Deutsche Telekom shows Europe has lost the public cloud fight

The German operator has urged Europe to stand up to US tech, but its own business appears to have backed down.

Iain Morris, International Editor

February 15, 2021

6 Min Read
Deutsche Telekom shows Europe has lost the public cloud fight

Timotheus Höttges, the boss of Germany's Deutsche Telekom, regularly champions the need for a European answer to the US technology giants.

In the aftermath of Edward Snowden's revelations that US spooks had routinely spied on Germans, Deutsche Telekom positioned itself as a safe local alternative to the US public clouds, bound by Germany's tough laws on data protection.

But Europeans do not seem to care. Amazon, Google and Microsoft have never been stronger, while T-Systems, the part of Deutsche Telekom that looks after cloud infrastructure, is at an all-time low.

Back in 2012, the IT services unit employed more than 52,000 people and made about €10 billion ($12.1 billion) in sales. After successive rounds of restructuring, fewer than 29,000 employees were left on its books in September. Annual revenues had slumped to €6.8 billion ($8.2 billion) by 2019 and were still falling last year.

Figure 1: Deutsche Telekom's Timotheus Hottges seems to have a love-hate relationship with US tech. Deutsche Telekom's Timotheus Höttges seems to have a love-hate relationship with US tech.

T-Systems has become a persistent injury for the otherwise healthy Deutsche Telekom.

For years, its main problem has been a sharp fall in demand for the traditional IT services provided by telecom operators. While newer cloud services are popular, sales have never risen sharply enough to compensate. That, at least, has been the recurring message.

The trouble is that any cloud ambitions are tempered by the unstoppable growth of Amazon, Google and Microsoft, the very firms Deutsche Telekom once hoped to challenge.

Despite his occasional grumbling about US tech, Höttges is more typically in cahoots with these companies than trying to fight them. One notable tie-up allows Microsoft to operate public cloud services from T-Systems' facilities.

If you can't beat 'em...

Increasingly, then, T-Systems is merely a conduit to the main public cloud providers, rather than a public cloud alternative. It is a regional middleman, chucking in security features and promising to relieve customers of the "multicloud" management hassle.

In a "cloud-first" strategy update last week, it namechecked Amazon Web Services and Google Cloud – besides Microsoft Azure – as partners. If you can't beat 'em, join 'em, T-Systems appears to have decided.

So where does this leave Open Telekom Cloud, Deutsche Telekom's own public cloud? According to last week's announcement, it remains available for customers "with the highest compliance and data protection requirements." T-Systems still appears to be expanding its capacity, as well.

But the signals all point to failure. Recent data from Synergy Research Group puts Deutsche Telekom's share of Europe's entire market for cloud services at just 2%.

Worryingly, for European tech revivalists, that makes it the biggest of the European providers, whose overall market share has dwindled from 26% to 16% since the start of 2017. Two-thirds of business is now served by Amazon, Google and Microsoft, which have collectively spent more than €12 billion ($14.6 billion) in Europe in the last year.

Across the region, they have 67 hyperscale data centers and more than 150 additional points of presence, Synergy reckons. Smaller US firms have another 36 data centers, according to the data.

Figure 2:

This is grim stuff for European providers with their messages about data sovereignty and privacy.

"Their efforts are laudable but the trouble is that this is a bit like King Canute attempting to stop an incoming tide," said John Dinsdale, an chief analyst at Synergy Research Group, in his prepared comments about the data.

"European firms are facing a huge challenge if they want to break out of their niche-like positions – the revenue growth opportunities are massive but so too is the funding and willpower required to tap into those opportunities."

Huawei's public cloud?

A further complication for T-Systems could be the identity of its main Open Telekom Cloud partner. Before the recent backlash against Chinese telecom vendors, Deutsche Telekom had picked Huawei as a technology supplier.

In 2019, with Huawei under pressure, it played down the Chinese firm's involvement, describing it as a hardware provider only, and saying that "operation in our Biere data center, and the management of the cloud services and customers, is in the hands of T-Systems alone."

At the time of publication, Light Reading was still awaiting a status update from Deutsche Telekom on Huawei.

The operator seems unlikely to have switched hardware suppliers, though. Even while replacing Huawei in parts of its core network, Deutsche Telekom still relies on it as an equipment vendor in mobile. That will not change under government rules, which include none of the tough restrictions introduced in the UK.

But the wider backlash against Huawei will surely dissuade some European organizations from considering the Open Telekom Cloud – especially if its main selling point is as a supposedly secure alternative to US infrastructure.

How many people worried about storing information in a US data center will happily rely on Chinese equipment?

Figure 3: Performance and headcount at T-Systems Source: Deutsche Telekom. Source: Deutsche Telekom.

In the meantime, T-Systems remains unprofitable. In 2019, it reported an operating loss of €218 million ($264 million) on sales of about €6.8 billion.

For the first nine months of 2020, losses ballooned to €618 million ($749 million), on revenues of about €3.1 billion ($3.8 billion), because a "reduction in the business outlook for IT operations" triggered a writedown.

There has also been a dramatic reduction in headcount since 2012, and especially last year. By September, employee numbers were down about 9,500, to roughly 28,600, since the previous December.

Deutsche Telekom attributes this drop largely to the transfer of staff from T-Systems to the Germany operating segment. But the total number of employees across those two units fell by 3,100.

Investor patience must be wearing thin with T-Systems, whose turnaround is taking longer than a roundtrip to Mars. Fortunately, shareholders are willing to overlook that while Deutsche Telekom can regale them with a compelling story of US growth.

What's depressing is that T-Systems provides the clearest example of Deutsche Telekom doing something apart from connectivity. If it ends up as a shrunken multicloud manager, there will be little optimism that Deutsche Telekom can help Europe survive the three horsemen of the US techpocalypse.

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— 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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