Telecommuni­cations market

Demand for high-speed broadband – over the fixed and mobile networks – remains high. According to estimates by Analysys Mason, data traffic over the fixed network grew by 38 percent worldwide in 2018. In the same period, estimates by Dialog Consult put the average data volume per fixed-line connection and month in Germany at 90 gigabytes – more than quadruple the level seen five years ago. Analysys Mason estimates that mobile data traffic grew worldwide in 2018 by 67 percent, almost representing a fifteen-fold increase in five years. For the telecommunications industry, these developments present both a challenge and the opportunity to monetize the strong growth in volume.

Worldwide, revenues on the market for information and communications technologies (ICT) grew by 4.1 percent in the reporting year to EUR 3.26 trillion. The high-tech association Bitkom (Federal Association for Information Technology, Telecommunications and New Media) and EITO (European Information Technology Observatory) expect the telecommunications market segment (services and equipment) to record an increase of 3.3 percent worldwide to EUR 1.82 trillion and the information technology (IT) market segment to record an increase of 5.1 percent for 2018.

In the European Union (EU), revenues in the telecommunications market segment increased by 1.3 percent in 2018. Revenues with telecommunications equipment rose by 3.2 percent, while revenues with telecommunications services only grew slightly by 0.6 percent. In the Central and Eastern European Countries (excluding Russia), revenues with telecommunications equipment and services grew by 3.7 percent in the reporting year. In 2018, telecommunications revenues in Europe continued to grow at a slower pace overall than in other major industrial nations: The United States posted growth of 2.6 percent and China of 3.1 percent. While telecommunications policy in the EU is designed to relentlessly drive price competition by way of regulatory intervention, outside of the EU the focus is much more on encouraging investments.

The telecommunications industry is characterized by intense competition. Consumers benefit from a greater range of products to choose from. Each of our markets is occupied by three or four mobile operators with their own network infrastructure. On top of this, we are seeing mobile providers becoming established in many markets using the network infrastructure of the mobile network operators. Competition is also intense in the fixed network. Established telecommunications companies are competing with cable network operators, city network operators, and resellers, who predominantly make use of regulated wholesale products. Added to this are internet companies with over-the-top (OTT) communication services that further intensify the competitive pressure.

The rapid technological transformation in the telecommunications sector calls for high investments to build out next-generation network infrastructure. The rollout of 5G networks is fast approaching and the telecommunications networks are continually being upgraded with optical fiber. Established telecommunications companies like Deutsche Telekom are investing a substantial portion of their revenues in building out network infrastructure and acquiring spectrum. To ensure that these efforts can continue, it is essential that the market environment, especially in the European markets, improves. In such a capital-intensive and innovative industry as telecommunications, consumers benefit first and foremost from high investments by telecommunications network operators. As such, economies of scale and fair conditions for private investment and build-out partnerships play a prominent role.

Alongside the supply of basic broadband infrastructure, looking ahead the focus will be on connecting billions of things, appliances, machines, and sensors of all kinds to create an Internet of Things (IoT). In the next few years, connectivity will not be restricted to millions of smartphones and computers – billions of appliances worldwide will also communicate with each other. The network infrastructures of the gigabit society must enable the transportation of growing data volumes in parallel with providing intelligent features and services that offer the best support for the diverging challenges generated by future applications, such as connected automated driving, IoT, Industry 4.0, e-health, and smart grids. The demands of these applications can vary a great deal with respect to real-time requirements, latency, availability, bandwidth, mobility, security, and energy efficiency, to name a few. For this reason, steps must be taken to ensure quality-assured services are possible both now and in the future. The infrastructures for the gigabit society will comprise an intelligent, application-specific mix of technologies at both a network and features level.

Germany

According to EITO, revenue from IT products and services, telecommunications, and consumer electronics increased by 2.1 percent to around EUR 138.2 billion in Germany in the reporting year. This was primarily attributable to the 2.5 percent growth in information technology. Telecommunications revenues (telecommunications services, hardware, and infrastructure systems) increased by 1.4 percent to around EUR 58.4 billion.

The number of broadband lines in Germany grew by 3.0 percent in 2018 to around 34.1 million at year-end, according to EITO. For 2019, the number of broadband lines is expected to grow by a further 2.3 percent to 34.9 million. Companies with their own infrastructure benefited the most from this market growth, along with resellers and regional providers. High-bandwidth lines are increasingly marketed in cable and VDSL/vectoring networks. The offerings in this area are supported by innovative hybrid connection technologies. The availability of high bandwidths in Germany and the large choice of HD content and video-on-demand services are stimulating customer growth in IPTV business. Convergent offers comprising fixed-network and mobile communications (fixed-mobile convergence, FMC) offer customers many advantages and help increase customer retention. The trend towards FMC offerings continued in the reporting year, with more and more providers expanding their portfolios. We launched our first convergent offering, MagentaEINS, on the market in fall 2014. Since then, we have been gradually enhancing the service both in the area of traditional communication and add-on services such as smart home, cloud computing, and security applications. SDG 9 Vodafone and O₂ made up ground in terms of convergent offers.

