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Fiber Revival at Deutsche Telekom

Iain Morris
UBB Forum News
Iain Morris
8/25/2014
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When Deutsche Telekom published its latest quarterly earnings in August, most of the attention was focused on the resurgent T-Mobile US and the drama surrounding that particular operation.

But were it not for all the speculation about the US mobile subsidiary's future ownership, the German operator's domestic business, Telekom Deutschland, may have grabbed the headlines.

Following four consecutive quarters of losing broadband customers, Telekom Deutschland finally turned a corner, reporting its first gains since March 2013. Small as the increase was -- just 7,000 net additions -- it augured well for the operator's prospects during the rest of 2014, owing everything to a sharp rise in spending on the rollout of fiber-based access networks.

Perhaps more than any other European incumbent, Deutsche Telekom AG (NYSE: DT) has staked its future on a programme of huge investment in higher-speed broadband services. Nearly two years ago, the operator told investors it would spend €6 billion (US$7.9 billion) on the deployment of fibre-to-the-curb (FTTC) and vectoring, a technology that boosts connection speeds by cutting out interference between lines. The aim was to make FTTC available to 65% of the German population by 2016, and halt the progress being made by cable operators touting superfast capabilities.

Since then, Deutsche Telekom's investment plans have been largely held up by regulators. Vectoring is a controversial technology because of its incompatibility with unbundling, the preferred means of fomenting broadband competition in the DSL era. But having satisfied authorities that it will provide wholesale alternatives for unbundlers, and with less of a need to commit capex to the US, the German operator pushed ahead with its domestic investment plans in the second quarter of 2014. Between April and June, nearly €1.1 billion ($1.45 billion) was spent on capital expenditure in Germany, almost 60% more than in the same period a year earlier, extending the operator's fibre-based access network technology to some 15.9 million German households, up from just 14.2 million in June 2013.

Some of the early results of this investment drive are encouraging. Besides growing its overall retail broadband base by 7,000 customers during the second quarter, compared with a loss of 47,000 in the same period a year earlier, Telekom Deutschland added 119,000 retail fiber subscribers (227,000 if wholesale lines are included), nearly twice as many as between April and June 2013.


Want to know more about these trends? Check out this invitation to the Ultra-Broadband Forum 2014, to be held in London on Sept. 24-25.


Speaking to analysts during Deutsche Telekom's recent earnings call, Timotheus Höttges, the operator's CEO, noted that fiber deployment was also spurring take-up of broadband-delivered television (TV, or IPTV) services. Telekom Deutschland added 63,000 TV subscribers in the second quarter, compared with 43,000 in the corresponding quarter a year earlier.

But there is a long way to go. Despite the surge in spending, fiber is still available to just 39% of the German population, some way short of the 2016 coverage target of 65%, while Telekom Deutschland's share of the broadband market remains lower than in mid-2013. Moreover, revenues from the "connected home" services of broadband and TV have continued to decline, falling very slightly year-on-year to €1.3 billion ($1.72 billion) in the second quarter. "This is clearly not satisfying and not in line with the target we set of 2% growth," said Thomas Dannenfeldt, Deutsche Telekom's CFO, during the operator's earnings call.

Table 1: Telekom Deutschland’s Broadband Performance

Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
Retail broadband customers ('000) 12,430 12,383 12,360 12,354 12,361
Retail fiber customers ('000) 1,096 1,165 1,246 1,375 1,494
Broadband TV customers ('000) 2,078 2,121 2,177 2,255 2,318
Broadband revenues (millions) €1,075 €1,065 €1,057 €1,046 €1,042
TV revenues (millions) €239 €241 €244 €251 €259
Source: Deutsche Telekom

Yet there are plenty of reasons to remain optimistic. Taking advantage of vectoring in the second half of the year, Telekom Deutschland plans to increase the maximum speed available on its broadband network to 100 Mbit/s, from 50 Mbit/s today, "upselling" the faster services to existing customers. A 'hybrid router,' supplied by Huawei Technologies Co. Ltd. and combining the capabilities of 4G and fiber broadband access, is also due to go on sale in the second half. And continued spending should increase fiber coverage to 45% of the population by the end of the year. (See Deutsche Telekom Works Toward One Network.)

If Telekom Deutschland can maintain its customer growth trajectory, and produce a revenue turnaround to match, its fiber revival will look assured.

— Iain Morris, Site Editor, Ultra-Broadband

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iainmorris
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iainmorris,
User Rank: Blogger
9/3/2014 | 8:42:03 AM
Deutsche Telekom and vectoring rollout
Deutsche Telekom has provided details of its progress on vectoring rollout following earlier press reports, although currently only in German (see http://www.telekom.com/medien/konzern/248520). The operator says 200,000 households in Germany can now access broadband services based on the technology and is promising connection speeds of up to 100Mbit/s.
pcharles09
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pcharles09,
User Rank: Light Beer
8/31/2014 | 10:43:04 PM
Re: Fiber rich diet
@kq4ym,

Good point. They do a LOT of surveying befor they even go ahead & upgrade the infrastructure. There's still a lot of places in NY that don't have fiber as an option.
iainmorris
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iainmorris,
User Rank: Blogger
8/29/2014 | 6:09:11 AM
Unbundling
According to Alcatel-Lucent it's compatible with ADSL LLU at the central office, but in a VDSL2 sub-loop unbundling scenario "significant vectoring gains cannot be guaranteed unless all VDSL2 lines in the cable are controlled by the same vectoring system", which means the best solution is to have a single operator control all the lines and offer bitstream access to alternative operators.
kq4ym
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kq4ym,
User Rank: Light Sabre
8/28/2014 | 8:52:50 AM
Re: Fiber rich diet
While it's generally true customers don't go backwards when convenience or speed in this case is involved, it might also be true that the customers who sign up for fiber are most able to afford the upgrade, so marketing might have to be targeted for those particular prospects in order to grow the business.
DHagar
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DHagar,
User Rank: Light Sabre
8/27/2014 | 12:54:59 PM
Re: Competitive challenge
@Susan, agreed - I think they can remain a strong competitor as well.
Susan Fourtané
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Susan Fourtané,
User Rank: Light Sabre
8/27/2014 | 5:45:11 AM
Re: Competitive challenge
DHagar,

"And will they attract customers just by being the first available or because they are the preferred choice?"

Deutsche Telekom is the market leader followed by Vodafone, so maybe a little bit of both. 

-Susan 
pcharles09
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pcharles09,
User Rank: Light Beer
8/27/2014 | 12:25:50 AM
Re: Fiber rich diet
@smkinoshita,

I agree. I've never heard of a fiber customer going back to copper!
thebulk
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thebulk,
User Rank: Light Sabre
8/26/2014 | 10:57:52 PM
Re: Fiber rich diet
@smkinoshita, I totally agree, but providers don't seem to See it that way for some reason.
smkinoshita
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smkinoshita,
User Rank: Light Sabre
8/26/2014 | 8:57:08 PM
Re: Fiber rich diet
@thebulk:  One would think that fiber would be a strong demand from the consumers, and that going fiber would create a competitive advantage.  I'm pretty sure it did for Rogers in Canada.
Liz Greenberg
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Liz Greenberg,
User Rank: Light Sabre
8/26/2014 | 5:19:47 PM
Re: Not sure I understand the unbundling issue?
So @seven, are you saying that the vectoring can actually present extra technological issues for unbundled services? I tend to think of "unbundling" as services rather than the underlying physical cable "bundle" which is why I answered the way I do.  You are usually on top of all this so extra clarification would be really helpful - at least for me. Thanks.
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