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Telecommunications in Germany

by Bruce Kramer

Copyright 2017, Faulkner Information Services. All Rights Reserved.

Docid: 00017655

Publication Date: 1707

Report Type: MARKET

Preview

Germany has the largest and one of
the most advanced telecommunications markets in the world. Deutsche
Telekom, the former national provider of all telecom services, is one of
the largest communications carriers in the world, but some of the
company’s biggest competitors are merging to make formidable opponents.
For example, E-Plus and O2 merged to form the largest player in
the wireless market, while Vodafone acquired Kabel Deutschland, the
largest cable company in Germany. To round out the services it can offer,
Deutsche Telekom is investing heavily in broadband
services and is banking on bundled packages that include high-speed
Internet, television, and voice services.

Report Contents:

• Executive Summary
• Market Dynamics
• Market Leaders
• Market Trends
• Strategic Planning
  Implications
• Web
  Links
• Related Reports

Executive
Summary

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Germany is one of the
most densely populated countries in
Europe and has the region’s largest telecommunications marketplace.

Related Faulkner Reports

Deutsche Telekom Company Brief

T-Mobile US Company Profile

Telecommunications in Western Europe Marketplace

The telecom sector faces several challenges that operators are struggling to
overcome. The German telecom industry has undergone massive privatization since
1998. The industry has seen more than 1,800 new companies enter the landscape
and offer competitive services in local, regional, nationwide, mobile, and
international voice telephony, as well as Internet services. This has been
followed by successive waves of consolidation. The industry is at the forefront
of next-generation technology and continues to recognize technological
advancements that will offer better quality, lower cost, and customer
satisfaction. These opportunities have attracted the interest of telecommunications firms based
in the Netherlands, Finland, Spain, France, the UK, Italy, the US, and Japan.

Competition and the influx of foreign investors is providing customers with a
wide choice of
service providers, lower costs, unified billing for converging services, and
better network management. Services including DSL and third-generation mobile are creating a cost-effective means of delivering
critical and enhanced services.

These services are being provided by a number of operators, though there has been
consolidation. Legacy phone company Deutsche Telekom is dominant in just about
every sector, and each area tends to have a few major players and numerous
specialty and regional players. Key considerations for operators in the
marketplace include issues pertaining to service delivery infrastructure, which
includes wireless, broadband/Internet, and cable. 4G
and broadband deployment, although relatively sluggish, have been a major focus
to the extent that some carriers, notably in the cellular area, have been forced
out of the business due to a constantly rising ante in a depressed market.

Market Dynamics

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Germany is home to
80.7 million people, making it the second most populated country in
Europe. Its modern-day history has been marked by World War I and World War II, both
of which shattered the country’s economy. The end of World War II saw
the country split into two separate countries, East Germany and West Germany, from 1949 until 1990. Since reunification, Germany
has rebounded and is now the largest economy in
Europe. The current government is led by Chancellor Angela Merkel who has been in
office since November 2005. Figure 1 shows a map of Germany.

Figure 1. Germany

Source: CIA World Factbook

State of the Marketplace

Germany’s telecommunications market is currently fully open to competition and is one of
the largest telecom sectors in
Europe. The modern-day system was founded in 1995 when the federal government
privatized Deutsche Bundespost, the government-owned PTT, and restructured it
into three companies: Deutsche Telekom, Deutsche Post, and Deutsche Postbank.
Deutsche Telekom continued as the monopoly provider of all
fixed-line services until 1998, when the market was deregulated as a condition
of admission to the European Union. While Deutsche Telekom now faces
competition in all facets of the market, it is still a powerful company and is
the largest telecommunications carrier in
Europe. The German government still directly owns 15 percent of Deutsche Telekom,
and it indirectly owns another 17 percent through KfW, a government-owned bank.

Regulation. Germany’s telecom market is regulated by
an organization called Bundesnetzagentur (The Federal Network Agency for
Electricity, Gas, Telecommunications, Post and Railway). It was created in 2005
when the government expanded the role of the former regulatory agency, RegTP, to
include train transportation, electric and gas utilities, postal services, and
Internet services. The European Union also has a large influence in telecom
policy.