In the German mobile market, service revenues increased by 1.4 percent against 2017 to approximately EUR 20.0 billion. This moderate revenue growth was driven largely by the continued rise in data usage, which offset the aforementioned regulatory effects as well as sustained price and competitive pressure. The use of mobile data is growing exponentially, the percentage of voice and data rate plans is rising steadily. Traditional voice and text messaging services are increasingly being replaced by free IP messaging services like WhatsApp and social networks like Facebook. Connected products such as smartphones and tablets, as well as watches, shoes, bicycles, and much more, are growing ever more popular, pushing up demand for mobile broadband speeds and for large data volumes in the rate plan portfolios.

Digitalization is continuing apace, and as a result there is also growing demand by the industry for even more connectivity to allow machines and production sites to be networked and to tap efficiencies in value chains. Extensive IT and cloud solutions, as well as intelligent approaches to M2M communication (machine-to-machine) are needed in order to meet these demands.

United States

The mobile communications market in the United States continues to be divided between four major nationwide providers – AT&T, Verizon Wireless, T-Mobile US, and Sprint – and various regional network operators. In addition there are a number of mobile virtual network operators, which rely on the networks of one or more of the four national carriers to transport their voice and data traffic. The two largest national network operators are AT&T and Verizon Wireless, followed by T-Mobile US and Sprint.

The market continues to be very dynamic. Comcast, Charter, DISH, TracFone, and Google have successfully entered or are on the verge of entering the wireless market, demonstrating the intensity of current competition in the sector. For example, the cable companies Comcast and Charter have both begun offering mobile services to their customers. Both Comcast’s and Charter’s mobile services leverage their respective existing Wi-Fi networks, falling back on Verizon’s network when out of their respective Wi-Fi footprints. Both offerings have slowly churned subscribers away from the traditional wireless providers, exerting new and unique competitive pressures and blurring market boundaries. Altice, after announcing an MVNO partnership with Sprint last year, has been gradually building up its mobile department in preparation of a launch some time in 2019. DISH, which holds licenses to vast swathes of airwaves, has announced near-term plans for both a Narrowband IoT network and a 5G network (DISH has license obligations to build out much of its spectrum by 2020).

AT&T’s USD 85.4 billion acquisition of Time Warner, Inc. has closed, but is still making its way through the courts. AT&T beat an antitrust challenge by the U.S. Department of Justice at court, with the decision on the appeal forthcoming. The consolidation and convergence of the U.S. telecommunications market is expected to continue, as fixed and wireless become more integrated and wireless companies acquire content providers. On April 29, 2018, T-Mobile US and Sprint announced their intention to merge. The transaction is subject to customary closing conditions, including regulatory, antitrust, and national security approvals.

The FCC has issued a public notice requesting input from industry and analysts on the status of competition in the mobile wireless services market. Metrics are sought on total number of wireless connections, data usage trends, spectrum holdings, innovation and 5G, network quality, and market definition, etc. Although specific metrics are forthcoming, data consumption and smartphone penetration are steadily on the rise, and, with the advent of mobile 5G services expected in 2019, data consumption is expected to spike. For example, smartphone data usage is expected to surpass fixed broadband usage in 2018. With over 400 million mobile devices, there are more wireless devices in the United States than people – in fact, about 1.2 devices for every person in the country. More than 68 percent of these devices are data-intensive smartphones.

In the United States, 5G commercialization is moving at a swift pace. One of the four national service providers began deploying a 5G fixed wireless Internet service at the beginning of October 2018. Another has announced plans to deploy 5G based on the 3rd Generation Partnership (3GPP), a leading mobile standards body, 5G standard by the end of the year. The other two providers plan to launch mobile 5G services in early 2019.

For its part, the FCC has taken various steps to encourage investment in the wireless space. For example, to help providers prepare for the deployment of next generation networks, the FCC has cleared regulatory hurdles, and preempted several state and local obstacles, in efforts to streamline the impending build-out required to realize true 5G mobile networks. And on November 14, 2018, the FCC began auctioning off spectrum in the 28 GHz band (Auction 101), its first ever high-band 5G spectrum auction. This auction will be followed in early 2019 by a second auction of spectrum in the 24 GHz band (Auction 102), for a total of 1.55 gigahertz of spectrum. An additional auction is planned for 2019 for spectrum in the 37 GHz, 39 GHz, and 47 GHz bands. However, there are not yet any further details published by the FCC regarding the award of that spectrum.

