Group strategy

  • Deutsche Telekom aims to be the leading telecommunications provider in Europe
  • Group strategy successfully implemented again in 2017
  • Strategic action areas re-emphasized and refined

OUR CORPORATE STRATEGY: LEADING EUROPEAN TELCO

Since 2014, we have been aligning all of our corporate activities with our Leading European Telco strategy – with the aim of becoming Europe’s leading telecommunications provider.

This strategy has proved very successful: In terms of market capitalization, we are currently one of Europe’s highest value telecommunications companies (as of December 31, 2017). In the past financial year, we increased revenue, adjusted EBITDA and free cash flow once again. At the same time, we see our Group as facing new challenges:

  • New technologies, such as virtual, voice-activated assistants from Google, Amazon and Apple are creating entirely new usage scenarios and permanently changing the way our customers use the Internet.
  • Our direct competitors from the telecommunications industry are also increasingly digitizing their core business, setting new benchmarks in terms of customer experience and efficiency in the process.
  • New business models such as the Internet of Things not only require new network technologies for ever more connected devices, but also corresponding software to manage and control these devices.
  • On top of this in Germany comes ongoing public and political pressure with regard to our broadband strategy and the role we play in the provision of fast Internet.

We are tackling these challenges head on. That is why we have further developed our Leading European Telco strategy, re-emphasizing and refining certain aspects. As the graphic on the next page shows, our claim to leadership ranges over three dimensions: customer experience, technology, and business customer productivity. From this we derive three specific action areas with which we are creating the foundation for future organic growth. Because only if we grow can we sustainably secure our earnings performance and continue to reliably meet the high demands of our investors. This growth target is supported by two areas of operation which provide the framework for our internal activities.

STRATEGIC AREAS OF OPERATION

One connectivity & perfect service

We want to offer our customers a seamless and technology-neutral telecommunications experience. Hence, we market fixed-network and mobile communications in one convergent product (fixed-mobile convergence or FMC). By the end of the reporting year, some 3.6 million customers in Germany had opted for MagentaEins; that is more than 0.6 million more than in the prior year. The integrated national companies of our Europe operating segment won some 0.8 million new customers for MagentaOne and similar FMC offerings in 2017. Because we want to continue on this path of growth, we work continuously to improve and expand our convergent offer.

Our offer also includes attractive TV content across all screens – on any device. In Germany, for example, with Entertain TV, we aggregate linear television and the best streaming offers of our partners like Netflix or Maxdome on one platform; what’s more, since 2017, the offer has included exclusive TV series such as The Handmaid’s Tale, Valkyrien, and Cardinal, and our unique Telekom Sport offering. In the reporting year, we won 0.3 million new TV customers in Germany. In our Europe operating segment, we increased the number of TV customers by 0.2 million in the same period. Over the coming years we will continue to expand our content portfolio – for instance as part of our international partnership with Netflix – and implement new operating concepts such as voice control through smart speakers.

As a premium provider, we set ourselves apart from our competitors with perfect customer service: T-Mobile US leads the competition in numerous surveys. This is one of the reasons why we won 5.7 million new mobile customers in the United States in 2017. We also introduced a number of initiatives to improve customer service in Germany in the reporting year, including callback services, a service for optimizing home Wi-Fi, and installation packages for the home network. In 2018, for example, we are working on noticeably increasing our first-call resolution rate for customer queries. At our national companies in Europe, we are currently focusing on increasing the level of digitalization in customer interaction; for example, using our integrated sales and service app. In the coming years, the expansion of our online channel and a seamless transition between different channels will remain a major priority.

We measure customer satisfaction using the globally recognized TRI*M method. Based on this performance indicator, we improve our customer contact processes, and our products and services. At the same time, we determine the loyalty of our customers towards the Company. The results are presented as a performance indicator, the TRI*M index, which ranges between minus 66 and plus 134 points. At the end of the reporting year, the indicator came in at 68.6 points versus 69.6 points at the start of the year (measured on a comparable basis). This slight decline is due in part to the trend in the Systems Solutions operating segment, which was not able to fully match its high prior-year level. Our goal for the coming years is to achieve a steady overall improvement in customer satisfaction.

