Partnerships with local authorities and private sector investors could help Deutsche Telekom drag Germany into the gigabit age.

Iain Morris, International Editor

August 15, 2018

9 Min Read
DT Seeks Fiber Allies to Tackle Germany's Gigabit Lag

Buying a broadband service from Deutsche Telekom is like dining at a restaurant where the menu options are restricted to certain tables. Worst of all, the real treats are served in just one booth.

The German telecom incumbent has dabbled in nearly every flavor of broadband from ADSL (an old-fashioned copper service) to the gourmet dish of FTTH (all-fiber connectivity). But while its copper-based services are widely available, its all-fiber goodies are off the menu for most customers. Although Deutsche Telekom AG (NYSE: DT) does not publish details of all-fiber coverage or subscriptions, and did not respond to Light Reading's queries about these numbers, the OECD reckons that just 744,000 of more than 40 million German homes used fiber broadband at the end of last year. About 24.6 million used some form of copper, it says, with 7.7 million on cable. (See Germany's Gigabit Lag.)

Retail lines

Wholesale lines

Coverage (homes)

Coverage (%)

Broadband

13.4

6.3

N/A

N/A

Fiber (FTTC/VDSL, vectoring, FTTH)

6.6

4.4

32

74%

Source: Deutsche Telekom. Note: FTTC = fiber to the curb; VDSL = very high speed digital subscriber line; FTTH = fiber to the home.

Coverage (homes)

Coverage (%)

Coverage end 2018 (homes)

Coverage end 2018 (%)

Coverage end 2019 (homes)

Coverage end 2019 (%)

Vectoring (50-100 Mbit/s)

N/A

N/A

27

62%

35

80%

Supervectoring (up to 250 Mbit/s)

6

14%

15

35%

29

67%

Source: Deutsche Telekom.

This is not surprising in a country where building a nationwide all-fiber network might cost between €60 billion ($68 billion) and €80 billion ($91 billion), according to estimates. Deutsche Telekom does not want to invest in networks it would have to "open" to rivals on terms set by authorities. Nor have others filled the fiber void. Competitors say they cannot access infrastructure owned by Deutsche Telekom under acceptable arrangements, blaming the regulator's "timid line" toward the incumbent. (See Europe's Backhaul Black Hole Looms Above 5G and Vodafone Calls for Broadband Regulation Shake-Up in Germany.)

But there are signs of change. Galvanized by cable competition and some political pressure, Deutsche Telekom has embarked on several all-fiber projects in the last year. Partnerships with regional authorities and other fiber investors have been key.

Two initiatives stand out in particular, and are likely to serve as templates in future. In December, Deutsche Telekom teamed up with EWE, a German energy and infrastructure provider, to build an all-fiber network for about 1 million households in the states of Lower Saxony, North Rhine-Westphalia and Bremen. Together, the companies will invest about €2 billion ($2.3 billion) in all-fiber connectivity over the next ten years. Each will own a 50% stake in the network they jointly construct. (See Eurobites: Deutsche Telekom, EWE Form FTTH Joint Venture.)

An alliance with regional authorities in Stuttgart has similar goals. Under that plan, announced earlier this year, Deutsche Telekom will invest €1.1 billion ($1.2 billion), with Stuttgart contributing another €500 million ($566 million). More than 1.24 million homes and 140,000 businesses are promised "gigabit" connectivity by 2030. (See Eurobites: Opera Files for Nasdaq IPO.)

Criteria

Details

Partner

EWE

DT investment

euro 1B

Partner investment

euro 1B

Project duration

10 years

Number of households in coverage area

1M

Number of businesses in coverage area

N/A

Targets

Operations to begin in mid-2018; joint venture to make accesses available to third parties, for use at commercial terms

Headline speeds

N/A

Source: Deutsche Telekom.

Criteria

Details

Partner

Stuttgart regional government

DT investment

euro 1.1B

Partner investment

euro 500M

Project duration

10+ years

Number of households in coverage area

1.38M

Number of businesses in coverage area

140,000

Targets

Cover 90% of businesses by 2022; half of households by 2025; 90% of households and all businesses by 2030

Headline speeds

1 Gbit/s

Source: Deutsche Telekom.

Both schemes would seem like small beer alongside Deutsche Telekom's latest proposal. According to reports that originated with the German press, Timotheus Höttges, Deutsche Telekom's imposing boss, has reached out to United Internet, a broadband operator and wholesale customer, and suggested they jointly build an all-fiber network for about 5 million households. Ralph Dommermuth, United Internet's CEO, is said to have responded with interest. He thinks Deutsche Telekom should control 75% of the joint venture, with United Internet owning the remainder, to reflect their shares of Germany's broadband market. (See Eurobites: 'Get Carter!' Says BT's Board – Report.)

All of these moves are encouraging. Along with the UK, Germany has fallen a long way behind southern European markets when it comes to high-speed broadband. All-fiber services are now available to 89% of premises in Portugal, and 71% of properties in Spain, according to a recent UK government report. Germany's gigabit lag could leave its economy at a major disadvantage in the future, politicians fear. (See UK Bumpkins Told Not to Expect Fiber in Their Lifetimes.)

Next page: Long walk to fiber

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.

For more fixed broadband market coverage and insights, check out our dedicated broadband content channel here on Light Reading.

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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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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