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Legislation Frustration Hinders DT's All-IP Migration

Iain Morris

Adverse legislation is hindering Deutsche Telekom's aggressive push to shut down its German PSTN systems and shift all of its customers onto all-IP networks by the end of next year, casting doubt over its target for broadband revenue growth.

Due to a German court ruling, Deutsche Telekom AG (NYSE: DT) cannot simply migrate PSTN customers onto new all-IP systems but must instead cancel a customer's existing contract and then make a fresh offer.

Thomas Dannenfeldt, Deutsche Telekom's chief financial officer, described the legislation as "unbelievable" during an earnings call with analysts this week and blamed it for an increase in broadband "churn," or the percentage of customers abandoning its service.

"The normal behavior would be to inform the customer about the change in the line and give them an opt-out -- that would be much more customer friendly -- but we are required to cancel the lines," he told analysts. "We're driving a hard migration, which is necessary to get people off the platform, and there is some elevated churn on the broadband side."

In terms of customer numbers, Dannenfeldt said broadband churn levels had reached the "high 20,000s" in the first three months of the year. Deutsche Telekom's German business registered about 46,000 broadband net additions in the subsequent April-to-June quarter, down from 64,000 a year earlier, while overall fixed-line losses in Germany rose from 122,000 to 171,000 over the same period.

Deutsche Telekom claimed to have about 13 million retail broadband customers in Germany at the end of June, and around 19.5 million fixed access lines in the country altogether.

About 61% of German access lines are now all-IP-based, according to the operator, up from 47% this time last year. At the current rate of progress, the all-IP migration could take another three years, according to Dhananjay Mirchandani, an analyst with Bernstein. That would see Deutsche Telekom miss the 2018 target by about 18 months.

Dannenfeldt concedes that a project completion date could slip into 2019 for some enterprise customers but remains confident that Deutsche Telekom can hit the original deadline for the mass market through the "hard migration" now underway.

"We are, for the mass market, absolutely comfortable that by the end of 2018 we will have it done," he said.

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Deutsche Telekom is trying to minimize the impact of a hard migration through discussions with existing customers, and Dannenfeldt admitted that broadband churn could reach the "mid-30,000s" in the July-to-September quarter without "better mitigation."

"The incremental headwind from the hard migration … is worse than we had originally expected," said Dannenfeldt. "From today's perspective, the target of a 2% compound annual growth rate in broadband revenues … looks quite challenging."

Deutsche Telekom saw German broadband revenues grow at a year-on-year rate of 0.8% in the second quarter, to about €1.31 billion ($1.54 billion), after increasing by 1.4% in the first. While hard migration is partly responsible for the slowdown, Deutsche Telekom also blamed the impact of promotional activity that began last summer.

Announced in 2012, the all-IP transformation is a building block of Deutsche Telekom's overarching pan-European network project, which promises operational cost savings of €1.2 billion ($1.4 billion) by 2020. (See DT's Pan-Net Still at Start of the Marathon.)

Deutsche Telekom expects €700 million ($826 million) of those savings to come from Germany and the other €500 million ($590 million) from across its other European subsidiaries, some of which have already completed the all-IP transition.

Dannenfeldt said cost savings would come from PSTN shutdown as well as the virtualization of network infrastructure.

Among other things, Deutsche Telekom wants to replace the systems that cater to individual countries with pan-European service platforms. "We could just provide a service like TV out of two platforms instead of having ten platforms across the group," said Dannenfeldt.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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