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WIKI ANALYSIS
Deutsche Telekom AG (NYSE: DT) is the world’s fourth largest (by market capitalization, $86 billion) wireless service provider in the global telecommunications industry, bringing in more than € 62.5 billion in operating revenue in 2007 and also providing service to 119 million mobile communications clients in addition to 37 million and 13 million clients with fixed line dial-up and broadband services, respectively[1]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. [2] 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,[3] 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.[4]
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.
Another opportunity for the company is the release of Google's Android operating system for smart phones. Deutsche Telekom's subsidiary T-Mobile released the first cellphone to use the Android system on September 23, 2008. While competition in the smart phone market is steep, with Apple's iPhone and RIMM's Blackberry commanding market share, T-Mobile and Google are hoping that their software's speed and usability will help their new devices (called the G1) to attract users.
Business Operations
Deutsche Telekom operates globally to provide a wide array of corporate and private client solutions to their fixed line and wireless demands. In the United States, Deutsche Telekom operates as T-Mobile. Although wireless and fixed line market penetration in the United States is currently almost at full saturation and provides little chance for organic customer base growth, Deutsche Telekom still recognizes the cross-selling opportunities in the United States and is in the process of acquiring SunCom Wireless to expand its footprint inorganically throughout the southeastern United States.
Deutsche Telekom’s efforts to expand abroad originate from poor revenue growth regionally and domestically. Because of pricing pressures and regulation (within Germany and throughout Europe) and telecommunications market saturation levels near 100% in Germany and other areas in Western Europe, Deutsche Telekom has also taken steps to further integrate itself in emerging telecommunications markets.
Revenue By Region[5]
| 2007 | 2006 | 2005 | 2007/2006 Change | 2006/2005 Change | |
| United States | 14,075 | 13,628.00 | 11,887.00 | 3.3% | 14.6% |
| Germany | 7,993.00 | 8,215.00 | 8,621.00 | -2.7% | -4.7% |
| United Kingdom | 4,812.00 | 4,494.00 | 4,153.00 | 7.1% | 8.2% |
| Hungary | 1,118.00 | 1,050.00 | 1,090.00 | 6.5% | -3.7% |
| The Netherlands | 1,318.00 | 1,138.00 | 1,064.00 | 15.8% | 7.0% |
| Czech Republic | 1,121.00 | 1,043.00 | 938 | 7.5% | 11.2% |
| Austria | 1,182.00 | 1,149.00 | 885 | 2.9% | 29.8% |
| Croatia | 581 | 556 | 512 | 4.5% | 8.6% |
| Slovakia | 510 | 429 | 378 | 18.9% | 13.5% |
| Poland | 1,965.00 | 305 | n/a | 544.3% | |
| Other | 236 | 198 | 174 | 19.2% | 13.8% |
| Intersegmental Revenue | -175 | -165 | -250 | 0.06 | 34.0% |
| Total revenues | 34,736 | 32,040.00 | 29,452.00 | 0.08 | 880.0% |
| (millions, €) | |||||
As you can tell from the above chart, year over year revenue growth in 2007 increased for all regions except for in Germany, with the largest revenue growth being exhibited in Poland because of the acquisition of 48% of Polska Telefonia Cyfrowa (of which they already owned 48%), causing revenue to greatly increase for DT in the region. ref>DT 2007 10-K, “Consolidated Financial Statements,” p. 116. </ref>
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 services; for FY 2006, Deutsche Telekom’s ARPU was €40 in the United States and €20 in Germany, declining in both countries year on year.[6]
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, with broadband service subscription up 3.1 million and fixed line dial-up subscription down 2.3 million year on year since Q3 2006.[7]
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,[8] DT’s Business Communications segment is responsible for seamlessly integrating corporate fixed line and wireless networking infrastructure but Business Communications’ revenue has sliding year on year since Q3 2006.
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.[9]
Net Revenue, millions (€) [10]
| ' | 2004 | 2005 | 2006 | 2007 |
| Mobile Communications | 25,450 | 28,531 | 31,308 | 34,0505 |
| Broadband/Fixed Network | 22,397 | 21,731 | 20,635 | 19,072 |
| Business Customers | 9,246 | 9,058 | 9,061 | 8,971 |
| Group Headquarters & Shared Services | 260 | 284 | 343 | 423 |
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.
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.
The Exchange Rate
Exchange rates are a reflection of the relative supply and demand of all of the world’s currencies. Since DT conducts business across a minimum of 50 borders globally, exchange rates are of great concern to the corporation. As DT continues to expand into emerging markets and given that global economic growth continues to flourish, exchange rate risk will lessen and lessen through a diversification of the transaction currencies.
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.
Industry Competition
Given that the Deutsche Telekom is a globally operating multinational corporation, it is prudent to discern between global and domestic competition. Considering the US and global telecommunications markets, Deutsche Telekom is a major competitor in the both the telecommunications services and equipment sectors of the telecommunications industry. Operating as T-Mobile within the United States, DT competes with other major US service providers such as Verizon, Sprint, and ATT. Globally, DT competes with China Mobile in Asia, and France Telecom and Vodafone throughout Europe.
| ' | 2007 Net Revenue (millions) | 2007 Avg. ARPU | Country |
| Verizon | 93,469 | $50.96 | US |
| Sprint | 40,146 | $58.00 | US |
| ATT | 118,928 | $50.37 | US |
| T Mobile | 62,516 | $49.58 | US |
| *China Mobile | 41,015 | $12.90 | China |
- These figures for China Mobile are still for 2006 because this company has yet to file its 20-F annual statement with the SEC as of March 18th, 2008.
References
- ↑ DT 2007 10-K Financial Report, “Key data of the Group's operating segment” p. 121.
- ↑ Deutsche Telecom Wikipedia Entry
- ↑ DT 2007 Q3 Financial Report, “Overall Economic Situation,” p. 16.
- ↑ DT 2006 10-K, “Segment Revenue Breakdown,” p. 21.
- ↑ DT 2006 10-K, “Total Revenue by Geographic Area,” p. 103.
- ↑ DT 2006 10-K, “ARPU by Geographic Area” p. 110 and 112.
- ↑ DT 2007 Q3 Financial Report, “The Business areas of Deutsche Telekom,” p. 3.
- ↑ Ibid.
- ↑ Ibid.
- ↑ DT 2006 10-K, “Segment Revenue Breakdown,” p. 21.
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