Wednesday, August 9, 2006

Deutsche Telekom Plans Aggressive Price Cuts, Accelerated Move to IP Platform

In a press conference to review its half year performance, senior managers of Deutsche Telekom vowed to take a much more aggressive approach to competition in its domestic markets in the second half of 2006 with price cuts, bundled products and the launch of new services. The company is losing high-margin revenue in Germany while growing internationally where margins generally tend to be lower. DT plans to respond by defending its market share and revenues in Germany.

Earlier in the week, the company trimmed its financial outlook for the remainder of the year.

The newly released financial report shows DT's net revenue rose by 3.2 percent to 30.0 billion EURs in the first half of the year. Adjusted EBITDA fell by 2.4 percent to 9.8 billion EURs. Cash flow from operating activities remained almost stable at 5.7 billion EURs. At 2.1 billion EURs, net profit was also at the prior-year level.

In contrast, revenues generated outside of Germany increased 13.5% to EUR 13.6 billion.

DT said the mobile business in Germany is marked by aggressive competition, a massive drop in prices and cuts in termination charges. In the first half of 2006, T-Mobile Deutschland's revenue declined by 3.3 percent despite an increasing customer base.

T-Mobile plans to respond with a highly simplified and lower prices. New bundled offers will cost under 10 cents per minute regardless of network termination.

More than 700,000 customers are now signed up for the T-Mobile@home service, including the addition of 187,000 users in Q2.

Domestic revenue in DT's broadband/fixed network strategic business area declined by 6.5 percent year-on-year in the first six months of 2006. The decrease in access, call and interconnection revenue had a negative impact on development, as in previous quarters.

T-Com lost approximately 500,000 lines in the second quarter of 2006 as a result of customers' switching to other network operators and to the cable network, and as a result of mobile substitution. Over 1 million lines losses have been recorded this year -- more than expected.

In Q2, there were about 400,000 domestic DSL additions, bringing the total count to 8.96 million. At the same time, 387,000 of the DSL additions were sold by other retailers. That means the DSL resellers are now accounting for 96% of growth.

T-Com plans to respond with a new pricing and product structure in the fall that is geared towards bundled products and is aimed at customers considering changing to bundled offers of alternative network operators. There will be new pricing plans for single-play, double-play and triple-play bundles. Double-play (telephony + broadband will cost under EUR 40).

T-Systems revenue is down around 2.7% year-on-year. Revenue in Germany has declined by 5.2%, as voice and access prices have fallen faster than expected. On the positive side, business process outsourcing continues to grow.

Internationally, T-Mobile USA added 613,000 users in Q2, giving it a total customer base of 23.3 million. This is below the 972,000 new adds recorded in Q2 2005, although the contract periods have been increased from one-year to two-years.

DT is trimming its CAPEX budget from EUR 10 billion to EUR 9 billion for the current year, not including potential spectrum acquisition costs in the U.S.

DT also faces staff restructuring costs affecting 32,000 employees by 2008. By the end of June, 5,100 employees had decided to leave the company.

"The industry is in the middle of a transformation phase... We will take an even more systematic approach to defending our market share and revenues in Germany -- by slashing costs and implementing simpler, cleaner price structures. At the same time, we plan to develop new products to retain our existing customers and attract new ones where possible.

"We will substantially reduce our cost base, mainly by accelerating the expansion of our IP-based broadband network platform.... To this end, our investments in the IP-based production platform will be made earlier than we planned."

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