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?

(1)  |