The current regulatory structure is dictated by a Telecommunications Act that was
adopted in 2003. This Act added a considerable increase in regulation,
particularly in the area of wholesale services, over the previous regulation. In
mid-2003, the licensing requirement for telecoms was lifted. The state of
competition is apparent by the fact that there were 875 licenses current at the
time. In 2004, the Act was amended with the goal of further fostering
competition against Deutsche Telekom, but new changes passed in December 2006
put Deutsche Telekom’s new multi-billion-dollar network off limits to
resellers. This decision has drawn the ire of the European Union, who threatened to sue Germany over the changes. In a study published in the middle
of 2009, the European Competitive Telecommunications Association (ECTA) ranked
Germany’s regulatory landscape 15th out of 22 countries, largely because the
country has not done much to promote open access to the incumbent provider’s
next-generation network. The ECTA also criticized Germany for having one of
"the weakest institutional environments" among the countries examined
because the Bundesnetzagentur receives a great deal of direction from the
federal government and does not have as much autonomy as in neighboring
countries. 

In November 2009, Bundesnetzagentur said it would start imposing caps on the
prices Deutsche Telekom could charge consumers, but it would not do anything
about the rates the incumbent charges competitors for wholesale access to the
PSTN. This means that the company could theoretically make other telecom carriers pay
retail rates for network access. This action drew criticism from the European Commission,
who, in December 2009, issued a report urging the government to do a better job of
promoting competition in the fixed-line sector. 

Key factors in the German telecom market environment include continuing incremental
improvements in regulation that have been fostered by EU mandates, suggestions
from trading partners, and WTO obligations. In services, fixed line access has
reached a plateau and telecommunications companies are seeking to improve
revenues through broadband and Internet connections. Deutsche Telekom remains
the market leader in most sectors, although there is significant competition
across all service areas. Development of broadband service and Internet access
is seen as a priority by the government as well as by the service providers.

Germany has a highly advanced telecom network, but the country had to invest
heavily after the reunification to update the infrastructure in the areas that
made up East Germany. At the time of reunification, West Germany had a
teledensity of about 46.5 percent, while East Germany had a teledensity of just
18.1 percent. Deutsche Telekom invested heavily to replace copper lines with
state-of-the-art fiber-optic cables. According to the most recent information
compiled by the International Telecommunications Union (ITU), Germany had about
44 million fixed lines in service at the end of 2016. This places the overall
fixed-line teledensity at about 54 percent, which is one of the highest rates
among major countries. However, like most countries around the world, the number
of fixed lines has been gradually but steadily decreasing as consumers abandon
landline telephones.

Figure 2 shows how the number of fixed lines in Germany has grown over the last
10 years.

Figure 2.
Fixed Lines in Germany, 2006-2016

Source: ITU

Wireless.

Wireless services were first introduced in Germany in 1985 when Deutsche
Bundespost, the PTT predecessor of Deutsche Telekom, began offering analog
service under the brand name C-Tel. The first digital GSM network was activated
in 1992. Today, Germany has a healthy wireless sector. The country has about
94.4
million subscribers, which places the overall penetration rate at 115 percent,
and there are three companies providing nationwide service.

The following figure shows how the wireless market has evolved over the last
decade.

Figure 3. Mobile Customers in Germany, 2006-2016

Source: ITU

3G. Germany auctioned off licenses to provide third-generation wireless services in
2000 when 3G licenses were viewed as killer applications and companies shelled
out billions of dollars for the rights to build next-generation networks. Six
carriers secured licenses through the auction: T-Mobile, Vodafone, E-Plus, O2,
MobilCom Multimedia, and Group 3G. These companies collectively shelled out 50.8
billion euros for their licenses, and some of them never had a chance to recoup
their investment. MobilCom returned its license in 2003, and the company’s 3G
wireless operations were eventually bought by KPN of the Netherlands and merged
with E-Plus; the fixed-line assets were merged with freenet. Group 3G was a
consortium backed by Telefonica Moviles and Sonera. It paid $8.4 billion
for its 3G license but went out of business before it ever launched its service. 

