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Deutsche Telekom CEO Tim Hoettges is looking to close the valuation gap between T-Mobile US and its rivals, as the telco revels following a very positive earnings call.
Share price in the German telco has jumped 3.9% in early morning trading following the financial results which saw revenues increase by 6.4% to €80.4 billion for 2019. Net profit was up by almost 80% to €3.9 billion, while free cash grew by 15.9% to €7 billion.
“The market environment in the European telecommunications sector is far from straightforward. Yet, despite the heavy regulation and inconsistent competitive situation, we emerged from the year just ended even stronger,” Hoettges said his letter to the shareholders.
“Not only that, but we are once again the leading European telco, based on both revenue and market value. That was and remains our overarching goal.”
Deutsche Telekom is one of the largest telcos across the world, but in recent years it is questionable as to whether it is one of the more progressive or future proofed. When looking at the penetration of full-fibre broadband or deployment of 5G infrastructure, the numbers are not as favourable, though the tide does seem to be turning.
The team now suggests 5G connectivity is being delivered in eight cities in its domestic German market, with ambitions to increase this to 20 by the end of 2020. Elsewhere, T-Mobile US launched its 5G offering in December and Austria has 31 5G base stations up-and-running.
Deutsche Telekom is heading in the right direction, but it is moving at a much slower pace than other telcos. It might want to proclaim itself as a leader in the telco arena, but realistically it is a fastish-follower at best, BT for example, has already launched 5G in 50 towns and cities across the UK.
One area where the company is proving to be incredibly aggressive is in the US, and this should continue over the coming months.
“We have the chance to become No.1 in the United States, to overtake AT&T and Verizon. That, at least, is our ambition,” Hoettges said during the earnings call.
With T-Mobile US and Sprint now looking at a clear path to the finish line, after a District Judge ruled in favour of the merger in the face of opposition from 13 Attorney Generals, the team can look further into the future. Following the merger, T-Mobile will be roughly the same size from a subscriber base as AT&T and Verizon, allowing more opportunity for the team to compete on a level playing field.
The US business is one which is once again proving to be very profitable for Deutsche Telekom.
T-Mobile US is the single largest business unit in the overarching business, accounting for just over 50% of the total revenues at €40.4 billion, a year-on-year increase of 10.7%. Momentum is clearly with the business also, the team boasted of 1.3 million branded postpaid net additions during its last financial results.
While the US is looking very positive for the telco, it will have to be careful sluggish activity in Europe does not open the door for rivals to steal market share in the various markets.
A report claiming one of Europe’s biggest operator groups has demanded Nokia get its house in order when it comes to 5G has not really been refuted by either of them.
Reuters grabbed the exclusive with the headline ‘Fearing Huawei curbs, Deutsche Telekom tells Nokia to shape up’. The reporter had not only spoken to the ubiquitous anonymous source who reckons they know a thing or two, but got hold of internal documents too. They paint a picture of DT having a low opinion of Nokia’s 5G offering, resulting in the vendor being ditched by most of the countries in which it operates.
All the fuss around Huawei, however, especially the EU’s recent guidance, seems to have forced DT to have another look at Nokia, albeit with a heavy heart. It looks like DT has put the ball in Nokia’s court and told it there’s business to be had it if can raise its game. This doesn’t seem especially contentious since Nokia openly admits to having dropped the ball on 5G and DT wouldn’t have dropped it as a supplier without good reason, you assume.
But for some reason the two companies felt compelled to address the story nonetheless. “We have been a long-term partner of Deutsche Telekom and have been proud to work with them extensively over the years, providing leading network technology and services,” said Federico Guillén, President of Customer Operations, EMEA & APAC, Nokia. “We continue to work extensively with Deutsche Telekom which is one of our most significant customers, both in Europe and the U.S.”
“As one of the major European manufacturers, Nokia is of strategic importance to Deutsche Telekom,” said Claudia Nemat, Board Member Technology & Innovation, Deutsche Telekom. “It is well known that Deutsche Telekom is pursuing a multi-vendor strategy so that we are not dependent on just one supplier. This is an elementary part of our security philosophy. However, as in the past, Deutsche Telekom will not comment on individual contractual relationships and strategic purchasing decisions.”
So why bother with the announcement at all then? Nothing in either statement comes close to addressing the claims in the story, one way or the other, and the whole thing just comes across as a lame attempt at damage limitation, presumably driven by Nokia. But the good news for Nokia is that it’s first in line to get some scraps off the Huawei table if it can get its 5G act together.
