Group strategy Deutsche Telekom expands position as leading telecommunications provider in Europe Group strategy successfully implemented again in 2018 Our corporate strategy: Leading European Telco Since 2014, we have been aligning all of our corporate activities with our Leading European Telco strategy – with the aim of becoming Europe’s leading telecommunications provider. This strategy has proved very successful: In terms of market capitalization, we are Europe’s highest-value telecommunications company (as of December 31, 2018). In the reporting year, we increased revenue, adjusted EBITDA, and free cash flow once again. At the same time, we see our Group as facing new challenges: The parallel build-out of broadband and mobile infrastructure (optical fiber and 5G) calls for high investments and innovative approaches to implementation. This situation is intensified by sustained public and political pressure on our build-out strategy, predominantly in Germany. Innovative technologies like artificial intelligence are increasingly becoming part of everyday life. Voice-controlled assistants and chatbots, to name just a couple of examples, are permanently changing the face of the customer experience, our working environment, and our responsibility in the digital society. Businesses need simple, end-to-end solutions for connecting their production operations and managing ever increasing data streams. Providers like Google and Microsoft are also entering the global connectivity field. On top of this, our direct competitors in the telecommunications industry are digitalizing more and more elements of their core business, improving efficiency, and enhancing the customer experience. We are tackling these challenges head on. We continue to systematically implement our Leading European Telco strategy. As the graphic below shows, our claim to leadership ranges over three dimensions: customer experience, technology, and business customer productivity. From this we derive three specific action areas with which we are creating the foundation for future organic growth. Because only if we grow can we sustainably secure our earnings performance and continue to meet the demands of our investors. This growth target is supported by two areas of operation which provide the framework for our internal activities. Leading European Telco corporate strategy Strategic areas of operation One connectivity & perfect service We want to offer our customers a seamless and technology-neutral telecommunications experience. Hence, we market fixed-network and mobile communications in one convergent product (fixed-mobile convergence, FMC). By the end of the reporting year, some 4.3 million customers in Germany had opted for MagentaEINS; that is more than 0.6 million more than in the prior year. The integrated national companies of our Europe operating segment won some 1.1 million new customers for MagentaOne and similar FMC offerings in 2018. Because we want to continue on this path of growth, we work continuously to improve and expand our convergent offer. Our offer also includes attractive TV content across all screens and on any device. In 2018, we realigned our TV service in Germany under the MagentaTV brand, overhauling the user interface and adding further content. We aggregate linear television with extensive features, access to content from the biggest video-on-demand providers (Sky, Netflix, Maxdome, and Amazon Prime Video), exclusive TV series, and a wide range of sports content on a single platform. For the first time ever, customers can now access our TV content irrespective of their internet provider. The success of this product bears out our strategy: In the reporting year we won 0.2 million new TV customers in Germany. In the same period, the number of TV customers at our national companies in Europe grew in organic terms by 0.1 million. By standardizing our technical platforms and expanding our services to selected markets, we have consolidated our leading position. As a premium provider, we set ourselves apart from our competitors with perfect customer service: In the reporting year, we presented several service improvement initiatives in Germany, including improved self-service options, callback services, a service for optimizing home Wi-Fi, and installation packages for the home network. Our top rating in the connect hotline test (number 1 spot among German broadband providers in 2018) shows that we are on the right track. We will continue our efforts in 2019 to offer customers the best service, for example by noticeably further improving our first-call resolution rate for customer queries. In the United States, T-Mobile US leads the competition in numerous service quality surveys. This year, we introduced the Team of Experts initiative in the United States with the aim of giving customers even more personal service and systematically removing frustration factors in customer service. This is one of the reasons why we won 4.9 million new mobile customers in the United States in 2018. At our national companies in Europe, we are currently focusing on increasing the level of digitalization in customer interaction; for example, using our specially developed service app. Following successful international rollout, this app aims to improve both the customer experience (e.g., with self-administration of