Group strategy

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, 2019). We once again increased our revenue, adjusted EBITDA AL, and free cash flow AL in the reporting year, and recorded growth on both sides of the Atlantic. Our brand value reached an all-time high in the Company’s history in 2019, putting us in second place in a comparison of globally leading German companies. However, we also face a new set of emerging challenges that affect both us as a Group and society as a whole:

• 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, primarily in Germany.
• Competition in the telecommunications sector continues to intensify: Not only are telecommunications companies using the digital transformation to enhance their core business efficiency, but we are also seeing companies from other industries pushing onto the market with lean, software-based production models and providers such as Google and Microsoft are expanding into the global connectivity field.
• As data availability continues to grow and artificial intelligence becomes more advanced, new usage scenarios are opening up both in internal production processes (such as data-driven network build-out) and in business-to-customer interaction (e.g., hyper-personalization). At the same time, we need to equip people with the relevant skills and expertise to keep pace with these developments, and define new standards for handling data responsibly in the digital society.
• The rising tide of digitalization and data availability goes hand in glove with the potential for abuse – reflected in trends such as the huge surge in cybercrime, which has rapidly escalated from targeted attacks to high-volume crime and which can both dramatically affect the stability of critical infrastructure and influence political relations.
• Sustained economic globalization, world population growth, and increasing use of digital technologies all put a strain on the available resources (for example, if the internet were a country, it would be the sixth-largest consumer of electricity on the planet). It is thus imperative that we find a sustainable, more ecological way of doing business and act with a greater focus on social responsibility.

We are tackling these challenges head on. We continue to systematically implement our Leading European Telco strategy. As the following 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. Two action areas contribute to this growth target and provide a framework for our actions: “Save for growth investments,” and “Simplify, digitalize, accelerate & act responsibly.” The “Act responsibly” element was added in the reporting year. Sustainability and social responsibility have played a key role in our corporate activities for many years (for example, we set our first climate protection target back in 1995). We now plan to adapt our strategic target and integrate it as a core element of our Group strategy. SDG 8SDG 9SDG 12SDG 13

Corporate strategy: Leading European Telco

Strategic areas of operation

One connectivity & perfect service

We want to offer our customers a seamless and technology-neutral telecommunications experience. That’s why we market fixed-network and mobile communications in convergent products (fixed-mobile convergence (FMC)). By the end of the reporting year, some 4.7 million customers in Germany had opted for MagentaEINS; that is over 0.4 million more than in the prior year. The national companies of our Europe operating segment won some 1.5 million new customers for MagentaOne and similar FMC offerings in 2019. Because we want to continue on this path of growth, we work continuously to improve and expand our convergent portfolio.

We also plan to incorporate new services that genuinely add value for our customers, and set some key milestones in this regard in the reporting year. In 2018, we relaunched our MagentaTV offering in Germany to position ourselves as an aggregator for linear television including extensive features, access to content from the biggest video-on-demand providers, and exclusive sports and TV content. On this basis, in 2019 we continued to improve the service, for example, by expanding our partnerships with key content partners (including Netflix). Looking ahead, we have secured added appeal by acquiring the media content rights for UEFA EURO 2024. The addition of around 0.3 million TV customers in Germany shows that we are on the right track with our aggregator strategy. Our new digital voice assistant, Hallo Magenta, is enhancing the customer experience in interactions with our services while safeguarding data security and personal privacy. We work together with our customers to continually develop and test new services and further strengthen our entertainment portfolio. Our MagentaGaming beta, launched in 2019, is just one example of this.

We also see our goal to deliver perfect customer service as a powerful tool to help set us apart from the competition. This view led us to launch several initiatives in the reporting year that aim to enhance the quality of our customer service in Germany. These include improved self-service channels, a personal callback service, SprachID voice authentication, and the promise of assistance for customers struggling to set up and optimize their Wi-Fi at home. Numerous accolades underscore our hard work in this area: the No. 1 German mobile provider in 2019 in the connect hotline test (issue 5/2019), the best digital customer service 2019 (No. 1 German telecommunications provider, Computer Bild, issue 17/2019), and Service King 2019 in the telecommunications industry by Focus Money magazine (Deutschland Test, issue 43/2019). We will continue our efforts in 2020 to offer customers the best service; for example, by further improving our first-call resolution rate for customer queries. In the United States, too, we are reaping the rewards of measures such as the Team of Experts approach launched last year: Several surveys on service quality place T‑Mobile US ahead of its competitors (including being rated best customer service for the 17th time in succession in the J.D. Power ranking of U.S. mobile providers), while the Net Promoter Score in Customer Service stands at 70 percent – putting it at an all-time high. This is one of the reasons we won over 4.9 million new (branded) mobile customers in the United States in 2019. At our national companies in Europe, we are currently focusing on increasing the level of digitalization in customer interaction; for example, using our updated service app. Following successful international rollout, this app improves the customer experience (e.g., with self-administration of contracts) and enables us to monetize our offerings (e.g., with customer-specific approaches).