In 2003, T-Mobile was the first carrier to begin trials of its UMTS networks.
Today, all four of the remaining license holders provide 3G services and view
them as a key to future growth in Germany’s wireless sector. Three of the
companies have taken the additional step of deploying HSDPA technologies in
addition to their UMTS networks, and T-Mobile has gone so far as to install
HSDPA across its entire 3G network. The German government issued a second series
of 3G licenses to Vodafone, Deutsche Telekom, and O2 in 2009 for a combined 3.6
billion euros. E-Plus, the smallest of the country’s mobile operators, failed to
win any additional licenses, leaving a hole in its network coverage. 

4G.

Germany was also the first country in Europe to issue
licenses for fourth-generation service. In 2010, the government allowed the four
companies operating in the market at the time to bid on blocks of spectrum, and
all of companies secured licenses for a combined total of 4.3 billion euros. In
February 2012, Vodafone Germany launched the first 4G smartphone in Europe.

Today, all three of the country’s wireless carriers offer 4G service over LTE
networks to 70 percent of the country. German
mobile carriers are also moving forward with plans to bring even faster LTE-A
technology to their networks.

Broadband/Internet.

The market for Internet services in Germany has been explosive. At the end of
2016, 90 percent of the population used the Internet. Germany also has 31.4
million broadband subscribers for a penetration rate of 38 percent, which ranks
7^th among the 34 countries participating in the Organization for
Economic Cooperation and Development (OECD). Figure 4 shows how the number
of Internet users has taken off in the last decade.

Figure 4. Broadband Subscribers in Germany, 2006-2016

Source: ITU

The market for broadband access was slow to take off because ISDN was very
popular in Germany. The technology is faster than dial-up, but it can only
deliver speeds around 128K bps. Within the broadband sector, DSL connections are
by far the most popular, representing 81 percent of all broadband connections.
Broadband is poised for explosive growth, however, as more companies are rolling
out triple-play packages of voice, video, and Internet services and prices
slide.

The following graph breaks down the broadband sector by access technology.

Figure 5. Broadband Technologies in Germany

Source: OECD

Market Leaders

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The
following sections discuss the leading players in the fixed-line,
wireless, and Internet sectors of Germany’s telecommunications market. Deutsche Telekom is the leading player in most
sectors, although the market is fully deregulated and open to competition, and competitors
have been generating more revenue than Deutsche Telekom since mid-2005.
According to the most recent annual report published by the country's
telecom regulator, Deutsche Telekom generated 44 percent of
all revenue in the market in 2015.

Figure 6. Market Share for Overall German Telecom Market by Revenue

Source: RegTP

There are only two major players in the German fixed-line market: Deutsche
Telekom and Vodafone.  

Telekom Deutschland.

Telekom Deutschland was created in 2010 when Deutsche Telekom merged T-Home and
T-Mobile into a single group. It is the largest landline carrier in Europe and
the leading provider of local and long distance services in Germany. The company
got its start as a government-owned monopoly, but competitors have been
gradually eating away at its market share since they were allowed into the
market in 1998.

Deutsche Telekom recognizes that the lines between various communications
delivery platforms continue to be blurred as people access the Internet from
their telephones, watch television over their computers, and more.

The company’s focus on converging technologies is also evident in its
two-pronged growth strategy designed to offset declining revenues in its home
territory. First, the company seeks to continue to grow its international
presence organically and through acquisition. Secondly, it is aggressively
marketing creative new services and bundles in Germany that combine telephone
service with broadband Internet access, IP television, and/or mobile calling.

For example, it offers a package of fixed and mobile calling,
television, and broadband Internet called Magenta One. The company expects to have three million
subscribers by 2018.

Another example is a package called MagentaHome Hybrid that combines broadband
DSL with LTE mobile service. This service first tries to connect to the
company’s DSL network then switches over to LTE if the network is congested.

The company is also looking beyond the PSTN toward next-generation networks and
the services that can be offered over them. A core part of this strategy is the
company’s plan to build out a pan-European IP network by 2018. This project has
been a serious point of contention in the international telecommunications
community since the German government ruled that the company does not have to
open to resellers.

