony and…have put together a fairly credible offer including broadband,” says Bieler. In fact, Bieler says German IPTV service providers lag behind their counterparts in France when it comes to quality of service. “People here are still not getting their act together. There is very little reason to migrate to IPTV apart from if the pricing is lower than cable. IPTV channels freeze and are unreliable at present. Germany is several years behind France.”