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T-Mobile Hangs Up on Cheap Customers in Germany (Update2)

Aug. 10 (Bloomberg) -- Deutsche Telekom AG says German consumers have too many phone choices.

The company's T-Mobile International AG unit, Germany's biggest cell-phone operator, is getting rid of discounts for customers who pay for calls in advance. T-Mobile instead is luring big-spending clients such as business people and those who surf the Internet on their mobile phones.

T-Mobile Chief Executive Officer Rene Obermann says the plan will turn around the German division. Bonn-based Deutsche Telekom's shares have trailed their peers since Obermann, 42, announced his strategy Jan. 20. Obermann's track record in building the U.S. unit may help Deutsche Telekom report a doubling in second-quarter profit tomorrow even though T-Mobile Germany has lost market share to Vodafone Group Plc for 10 straight quarters.

``There's always a danger that Vodafone comes closer or overtakes, but that danger was there over the last three years,'' Obermann says. ``This industry isn't just about growing anymore.''

T-Mobile, which generated 43 percent of Deutsche Telekom's sales last year, had 79 million clients in nine European countries and the U.S. at the end of March. It had 27.56 million users in Germany, followed by Vodafone at 27.22 million; Dusseldorf, Germany-based E-Plus Mobilfunk GmbH, a unit of Royal KPN NV, at 9.65 million; and Slough, England-based O2 Plc at 7.98 million.

The Deutsche Telekom unit probably added 380,000 German users in the second quarter, according to the median estimate of 11 analysts surveyed by Bloomberg. Vodafone Germany last month said it added 497,000 customers in the period.

`Arrogant'

``T-Mobile is arrogant and has lost the interest to fight,'' says Boris Boehm, a fund manager at Nordinvest in Hamburg, which oversees $5.5 billion, including 1.6 million Deutsche Telekom shares. ``Losing to Vodafone won't just be a slap in the face. To regain leadership afterwards will take a lot of work and will sacrifice profit margin.''

Shares of Deutsche Telekom, Europe's biggest phone company, have gained 1.4 percent to 16.46 euros since Jan. 20. The stock's performance ranks No. 16 in the 24-member Dow Jones Europe Stoxx Telecommunications Index, which was up 3.7 percent in the period. Newbury, England-based Vodafone rose 6 percent to 147 pence. Deutsche Telekom rose 1 percent to 16.46 euros in Frankfurt today.

Obermann's plan includes cost cuts to attract new users with lower rates. T-Mobile is dismissing 1,500 workers in Europe to help lower expenses by 1 billion euros by the end of 2006.

The company reduced the number of handsets it offers so it could negotiate volume discounts on the models it does sell. At the T-Punkt shop on Friedrichstrasse in Berlin, T-Mobile sells about 30 phone models. A block away, Vodafone offers almost 70.

Web Service

Obermann also has introduced new calling programs to attract customers and induce existing clients to spend more. These include so-called bucket plans that offer additional free minutes for a higher monthly fee, and a service that provides unlimited calls to two prefixes of a customer's choice. T-Mobile's new Web `n' Walk service triples the data customers can download each month.

``The market is clearly going in the direction of low-cost, no-frills operators,'' Obermann says. ``It's a big tanker, and it takes time to get that tanker going in the new direction.''

Analysts are optimistic about Deutsche Telekom shares, with 66 percent of the 41 tracked by Bloomberg rating them a ``buy.'' Per-Ola Hellgren, an analyst at Landesbank Rheinland-Pfalz in Mainz, Germany, expects T-Mobile to have added 465,000 German clients in the quarter, 22 percent more than the median estimate.

``Deutsche Telekom is a big company that always has to fight a rearguard action,'' says Hellgren, who has an ``outperform'' rating on the stock. ``I expect to see increasing benefits from T- Mobile's pricing structures.''

Austrian Takeover

In Austria, where T-Mobile is the second-biggest wireless company, Deutsche Telekom today said it agreed to buy Tele.ring Telekom Service GmbH, the No. 4 in the country, for 1.3 billion euros to increase its market share. The purchase is Deutsche Telekom's biggest since its 2001 acquisition of VoiceStream Wireless Corp. for $35 billion.

Deutsche Telekom's second-quarter net income probably more than doubled to 1.2 billion euros ($1.5 billion), according to the median analyst estimate.

T-Mobile has lost and recaptured the top spot in Germany before. Mannesmann AG, later acquired by Vodafone, passed T-Mobile in 1997, then was itself overtaken in 2001. T-Mobile's lead grew to more than 2 million customers in 2003, according to Gartner Inc., a Stamford, Connecticut-based market research firm.

