US slowdown, tower sales and Huawei pose big questions for DT

There was a time when Deutsche Telekom could rely on its T-Mobile unit in the US for a financial boost while its European operations were limping. Exactly two years ago, US revenues soared by 62% and earnings by more than 80% for the first quarter, compared with the same period of 2020. Everyone could overlook the weak 2% sales increase in Germany and happily ignore the 1% dip in the rest of Europe.

But those days are over. After years of turbocharged growth, T-Mobile is now also eking out a 2% gain, or was in the first quarter of 2023, when it clocked revenues of about €18.3 billion (US$20 billion). Converted to euros, earnings rose by a more impressive 6%, to €6.5 billion ($7.1 billion). But this is well below the 80% it was delivering back in 2021. And in dollars, the increase was just 1.3%.

Fortunately, other parts of Deutsche Telekom picked up some of the slack. Sales in Germany rose 3% and in Europe they were up 3.8%, for instance. The toiling systems solutions unit, which essentially houses Deutsche Telekom's T-Systems IT business, reported 10% growth in earnings, although it remains barely profitable, with a lousy earnings margin of 8%.

Figure 1: Deutsche Telekom CFO Christian Illek (left) alongside CEO Timotheus Höttges.
(Source: Deutsche Telekom)

Overall, though, Deutsche Telekom's results looked depressingly European. With headline revenues up 0.3%, to about €27.8 billion ($30.4 billion), and earnings (adjusted for adjustments) rising 0.9%, to nearly €10 billion ($10.9 billion), it could have been any of Europe's Tier 1 telecom plodders, not the one so recently invigorated by its exposure to the US.

It may have its headquarters in Bonn, and a German-speaking CEO in Timotheus Höttges, but Deutsche Telekom now looks as American as the cheeseburger. T-Mobile US revenues accounted for two thirds of total sales and earnings adjusted for adjustments in the recently ended first quarter. Sustained successes against AT&T and Verizon, dating back to when former T-Mobile CEO John Legere first led a marketing assault against his mobile rivals, persuaded Höttges to invest bigger sums on the opposite side of the Atlantic.

The strategy has paid off, distinguishing Deutsche Telekom from European incumbents with zero presence in the US or any other giant telecom markets ripe for disruption (are there any?). In April, the German operator eventually became T-Mobile's majority owner when its stake nudged past the 50% threshold.

From landlord to tenant

But the recent slowdown at T-Mobile US must be a concern for Deutsche Telekom's bosses. T-Mobile outperformed its once-bigger rivals thanks to clever marketing, credit for which must go to sweary Legere, and by prioritizing the rollout of high-speed network services in lower frequency bands. Rivals, meanwhile, were obsessing about higher spectrum ranges (good for speed, bad for coverage), fixated on concepts such as virtualization and open RAN (which carry little importance for customers) or trying to become media companies. What T-Mobile did not do was find a new way for telcos to make money. As the US market matures, and AT&T and Verizon refocus, future growth looks uncertain.

Deutsche Telekom's answer to this growth problem in Europe, where telecom markets are more competitive, is partly to be as efficient as possible. Outside the US, nearly 28,000 jobs have been cut from the payroll since late 2017 (although Deutsche Telekom gained employees in the first quarter). More recently, it has been ceding control of assets it would, at one time, have considered strategically important.

In February, then, it sold a 51% stake in GD Towers, the company that owns about 40,000 masts used by Deutsche Telekom's operating subsidiaries in Germany and Austria. Pocketing €10 billion from the transaction, Deutsche Telekom was able to report €15.4 billion ($16.8 billion) in net profit for the first quarter, up from €3.9 billion ($4.3 billion) the year before. Net debt had soared on the takeover of Sprint, a struggling US operator now merged with T-Mobile. Thanks to the sale of GD Towers, the ratio of net debt to earnings shrank to about 2.3, from nearly 2.6 at the end of last year.

Figure 2: T-Mobile US sales ($B) (Source: T-Mobile US)
(Note: T-Mobile's merger with Sprint was completed on April 1, 2020)

Essentially, Deutsche Telekom is now a tenant, not a landlord. Following its windfall, it will have to make regular payments for the use of towers and pray its new private-equity majority owners decide not to grind them down for raw materials. That's unlikely, Deutsche Telekom will have reasoned.

But the next step – although Deutsche Telekom will probably resist it for a while – could be the sale of the basestation equipment that bejewels these towers. Cellnex, Europe's biggest independent towerco, already owns some of that and rents it out to service providers, just as it does with concrete and steel. New radio technologies make it easier for two or more operators to run separate software systems on the same hardware. The implications of that for the telco business model are dramatic.

Unfair share

For sales growth, Deutsche Telekom seems bereft of genuinely innovative ideas. Instead, along with Europe's other big telco groups, it is pressuring local authorities on "fair share," the spurious notion that Big Tech companies should fund network investment – without receiving a stake – because they are responsible for most data traffic.

Yet Big Tech would have to stump up huge sums annually to make a difference. Deutsche Telekom, Orange, Telecom Italia, Telefónica and Vodafone, all of which back the idea, collectively made about $283 billion in sales last year. And the fees Big Tech is charged would have to increase every year to be a source of growth. If a tech giant refuses to pay, does a telco block or throttle it, thereby violating rules on net neutrality?

Deutsche Telekom's other big problem is Chinese. It has bought thousands of antennas for its 5G rollout from Huawei, and it was boasting 95.1% coverage of the German population at the end of March in this week's earnings report. German policymakers are suddenly wondering if the Chinese vendor – at the behest of saber-rattling Chinese leader Xi Jinping – could switch off 5G, or slip something noxious into the airwaves, much as Russian mobster Vladimir Putin turned off the gas. A government order to replace those antennas would cost Deutsche Telekom billions.

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— Iain Morris, International Editor, Light Reading