A year of deregulation leaves Deutsche Telekom at crossroads
After more than a year of legally binding, no-holds-barred competition, Europe`s telecommunications services market has been transformed more completely, and more quickly, than any could have dared hope.
In Germany, a telecommunications services market with a 1998 value estimated by European Information Technology Observatory at nearly 45 billion Euro ($40 billion) is Europe`s largest and most important prize. More than one year after liberalized competition began, incumbent national carrier Deutsche Telekom (DT) has lost almost one-third of its share in the long-distance and international service billings--more than BT lost in a decade of competition in the United Kingdom.
In an interview published in November 1998 in the magazine Stern, DT chief executive Ron Sommer said, "The company was in a dramatic situation that required drastic measures." The reason for Sommer`s unusually candid remarks: "The amount of long-distance traffic that we have lost since January is what we had expected to lose over a period of several years." Since the full liberalization of the German telecommunications market in January, the incumbent has seen its share of the long-distance fixed-line market erode from 100% to 70%. Although posting a modest 3.6% growth in telephone revenues in the first nine months, DT reported almost no revenue growth in the third quarter.
Yet, despite all the increased competition of the past 12 months, a slowing or even reversal of the trend toward competitive markets remains a real risk, especially as new technologies and services test regulators to the limit. The German telecommunications regulatory agency, Regulierungsbehoerde fuer Telekommunikation und Post (RTP), will need to be extremely vigilant if it wants to keep competition on track. With its new telecommunications law, Germany has gone from being one of Europe`s most closed telephone markets to one of its most open. But industry observers are now concerned the new government may be overprotective of DT, which is still 74% state-owned. The previous government under Helmut Kohl encouraged competition among alternative operators renting local lines from DT.
Politics and the RTP
RTP has set the monthly fee for unbundled access this month at DM25.40 ($15), slightly more than expected. DT shelved its pricey rate proposal of DM47.26 ($27.80) after direct intervention by the recently appointed economics minister, Werner Mueller, who is responsible for the RTP. Mueller urged DT to revise its proposal after regulatory officials failed to determine how the incumbent`s costs justified its proposed DM47.26 fee. RTP reports other alternative carrier applicants are seeking fees for unbundled access from DM15 ($8.82) to as low as DM7 ($4.11). New German entrants are also concerned with the one-time setup fee of DM630 ($370.31)--significantly higher than their proposed fee of DM265 ($155.77)--that DT is demanding for handing over a line to the competition.
"The economics minister`s recommendation clearly shows the protection Telekom is getting from politicians," says Harald Stoeber, chief executive of Mannesmann Arcor AG (Frankfurt). His group, which represents one of DT`s top competitors, has recently announced its intent to battle these RTP decisions in the German courts. On the other hand, DT chief executive Ron Sommer has warned that anything less than the full DM47.26 access charge would wipe out DT`s profits in 1999. Mueller has said he intends to protect DT shareholders from harmful regulatory decisions.
"The incumbent DT has to recognize in its heart what the implications of competition are," says Falk Muller-Veerse, principal consultant at DDV Group (Germany) consultancy. They have to think strategically. A lot of their strategic thinking has been in planning the network. Now they need to think about profit, market share, and rapid pricing changes." While novices at the game, DT hasn`t been completely inactive. There are growing, although disputed, reports that the incumbent is stalling at negotiating and signing interconnect agreements with the newcomers. (DT plans to renegotiate all existing interconnection agreements during this year in favor of carriers with more than 24 points of presence.)
In June 1998, before the American Enterprise Institute in Washington, DC, Sommer cited the factors driving the rapid growth of the global telecommunications market, hailed the rapid emergence of competition within the newly liberalized German telecommunications market, and outlined DT`s strengths and strategy to succeed within these dynamic markets, especially the long-distance fixed-line business. Driving the rapid growth of the telecommunications market, Sommer said, "are four key factors: the globalization of the economy, technological progress, growing customer needs, and the liberalization of markets."
The fourth factor behind the rapid growth of telecommunications, Sommer cited, is the liberalization of national markets formerly dominated by state monopolies. Sommer also pointed out that since the opening of Germany`s voice telecommunications market, 140 licenses for network and voice telephony have already been granted, with another 90 licenses pending. This trend is being duplicated in many other markets. "Within this magic square of the globalization of markets, technological progress, growing customer needs and liberalized markets lie the challenges for telecommunications companies in the 21st century," Sommer surmised.
The leader of the band
DT is well positioned to thrive in a competitive market, he added, noting that since 1990, DT has invested more than DM160 billion ($94 billion) in Germany`s digital network, while reducing debt by almost DM40 billion ($23.5 billion) and raising productivity per employee by 12.5%. Sommer said that today, DT is Germany`s only full-service provider and one of the few companies in the world with a complete range of modern communications services. He also noted that DT is the largest online provider in Europe (T-Online), offers a system solution to suit all forms of electronic commerce, is blazing new trails in areas such as Internet telephony, and will soon be offering an integrated system for mobile and fixed network communications. "All of these offerings require a strong technical base. And DT`s networks are among the most modern telecommunications infrastructures in the world," Sommer said.
In 1998, DT announced the following multimillion-dollar enhancements to its massive fixed-line network, one of Europe`s largest Synchronous Digital Hierarchy long-distance networks:
Full digitalization of DT`s national network. DT took the lead in the modernization of the former East Germany, especially recent work in Germany`s capital of Berlin.