Europe

In the 2018 financial year, the traditional telecommunications markets continued last year’s growth trend in the highly competitive market environment of our Europe operating segment. Steady growth in broadband and TV services offset declining revenues from voice telephony in fixed-network business. Growth rates for mobile data usage remained high, especially due to the wide range of video services available. Overall, mobile business developed positively, making it a driver of growth in the traditional telecommunications markets. The continued levying in 2018 of special taxes on telecommunications services in some countries had a negative impact, for example in Greece and Hungary.

Compared with prior years, expenses for the acquisition of spectrum and extension of existing mobile licenses remained at a moderate level in 2018. Spectrum award proceedings were held primarily in Hungary. In the reporting year, several merger and takeover transactions were concluded in the countries of our Europe operating segment (for instance T-Mobile Austria and UPC Austria, Digi/Invitel and the sale of Telenor to PPF in Hungary, and Vodafone/Cyta in Greece).

The trend towards convergent product bundles combining fixed-network and mobile communications (FMC) continues, for example with Kombinieren & Sparen (combine & save) in Austria, Love in Poland, and MagentaOne and CosmoteOne in our subsidiaries with integrated telecommunications infrastructure. These offers are enjoying strong growth and, for some providers, already address the majority of consumers. Streaming video services like Netflix and Amazon Prime Video continue to be of limited significance in Southern and Eastern Europe: According to Ampere Analysis, the household penetration rate there was 6 percent in the reporting year compared with 30 percent in Western Europe. In the business customer segment, the advance of digitalization prompted massive growth in M2M/IoT applications. We participate in this growth with our smart city projects, for instance in Hungary, Romania, and Greece. SDG 11

Systems Solutions

In the information and communications technology (ICT) industry in our core market of Western Europe, the volume addressed by our portfolio in the Systems Solutions operating segment increased by 5.3 percent in the reporting year to over EUR 185 billion. However, this trend impacted the business areas of the market in very different ways.

In the telecommunications segment, the market was dominated by continued price erosion in telecommunications services and by intense competition. The focus in this segment continues to be on the substitution of elements of the portfolio and demand for stable, intelligent and secure network solutions with increasingly large bandwidths. Growth in ICT security (cyber security), the Internet of Things, cloud computing, and unified communications is leading to a long-term stabilization of the markets served by our operating segment. Substitution effects between fixed-network and mobile operations continue to intensify. The migration to all-IP solutions, e.g., the combination of Internet access, Voice over IP, IP VPN, and Unified Communications, continues to increase.

In terms of IT services, demand has grown further for cloud services and cybersecurity services, as has the importance of digitalization, intelligent networks, the Internet of Things (including Industry 4.0), and communication between machines (M2M). The advance of digitalization and the shift towards cloud solutions also transformed demand in the systems integration business. Traditional project business – application development and the associated integration – stagnated. By contrast, the market for consultation and integration services for cloud solutions grew by almost 25 percent.

The market for outsourcing computing and desktop services (CDS) grew marginally by 0.1 percent in the reporting year to EUR 54 billion. Two contrasting trends played a role in this context: Business from long-term, rather traditional outsourcing contracts declined by 4 percent, while the market for cloud computing grew by 13 percent.

Competitive and price pressure persisted in all submarkets of our Systems Solutions operating segment. This was caused in part by competitors such as BT Global Services and Orange Business Services in the telecommunications market and IBM, Atos, and Capgemini in the IT segment; in addition, the IT segment in particular came under price pressure from cloud providers such as Amazon Web Services, Google, and Microsoft. This effect is further intensified by providers of services rendered primarily offshore. We are positioning ourselves in this environment as a digital enabler, a cloud transformer, and an ICT operator, with a focus on quality, data security, and end-to-end responsibility for the transformation, integration, and operation of ICT services. Furthermore, we are increasingly entering into strategic partnerships with our competitors with the aim of offering our customers innovative solutions. SDG 9

Group Development

The environment of our Group Development operating segment is largely dominated by the markets served by our companies T-Mobile Netherlands and Deutsche Funkturm (DFMG).

The mobile communications market in the Netherlands has been marked by high price and competitive pressure for quite some time, and this situation intensified again in 2018. One of the trends contributing toward this is the growing bundling of fixed-network and mobile products into convergent offers (FMC), an area that is dominated by the two companies KPN and VodafoneZiggo. As in the past, the trend towards bundled offers brings pressure to bear on prices for mobile products. The strong discount segment, comprising mobile providers’ secondary brands and MVNOs, has further intensified competition. On November 27, 2018, the European Commission unconditionally approved the acquisition of telecommunications provider Tele2 Netherlands by T-Mobile Netherlands and the transaction was consummated on January 2, 2019.

DFMG is the biggest provider of passive wireless infrastructure for mobile communications and broadcasting in Germany. SDG 9 The market also saw increased demand for cell sites in the 2018 financial year, due on the one hand to the fact that network operators plan to close gaps in coverage, and on the other to the fact that demand for mobile data services is growing, which calls for a further increase in the density of mobile networks.