contracts) and the monetization of our offerings (e.g., with customer-specific approaches). We measure customer satisfaction using the globally recognized TRI*M method. Based on this performance indicator, we improve our customer contact processes, and our products and services. At the same time, we determine the loyalty of our customers towards the Company. The results are presented as a performance indicator, the TRI*M index, which ranges between minus 66 and plus 134 points. At the end of the reporting year, the indicator came in at 67.7 points versus an adjusted value of 67.2 points at the start of the year (measured on a comparable basis). Our goal for the coming years is to achieve a steady overall improvement in customer satisfaction. Integrated gigabit networks Convergent products require integrated networks. SDG 9 That is why we are systematically building out and interlinking our fixed and mobile networks, so that we can offer our customers the fastest possible connection at top quality, anytime, anyplace. As part of this, we are also striking out in new directions, for example, with innovative technologies like fixed-network substitution using mobile technology to offer speeds of over 1 Gbit/s, or the use of artificial intelligence to ensure infrastructure is built out in line with demand, as well as exploring new partnerships and joint ventures. Integrated management also improves the capacity utilization of our infrastructure and increases efficiency in operations and maintenance. Fiber optic-based fixed networks are the basis for an integrated network experience. We already operate the largest fiber-optic network in Germany with around 500,000 kilometers of fiber-optic cable. In 2018, we added some 60,000 kilometers. We are currently investing over EUR 5 billion annually in building out and operating networks across Germany, with over EUR 4 billion of this attributable to the Germany operating segment. That’s more than any of our competitors are investing. We continued to build out our network in the reporting year by deploying vectoring. At present, we can offer high-speed internet to some 28 million households using this technology – around 14 million of these are already benefiting from speeds of up to 250 Mbit/s. At the same time, we are resolutely pressing ahead with the transition to fiber-optic technology: By 2022, for example, we plan to supply around 3,000 business parks with fiber to the office and thus offer gigabit connections to around 80 percent of companies in business parks across Germany. SDG 8 In addition, existing customers are gradually being migrated to IP-based solutions and in consultation with the customers themselves. The migration of the German mass market will be completed in 2019 as planned. We have already completed the migration to IP lines in five national companies (Hungary, Croatia, Slovakia, Macedonia, and Montenegro) and will continue to move forward with our migration efforts in Greece on a step-by-step basis. In mobile communications, we set ourselves apart from our competitors with the outstanding quality of our network. We have regularly come out on top in independent network tests. In 2018, we won the three big network tests – by connect, Chip, and Computer Bild – in Germany. Independent certification organization TÜV rated our mobile network as offering the best “quality to the customer.” In our Europe operating segment, six national companies were rated as “best in test overall” by the P3 communications network experts, as was T-Mobile Netherlands. Furthermore, T-Mobile US was once again the clear winner in the OpenSignal tests in August 2018. We intend to remain a quality leader and hence are further building out our LTE networks: In Germany, we plan to cover approximately 99 percent of the population with LTE by the end of 2020; in our European national companies, coverage is to reach around 98 percent on average. With the fifth-generation mobile communications standard (5G), SDG 9 we will create a highly reliable mobile network with extremely low latency and high data throughput. To this end, network functions will be decoupled from the access medium (e.g., optical fiber, copper, or air). By distributing computing power in the network (mobile edge computing) and creating dedicated network layers for individual applications (network slicing), 5G creates the basis for future technologies such as virtual reality, autonomous driving, and the Internet of Things. Our goal is to work with policy-makers and industry to build the most powerful digital infrastructure for Germany – in cities and rural areas alike. We will continue to make massive investments in infrastructure, but at the same time need fair and reliable conditions to be in place. Secure ICT solutions & big IoT Our international network solutions remained popular among German business customers in 2018. Secure, reliable global connectivity is essential to the advancing digitalization of critical processes in companies and industry associations. We remain a dependable partner to German industry thanks to our portfolio of international communications solutions that combine the strengths of our national network infrastructure with our international network assets. Our business with “traditional” IT outsourcing services for international corporate customers has been in