With Deutsche Telkom set to become BT's biggest shareholder, strategic opportunities in the all-IP and cloud services areas could beckon.

Iain Morris, International Editor

January 12, 2016

6 Min Read
BT, DT Tie-Up Holds All-IP, Cloud Promise

A few weeks from now (and maybe sooner) the biggest single shareholder in UK fixed-line incumbent BT will be its German counterpart Deutsche Telekom, heralding the possibility of strategic partnerships between two of Europe's biggest operators. (See BT Locks Down £12.5B EE Takeover Deal.)

Following BT Group plc (NYSE: BT; London: BTA)'s £12.5 billion ($18 billion) takeover of EE , a joint mobile venture between Deutsche Telekom AG (NYSE: DT) and France's Orange (NYSE: FTE), the German telecom giant -- as part of that deal -- will own a 12% stake in its UK peer. Some analysts reckon this foot in the door will make it easier for Deutsche Telekom to shoulder its way into a full-blown takeover of BT in future. Meanwhile, Sir Michael Rake, BT's chairman, has told the Financial Times (subscription required) that joint ventures with Deutsche Telekom could take shape following the conclusion of the EE deal. (See Eurobites: BT Eyes Joint Ventures With DT.)

It might not be immediately obvious why Deutsche Telekom would prefer 12% of BT to additional cash. Outside the UK, there is little overlap between the two operators' footprints (if any, in some sectors). While BT is expanding into the TV, mobile and ultra-fast broadband markets in the UK, Deutsche Telekom is heavily focused on building a "pan-European" network in central and eastern Europe. (See BT May Offer Sports on EE Devices – CEO and DT Completes All-IP Move in Croatia.)

Both operators, however, have been at the forefront of the industry transition from old-fashioned PSTN to more efficient all-IP networks. That move is allowing Deutsche Telekom to jettison its country-specific service platforms and introduce a smaller number of technologies it can deploy across its entire European footprint. According to Axel Clauberg, Deutsche Telekom's vice president of aggregation, transport, IP and fixed access, all-IP investments are also laying the foundations for the rollout of New IP technologies like SDN and NFV. (See DT's Journey to a New IP World.)

All-IP and New IP could provide a financial rationale for cross-border takeover activity, according to financial analysts who have previously been in contact with Light Reading. The idea is that an operator buys a network in a neighboring country, dispenses with that player's service platforms (along with some facilities and employees needed to support them) and bolsters its sales and margins accordingly. This could justify a takeover of BT. (See All-IP DT Could Drive Euro M&A, Say Analysts.)

Besides their all-IP ambitions, though, BT and Deutsche Telekom share an interest in expanding their enterprise-sector businesses through the rollout of cloud services.

Deutsche Telekom wants to double annual revenues in this area between 2014 and 2018 and has recently launched a number of public cloud services in partnership with vendors including Cisco Systems Inc. (Nasdaq: CSCO) and Huawei Technologies Co. Ltd. . To support its proposition, it has been investing in new data center facilities in Germany, whose rules on data protection -- it frequently points out -- are among the most stringent worldwide. It believes it can challenge the web-scale giants of Google (Nasdaq: GOOG) and Amazon.com Inc. (Nasdaq: AMZN) on pricing and through its systems integration and consulting expertise. (See DT Ups Cloud Challenge to Google, Amazon and DT Takes Cloud Fight to Google, Amazon.)

This is quite at odds with the cloud strategy of BT, which doubts it would be able to compete against "hyperscale" cloud players like Amazon and still generate profits. Instead, BT is positioning itself as the central connection in a web of other data center companies, including Amazon itself. By offering an IP/MPLS alternative to the public Internet for connecting to cloud computing services, BT says it can provide enterprise customers with better performance, security and reliability than they would otherwise enjoy. As well as Amazon, its partners include Equinix Inc. (Nasdaq: EQIX), Interxion , Microsoft Corp. (Nasdaq: MSFT) and Salesforce.com Inc. (See BT to Unveil New Cloud Partners by Christmas.)

Next page: Ahead in the cloud?

Ahead in the cloud?
Yet the two operators could see opportunities in a tie-up. For one thing, BT currently operates 48 data centers of its own. Those include facilities in the German cities of Frankfurt and Munich that Deutsche Telekom might be able to exploit as it touts its secure cloud-services proposition. BT assets in other parts of the European Union (EU) could also help to expand the addressable market for Deutsche Telekom's cloud-services business. Indeed, earlier today, BT flagged a €24 million ($26 million) agreement with the European Commission, noting that its data center presence in the region helped it to seal the deal. (See Eurobites: BT Lands EU Cloud Deal.)

BT, for its part, may see benefits in attaching its "integrator" efforts to those of Deutsche Telekom. While DT sounds confident of winning business at the expense of Google and Amazon, the German incumbent is also collaborating with software players in the cloud-services market. BT's "cloud of clouds" vision is certainly not unique, and it may -- in any case -- need to join forces with another service provider pursuing a similar strategy if it is to flourish.

No doubt, Deutsche Telekom is capitalizing on revelations that US authorities have spied extensively on Internet communications in Europe, which met with particular indignation in Germany. Microsoft's response has been to appoint Deutsche Telekom the "data trustee" for its cloud offering in Germany. Under this approach, the operator controls access to Microsoft's customer data. The idea is to ensure (and assure customers) that Microsoft cannot be forced to hand data over to US authorities.

Want to know more about cloud services? Check out our dedicated cloud services content channel here on Light Reading.

These trustee arrangements could appeal to companies doing business in the European Union. But they do not guarantee success for Deutsche Telekom or necessarily justify the investments it is making in its data centers. Hewlett Packard Enterprise (HPE), another of BT's cloud partners, is building its own "cloud of clouds" in Europe through an initiative it calls "Cloud 28+." Because it is based in Europe, the data it holds should also be safe from prying US eyes. HPE lists a number of European service providers as Cloud 28+ members, including BT, Telecom Italia (TIM) and Numericable-SFR . But Deutsche Telekom is not among them.

In the US market, a number of major telcos have been divesting themselves of data center assets, partly signaling a failure to compete against web-scale players in the market for public cloud services. Given EU concerns, a strategic cloud partnership between BT and Deutsche Telekom could have a better chance of standing up to them -- for a while, at least. (See Verizon Seeks $2.5B From Data Center Sale – Report and Verizon Enterprise Sale Would Signal Big Shift.)

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

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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