Deutsche Telekom CEO Tim Höttges is always a colourful character, but he hasn’t held back in brutally condemning Europe as we enter the digital age.
“I have 50%, 50% businesses in Europe and the US,” said Höttges at the FT-ETNO Conference in Brussels. “I would love to invest patriotically, but it is better to invest in the US. They want 5G for every citizen as soon as possible, they are bringing a lot of spectrum to the market.”
Europe is a market which has grand ambitions for the digital age, but it is struggling to keep pace with the likes of the US, China and Korea. As it stands, some could argue there is parity for control of digital economy, but it is questionable as to whether this will be the case moving forward.
“I would like to say the future is Europe, but I can’t, at least not unconditionally,” said Höttges.
Governments and regulators are demanding rapid deployment of infrastructure, but consolidation is the dirtiest of words. Scale is critical, but no assistance is being offered. There are positive noises about spectrum harmonisation, but fragmentation is rife. This valuable asset is becoming increasingly expensive with every passing auction. And the legal framework for digital services does not line-up between the telcos and the cloud players.
This is of course yet another example of a telco moaning about regulation, but if the moaning leads to investment being directed elsewhere regulators cannot ignore it for much longer. Höttges is a very honest CEO and today saw a statement which should seriously worry authorities across the continent.
Investors demand DT invests in areas which return the greatest profits, Höttges has a fiduciary responsibility to ensure this is the case. If the US landscape is more likely to generate the required returns, this is where the company will drive investment.
“I invest where I see the biggest opportunity,” Höttges stated.
US authorities and consumers will be thrilled to hear such proclamations. Over the course of 2018, DT investments totalled more than €12.2 billion worldwide. If the US is creating a more investment friendly landscape, regulators are arguably doing their job. This means more money being pumped into T-Mobile US, a company which is already forcing the hands of rivals with disruptive strategies. More money could mean more disruption. Theoretically, this will only benefit the US telecoms industry.
What is worth noting is that DT is not alone in its criticism. Telecom Italia Chairman Salvatore Rossi suggested there has not been enough attention paid to industrial policy. Altice Portugal CEO Alexandre Fonseca complained about market consolidation resistance from authorities when the fourth player accounts for less than 3% market share. Telefonica Chief Finance and Control Officer Laura Abasolo bemoaned shifting regulations; inconsistency is the enemy of investment after all.
These are only a few of the frustrations which were aired today. Some very senior people said some very condemning things, but this is of course not new.
Telcos will always complain about regulation. From their perspective, there are always too many rules, never enough subsidies and spectrum is consistently too expensive. The majority of the time these companies are trying to get more for less, profit is the ultimate goal after all, but occasionally you have to listen to the moaning. The outcome is arguably more important than the process, and this outcome is not beneficial for Europe or DT’s customers.
If investment is being directed elsewhere because the regulatory framework is not working for the continent’s largest telco, the dynamic needs to change, and change quickly.
Rumours of corporate courtship between Deutsche Telekom and Orange have resurfaced by they seem as implausible as ever.
The bringer of the rumour this time is German publication Handelsblatt, which witters on for several paragraphs before getting to the point that DT CEO Timotheus Höttges is wargaming how a merger with French operator Orange would play out. Even allowing for the idiosyncrasies of Google Trnaslate, the piece seems to be thin on substance, but they presumably got the goss from somewhere so we thought we’d do a spot of war gaming of our own.
The first major impediment to such a deal would be ownership of the combined entity. You might think two former state monopolies from similar-sized countries might be roughly the same size, but that’s not the case. DT has a market cap of around €73 billion, while Orange is worth a mere €40 bil.
The last time this came up this was apparently the main deal breaker but surely shareholders should just get a stake in the combined entity in proportion to the market caps at time of deal. This would give DT shareholders roughly two thirds of the merged company and Orange one third. It’s presumably a lot more complicated than that, but it’s not immediately obvious to us why.
Then there’s the not inconsiderable matter of regulation. The European Commission isn’t a big fan of M&A because it reckons the consumer always ends up getting ripped off as a result. However in the case of telecoms this has tended to be focused on keeping at least four MNOs in each country. If the EC focuses solely on national considerations then the fact that two of the world’s largest operators merging has broader competition implications may be overlooked.
They’re not totally in the clear, however, as both have significant operations in Poland, Romania and Slovakia. They would presumably have to do that manoeuvre when they hand over a bunch of their combined assets in each country, which in turn would be made available for a new entrant to the market to ensure the magic MNO number is maintained.