decline for a number of years now, mainly due to persistent intense competition. For this reason, our Systems Solutions operating segment is currently undergoing a radical transformation comprising four key thrusts: a shift to portfolio-based business management, the integration of our sales organization, the reduction of interdisciplinary costs by streamlining processes and hierarchy levels, and a significant increase in the level of automation in service provision with a higher share of offshore/nearshore services. We made excellent progress with the transformation in the reporting year and will be able to implement the new portfolio-based organization in 2019 as planned. We will also tailor our IT and cloud offers even more closely to the needs of our SME customers in the future. In 2018, we generated revenue of some EUR 700 million in this area in our Germany operating segment, up once again by around 20 percent against 2017. As we expect this business to grow significantly over the coming years, we are expanding our IT and cloud ecosystem for SMEs together with market-leading technology partners. For us, the biggest growth driver in the business customer environment is the Internet of Things. SDG 12 Over the next few years, we expect billions of new devices – means of production such as machines or tools, everyday objects like cars or fridges, but also public infrastructure like street lights or park benches – to be connected to the Internet. Our NarrowBand IoT networks (NB-IoT) alongside M2M connectivity create the basis for cost-effective and energy-efficient networking. In addition, we will provide our customers – e.g., in the automotive, healthcare and public sectors – with the platforms to manage these devices and use the data collected for their business. As a leading network operator in the NB-IoT environment, we also operate networks in ten countries, offering coverage nationwide in the Netherlands, Austria, Slovakia, and the United States. At present, we work with over 500 customers in Europe, helping them to prepare and roll out their NB-IoT-based hardware and applications. These customers include, for example, Ista (smart submetering), BMW (paperless displays), the City of Hamburg (smart parking), Veolia and Geotermia Zakopane in Poland (smart metering), and Dual Inventive (rail track monitoring). We supplement these offers with our comprehensive cybersecurity portfolio. SDG 16 Telekom Security, which was established in early 2017, is today Germany’s leading provider of cybersecurity solutions. In the medium term, we also want to take on a leading role in Europe. Since cyberattacks pose a growing threat to companies and our customers’ need for data privacy and security is increasing, we expect growth rates in this business area to remain consistently high over the next few years. Supporting areas of operation Save for growth investments Future growth requires adequate investment. To this end, we are investing in our own innovativeness as well as integrating successfully new developments from outside our Company. Thanks to our strict cost discipline, we generate the funds we need to finance this investment and safeguard our competitiveness. We will therefore systematically continue on this path of cost transformation. In the long term, we also want to be Europe’s leading telecommunications provider in terms of efficiency. We take a value-oriented approach to managing our investment portfolio. Business areas that cannot be adequately developed within the Group are disposed of, while our growth ambitions are bolstered by means of equity investments and acquisitions. Since 2018, we can also offer convergent products from a single source in Austria and the Netherlands: The acquisition of cable provider UPC Austria by T-Mobile Austria was consummated. The European Commission also unconditionally approved the acquisition of Tele2 Netherlands by T-Mobile Netherlands. We aim to strengthen our position in the U.S. mobile market through the business combination of T-Mobile US and Sprint, agreed in April 2018. Not only is the planned combination of business activities under the all-new, larger T-Mobile US consistent with our strategy of successfully developing our U.S. business, it will also bolster the customer-oriented Un-carrier strategy and allow us roll out 5G technology across the United States faster and better than before. After implementation of the planned combination, the new company will have a value of approximately USD 150 billion; the anticipated synergies will have a present value of around USD 43 billion (after integration costs). Simplify, digitalize, accelerate Simplicity in our offers and in our organization makes the digital transformation of our core business easier. In this way, we increase our implementation speed – both in the interaction with customers and in the implementation of new, strategic initiatives. This is why we want to become simpler, more digital, and ultimately more agile. There are two main thrusts to our pursuit of simplicity. First, we want to offer our customers intuitive products and easy to understand rates: Our convergent products such as MagentaEINS are a first step in this direction. Going forward, we want to significantly further reduce product complexity. Second, we want our internal operation to be as efficient as possible, i.e., in