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Deutsche Telekom AG (NYSE: DT) is the world’s fourth largest wireless service provider by market capitalization in the global telecommunications industry. Deutsche Telekom operates in over 50 countries in the Americas, Europe, Africa, Asia, and Europe, with heavy capital investments in the United States and throughout Western Europe.

As the premiere fixed line, broadband and wireless service provider in Germany, Deutsche Telecom has done well in the past ten years in taking its national brand to the world scale. In 1996, the German state owned Deutsche Bundespost telecommunications company was taken public. [1] Service has since expanded from a state-owned operation to a global telecommunications service provider, operating in over 50 countries. Now the largest telecommunications organization within the EU, DT is finding it hard to expand its business regionally. Due to pricing pressures originating from increasingly restrictive EU sector specific legislation and increased competition as a result of moving from regional to global markets,[2] expansion of the telecommunications service industry in Western Europe is turning from infrastructure development(devices, networks, and subscription) to developing more data centric services such as mobile email, GPS systems, and mobile social networking. Looking at net revenue in each segment, broadband/fixed line has decreased sequentially for the last two years, while mobile devices have generated sequentially increasing revenue, even with static customer base figures over the two years.[3]

Although DT is struggling regionally to attract subscription growth, Emerging Markets have been providing opportunities to multinationals for subscription growth; although average revenue per user in emerging markets tend to be lower as a result of overall lower consumer spending, there are still customer growth opportunities in China, India, and Argentina (DT operates as “T-Systems” in these countries). Over time, economies of emerging markets grow as a result of wired and wireless connectivity, catalyzing cyclical growth of opportunities for DT to increase average revenue per user in these markets.

Business & Financial Metrics[4]

In 2009, DT generated a net income of €80 million on revenues of €64.6 billion. This represents a 76.5% drop in net income and a 4.8% increase in revenues from 2008, when the company earned €340 million on €61.7 billion in revenue.

Business Segments

Mobile Communications – mobile communications provides mobile voice and data services, in addition to cellular hardware and terminal devices, for 119 million people globally. Revenue is generated by this segment through selling of devices and other hardware, monthly service fees, and data and peripheral service.

Broadband/Fixed Network – the Broadband and Fixed Network segments provide corporate, private, and institutional clients with traditional dial-up, broadband DSL, and multimedia service solutions. DT serves 13.3 million broadband and 37.2 million traditional fixed line dial-up customers.[5]

Business Communications – supporting the fixed wireless needs of about 160,000 small, medium, and large domestic enterprises on a global basis, in addition to 160 multinational corporations,[6] DT’s Business Communications segment is responsible for seamlessly integrating corporate fixed line and wireless networking infrastructure.

Group Headquarters & Shared Services – this segment is responsible for coordinating business across segment lines and any operations central DT’s growth not preformed but the other segments. Functions of this segment include the maintenance of the DT fleet and the management and maintenance of the DT real estate portfolio. Revenue is generated through the capital gain of assets from within the real estate portfolio.[7]

Key Trends and Forces

Market Penetration

The term market penetration refers to the percentage of market users for a specific market given the potential size of the specific market within a certain country or region. For instance, if there were three hundred potential broadband users in country X and two hundred of those people already had broadband service, we would say that the broadband market penetration in country X is 66.7%. For DT, how penetrated a market is (in this case, DT is concerned with the wireless, broadband, and dial-up markets) greatly impacts the potential for growth in each respective segment. High market penetration means that there are few potential organic subscription growth opportunities. DT is experiencing extremely high penetration levels in the United States and Western Europe and as a result, new customer growth in broadband and wireless is slowing. However, taking chances to grow subscription inorganically, DT has announced its acquirement of SunCom Wireless, a regional cellular service provider in the southeastern United States.

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Overall market penetration in key markets (31 December 2005)

Emerging Markets Mobile Adoption

Emerging Markets provide a vast opportunity for growth because of relatively low market penetration. Generally, multinational corporations that provide developed countries with myriad wireless, broadband, and networking services take a different approach to addressing the advantages and opportunities within emerging markets. In general, consumer spending in emerging markets is not as high as in developed markets, so corporations need to provide services and products at a relatively lower cost. As a result, across the spectrum of countries, ARPU in emerging market countries tends to be lower than that of developed countries. Specifically, DT serves the emerging markets of various South American, Asian, and African countries such as Argentina, Brazil, India, China, and South Africa.

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Interest Rates

Although DT is not as dependent on domestic interest rates as, say, any company within the financial services industry, interest rates do still provide risk to the corporation. For instance, any project that the corporation takes on and any offer that DT makes to acquire a company depends on a time weighted discount of expected cash flows. Since future cash flows are never guaranteed, we must discount these flows with interest rates and ultimately, the value of a project or the implied value of a possible acquisition is partially dictated by current interest rates.

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