Vodafone.
Deutsche Telekom’s largest competitor in the local and long distance market is
Vodafone, which entered the market when it acquired Arcor in 2000 to get a
foothold in the German mobile market. The global wireless service provider
originally expected to shed the company’s fixed-line assets, but it changed its
mind in 2006 after recognizing a strategic opportunity to compete directly with
Deutsche Telekom. Arcor has an advantage over other competitors because it
operates its own nationwide IDSN network. It uses this network to offer VoIP
service, meaning it does not have to purchase wholesale PSTN access from
Deutsche Telekom.

In late 2013, Vodafone acquired Kable Deutschland, the largest cable company in
Germany, for $10.3 billion. It now uses those assets to offer service bundles
that combine television and DSL broadband service.

Figure 7 provides market share information based on the number of access lines.

Figure 7. Market Share for German Landline Companies, Based on Lines Owned

Source: RegTP and Vodafone

Wireless

After some recent consolidation, there are three companies providing
mobile service in Germany.

Telefonica Deutschland. Telefonica Deutschland was formed
when Telefonica acquired E-Plus for 8.6 billion euros. The combined company is
the largest in Germany, with 44.7 million customers and 38
percent of the market. Telefonica owns 62.1 percent of the company while KPN owns 20.5 percent
thanks to its previous ownership of E-Plus. The remainder is owned by
public shareholders.

The deal came under heavy scrutiny from German and
European authorities who were concerned that having one less carrier in the
market would limit competition and be bad for consumers. In order to gain
approval, Telefonica has to sell 20 percent of the new company’s total network
capacity to Drillisch, a German virtual mobile operator. It also has to be
willing to sell another 10 percent to Drillisch in the future.

The company offers its
service through O2’s 940 retail locations across the country as well as through
partnerships with a series of retailers and other businesses, most notably
Kabel Deutschland, one of
Germany’s largest cable operators. The combined company offers
3G and 4G service across the country.

Telekom Deutschland. Telekom Deutschland, the wireless
division of Deutsche Telekom, is now the second largest mobile carrier in
Germany with 41.8 million subscribers and 36 percent of the market.
The German wireless market is approaching the saturation point, so T-Mobile and
the other carriers are looking for new ways to generate revenue. One component
of the company’s growth strategy is to offer innovative phones. Telekom
Deutschland is the exclusive seller of the Apple iPhone in Germany as well as the G-1, which was the first phone to run Google’s Android
platform; the BlackBerry Bold; and the HTC Touch2 and HTC HD2, which
were the first phones in the world to run the Microsoft Windows Mobile
6.5 Professional.

Telekom Deutschland also views mobile data services as a key growth
driver. The company is the largest operator of Wi-Fi hotspots in the
world, and it has 8600 of them in Germany alone. The company already
operates a wireless broadband network that uses UMTS and HSDPA
technologies supporting download speeds of 3.6M bps. It also has an EDGE
network in areas where there is no UMTS/HSDPA coverage. 4G LTE service
is available in all 16 federal states, which was the coverage
requirement issued by the government when the company won its operating
license. The company is currently upgrading its 4G network to support
speeds of up to 150M bps, and it is helping the telecom industry develop
5G standards.

Lastly, Telekom Deutschland has been introducing
service bundles: The company offers calling plans that
combine mobile voice and data usage into a single bill.

Vodafone. Vodafone is the third largest wireless carrier in Germany and the
second largest in the world. Domestically, it has 30.7 million customers
and 26 percent of the market.

The company is fighting competing with Telekom Deutschland by offering service bundles that combine wireless service
with fixed-line calling and broadband Internet access from its Arcor
business, although it is placing less emphasis on its fixed-line
business. A unique aspect of Vodafone’s strategy is the way it is
applying cloud computing to wireless services. The company has been
offering a cloud-based telephone service called Vodafone One Net, where
the company will store data and applications on its own network, which
can then be accessed via a mobile phone or Wi-Fi connection. Vodafone
was also the first company in Germany to launch 4G service over an LTE
network, which now covers 90 percent of the population and has about 10 million
customers connected to it. The company also offers LTE-A service in 10
cities across the country.

