Monday, August 25, 2014

TV Drives Deutsche Telekom Fixed Network Results

Fiber to cabinet investments in the German market remain difficult to justify on tradtional return on investment grounds, but appear to be strategic, nonetheless.

Deutsche Telekom argues it is “investing more in our home market than any other European incumbent,” according to Timotheus Höttges, Deutsche Telekom Chairman of management board chairman and CEO.

As part of that investment, Deutsche Telekom has bumped Long Term Evolution coverage to 77 percent of potential customers and fiber to the home coverage to 39 percent of households.

Deutsche Telekom expects it will cover 45 percent of homes with fiber facilities by the end of 2014, as well.

But financial results in the second quarter illustrate how difficult it is to justify the return on investment from fiber to home facilities, even when they are deemed necessary.

In the second quarter of 2014, overall Deutsche Telekom revenues fell 0.3 percent year-over-year.

Deutsche Telekom did report organic revenue growth of about 0.6 percent, mainly on the strength of the U.S. operations.

Adjusted EBITDA also increased 0.3 percent, largely driven by U.S. results, though operating cost reductions in Deutsche Telekom European markets also helped.

Deutsche Telekom says it gained 227,000 net new additions, of which 119,000 came from its own retail business. In total, the German service provider has almost two million fiber customers on our German network.

Broadband net adds totaled 7,000 in the quarter. But video accounts made possible by the high speed access investments, might be the bigger story.

Broadband revenues actually declined three percent year-on-year, despite TV revenue growth of 8.4 percent.

Deutsche Telekom added 63,000 net new video entertainment customers in the quarter.

Importantly, Deutsche Telekom says, 53,000 of those new customers came on the new upgraded fiber access networks.

Overall fixed network revenues declined by 1.2 percent year over year, while voice revenues were down 6.7 percent.

The point is that high speed access investments are important principally because they enable TV revenue. “Where we build VDSL, we see a higher uptake of customers,” said Höttges.

“So this is, I think, absolutely the support for our strategy for the huge investments which we're doing in the infrastructure,” Höttges said.

Part of the upside comes from the ability to sell faster high speed access connections, to compete with cable TV company offers, and partly to sell higher-price access packages.

But video entertainment arguably offers the bigger revenue opportunity. Deutsche Telekom has gained about 400,000 retail fiber customers, year over year, and 240,000 TV customers.

But high speed access revenues have dropped, year over year, while Deutsche Telekom also lost a net 69,000 high speed access customers.

TV revenues, on the other hand,  have grown, year over year.

The point is that the return on investment for fiber facilities (either fiber to home or fiber to cabinet) remaining a difficult proposition. It increasingly seems to be the case that telcos must, in many instances, invest in fiber to the home for strategic reasons, even if the traditional return on investment might be lower than for other investments.

Deutsche Telekom High Speed Access and Video Entertainment Revenues
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Retail broadband customers ('000)
Retail fiber customers ('000)
Broadband TV customers ('000)
Broadband revenues (millions)
TV revenues (millions)
Source: Deutsche Telekom

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