But lastly, and most importantly, we have the resulting colour scheme. Unless you have an irrational love of 60s psychedelia, pink and orange have no business appearing on the same sheet of paper. If they chose to combine them, possibly in proportion with the respective market caps, we’d be left with some kind of smoked salmon abomination that would surely spell disaster for the resulting company. For this reason alone we can’t see the deal happening.
The potential to earn money is certainly there, but the telco industry needs to demonstrate speed and agility to take advantage of the private networks opportunity, and history is not on its side.
“It will be interesting to see who develops into the market,” said Ros Singleton, Chair of national research programme UK5G, at the Private Networks in a 5G World event in London.
As Singleton highlighted, the development of this segment needs to be done in collaboration, with an on-going conversation between the telco industry and the verticals. However, with these parties often speaking different languages, there will of course be hurdles.
An interesting question which is beginning to emerge is who will collect the revenues attached to the development of this segment?
Starting with the telcos, these are companies who would appear to be the logical partner, connectivity is their core business after all, but are these companies agile or innovative enough? Traditionally, this segment is very slow to adopt and accelerate new trends, but it might be forced into action through necessity.
As Antje Williams, SVP of 5G Campus Networks at Deutsche Telekom, highlighted at the Private Networks in a 5G World conference, this is one of the few areas which provides genuine and concrete ROI for 5G investments.
Few people around the world are prepared to pay for enhanced mobile broadband (eMBB), but enterprise customers are now ready to pay for private networks. Telcos can extend their core business, building networks, to new environments to drive additional revenues without having to experiment in unknown areas. 5G is not a necessity for this market, but it creates more opportunity to work with a broader range of customers.
That said, the issue for telcos is rising through the emerge of new spectrum initiatives. In Germany, regulator Bundesnetzagentur has started the process to release highly-localised spectrum licences, while in the UK, Ofcom has designated the 3.8-4.2 GHz airwaves for spectrum sharing. In both of these examples, an enterprise organisation could purchase a localised licence with the ambition of building their own networks.
This has proven to be a very unpopular initiative for some. In Germany, Vodafone’s Robert MacDougall suggested the idea of spectrum localisation has created scarcity for the MNOs, not only pushing the price up at auctions, but also impacting the long-term experience for the consumer. There are elements of logic to this point but bear in mind this is a telco which is under-threat from innovation and experimentation.
If an enterprise organization purchases spectrum, the telcos can still make money by building or managing the network on behalf of the customer. Enterprise customers are unlikely to have in-house expertise in the short-term, though the telcos are certainly not the only option partner.
Infrastructure OEMs such as Nokia, are seemingly exploring how they can work directly with enterprise customers, effectively becoming a competitor to their telco clients, while Service Integrators such as Capgemini could also fit the bill. UK5G’s Singleton also pointed out that many ICT firms already offer similar services so could expand, while the operational nuances of integrating the control room could offer momentum for niche players in each of the verticals.
In private networks, there is an opportunity for telcos to make extra cash, but it certainly is not a given.
There are some advantages of ignoring the spectrum localisation initiatives and working directly with the telcos, as Williams (Deutsche Telekom) points out. If an enterprise purchases spectrum in the 3.6-3.8 GHz airwaves there are limitations. For example, indoor connectivity, extended coverage, extreme download speeds or passing through walls. Some of these cases would require different spectrum frequencies, making the telcos broad range of licences more attractive.
Private networks are an attractive trend for the telcos, even if enterprise customers haven’t quite figured out all the details, but this is not a guaranteed win. Service integrators, infrastructure OEMs, cloud companies, ICT suppliers and niche unknowns are going to be scrapping to gain their own slice of the private networks pie.
Deutsche Telekom is testing out the resourcefulness of its lawyers in an attempt to own the colour magenta as it battles with Israeli insurance start-up Lemonade.
Shortly after launched the online-only insurance brand in the German market, a court injunction was filed by the telco with Lemonade being told to remove all branding with the offending colour. It does seem quite remarkable a company can ‘own’ a colour, but that it was the German courts have ruled.
Although the ruling is limited to the German markets for the moment, Lemonade is escalating the legal fracas to the European Union Intellectual Property Office to invalidate the decision. As with many legal decisions of this nature, there is the risk of precedent being set, with this ruling being used as a basis for future decisions in additional markets, though Lemonade wants to cut the monopoly down before any momentum can be gathered.
“At first we thought it was a joke,” Lemonade co-founder Shai Winiger said on Twitter.