Figure 8 shows market share for the German wireless carriers, while Table
2 shows the carriers’ subscriber numbers and the network
technologies they use. 

Figure
8. Market Share for Mobile Carriers

Source: Carrier Data

Source: Carrier Data

Broadband/Internet

The market for Internet services, particularly broadband, is starting to
heat up. The following companies are leading the way in
the sector.

Deutsche Telekom.
Deutsche Telekom is the largest Internet service provider in Europe and
Germany. Domestically, it has
12.9 million broadband subscribers and 41 percent of that market. DSL
has been a key part of the company's broadband strategy for years. As such, the company has been aggressively building out its
infrastructure. Its DSL network now covers 96 percent of the population, and
it offers faster ADSL2+
in 1,000 markets and VDSL service in 50.

DT is also aggressively building out a fiber-optic network to keep pace with
increasing demand for faster broadband service. At the end of 2016, the company
had 4.3 million fiber-optic customers, an 45 percent increase from the year
before.

United Internet. United Internet is the second largest ISP in Germany,
with 8.9 million total customers. In addition to
providing Internet access, United Internet offers a portfolio of other
Web-related services, such as e-mail and Web hosting. The company
purchases wholesale network access from Arcor. United Internet’s business strategy is built around four areas:
networking, content, end-user equipment, and software. Much of the
company’s content and software strategy is built around cloud-based
computing, where customers access and store information on the Internet.
It is also leveraging its ownership in WEB.de, the second largest Web portal in the country.

In June 2017, United Internet agreed to merge with Drillisch, a virtual
mobile operator that acquired up to 30 percent of Telefonica Deutschland’s
network capacity as a condition of that company’s merger with E-Plus. This new
company will create another major player in the industry that is capable of
provided mobile, landline, and broadband services.

Vodafone. Deutsche
Telekom’s biggest fixed-line competitor is also a major broadband
provider. The company is working aggressively to acquire new
customers, and it has been investing heavily subsidize subscription costs in order to steal customers from the
incumbent in a price war. In addition to operating a nationwide ISDN
network, Arcor has a fiber-optic network that covers 70 percent of the
German population and it has been aggressively building out its DSL
infrastructure. In July 2017, the company launched a faster broadband
service that operates at 500M bps. While 93 percent of the homes in its
operating area can receive speeds of 200M bps, Vodafone expects to bring
the 500M-bps service to 25 percent of its footprint. 

In order to compete against the other major players in the telecom market,
Vodafone introduced a service bundle in late 2016 called GigaKombi that combines
4G mobile service with broadband Internet.

Telefonica Deutschland. Telefonica
Deutschland sells broadband products and services to its retail
stores and other distribution channels so it can offer service bundles that combine high-speed
Internet access with mobile calling plans.  

The
following chart provides market share information for the German
broadband market.

Figure 9. Market Share for German Broadband Providers

Source: RegTP

Market Trends

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The following trends are shaping the future of the German telecommunications
sector.

The Market Gets Another Major Player

Drillisch's acquisition of network capacity for Deutsche Telecom and its
merger with United Internet will add another major player to the competitive
telecom market alongside Deutsche Telekom, Vodafone, and O2. The combined
company has 12 million customers and 3.2 billion euros in annual revenue.

Continuing Growth in the Mobile Sector

The wireless penetration rate in Germany is now over 120 percent. The market
is likely approaching the saturation point as far as new customers go, so the
country’s four wireless companies are focusing on keeping the customers they
have and getting as much revenue as possible out of them. Offering the best
phones and the fastest networks is an important part of that strategy. The
companies involved in the German broadband market are already talking about 5G
technologies and expect to have service commercially available by 2020. In June
2017, the German telecom regulator published the initial draft of a framework
document that will govern how frequency will be used for 5G service and said
they expect to auction off 5G licenses in 2018.

The Evolving Broadband Market

Germany has the second largest broadband market in Europe and,
like the wireless sector, service providers are looking to increase the speed
offered over their networks in order to keep their customer base. DSL is the
dominant type of broadband connection, but cable carriers have been more
successful in Germany than several other countries in Europe. Much of the cable
sector has invested in upgrading their networks to DOCSIS 3.0, which allows them
to offer speeds up to 120M bps, which is faster than DSL.