We measure customer satisfaction using the globally recognized TRI*M method. We use the results of this performance indicator to improve our customer contact processes, and our products and services. At the same time, we determine the loyalty of our customers towards Deutsche Telekom. 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 67.3 points versus an adjusted value of 68.5 points at the start of the year (measured on a comparable basis). Our goal for the coming years is to again achieve an improvement in customer satisfaction.

Integrated gigabit networks

Convergent products require integrated networks. 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. We are investing EUR 13 billion (not including spectrum purchase fees) primarily in building and operating networks in Europe and the United States, with around EUR 5.5 billion of this figure earmarked for Germany alone. This makes us the biggest investor among all of our German competitors. In pursuit of outstanding quality, we are also striking out in new directions, for example, with innovative technologies like fixed-network substitution using wireless technology, or the use of artificial intelligence to ensure infrastructure is built out in line with demand, as well as exploring partnerships and joint ventures. Integrated management improves the capacity utilization of our infrastructure and increases efficiency in operations and maintenance. SDG 9

Fiber optic-based fixed networks are the basis for an integrated network experience. In virtually all of our European national companies, we are leading the build-out of fiber-optic lines to over 8 million households. In Hungary, for example, we can now offer fiber-optic lines to 2.2 million households – that’s over 43 percent. In the Germany operating segment, we operate Europe’s largest fiber-optic network with well over 500,000 kilometers of fiber-optic cable. We also continued to build out our network in the reporting year by deploying vectoring. We are thus delivering on our promise to provide fast internet with at least 50 Mbit/s to around 80 percent of households in Germany. In addition, existing customers are gradually being migrated to IP-based solutions and in consultation with the customers themselves. The migration in the German consumer market was completed in 2019 as planned. We have already completed the migration to IP lines in five national companies (Hungary, Croatia, Slovakia, North Macedonia, and Montenegro) and were in sight of the finish line in Greece at the end of 2019.

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 2019, we once again won the three big network tests – by connect (issue 1/2020), Chip (for the tenth time in succession; issue 1/2020), and Computer Bild (issue 25/2019) – in Germany. In the reporting year, the network experts from P3 communications tested eight of our European national companies (Greece, Hungary, Croatia, North Macedonia, Slovakia, the Czech Republic, the Netherlands, and Poland) and rated them all “best in test overall.” T‑Mobile US took the No. 1 spot in the OpenSignal Upload Speed Experience test in 2019. We intend to achieve these results on a regular basis in future, and hence are further building out our LTE networks: In our European national companies, we plan to cover 99 percent of the population with LTE by the end of 2021; in Germany, we aim to achieve this household coverage target by the end of 2020.

With the fifth-generation mobile communications standard (5G), 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 have already laid an important foundation with our investment of around EUR 3 billion for spectrum licenses, mainly in Germany, the United States, and Austria. In the United States, we plan to significantly improve our position to build out 5G nationwide through the business combination agreed with Sprint in 2018 and the additional spectrum this will bring to our portfolio. As the first telecommunications company in Europe to launch a live 5G network – in Austria, now with 31 sites nationwide – we are moving closer to our goal of technology leadership. T‑Mobile US launched the United States’ first nationwide 5G network in December 2019, offering network coverage to over 200 million people. So far, we have set up around 450 5G antennas across Germany. A further approximately three quarters of our existing sites are 5G-ready. Customers can currently use 5G in eight cities: Berlin, Cologne, Hamburg, Munich, Frankfurt/Main, Bonn, Leipzig, and Darmstadt. In addition to the high capital expenditure on spectrum licenses, we will be making the necessary large investments in building out 5G infrastructure. For this, we need conditions to be in place that are both fair and reliable.

Secure ICT solutions & big IoT

In the reporting year, we once again maintained our market-leading position (in terms of revenue) as a provider of telecommunications services in Germany. 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 product portfolio of international communications solutions that combine the strengths of our national network infrastructure with our international networks.

We also continued to post growth in IT revenue from business customers in our Germany operating segment (up 19 percent compared with 2018). With our IT solutions, we help all business customers – from microenterprises to SMEs and major corporations – to profitably deploy the technologies of the future. The Internet of Things and cybersecurity are just two of the focus topics gaining relevance in this context. SDG 8

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. The excellent progress we made with this transformation in the reporting year is reflected both in efficiency gains and in our order entry figures, which grew by almost 8 percent year-on-year to EUR 7.3 billion.

