HANDELSBLATT EXCLUSIVE Deutsche Telekom Recruits Innogy

Germany’s leading telecom has recruited the country’s newest utility to help accelerate the expansion of broadband internet access. The phone company is open to additional partners.

In a major strategic shift, Deutsche Telekom has reached out to competitors for assistance in expanding high-speed Internet access in Germany, abandoning its efforts to build up a broadband network on its own.

Telekom has already recruited at least one partner. It will cooperate with the utility Innogy to bring high-speed Internet to hard-to-reach rural areas, sources in the telecom industry told Handelsblatt.

The two companies plan to announce in the coming days a partnership that’s broad in scope, the sources said. The phone company is open to additional partnerships as well.

“We are open to cooperating with all types of providers, from small city network operators to the major competitors,” Johannes Pruchnow, the head of Telekom’s broadband efforts, told Handelsblatt.

In 2015, Telekom chief executive Tim Höttges vowed that Telekom would meet an ambitious goal without the help of its competitors.

Innogy, a spinoff of RWE, operates an electricity grid that covers nearly a fourth of Germany and services 9.3 million customers, many of whom live in rural areas.

Innogy now installs data cables whenever it connects new areas to its grid. By renting Innogy cable capacity, Telekom can save itself the time and expense of switching out or upgrading its own cables.

Telekom invested more than €4 billion ($4.2 billion) to expand its network in 2016, but many of its cables are old and cannot keep up with the demand for faster internet.

“We are also open in terms of the type of cooperation,” Mr. Pruchnow said. “We can imagine renting infrastructure, booking wholesale products or creating joint ventures.”

Telekom, which has a 40-percent share of the German broadband market, has traditionally shunned cooperation and has sought instead to force smaller telecoms to rent its cable capacity to deliver their services.

According to one Telekom employee, the company rejected cooperation in the past due to “stupid ideological reasons.” As a former state monopoly, Telekom is used to calling the shots.

It’s no surprise then that the government, which still owns a 32-percent stake in Telekom, has relied on the company to lead the charge to create a nationwide broadband network by the end of 2018.

Telekom even managed to sweet talk the government into easing regulations on the promise that it would provide 80 percent of households with faster internet by the end of 2018.

In 2015, Telekom chief executive Tim Höttges vowed that Telekom would meet this ambitious goal without the help of its competitors.

But the company has fallen behind in its efforts to provide households with faster internet. So far only 7 percent of households have Internet that’s faster than the 50 MB/s minimum set by the government.

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Faced with complaints from municipalities, the federal government has quietly pressured Telekom to cooperate with its rivals to speed up the process.

“In my opinion, the new willingness to cooperates is a real paradigm shift,” said Mr. Pruchnow, who previously led Telekom rival 1&1 Versatel.

Telekom and Innogy, for example, are considering a joint sales campaign. Parallel to its own services, Innogy would send Telekom offers to its electricity customers.

But much of the competition is skeptical that Telekom has truly had a change of heart. The battle has become fierce as smaller rivals such as Inexio, MNet and Deutsche Glasfaser have started laying cable.

“In recent months, the discussion about broadband expansion between Telekom and the competition has taken on a sharp tone,” Mr. Pruchnow said. “That led to atmospheric tension.”

The German Association of Broadband Communication, which represents much of the competition, is waiting to see whether or not Telekom will keep its word.

“We welcome the change of heart at Telekom and anticipate that it will seriously pursue its intention to buy wholesale products from its competitors,” Stephen Albers, the association's head, told Handelsblatt.

At the end of the day, Telekom might not have much of a choice. The European Commission wants to reform the E.U. telecommunications market on the basis of a co-investment model.

Under this reform, companies that operate a broadband network in a new region would have to accept competitors as co-investors that can use their infrastructure.

And Germany’s own digital network law came into effect in November. The law aims to cut costs in broadband expansion by boosting transparency and cooperation in the telecom market.

 

Ina Karabasz is an editor at Handelsblatt's companies and markets team, covering telecommunications, IT and security issues. Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the authors: [email protected] and [email protected]