“Turns out its anything but funny. So, we’re doing the one thing they least expect, by launching a legal attack against the ability of corporations to own things that should belong to humanity as a whole – like colours.”
What is slightly baffling about this case is the free-reign Deutsche Telekom has been handed by the courts. The patent doesn’t seem to be related to the use of magenta with certain letters, a concept, design or services, it apparently ‘owns’ magenta in Germany.
Launching the hashtag #FreethePink, the Lemonade team is challenging what seems to be a remarkable decision. The legal challenge is also generating a handy amount of PR for the business, which has its eyes set on international expansion after a positive start to life in Israel.
And as one would imagine, support on social media is gathering behind Lemonade with several users suggesting new targets for the telco to chase after. Perhaps the Pink Panther will be tackled next, or the hideous and slightly terrifying Troll Doll should start quaking it its boots. Maybe even Barney might be hauled out of retired to defend his tone, or if Deutsche Telekom fancies bullying children, it could take-on the Power Puff Girls.
Of course, this is not the first time Deutsche Telekom has attempted to use its legal weight to bully start-ups who dared to cross its colour palette. Dutch IT firm Compello felt the legal stick over the use of pink in its own logo, while dataJAR in the UK was also a victim.
Interestingly enough, in the case with Lemonade, the firm has not even been using the shade of pink Deutsche Telekom holds the patent for.
DT currently owns the patent for RAL 4010, a shade which is incredibly similar to the one being used by Lemonade, but not exactly the same. Following the ruling out of Germany, Lemonade has received a colour wheel from the telco, pointing out the colours it cannot use, one of which would be more readily described as Purple.
Although it might seem baffling a corporation can ‘own’ a colour outright, hopefully there will be some common sense shown by the European Union Intellectual Property Office and DT will be put in its place.
If you consider 5G is not 5G without a 5G core, why have we not been talking about the 5G core more when 5G is being deployed and the 5G economy is just around the corner.
If you hadn’t figured it out, this article might be about completing the 5G puzzle.
In Madrid, telco executives are gathering to talk about a topic which has not grabbed many headlines to date. The evolution, or perhaps revolution, of the core. And whilst it might be a very complicated project, one thing is very clear; the 5G core will not look very similar to the 4G core.
“We are not building infrastructure for the customer,” Telefonica CTIO Enrique Blanco said at the 5G Core conference.
“We are building it for society. How can we build a network which will not fail? 5G Core is a key topic for us.”
There are two interesting elements to this statement from Blanco. Firstly, the network is fundamentally different in its application. And secondly, if connectivity is going to central to society moving forward, failures cannot be tolerated, irrelevant of severity, location or impact.
Starting with the application of the network, while 4G was built for the mass market and appeasement of the increasingly digitally-native consumers, 5G is much more than that. Increased download speeds are an added bonus, but the value of 5G is realised through the creation of new services and engagement with enterprise.
Walter Wang of Huawei illustrated this nuance very well. The 4G network has been built for a single purpose, however the 5G core needs to be built in a way which allows for the creation of customisable connectivity services for enterprise. For example, a customer in the energy sector will be demanding low-latency. In manufacturing, reliability and resilience are key. And for broadcasting, its speed and availability.
The ‘one-size-fits-all’ 4G network cannot deliver on these demands. If 5G is to offer an opportunity to engage enterprise customers, the 5G core needs to be created in a way which allows for the creation of these services. It’s multi-layered, regionalised and distributed and multi-vendor. Which leads us very nicely onto the next area.
The 5G network cannot fail. The same could be said of the 4G network, however the impact is very different. If 4G networks go down, the general public can’t watch cat videos on the bus. If a 5G network fails, enterprise customers are irked and SLAs (service level agreement) come back to haunt the telco. Critical services fail and there is a very real impact to society.
As Blanco highlighted, operating through multiple layers, distributing the core over several regions and engaging with multiple vendors adds resilience. If there is a failure at one point in the network or ecosystem, it is a case of damage limitation not everyone to panic stations.
This is a perfectly reasonable approach to business, though there are certainly some risks to bear in mind.
A multi-vendor environment is all well and good for resilience, reliability, competition and innovation, however as Veon CTO Yogesh points out, the more variables in the ecosystem, the points of failure. Franz Seiser of Deutsche Telekom also echoed this point; the future network is impossible without automation and automation is very difficult.
This is the challenge with the 5G network of tomorrow; if it is multi-vendor, with telcos selecting components which have been deemed best-in-breed, this is not necessarily a guarantee they will complement each other. The ingredients might be perfect, but if the recipe doesn’t work, neither will the network. In some case, it might be worth sacrificing some quality because the components complement each other.
