When Deutsche Telekom published its latest quarterly earnings in August, most of the attention was focused on the resurgent T-Mobile US and the drama surrounding that particular operation.
But were it not for all the speculation about the US mobile subsidiary's future ownership, the German operator's domestic business, Telekom Deutschland, may have grabbed the headlines.
Following four consecutive quarters of losing broadband customers, Telekom Deutschland finally turned a corner, reporting its first gains since March 2013. Small as the increase was -- just 7,000 net additions -- it augured well for the operator's prospects during the rest of 2014, owing everything to a sharp rise in spending on the rollout of fiber-based access networks.
Perhaps more than any other European incumbent, Deutsche Telekom AG (NYSE: DT) has staked its future on a programme of huge investment in higher-speed broadband services. Nearly two years ago, the operator told investors it would spend €6 billion (US$7.9 billion) on the deployment of fibre-to-the-curb (FTTC) and vectoring, a technology that boosts connection speeds by cutting out interference between lines. The aim was to make FTTC available to 65% of the German population by 2016, and halt the progress being made by cable operators touting superfast capabilities.
Since then, Deutsche Telekom's investment plans have been largely held up by regulators. Vectoring is a controversial technology because of its incompatibility with unbundling, the preferred means of fomenting broadband competition in the DSL era. But having satisfied authorities that it will provide wholesale alternatives for unbundlers, and with less of a need to commit capex to the US, the German operator pushed ahead with its domestic investment plans in the second quarter of 2014. Between April and June, nearly €1.1 billion ($1.45 billion) was spent on capital expenditure in Germany, almost 60% more than in the same period a year earlier, extending the operator's fibre-based access network technology to some 15.9 million German households, up from just 14.2 million in June 2013.
Some of the early results of this investment drive are encouraging. Besides growing its overall retail broadband base by 7,000 customers during the second quarter, compared with a loss of 47,000 in the same period a year earlier, Telekom Deutschland added 119,000 retail fiber subscribers (227,000 if wholesale lines are included), nearly twice as many as between April and June 2013.
Speaking to analysts during Deutsche Telekom's recent earnings call, Timotheus Höttges, the operator's CEO, noted that fiber deployment was also spurring take-up of broadband-delivered television (TV, or IPTV) services. Telekom Deutschland added 63,000 TV subscribers in the second quarter, compared with 43,000 in the corresponding quarter a year earlier.
But there is a long way to go. Despite the surge in spending, fiber is still available to just 39% of the German population, some way short of the 2016 coverage target of 65%, while Telekom Deutschland's share of the broadband market remains lower than in mid-2013. Moreover, revenues from the "connected home" services of broadband and TV have continued to decline, falling very slightly year-on-year to €1.3 billion ($1.72 billion) in the second quarter. "This is clearly not satisfying and not in line with the target we set of 2% growth," said Thomas Dannenfeldt, Deutsche Telekom's CFO, during the operator's earnings call.
Table 1: Telekom Deutschland’s Broadband Performance
|Q2 2013||Q3 2013||Q4 2013||Q1 2014||Q2 2014|
|Retail broadband customers ('000)||12,430||12,383||12,360||12,354||12,361|
|Retail fiber customers ('000)||1,096||1,165||1,246||1,375||1,494|
|Broadband TV customers ('000)||2,078||2,121||2,177||2,255||2,318|
|Broadband revenues (millions)||€1,075||€1,065||€1,057||€1,046||€1,042|
|TV revenues (millions)||€239||€241||€244||€251||€259|
|Source: Deutsche Telekom|
Yet there are plenty of reasons to remain optimistic. Taking advantage of vectoring in the second half of the year, Telekom Deutschland plans to increase the maximum speed available on its broadband network to 100 Mbit/s, from 50 Mbit/s today, "upselling" the faster services to existing customers. A 'hybrid router,' supplied by Huawei Technologies Co. Ltd. and combining the capabilities of 4G and fiber broadband access, is also due to go on sale in the second half. And continued spending should increase fiber coverage to 45% of the population by the end of the year. (See Deutsche Telekom Works Toward One Network.)
If Telekom Deutschland can maintain its customer growth trajectory, and produce a revenue turnaround to match, its fiber revival will look assured.
— Iain Morris, Site Editor, Ultra-Broadband