Tele2 Seals ULL JV with QSC

Swedish pan-European alternative telecoms group Tele2 has signed a partnership with German carrier QSC to create a new ULL broadband infrastructure company that will operate under the Plusnet brandname. Tele2 has pledged to invest 50 million euro (US$63.7 million) in the joint venture to finance its expansion. The Swedish telco will own 32.5% of the new company, while its German partner will control the remaining 67.5% of Plusnet. The deal, which is subject to approval by the German anti-monopoly office, follows Tele2's negotiations last year with several companies, including QSC, Vodafone's Arcor, Telefónica and Tiscali, about renting capacity on their networks (see Germany: 27 September 2006: Tele2 Plans Expansion in Germany).

QSC's DSL network has over 1,000 central offices (COs), covering 30% of the German population. The joint venture (JV) is planning to upgrade QSC's network to ADSL2+ and extend coverage to some 2,000 COs by the end of 2007. This will enable Plusnet to expand its coverage to more than 50% of the population. The new company will provide both JV partners with access to an advanced ULL broadband network that can be used to deliver high-speed broadband services to their respective customers. Plusnet's fixed costs will be split between Tele2 and QSC, while variable costs will be apportioned according to use. Plusnet will recharge its operational expenses (OPEX) and not make profits on its own.

Outlook and Implications

• Synergies and Savings: The JV with QSC will enable Tele2 to launch ULL services approximately two years earlier than expected. Tele2 plans to launch its ULL offer in Germany at the end of 2006. The deal will allow the Swedish operator to leverage off its existing fixed-line customer base in Germany, which consists of over 2 million pre-select customers, advanced broadband services and voice products at attractive prices. There is little rivalry between Tele2 and QSC, with the former targeting the residential market, while the German corporate market is the domain of the latter. It will also significantly expand its footprint in Germany, enabling coverage of 50% of the German population of 82.5 million by end-2007. The move also generates significant cost savings for Tele2. According to the Swedish operator, the investment of 50 million euro is less than half of what the company would have to invest to build the same network on its own. Tele2 estimates that its OPEX savings will reach some 10 million euro a year from 2007.

• Boost for Alternative Broadband Infrastructure: The JV will enable both Tele2 and QSC to compete more effectively against German incumbent Deutsche Telekom. Teleplus's ULL broadband network will lessen both partners' dependence on Deutsche Telekom's wholesale broadband offering. Until now Tele2 has been reselling the incumbent's DSL products. Deutsche Telekom still dominates the German broadband market, but the competition is already healthy. Alternative operators have made significant inroads into the Deutsche Telekom-dominated DSL market and poached nearly 40% of broadband market share by January 2006, against 19.6% in the previous year. According to the European Commission, Deutsche Telekom's domestic broadband market share dwindled to 60.1% in January 2006, down from 80.4% in the previous year. There were 10.56 million broadband connections in Germany in January this year, representing a 52.8% year-on-year (y/y) growth from 6.91 million a year ago. Deutsche Telekom's DSL offering has faced regulatory pressure in recent months on both the domestic and the European front. In March this year, German telecoms regulator the Bundesnetzagentur banned incumbent Deutsche Telekom's wholesale DSL NetRental discount pricing model, alleging that it favoured larger ISPs over smaller rivals by allowing them to make higher margins on reselling DSL connections (see Germany: 23 May 2006: Regulator Bans Deutsche Telekom's Wholesale DSL Fee Model). In addition, the European Commission is now taking a hard line in efforts to prevent Deutsche Telekom from closing its new 3-billion-euro VDSL network to rivals (see Germany: 7 July 2006: EU Ups Pressure on German Government over VDSL Broadband Network). A year ago, Italian telecoms services provider Tiscali announced plans to invest 300 million euro to construct its own unbundled network infrastructure in its core markets, including Italy, Germany, the Netherlands and the United Kingdom, by 2007 (see Germany: 8 July 2005: Tiscali to Build German DSL Infrastructure).