Integrated gigabit networks

Convergent products require integrated networks. So we are systematically building out and interlinking our fixed and mobile networks so that we can offer our customers the fastest possible connection at top quality, wherever they are at all times. Integrated management also improves the capacity utilization of our infrastructure and increases efficiency in operations and maintenance. 9

Fiber optic-based fixed networks are the basis for an integrated network experience. We already operate the largest fiber-optic network in Germany with more than 455,000 kilometers of fiber-optic cable. In 2018, we will add nearly 60,000 more kilometers. Overall, the Germany operating segment currently invests around EUR 4 billion per year primarily in building out and operating networks – more than any of our competitors. In 2017, for example, we gave some 2,200 municipalities fast Internet access through vectoring technology; by the end of 2019, we want to be able to offer approximately 80 percent of households a download bandwidth of at least 50 Mbit/s. At the same time, we are again stepping up the pace of the fiber-optic roll-out to offices and homes: In the next five years, for example, we plan to supply up to 3,000 business parks with FTTH and thus offer optical fiber to around 80 percent of companies in business parks. Across Europe, we are migrating our entire fixed network to the Internet protocol (IP) step by step. We have already completed this migration in five national companies, most recently also in Hungary. In Germany, the transformation is already well advanced. Existing customers are gradually being migrated to IP-based solutions and in consultation with the customers themselves. 8

In mobile communications, we set ourselves apart from our competitors with the outstanding quality of our network. We have regularly come out on top in independent network tests. At the end of 2017, we won the mobile network tests conducted in Germany by the magazines Chip and connect for the seventh and eighth times in succession. In our Europe operating segment, eight national companies were rated as “best in test” by the P3 communications network experts, as was T-Mobile Netherlands. Furthermore, T-Mobile US came out on top in all six categories of the OpenSignal tests in August 2017. We intend to remain a quality leader and hence are further rolling out our LTE networks: In Germany, we plan to cover approximately 95 percent of the population with LTE by the end of 2018; in our European national companies, coverage is to reach between 89 and 99 percent. Thanks to the successful conclusion of the spectrum auction in April, T-Mobile US will also further improve its national LTE coverage.

We will continue to drive forward seamless integration of fixed and mobile networks with the fifth-generation mobile communications standard (5G). To this end, network functions will be decoupled from the access medium (e.g., glass, copper or air). By distributing computing power in the network (mobile edge computing) and creating dedicated network layers for individual applications (network slicing), 5G also creates the basis for future technologies such as virtual reality, autonomous driving, and the Internet of Things. Europe’s first 5G antennas have already been transmitting in Berlin with transmission rates of 2 Gbit/s since October 2017. We anticipate that 5G will be ready from 2020.

Secure ICT solutions & big IoT

We are the leading provider of international connectivity solutions for German business customers. In 2017, our revenues from telecommunications services for corporate customers in the Systems Solutions operating segment, for example, grew by 2.5 percent. Since we want to consolidate and build on this position of strength, we have co-founded the network alliance ngena (Next Generation Enterprise Network Alliance), which comprised 12 partner companies as of the end of 2017. This alliance, which is primarily aimed at international business customers, uses Cisco cloud and virtualization technology to link up the individual partners’ local networks into a global network and offers this to the partners as a platform. We launched the first product in this area – Smart SD-WAN powered by ngena – on the market in the reporting year. Step by step, we plan to establish ngena as a global platform for software-defined telecommunications networks (SD-WAN).

Our business with “traditional” IT outsourcing services for international corporate customers has been in decline for a number of years now, mainly due to persistent intense competition. For this reason, we will manage our Systems Solutions operating segment on a portfolio basis going forward and set up an integrated sales organization. We will also tailor our IT and cloud offers even more closely to the needs of our SME customers in the future. In 2017, we generated revenue of some EUR 560 million in this area in our Germany operating segment, up by around 20 percent against 2016. As we expect this business to grow significantly over the coming years, we are expanding our IT and cloud ecosystem for SMEs together with market leading technology partners such as Huawei, Microsoft and Salesforce.

