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.
``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.
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.''
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.''
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.
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.
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.
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
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.''
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.