The first dense wavelength-division multiplexing (DWDM) link
between Munich and Erlangen (2.34-Gbit/sec data-transmission rate). A second route is
scheduled soon between Frankfurt
and Cologne. Pirelli won these DWDM contracts.
Upgrade of a modern network-management center in Frankfurt that controls seamlessly the European Backbone Network that DT shares with its key foreign partner, France Telecom. With the new backbone network bandwidth upgrades announced, this pan-European network will span 20,000 km with 40 points of presence in 16 countries. This network-management center is another DT contribution to Global One, which is its largest international joint venture with France Telecom and Sprint.
Addition of 90,000 new ISDN subscribers per month, of which two-thirds will be residential nonbusiness users, to its installed base of four million. DT is the world`s leading Integrated Services Digital Network (ISDN) provider. Analyst Muller-Veerse cites ISDN business as one of DT`s principal sources of incremental traffic along with booming Internet protocol traffic from T-Online.
Continued investment in its transAtlantic joint venture, TAT-14, with the announcement of a DWDM project worth $120 million. DT`s stake is the third largest in the TAT-14 consortium.
Assumption of overall project responsibility for building the longest terrestrial SDH network, the Trans Asia-Europe optical-fiber cable system (TAE), from Frankfurt to Shanghai, China. This SDH network will cost more than DM1 billion ($588 million).
Long-distance traffic competition
While DT has reported dramatic revenue shortfalls as its long-distance market share shifted to alternative carriers, the drop in long-distance traffic that passed on DT`s network was less dramatic, as German reseller and carrier`s carrier business have yet to switch. Muller-Veerse views Mobilkom as the top reseller in Germany, with Talkline and Tele2 as the other leading resellers. "Because they use Deutsche Telekom`s fixed-line infrastructure, they were able to quickly capture long-distance traffic due to high tariffs charged by DT and its poor customer-service image in Germany," he says. With the new interconnection fee structure that DT is implementing this year, the business model for German resellers worsens. Not only must these carriers shoulder higher operating costs, but they must lower their retail price umbrella as DT attempts to lower its average long-distance rates (which are roughly twice as expensive as British rates). Muller-Veerse forecasts "consolidation of the 30 existing resellers during the next year due to economies-of-scale pressure and Deutsche Telekom price cuts that squeeze out the marginal operators."
This year, DT`s prime competition will come from other infrastructure network operators. There are three competing national SDH networks that offer long-distance services with 1998 traffic share percentages as follows: Mannesmann Arcor (4.3%), o.tel.o (3.3%), and Viag Interkom (1.3%). The other category of alternative carrier includes foreign-owned groups that are aggressively building local, long-distance, and intra-European broadband pipes. "Securing bandwidth is a major strategic advantage everyone is seeking," says Philip Low, deputy managing director of the market research group Phillips Tarifica Ltd. (UK). Major pan-European groups in Germany are MCI/Worldcom, Euronet (BT & local 14 partners), Cable & Wireless, Hermes Europe Railtel/GTS/ Global Crossing, Sonera/Hansenet, Unisource UCS/AT&T, VIATEL, Carrier1/Metromedia Fiber Network, and STAR Telecommunications.
Competitive local-exchange carriers (CLECs) are completing fiber-optic loops in nearly all of Germany`s 24 major cities. This market segment will benefit, as RTP is forced to revise current rates for unbundled access and fixed line-switching charges. Demand for bandwidth capacity in Western Europe will rise 100% to 200% annually over the next decade, according to Yankee Group Europe (UK), a market research firm. The business model for a successful city network promises an interesting investment opportunity with payback periods of less than two years, according to James Dodd, senior telecom analyst at Dresdner Bank/Kleinwort & Benson.
Sonera, COLT Telecom, MCI/Worldcom, Bayernwerk Netkom/Viag Interkom, STAR Telecommunications, and Carrier1/Metromedia Fiber Network are notable examples of foreign-owned groups that are active in the metropolitan network segment. Local utility companies and local governments are also evaluating projects to become minor partners in new telecommunications ventures. They plan to sell 20-year indefeasible rights of use (IRUs) for dark optical fiber at prices substantially below those of standard leased circuits. BerliKomm, a subsidiary of the Berlin water authority, is an innovative example of a metropolitan telecommunications operator in the congested German capital. In Berlin, current building costs are DM60,000 ($35,000) to lay just 100 m of fiber-optic cable, a task that takes roughly six weeks.
Future hybrid alternates
In Germany, there are two emerging alternatives that should be mentioned. All three big new GSM operators--Mannesmann Arcor (D2), Viag Interkom (Mobilfunk), and o.tel.o (e-plus)--are holding trials of point-to-multipoint technology from Bosch Telecom. Although these and other trials and commercial implementations are only a few months old, rumors of glitches have surfaced. One source says problems with attenuation could require more cell sites and therefore more equipment than originally anticipated. Finally, Muller-Veerse points out that RTP has not yet awarded the required broadband wireless licenses.
Another recent announcement came from DT in January following a European Community guideline to get telecommunications separate from cable-television. DT is spinning off its cable-TV network into two new subsidiaries, Kabel Deutschland and MediaServices. Both groups are scheduled to be sold off this year. One of these new entities should quickly enter the telecommunications market via the 18 million households that are wired for cable-TV services.
This year promises to be a difficult one for both Deutsche Telekom and its numerous fixed-line service competitors. But German fixed-line telecommunications users should smile throughout the year with ongoing long-distance rate cuts and continuously improving quality of service. u
Edward Harroff writes on telecommunications issues from Bellevue, Switzerland.