As part of our ongoing efforts to consistently implement the Group’s strategy pillar “Lead in business productivity” and continue building on the positive trend, in 2019 we initiated several more structural measures:

• We plan to offer our business customers “connectivity from a single source” (one connectivity) by establishing an integrated unit in 2020: With the exception of a number of activities assigned to Classified IT project business, the portfolio units TC Services and Classified ICT will be reassigned from T‑Systems to the Business Customers unit of the Germany operating segment. The transition to the new structure will affect T‑Systems’ telecommunications operations both on a national and international level. It not only establishes end-to-end responsibility – from product development to service delivery management and technical sales – within one unit, which reduces the number of interfaces, but also enables us to even better orient our services to the customer. We expect greater scalability and improved competitiveness from the resulting economies of scale alongside the benefit of being able to zero in even more closely on our growth areas (e.g., SD-WAN and Cloud Connect) on the basis of standardized production processes.
• At the same time, we want to ensure we stay flexible and agile in the fast-moving IoT and security growth markets. For this reason, the two portfolio units Security and IoT are to be turned into legally independent Group entities.

These changes mark an important milestone in the transformation of T‑Systems, and will continue to be pursued systematically next year.

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. In line with this policy, we sold our only mobile-only subsidiary in Albania effective May 7, 2019. On the other hand, we bolster our growth ambitions by means of equity investments and acquisitions. In the reporting year, we devoted our energies to integrating our recent acquisitions in Austria (UPC Austria) and the Netherlands (Tele2 Netherlands) into our operating business to transform the two companies into real convergent providers. Our customers in Austria experienced this in the form of the launch of our Magenta Telekom brand.

We aim to strengthen our position in the U.S. mobile market through the business combination of T‑Mobile US and Sprint, agreed in 2018. The approvals granted in the reporting year by the Federal Communications Commission and the Department of Justice bring us a huge step closer to continuing T‑Mobile US’ success story (including 27 successive quarters of new customer growth in excess of one million, and market capitalization growth of over 200 percent in the last five years). Not only is the planned combination of business activities under an 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 to roll out 5G technology across the United States faster and better than our competitors. The combination is expected to generate synergies with a present value of around USD 43 billion (after integration costs).

Simplify, digitalize, accelerate & act responsibly

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 rate plans, such as MagentaEINS, MagentaTV – Simply one for all, or the unlimited rate plan MagentaMobil XL. 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 service apps are now well established across Germany and Europe as central digital customer interfaces, and we continued to systematically expand the services available to include, e.g., router set-up functions and connectivity management. We interact with over 50 percent of customers in our European national companies digitally, via the service apps. The MeinMagenta app in Germany has now been downloaded almost 8.5 million times and receives positive ratings, with the iOS version rated 4.3/5 stars. Another element of our digitalization strategy, our SprachID voice authentication for customer service calls, has provided 830,000 identity verifications since its launch in July 2018. Long term, our plan is to digitalize virtually 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.

Yet, to achieve simplicity and take the digital transformation forward, we need new organizational forms, expertise, and a cultural change – in short, we need to master a whole host of new abilities if we are to handle current and future challenges. With measures such as the introduction of the Youlearn initiative to integrate self-paced learning into daily work, we are tackling these developments head on and giving our employees more opportunities for personal and professional development. Employees in Germany and our European national companies devoted over 3.9 million hours of their time to learning in the reporting year – that’s 4.5 working days on average. We also continued to lay the foundations for future-oriented ways of working with innovative concepts such as the 80/20 model (the option to dedicate 20 percent of working hours to Group-wide initiatives outside of the employee’s unit). We do this because we firmly believe it is central to our obligation as an employer to act responsibly. SDG 8

In parallel, we fulfill our responsibility to society by systematically aligning our core business processes with the principle of sustainability. We have expanded our existing climate strategy to include a new Group program. Our aim with “We care for our planet” is to make a meaningful contribution toward protecting the climate and conserving resources. For example, in 2019 we initiated a circular economy initiative to promote the recycling and reuse of used smartphones. Our aim is to substantially reduce the amount of resources that are wasted by unused devices gathering dust in people’s homes. By the end of 2021, we also plan to have fully converted our entire Deutsche Telekom network, across the entire gamut from mobile telecommunications to the high-speed DSL network, to use electricity entirely from renewable sources. In Germany, we have set ourselves a deadline for this of 2020. Above and beyond this, we are supporting a responsible approach to digitalization, e.g., with our guidelines on the ethical use of AI, and promoting digital democracy projects. SDG 13 SDG 16

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