The gap narrowed as Vodafone promoted sales of its Live! brand mobile Internet service and increased offers to businesses, a market dominated by T-Mobile. T-Mobile's move to reduce handset discounts in the second half of 2004 gave Vodafone another boost.

``People are going to Vodafone because it has acquired an attractive portfolio of handsets,'' says Martin Gutberlet, principal analyst at Gartner. ``Subsidies are important for operators to build end-user relationships.''

Student Entrepreneur

T-Mobile has been losing customers such as Benjamin Paul, a Berlin-based events manager who makes business calls on his cell phone. Paul, 22, in June signed a two-year service contract with O2 in return for a free Nokia 6230i handset equipped with a camera and MP3 music player. The deal cut his monthly bill by 150 euros.

``T-Mobile offered 10,000 free minutes to make me stay,'' Paul says. ``02's tariff is cheaper and easier to understand. I no longer need to worry if I get overcharged.''

Obermann got his start by co-founding ABC Telekom, a retailer of answering and fax machines, as a 23-year-old student at the University of Muenster in Germany. Hong Kong billionaire Li Ka- Shing's Hutchison Whampoa Ltd. bought ABC in 1991, after annual revenue had grown to 20 million deutsche marks ($13 million).

``The German business back then wasn't that big and glamorous, but he was a real fighter,'' Canning Fok, Hutchison Whampoa's managing director since 1993, says of Obermann.

Obermann, who rides his MV Augusta motorcycle through the countryside around Bonn on weekends, joined Deutsche Telekom in 1998 and became head of T-Mobile in 2002.

U.S. Success

He built T-Mobile's U.S. division into Deutsche Telekom's fastest-growing unit by pushing e-mail devices such as the Blackberry and Sidekick, and hiring actress Catherine Zeta-Jones as a spokeswoman.

T-Mobile entered the U.S. in 2001, when it bought Bellevue, Washington-based VoiceStream Wireless, an unprofitable company with 2.3 million clients. Now known as T-Mobile USA, the unit has 18 million customers. The U.S. unit probably helped T-Mobile increase second-quarter operating profit by 12 percent to 2.38 billion euros, the analyst survey shows.

Married with two daughters, Obermann is the youngest member of Deutsche Telekom's management board. He earned 1.5 million euros in salary and performance-related pay in 2004. Vodafone CEO Arun Sarin received 2.3 million pounds ($4.10 million) in salary and bonuses last fiscal year.

Reaction?

T-Mobile Germany's first-quarter earnings before interest, tax, depreciation and amortization rose 2.7 percent to 825 million euros. Its Ebitda margin, the percentage of revenue left after the cost of goods and services sold, widened to 39.8 percent, compared with a 40 percent target.

Still, revenue fell 2.2 percent to 2.1 billion euros. Average revenue per user, known as ARPU, also fell 2.2 percent, and costs to attract clients rose 14 percent.

``If you concentrate on the best customers and then show lower ARPU and a decrease in revenue, then clearly something is wrong that they haven't explained to the market,'' says Gartner's Gutberlet. ``Competition for business customers is getting stronger, and T-Mobile doesn't seem to be reacting.''

Accelerating growth in Germany may be more difficult than building the U.S. unit. While only two-thirds of U.S. residents own a cellular phone, nine out of 10 people in Germany have one.

Prepaid Callers

The country's mobile-phone rates are also the highest in Europe. Frequent German mobile-phone users pay an average of 69 euros a month, 9.60 euros more than their Italian counterparts and as much as 18 euros more than those in the U.K., according to a June study by the ZEW Center for European Economic Research in Mannheim, Germany.

As he courts the biggest-spending clients, Obermann is doing away with subsidized handsets for prepaid users.

Of the 89,000 new customers T-Mobile added in the first quarter, about 2,000 bought prepaid services. About half of the customers Vodafone added in the June quarter were prepaid.

``It's a good business,'' says Fritz Joussen, Vodafone Germany's chief operating officer. ``We don't want to skip the business and leave it to someone else.''

`Persistent'

Obermann says prepaid customers can be profitable as long as the cost of acquiring them is reasonable. To tap the prepaid market, T-Mobile this month introduced Xtra Click&Go, which lets customers buy blocks of calling time over the Internet.

``We're very interested in prepaid customers,'' Obermann says. ``We just didn't want to go for prepaid handset subsidies. That model is no longer suitable. We can grow, but we can't grow at any cost.''

In the face of resistance from customers and criticism from investors, Obermann says he plans to push ahead with his strategy of emphasizing profitability over growth.

``One thing I learned from Hutchison is that if you believe in something you also need to be persistent,'' Obermann says.


To contact the reporter on this story:
Kenneth Wong in Berlin at  kwong11@bloomberg.net.
Last Updated: August 10, 2005 12:31 EDT

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