Global Insight Perspective | |
Significance | The German incumbent, Deutsche Telekom, has ditched its VDSL strategy for the more cost-effective ADSL2+ technology, despite the recent regulatory drama over its VDSL network. |
Implications | The decision was prompted by the urgency to roll-out IP TV services on a mass-market scale as a means to boost slowing growth of the group's fixed-line business. |
Outlook | Deutsche Telekom has decided not to risk losing the mass-market appeal of its IP TV service. |
Europe's largest telecoms group, Deutsche Telekom, has shelved its 3.3 billion euro (US$4.3 billion) VDSL roll-out strategy and will not carry out its initial plan to connect 50 cities in Germany to its ultra-high-speed VDSL network, which is capable of delivering speeds of up to 50 Mbps and supports live streaming of high-definition television and the use of multiple connections. Instead, the telco intends to upgrade its infrastructure to the cheaper ADSL2+ technology, which is capable of delivering maximum of 24 Mbps, but only to customers located within 0.5 km of the central exchange. The VDSL system was rolled out to 10 cities last year at a cost of 500 million euro. The decision to switch to ADSL2+ technology will have repercussions for Deutsche Telekom’s IP TV strategy, as with less capacity on its infrastructure, the telco is likely to slim down the number of TV channels that it delivers to customers simultaneously. It originally intended to deliver 80 TV channels over the VDSL platform.
Outlook and Implications
Capex Pressures: The move reflects pressure on Deutsche Telekom's capital expenditures. The switch to ADSL2+ technology will enable the company to build out a next-generation IP network while also reducing operational expenditure. This shift in Deutsche Telekom’s broadband strategy comes as the group's new management team—headed by Chief Executive Officer (CEO) René Obermann since the resignation of Kai Uwe-Ricke in November last year—grapples to cut costs in efforts to revive growth and satisfy disappointed shareholders (see Germany: 8 January 2006: Deutsche Telekom Reiterates Plans to Focus on Costs and Price Cuts, World: 14 November 2006: Deutsche Telekom Appoints Obermann as New CEO). The company lost almost half its DSL market share in Germany over the last two years due to fierce competition. In the first nine months of 2006, Deutsche Telekom's T-Com fixed-line unit lost 1.5 million customers and the telco expects further losses of its fixed-line customers due to the fierce competition and regulatory pressure on its domestic market (see Germany: 8 December 2006: New Deutsche Telekom CEO Does Not See Quick Recovery in Customer Losses and World: 9 November 2006: Deutsche Telekom Posts 20.4% Y/Y Fall in Q3 Net Profit on Customer Exodus).
IP TV Strategy Shift: The IP TV strategy based on VDSL technology would only enable Deutsche Telekom to reach high-end users, losing its mass-market appeal. The telco charges between 70-80 euro per month for the basic IP TV package delivered via its VDSL platform, which is currently available in 10 German cities. Last week, Deutsche Telekom announced that its IP TV service, branded T-Home, had registered 25,000 customers since its launch in October last year, which renders its initial 500-million-euro investment in VDSL unprofitable (see Germany: 12 January 2006: Deutsche Telekom Registers 25,000 IP TV Customers). Even if the incumbent rolled out its ultra high-speed VDSL network to a total of 50 cities by 2008, it would still be extremely difficult for Deutsche Telekom to reach its target of one million IP TV customers by end-2007. The ADSL2+ technology will enable the telco to reduce monthly prices, making its IP TV services more competitive.
Regulatory Uncertainty: Deutsche Telekom recently won unprecedented regulatory protection from the German government. The latest amendment to the German telecoms legislation shielded Deutsche Telekom from opening its new VDSL fibre-optic network to competition. The legal action from the European Commission, however, has been looming, which may also be one of the causes behind Deutsche Telekom's strategic move (see Germany: 18 December 2006: EU Regulators Collide with German Government Over Deutsche Telekom's VDSL Network).