Can Deutsche Telekom's Brass Survive Its Troubles?

The German telco is losing market share. Its boss has to persuade critics DT's tactics of cost-cutting plus cheap Net/phone/video packages can work

Deutsche Telekom Chief Executive Officer Kai-Uwe Ricke wanted to make one thing clear: Despite rumors in the German press that he could lose his job, Ricke is not worried about a regularly-scheduled meeting of the German telco's supervisory board over the weekend of Sept. 2. "I'm looking forward to it," the CEO insisted at a press conference in Berlin Aug. 31. "I'm well prepared."

But Ricke is under pressure, and his drawn face showed it. The trouble started Aug. 10, when Europe's largest phone company said its second-quarter net profit fell 14%, to $1.3 billion, and it dramatically cut sales and earnings targets for the rest of this year. At about $25 billion, operating profit for 2006 will be more than $1 billion less than expected, Ricke warned at the time.

Since then, as Ricke acknowledged at the press conference, there has been rampant speculation about whether the company is poised for a executive shakeup. "The whole [management] board is in danger," says one analyst who asked not to be named. (German companies have separate supervisory and management boards.)


  At a press conference tied to the International Radio Exposition in Berlin, the normally good-natured Ricke displayed a touch of testiness toward his critics, saying their ideas about how he should be running the company "don't fit together at all." He declined to answer a reporter's question about what behind-the-scenes role U.S. buyout firm Blackstone Group, which owns 4% of DT, might be playing.

Like other European incumbent telcos, Deutsche Telekom (DT) is struggling to stem the tide of customers defecting to rivals offering cheaper phone and Internet services in its home market. All told, DT lost about half a million phone lines in the second quarter as customers switched to other carriers.

In Berlin, Ricke and his management team sought to convince doubters that the company has a strategy in place to stop that catastrophic loss of market share. "We have to work hard," he acknowledged, before unveiling a package of price cuts of as much as 30%.


  Ricke also will step up internal cost cutting and offer customers new packages designed to exploit Deutsche Telekom's holdings in all areas of the telecommunications market, from regular telephone lines to on-demand entertainment. For instance, the company announced Aug. 31 a new bundle called T-Home Complete Basic, which offers customers fixed-line telephony, high-speed Internet access, 60 TV channels via broadband, and an archive of on-demand programs and movies, all for about $100 a month.

In its first so-called "quad-play" offering, DT will further sweeten the T-Home deal by offering discounts to customers who are also T-Mobile subscribers. Such customers could get the Internet-telephone-entertainment-mobile package for as little as $85 a month. "I'm certain we will be able to stop the erosion of our market share," said Walter Raizner, DT management board member responsible for the landline and broadband networks.


  Deutsche Telekom is already late to the party, though. Other former phone monopolies such as France Telecom (FTE), BT Group (BT), and Telefónica (TEF) are far ahead in pushing broadband products such as television via the Internet, or IPTV. "Deutsche is definitely not at the forefront of IPTV," says Dan Bieler, a telecoms analyst with London-based telecom consultancy Ovum, citing Telefónica and Holland's KPN (KPN) as leaders.

Even though France Telecom said last month it may miss its target for 2% sales growth this year, it's moving faster than DT to offset declining fixed-line revenues by bundling broadband with multimedia services. The French telco's speedier response is due, in part, to fierce competition with local upstart Iliad, which first launched low-cost DSL broadband service in France in 2002.

Thanks to the pressure to innovate, France Telecom became the first former incumbent in Europe to roll out a residential Voice-over-Internet-Protocol, or VoIP, service two years ago, and it now counts 1.73 million users who pay a flat rate for unlimited Net-based calls anywhere in France.


  What's more, of the company's 3 million broadband customers, more than 300,000 have signed up to receive TV programming via DSL. By comparison, DT is only now rolling out TV via DSL, even though Ricke has been talking about it for a while (see, 3/9/06, "Deutsche Telekom Turns on the TV").

Likewise, in Spain, Telefónica's IPTV offering has been so well received that the company has even able to sell DSL connections to people who don't have computers, says Thomas Friedrich, a telecoms analyst at HVB Group in Munich. Telefónica has signed up 267,000 customers to its Net-TV service (see, 7/28/06, "Telefónica Gets the Last Laugh").

One problem for DT has been internal barriers between divisions. Ricke is working on breaking those down to get managers focused on retaining customers. A major step in that direction occurred earlier this year, when DT rolled its fixed-line and Internet-access groups into a single unit. "Internally they really have to work together rather than against each other," said Martin Gutberlet, vice-president at Gartner Research.


  With its price cuts, DT risks getting caught in a price war that will choke profits. But many analysts don't see any other way. "You can't afford to lose too much market share, especially if you want to make money in the future on value-added services," says Hannes Wittig, a telecom analyst at JP Morgan Chase. "DT is taking a profit hit now in the hopes of regaining market share in the future."

Ricke vowed the company won't be sucked into a ruinous price war. And in another jab at his critics, he pointed out that Deutsche Telekom has defied conventional wisdom in the past, and been proved right. For example, the company refused a few years ago to spin off its mobile division, especially the T-Mobile U.S. unit, as competitors were doing.

Now, Ricke noted, rival BT, which sold off its O2 mobile arm, is getting back into mobile by leasing capacity on rival networks. "The comfortable route is not always the right one," Ricke said. He has to hope that his supervisory board is similarly philosophical.

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