Mobile Market Vodafone: Deutsche Telekom Has Unfair Advantage

The head of Vodafone Germany said Deutsche Telekom, still 27-percent owned by the German government, enjoys unfair advantages, and restrictions on industry consolidation should be relaxed.
The others aren't playing fair, says Jens Schulte-Bockum.

Jens Schulte-Bockum has been the chief executive of Vodafone Germany since October 2012. The former McKinsey consultant joined the company in 2003, and became head of Vodafone in the Netherlands five years later. He recieved his master's degree in economics from the University of Chicago. He spoke to Hans-Jürgen Jakobs, the Handelsblatt co-editor in chief, and Handelsblatt editor Ina Karabasz about the challenges facing Vodafone in Europe's largest market.

 

Handelsblatt: Mr. Schulte-Bockum, the leaders of the telecommunications industry, as part of the German digital network alliance, recently met in Berlin with the E.U. Commissioner for the Digital Economy, Günther Oettinger. Why were you absent?

Mr. Schulte-Bockum: I was attending an event hosted by the chancellor instead. Mr. Oettinger was also there, delivering messages similar to those he delivered at the network alliance meeting, which my cable colleague Manuel Cubero attended.

Were you satisfied with what he had to say?

As digital economy commissioner, Mr. Oettinger has recognized that something has to change. In the past, politicians have not always understood that our industry drives the entire economy. It was long viewed as a cash cow, and yet Europe's fixed network sector hasn't been growing for years, and sales in mobile communications are also declining. At the same time, companies are expected to make investments. It can’t go on this way.

What should the new digital commissioner do?

He has three levers. The first one is regulation that supports investment. The second is to permit consolidation, that is, mergers and acquisitions. What we have now is hesitation at the corporate level, which we have to overcome to prevail in competition with U.S. companies. Third, there is the matter of co-financing, that is, the question of how broadband networks are to be expanded in regions with government assistance.

You intend to help him with consolidation – with the acquisition of cable provider Unitymedia Kabel BW. Then you would have a nice monopoly.

We have no immediate plans. But the truth is that another national fixed-network provider would be very good for the German market. It's the only way to stand up to Deutsche Telekom in the fixed-network sector – and create more competition. To achieve that, we would need cable networks nationwide, which is probably a long-term project.

The Federal Cartel Office isn't fond of such deals.

It's a question of jurisdiction. Quite a few things have changed. Nowadays major consolidations in the telecommunications industry are decided at the European level. There are precedents for that, in the Netherlands, for example, where Liberty Global subsidiary Ziggo acquired the country's biggest cable network operator. It was rubber-stamped, but with conditions. The European perspective is more relaxed.

You would dominate the market after a takeover. It might prompt the Federal Network Agency to regulate the cable market as well.

Even after a possible takeover, we would still be a long way from a dominant market position. The only company with a dominant market position is Deutsche Telekom. It still controls the entire physical infrastructure in the classic telephony-broadband sector. Consolidation would fuel competition. I see no reason for regulation.

Deutsche Telekom is complaining that it no longer has a strong position in metropolitan areas. It argues that there is sufficient competition there, and nevertheless regulators only focus on Deutsche Telekom and not the cable network operators.

Deutsche Telekom is twisting the arguments. The overwhelming portion of customers uses its infrastructure. The fact that the company hasn't taken a hammering with consumers is a desired consequence of regulation. I don't see that Telekom could be exempted from regulation anywhere in Germany. The Federal Network Agency is likely to hold the same view. The answer to the Telekom argument is "nice try."

Since the merger of Telefonica/O2 with E-Plus, Vodafone is now only the third-largest player in the German market. Is 2015 the year of the attack?

We want to continue what we're doing and are in a better position than we were a year ago. We've made significant strides in terms of network quality. In the connect test, we cut Deutsche Telekom's lead in half and doubled our lead over third-place Telefonica. As a result, we have reestablished the pecking order in the market. Customers now choose between two providers in the quality segment, Telekom and us – as well as a company that is more of a player in the discount segment, with its aggressive pricing. In a year, we will have a fully modernized network and more than 90 percent LTE coverage. We are on an equal footing with Telekom once again.

Equal footing sounds good, but you are still only in third place.

Perhaps according to customer numbers, but we are clearly in second place when it comes to sales, and for good reason. On the one hand, our new rates make us competitive once again. On the other hand, we can deliver a real quality promise once again. We are investing more than ever before in the network and service. We are hiring new employees and setting new standards in digital customer communication. We have moved back into the premium segment with a vengeance.

Will your growth be sufficient? You have investments ahead that cost money – such as the mobile wireless frequency auction.

Frequency spectrums are basically an expensive resource. That's why we have to be careful that an artificial scarcity isn't created for fiscal reasons, so as to force the industry to pay up. The political concepts are a different story.

What story?

It's an open secret that the states, the infrastructure ministers and the finance minister have an interest in pulling funds out of this auction to finance the expansion of broadband. We don't think that's right. First of all, a mobile communications auction has nothing to do with the expansion of broadband in the fixed network. We have to be careful not to overshoot the mark. Everyone must realize that every euro collected in an auction has to come from somewhere, and the problem will fall back on customers in the end.

Why don't you just come out and say it: That Deutsche Telekom will eventually get the money for the auction back through subsidies for broadband expansion?

Of course it annoys us, because Deutsche Telekom already collects 70 to 80 percent of the subsidies today. That alone is a clear distortion of competition, which can continue in the auction. That's because the main objective of promoting broadband is to further expand fiber optics. And, of course, a company that is already active in this area has the lowest additional costs to tap new markets – and that company is Deutsche Telekom, in many cases. Of course, we too are looking at what we can do in this area.

How do you feel about the fact that the federal government, as a major shareholder of Deutsche Telekom, has a say in this important issue?

Various aspects of the process are problematic. First, there are the unequal starting conditions. Deutsche Telekom has a network that was paid for by our grandparents and now provides the company with an advantage when it comes to expansion. Second, the federal government, as a major shareholder, has a very clear conflict of interest. It doesn't make sense that it should hold its shares in Telekom in the long term. The stock is in good shape, and I can only advise Mr. Schäuble (the German finance minister) to cash out.

 

Ina Karabasz is an editor with Handelsblatt Live. Hans-Jürgen Jakobs is one of Handelblatt's editors in chief. To contact the authors: jakobs@handelsblatt.com; karabasz@handelsblatt.com.

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