Vodafone to Reinvent German Unit as Integrated Services Operator

Vodafone Germany plans to revamp its strategy as a provider of integrated telecoms services, including fixed-line voice and mobile, as well as advanced multimedia offerings such as IP TV and mobile TV. The turnaround comes after the company decided not to dispose of its German fixed-line unit Arcor, opting to make use of it instead. The incorporation of Arcor will enable Vodafone to launch its foray into fixed-mobile convergence (FMC). Germany will also become Vodafone's testing ground for FMC, internet TV and VoIP services.

Arcor has more than doubled its broadband customer base in the past year, achieving more than 1.3 million DSL customers by end-March, with most of its broadband net additions over its own infrastructure. It has an unbundled broadband offering in 300 German cities. The company said that it plans to expand its network by approximately 80 cities (also including smaller conurbations), covering 45% of the population by the year-end (see Germany: 1 June 2006: Vodafone's Arcor Posts End-Year Profits of US$69 million). Until May this year, Vodafone was still considering the divestment of its German fixed-line unit; however, given that operators have been integrating their mobile, fixed-line and broadband products, the group has decided to leverage its presence in the German market. Vodafone holds a majority 75% stake in Arcor and eventually intends to buy out minority stakeholders, including Deutsche Bank and railway operator Deutsche Bahn. Such a move would set the operator back by about 600 million euro (US$761 million) (see Germany: 6 July 2006: Vodafone to Buy Remaining Arcor Stake by Year-End and 22 May 2006: Vodafone to Shelve Arcor Sale).

Outlook and Implications

Incumbent Under Pressure: The European Commission plans to demand that Deutsche Telekom open its German broadband network to rivals. The operator has faced criticism that it is trying to drive rivals out of the market by closing its VDSL network to competitors, also indicating that the move would enable it to recoup hefty investment in the roll-out of the VDSL system, which will become its platform for IP TV services. Despite Deutsche Telekom's lobbying efforts with the German government, the country's telecoms market regulator agreed last week with the European Commission to force the German incumbent allow rivals to buy ”bit-stream” access to its VDSL network at regulated prices access. Deutsche Telekom was previously warned by the European competition authorities that its desire to keep rivals away from its VDSL network would stifle broadband growth. Broadband penetration in Germany is—at 12.5%— one of the lowest broadband figures among European Union (EU) member states (see Germany: 17 August 2006: Regulator Warns Deutsche Telekom on Access to VDSL Network, 9 August 2006: ECTA Warns Deutsche Telekom Against Stifling Broadband Growth, 18 May 2006: Government Keeps Rivals Off Deutsche Telekom's US$3.9 bil. VDSL Network, 20 February 2006: EU Pressures German Regulator on Deutsche Telekom Fibre-Optic Plans and 20 September 2005: Deutsche Telekom Unveils US$3.7 bil. Fibre-Optic Network Upgrade Plans).

Fixed-Mobile Convergence: The reintegration of Arcor, Germany's number-two telecoms operator, into Vodafone Group will enable the company to implement its new convergence strategy and challenge Deutsche Telekom. The latter has also been exploring new revenue sources and growth drivers in efforts to retain its declining fixed-line customer base (see Germany: 14 August 2006: Deutsche Telekom CEO Not Ready to Resign and World: 10 August 2006: Deutsche Telekom Lifts Q2 Revenue by 2.6% Y/Y, Helped by International Operations). The incumbent has already launched FMC services, leveraging its control of the country's leading mobile operator, T-Mobile (see Germany: 4 August 2006: Deutsche Telekom Starts FMC Promotion and 31 July 2006: O2 Germany Focuses on Gaining New Customers). Vodafone Germany followed with its FMC service, branded Zuhause, which allows customers to make low-cost, flat-rate voice calls within reach of their homes. Vodafone's strategy to keep Arcor and develop a more comprehensive customer offering, including broadband internet, IP TV, and fixed-line services, represent efforts to rival Deutsche Telekom. The competition, as well as pricing pressure, is likely to heat up in the course of 2006; Deutsche Telekom plans to adopt a much more aggressive approach to competition in its key domestic market in the second half of this year, to tackle its declining market share. The move is backed by an extra 1.2 billion euro that the incumbent will spend on marketing and product enhancement this year, on top of its 3 billion-euro investment in a ultra high-speed fiber-optic network (see Germany: 7 June 2006: Vodafone Germany Plans ADSL Move in Q3 and World: 30 May 2006: Vodafone Hit by Asset Write-Down, Unveils New Strategy).