For us, the biggest growth driver in the business customer environment is the Internet of Things. Over the next few years, we expect many millions of new devices – means of production such as machines or tools, everyday objects like cars or fridges, but also public infrastructure like street lights or park benches – to be connected to the Internet. Narrowband-IoT networks, which we have already begun to build out in eight European countries, and machine-to-machine (M2M) connectivity create the basis for cost-effective and energy-efficient networking. 12 For example, since July 2016, BMW has fitted all its vehicles in 65 countries with 4G connectivity from Deutsche Telekom. In addition, we will provide our customers – e.g., in the automotive, healthcare and public sectors – with the platforms to manage these devices and use the data collected for their business. 3

We supplement these offers with our comprehensive cyber security portfolio. Telekom Security, which was established in early 2017, is already Germany’s leading provider of cyber security solutions. Looking ahead at the medium term, our goal is to become a leading provider in Europe in this market. Since cyber attacks pose a growing threat to companies and our customers’ need for data privacy and security is increasing, we expect growth rates at Telekom Security to remain high over the next few years.

SUPPORTING AREAS OF OPERATION

Save for growth investments

Future growth requires adequate investment. Thanks to our strict cost discipline, we generate the funds we need to finance this investment and safeguard our competitiveness. We will therefore systematically continue on this path of cost transformation. In the long term, we also want to be Europe’s leading telecommunications provider in terms of efficiency.

We manage our portfolio of shareholdings with the aim of enhancing value. Business areas that cannot be adequately developed within the Group are disposed of, while our growth ambitions are bolstered by means of equity investments and acquisitions. In order to be able to offer convergent products from a single source in Austria and the Netherlands in the future, our subsidiaries in those countries, T-Mobile Austria and T-Mobile Netherlands, signed agreements in December 2017 to acquire the fixed-network providers UPC Austria and Tele2 Netherlands, respectively. Both of these transactions are awaiting approval from the responsible authorities, which is expected in the course of 2018. Also in December of the reporting year, T-Mobile US announced the acquisition of online TV provider Layer3 TV, which was closed on January 22, 2018.

We carefully consider all options in terms of their added value for our Group. No transaction is better than a bad one, both for our shareholders and ourselves. Hence we and the management of T-Mobile US decided against a merger of our subsidiary with its competitor Sprint. We do not believe the successful continuation of our growth course is jeopardized by this decision.

Simplify, digitalize, accelerate

Simplicity in our offers and in our organization makes the digital transformation of our core business easier. In this way, we increase our implementation speed – both in the interaction with customers and in the implementation of new, strategic initiatives. This is why we want to become simpler, more digital, and ultimately more agile.

There are two main thrusts to our pursuit of simplicity. First, we want to offer our customers intuitive products and easy to understand rates: Our convergent products such as MagentaEins are a first step in this direction. Going forward, we want to significantly further reduce product complexity. Second, we want our internal operation to be as efficient as possible, i.e., in terms of time and costs. Hence we will scrutinize our organization, processes, and decision-making procedures and further optimize them wherever possible.

With the digitalization of our core business, we want to improve customer experience and increase our efficiency. In Germany, more than 1,500 front-end assistants provide fully-automated support in up to 2.9 million transactions per month. This frees up our employees from technical service to provide more detailed consultations and deal with complex customer issues. Another application is the use of chatbots in direct dialog with customers: At T-Mobile Austria, Tinka currently answers the queries of around 50,000 customers per month. Our long-term aim is to completely digitalize all stages of the value chain: including a standardized app landscape, predictive maintenance of customer hardware, use of standardized data structures, and analysis models and artificial intelligence based on this.

Simplicity and digitalization require new skills, incentive models, and a culture of change. In 2017, therefore, we created levelUP!, an innovative development program for executives, and further developed our “Lead to win” leadership model, adapting it to changes in the world of work. Future Work offers our employees modern, open office environments that enable flexibility and new ways of working together. One of our focuses for the future will be on skills management. Ultimately, we want to identify and further develop the skills of our employees at an early stage. 8

In summary, our Leading European Telco strategy is reflected in our goal:

To be the leading European telecommunications provider.

  • We want to be a leader in terms of customer experience, technology, and the implementation of advances in productivity for our business customers. Because only when we lead can we grow and meet the demands of our investors in the long term.
  • This growth will be made possible by carefully managing our financial resources and systematically transforming the Company to be simple, digital, and agile in every sense.
  • We play a responsible and active role in society. We are a partner, not just at a social level, but also at a political one, and we work in the interests of ensuring the open, forward-looking development of all countries in which we are active. 8