The German government wants all 40 million homes in Germany to
have access to broadband connections of at least 50M bps by 2018, which is a
more aggressive target than the European Commissions goal of having 30M bps
available to 50 percent of Europe by 2020. Forbes magazine estimates that it
will take up to 80 billion euros to build out the infrastructure required to
support this goal, and much of that investment will need to come from Deutsche
Telekom.

This puts Deutsche Telekom in a trailblazing position for the European
broadband market.

Convergence
and Service Bundles

Telecommunications
companies and cable network operators are looking for creative ways to
get as much revenue as possible out of their existing customers. To this
end, these companies are rolling out triple-pay service bundles that
combine voice service, broadband Internet access, and cable television,
and Deutsche Telekom is now leading the way, offering service over a
new, advanced network. As these lines continue to blur, Deutsche Telekom
expects the market to undergo more consolidation, particularly in the
mobile sector. 

Vodafone’s Role in the Market

Other companies have been unsuccessful in
making much headway against
Telekom Deutschland, but that could change now that
Vodafone has acquired Kabel Deutschland. Vodafone plans to use the the cable
company’s network and market presence as the hub of its fixed-line business, and
it wants to expand into services like Web hosting and security in addition to
television content. The acquisition is a change in direction for Vodafone, which
is mostly centered on wireless business, but it allows the company to offer
quadruple-play bundles of landline and mobile telephone service, broadband
Internet access, and cable television all on one bill. .

Strategic Planning Implications

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The
Federal Republic of Germany is situated in the center of
Europe
and covers an area of about 357,000 square kilometers. With a population of
80.7 million people, it is one of the most densely populated
countries in
Europe. This population is distributed among the country’s 16 states, also called
Landers, each of which has its own constitution, legislation, and government.
There are still considerable differences between what was the old
East Germany

and the Western part of the country; this is reflected in attitudes toward
investment, as well as in infrastructure.

Not
only does
Germany
have
Europe’s largest telecommunications market, but it also boasts one of the world’s
most technologically developed telecom systems, thanks to extensive capital
investments since reunification. On the home front,

Germany

has an extensive system of automatic telephone exchanges connected by
fiber-optic cable, coaxial cable, domestic satellite system, and microwave radio
relay. On the international front,

Germany’s service is possible because of extensive land and undersea cable facilities
in addition to earth stations and satellite systems.

The
German telecommunications market is large and progressive and offers many
opportunities for investment. In general, investors tend to find long term
commitments most profitable. German businesses tend to be risk averse, and
proposals need to be backed up with extensive statistics and convincing
arguments. Because of its central position,
Germany

can serve as a starting point for building services or selling equipment across
the European Union.

Fourth-generation mobile services are widely available and 5G services are a
few years away.

With Germany, the near monopoly position of Deutsche Telekom can be problematic. New
telecommunications legislation, introduced in 2003, should mitigate some of DT’s
advantages, particularly in provisions that better regulate wholesale access.
However, DT’s dominant position in nearly all markets, combined with vast
resources from its considerable overseas investments, make it a formidable
competitor.

Web Links

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• Arcor AG & Co.: http://www.arcor.de
• Bundesnetzagentur: http://www.bundesnetzagentur.de
• Deutsche Telekom: http://www.telekom.com/home
  Drillisch: https://www.drillisch.de/
• E-Plus: http://www.eplus.de/
• Freenet.de: http://www.freenet.de/
• MobilCom-Debitel: http://www.mobilcom-debitel.de/
• O2 Germany: http://www.o2online.de/
• T-Mobile: http://www.t-mobile.de/
• Vodafone Germany: http://www.vodafone.de/

About the Author

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Bruce Kramer is a
regular contributor to Faulkner Information Services who has written
over 200 articles and white papers on the technology industry over the
last 16 years. In addition to working as an independent author and
analyst, Bruce is a former Senior Editor for Faulkner Information
Services and has over a decade of experience in the supply chain
management and business process outsourcing industries.

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