terms of time and costs. Hence we will scrutinize our organization, processes, and decision-making procedures and further optimize them wherever possible. The digitalization of our core business is helping us to improve customer experience and increase our efficiency. Our innovative service app lets our customers in Germany and Europe view their data and contracts at any time and get the most benefit from our extensive services. The app is a resounding success: For example, our customers rate the MeinMagenta app for iOS with 4.4 out of 5 stars. Long term, our plan is to digitalize all value creation stages in their entirety. To this end, we are implementing more agile IT solutions and systematically expanding our expertise in innovative technologies like artificial intelligence. Data-based analyses are already helping us to maintain our hardware more proactively, understand customer needs better, and manage our networks more efficiently. Innovation that works: A study by Berlin University of Applied Sciences and CEBIT in the reporting year rated, for example, our chatbot at T-Mobile Austria – Tinka – the best chatbot out of all the DAX 30 and MDAX companies. However, simplicity and digitalization also call for new organizational forms, new skills, and a cultural shift. Given this, in the reporting year we introduced the principle of end-to-end customer responsibility, particularly in areas close to the market, and implemented an agile organizational structure. We target and systematically develop our employees’ abilities in line with the challenges being faced in the digital age and promote diversity as a source of change, innovation, and creativity across our entire Company. Future Work offers our employees modern, open office environments that provide the perfect setting to encourage flexibility and new ways of working together. SDG 8 In summary, our Leading European Telco strategy is reflected in our goal: To be the leading European telecommunications provider. We want to be a leader in terms of customer experience, technology, and the implementation of advances in productivity for our business customers. Because only when we lead can we grow and meet the demands of our investors in the long term. This growth will be made possible by carefully managing our financial resources and systematically transforming the Company to be simple, digital, and agile in every sense. We play a responsible and active role in society. We are a partner, not just at a social level, but also at a political one, and we work in the interests of ensuring the open, forward-looking development of all countries in which we are active. SDG 8 schließen Optical fiber Channel for optical data transmission. schließen 5G New communications standard, which offers data rates in the gigabit range, converges fixed-network and mobile communications, and supports the Internet of Things – rollout starting 2020. schließen FMC - Fixed-Mobile Convergence The merger of fixed-network and mobile rate plans for customers that have fixed-network and mobile contracts with Deutsche Telekom. schließen Mobile customers In the combined management report, one mobile communications card corresponds to one customer. The totals were calculated on the basis of precise figures and rounded to millions or thousands. Percentages were calculated on the basis of the figures shown (see also SIM card). schließen Vectoring Vectoring is a noise-canceling technology that removes the electro-magnetic interference between lines, enabling higher bit rates. However, in order to cancel noise, the operator must have control over all lines. This means that other operators cannot install their own technology at the cable distribution boxes. schließen IP - Internet Protocol Non-proprietary transport protocol in Layer 3 of the OSI reference model for inter-network communications. schließen LTE - Long Term Evolution New generation of 4G mobile communications technology using, for example, wireless spectrum on the 800 MHz band freed up by the digitization of television. Powerful TV frequencies enable large areas to be covered with far fewer radio masts. LTE supports speeds of over 100 Mbit/s downstream and 50 Mbit/s upstream, and facilitates new services for cell phones, smartphones, and tablets. schließen IOT - Internet of Things The IoT enables the intelligent networking of things like sensors, devices, machines, vehicles, etc., with the aim of automating applications and decision-making processes. Deutsche Telekom’s IoT portfolio ranges from SIM cards and flexible data rate plans to IoT platforms in the cloud and complete solutions from a single source. schließen M2M - Machine to Machine Communication between machines. The information is automatically sent to the recipient. For example, in an emergency, alarm systems automatically send a signal to security or the police. schließen IOT - Internet of Things The IoT enables the intelligent networking of things like sensors, devices, machines, vehicles, etc., with the aim of automating applications and decision-making processes. Deutsche Telekom’s IoT portfolio ranges from SIM cards and flexible data rate plans to IoT platforms in the cloud and complete solutions from a single source. schließen Cybersecurity Protection against internet crime. schließen Carrier A telecommunications network operator.