DT Seeks Fiber Allies to Tackle Germany's Gigabit Lag

Long walk to fiber
But there is no guarantee that a joint venture with United Internet will take shape, or that other projects will go far and fast enough. Together, the EWE, Stuttgart and United Internet AG schemes would account for just 17% of German households. In the case of EWE and Stuttgart, Deutsche Telekom does not expect to finish work until 2028 and 2030, respectively. While there are few details at this stage about offerings and wholesale provision, the EWE network will not get built unless authorities agree not to regulate services, Höttges has made clear. Regulation could also "stand in the way" of the Stuttgart plan, says Deutsche Telekom.

If the partnership approach is to bring all-fiber connectivity to most Germans, Deutsche Telekom will have to find more partners. It has budgeted future spending of up to €2 billion ($2.3 billion) annually on all-fiber rollout, and indicated it will have to realize an internal rate of return of at least 7.5% on any fiber project. "Within that €2 billion framework, there is room for a number of projects like Stuttgart that will cost about €100 million a year," said Hannes Wittig, Deutsche Telekom's head of investor relations, during a recent earnings call with analysts. (See Deutsche Telekom Raises Outlook on US Growth and DT to Lay Out Conditions for All-Fiber Splurge.)

Given Deutsche Telekom's rough estimate that covering each household costs around €1,000 ($1,132), it is reasonable to think a project with United Internet would cost it €375 million ($424 million) annually, assuming rollout took around ten years and that Deutsche Telekom coughed up 75% of the funds. Added to the costs of the EWE and Stuttgart schemes, that should still leave more than €1.4 billion ($1.6 billion) available each year -- enough to pass around 1.4 million homes annually. Deutsche Telekom thinks the build rate will "ramp up" to around 2 million properties each year by 2021.

But a big challenge will be to identify partners prepared to share the investment burden and, in the case of local authorities, ease the planning process. After EWE and United Internet, there may be few private sector companies that are willing or able to consider an all-fiber tie-up with the German incumbent. Thomas Dannenfeldt, Deutsche Telekom's chief financial officer, confessed to being "surprised" by the paucity of private sector bidders during the Stuttgart all-fiber tender. "My expectation was that more parties would seriously put a stake into the ground," he said during the recent earnings call.

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Gigabit connectivity may come from other providers, though. Deutsche Telekom reckons about 70% of the population will ultimately have access to gigabit-speed cable services. Competition will further intensify if Vodafone's planned takeover of Unitymedia, Germany's second-biggest cable operator (behind Kabel Deutschland, which Vodafone Group plc (NYSE: VOD) already owns), secures regulatory approval. Concern about falling behind cable operators has clearly driven Deutsche Telekom's investment strategy. (See Vodafone-Liberty Merger Doubtful in Germany, Says Analyst.)

In the meantime, executives are eager to put the boot in where they can. One possible advantage for Deutsche Telekom is that old-fashioned DSL offers dedicated connectivity per customer, while cable subscribers have to share bandwidth. A new "supervectoring" update to copper broadband will therefore ensure that a "large majority" of homes passed receive at least 175 Mbit/s, said Dannenfeldt. "This is something you cannot guarantee with cable," he insisted. "We are competing well in network tests." If gigabit connectivity is the ultimate prize, such boasts may start to lose their power.

— Iain Morris, International Editor, Light Reading

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iainmorris 8/16/2018 | 1:21:44 AM
OECD update The OECD figures in this story had been slightly overstated due to a calculation area. They have now been corrected. Apologies.
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