What is worth noting is that all of these discussions are very much in the early days. The 3GPP Release 16, due in the early part of 2020, will pay more specific attention to the 5G core, and at this point we might see work accelerate.
That said, always bear in mind that 5G is not really 5G until the core is 5G. And the nuances of delivering a 5G core are a lot more complicated than 4G.
A letter has emerged from T-Mobile Workers United, with the union asking Deutsche Telekom executives to confirm jobs will be safe following the merger between T-Mobile US and Sprint.
According to Reuters, the union, representing around 500 employees from the telco, have seemingly decided to skip out T-Mobile US CEO John Legere and gone straight to group boss Tim Hoettges. The union is seeking assurances jobs will be safe should the merger between the two telcos survive legal challenges which are emerging.
Although there have been several assurances from Legere the merger will be a net creator of jobs, this is under the assumption growth can be achieved through the union. It might sound like a good headline, but reading into the statements, Legere is suggesting job creation will be down to synergies between the firms and a more assertive challenge to AT&T and Verizon.
However, the issue of business rationalisation has not been addressed head on. Whenever two large businesses are brought together through a merger, redundancies are unavoidable. This is a point which has not been addressed by the management teams, with senior managers simply pointing to the potential for growth.
Irrelevant as to whether there will be job creation through an aggressive network rollout or a taking the combined business into new, regional markets, there will be overlap between the two businesses. Not every lawyer, accountant or HR employee will need to be retained as the team will seek cost efficiencies during the integration process. The other thing you have to think about is the retail presence.
It won’t be in every location, but there will of course be hundreds of jobs at risk as the merged business seeks to rationalise its presence on the high street. There are going to be numerous locations where both Sprint and T-Mobile US have a physical store within minutes of each other; a choice will have to be made and job cuts will be evident. Being a net creator of jobs does not mean there will be no redundancies.
These staff are perfectly entitled to feel nervous, as the issue has not been directly addressed and any logical person would say there will be redundancies.
The German telecommunications industry is doing everything it can to dispel the stereotype of German efficiency, but Deutsche Telekom is making progress in the 5G world.
When it comes to the connectivity rankings, the Germans do not generally feature towards the top. This is evident in both mobile, with 4G coverage, and broadband. However, at IFA the management team has been pitching its progress, and in fairness, DT has beaten the majority of telcos to the 5G punch.
5G is now live in Germany, with six cities welcoming the connectivity euphoria. A total of 129 5G antennae are now transmitting the super-speed connectivity, though plans are to have 20 cities on the coverage map by the end of 2020. DT is not moving as quickly as some European rivals, the UK telcos for example, though it is progress.
Berlin’s Mitte district is the largest coherent 5G coverage area in Germany, at around six square kilometres, with 66 5G base stations. Currently, work is being done to increase the coverage footprint in five cities, with single, clustered locations being targeted. It does appear to be a slowly, surely approach to 5G, but few will argue with progress.
However, you have to measure this progress against European counterparts. In the UK, three of the four MNOs have launched 5G services. EE, the first to launch, has promised 15 cities by the end of 2019, claiming to add 100 5G base stations to its network each month. In France, although 5G has not launched, Orange is suggesting it now has 352 5G pilot sites around the country. In Spain, Vodafone launched its 5G services in June with base stations in 15 cities across the country.
There are of course pros and cons to the breadth versus depth conversation, but it is always worth placing some context into the situation.
The claim has been made at the IFA conference in Berlin, where DT has also been plugging its broadband ambitions.
“For the first time in many years, we have succeeded in surpassing the range of cable companies with a bandwidth of 50 Mbps,” said Michael Hagspihl, Head of Consumers at Telekom Deutschland.
Broadband is another area where the Germans have been sluggish compared to European averages. According to the FTTH Council Europe, Germany has a fibre penetration rate of 2.3%, considerably behind the leaders such as Spain, Latvia or Sweden, all of which have penetration rates north of 40%. However, progress is being made once again.
DT is claiming its fibre network is the largest in Germany, measuring over 500,000 km in length. It has said more than 30 million households can now access broadband speeds between 50 Mbps and 250 Mbps, with 1.1 million able to purchase connectivity which exceeds 1 Gbps. These numbers are of course houses passed rather than actual connections, but it is a better position than previous years.
Whether the slowly, surely approach is going to be a winning strategy when the awards are handed out in a few years remains to be seen, though Germany is starting to sort out its own house.