Risks and opportunities

In the following section, we present all risks and opportunities of significance to the Group that, as things currently stand, could affect the results of operations, financial position, and/or reputation of Deutsche Telekom and, via the subsidiaries’ results, the results of operations, financial position and/or reputation of Deutsche Telekom AG. We describe the majority of the risks before the measures for risk containment are taken. If any remaining risks have been identified despite such measures for risk containment, they are labeled as such. If risks and opportunities can be clearly allocated to an operating segment, this is presented accordingly in the following.

In order to make it easier to understand and see their effects, we have allocated the individually assessed risks to the following categories:

Corporate risks
  Probability of occurrence Risk extent Risk significance Change against prior year
Industry, competition, and strategy        
Economic risks, Germany low small low
Economic risks, United States low medium low
Economic risks, Europe low medium low
Risks relating to the market and environment, Germany medium small low
Risks relating to the market and environment, United States low large medium
Risks relating to the market and environment, Europe medium medium medium
Risks relating to innovations (substitution) medium medium medium
Risks relating to strategic transformation and integration medium medium medium
Regulation see Regulation      
Operational risks        
Personnel, Germany and Systems Solutions medium small low
Risks relating to IT/NT network operations, Germany low large medium
Risks relating to IT/NT network operations, United States very low very large medium
Risks relating to IT/NT network operations, Europe very low large low
Risks relating to existing IT architecture, United States medium medium medium
Future viability of the IT architecture, United States medium large medium
Procurement low small low
Data privacy and data security high medium medium
Brand, communication, and reputation        
Brand and reputation (reporting in the media) low small low
Sustainability risks very low small low
Health and environment low medium low
Litigation and anti-trust proceedings see Litigation      
Financial risks        
Liquidity, credit, currency, interest rate risks low small low
Tax risks see Financial risks      
Other financial risks see Other financial risks      
 
⬈ improved unchanged ⬊ deteriorated

RISKS AND OPPORTUNITIES FROM INDUSTRY, COMPETITION, AND STRATEGY

Risks and opportunities relating to the macroeconomic environment. It is clear from the positive economic and political developments of the last few months that economic uncertainties have decreased both worldwide and in our footprint countries. The leading institutes and organizations have revised their economic forecasts upward and are expecting most economies to post very positive rates of growth. At the same time, the continuing economic uncertainty since the Brexit vote in June 2016 shows that the UK economy, and especially the pound, have been weakened. This political situation harbors uncertainties as regards development of the UK market – a market in which we are involved through our financial stake in BT.

The main risks to future economic growth in the countries are posed by political uncertainties in Europe and the United States, more intense protectionism in global trade, investments, and regarding factors influencing exchange rate fluctuations, the danger of an unexpected decline in growth in China, geopolitical crises, and, in the medium term, an unexpectedly sharp increase in interest rates worldwide that could weigh on the otherwise positive economic trend. These risks are counterbalanced by opportunities in particular from stronger-than-expected investment activity coupled with continued moderate inflation and wage growth, as well as positive growth effects from the U.S. tax reform, which can have an impact both on the U.S. economy and on the export-oriented economies. Risks to economic development could manifest themselves in different ways in some of our markets. Consumers and business customers could rein in their consumption if the economy slows substantially again and uncertainty continues to rise. Government austerity measures could also have negative effects on demand for telecommunications services, for example due to reduced public-sector demand or lower disposable incomes in the private sector.

Risks relating to the market and environment. The main market risks we face include the steadily falling price level for voice and data services in the fixed network and in mobile communications. In addition to price reductions imposed by regulatory authorities, this is primarily attributable to intensive competition in the telecommunications industry, cannibalization effects due to new products and services, and technological progress.

Competitive pressure is expected to continue, especially in the fixed network in Germany and Europe. In the broadband market, we are observing disproportionate growth in the market shares of regional network operators, particularly in Germany. They build out their own infrastructure and thus increase their market coverage. In certain regions, our competitors are extending their own fiber-optic network to the home so that they are independent of our network in the local loop, too. There is also strong competition to gain new customers by cutting prices and offering introductory discounts.

We also expect prices for mobile voice telephony and mobile data services to decrease further, which could adversely affect our mobile services revenue. Among the main reasons for the decrease in prices are providers that are pursuing aggressive pricing policies (MVNOs) and expanding in Germany and other European markets. Pure eSIM smartphone offerings could put even more pressure on prices for mobile voice telephony and mobile data services. In addition, the risk remains that smaller competitors will take unforeseen, aggressive pricing measures.

Another competitive risk lies in the fact that, both in the fixed network and in mobile communications, we are increasingly faced with competitors who are not part of the telecommunications sector as such, but are increasingly moving into the traditional telecommunications markets. This mainly relates to major players in the Internet and consumer electronics industries. We continue to be exposed to the risk of a further loss of market share and falling margins and of increasingly losing direct customer contact.

T-Mobile US operates in a very competitive wireless industry where customer attrition may increase as the wireless industry shifts away from service contracts and market saturation leads to increased competition for customers. The growing appetite for data services will increase demand on its network capacity. Furthermore, industries are converging as video, mobile, and broadband companies compete to deliver content. Joint ventures, mergers, acquisitions and strategic alliances are resulting in larger competitors who could enter into exclusive handset, device, or content arrangements or refuse to provide T-Mobile US with roaming services on reasonable terms. This may adversely affect T-Mobile US’ competitive position and ability to grow. The scarcity and cost of additional wireless spectrum, and regulations relating to spectrum use, may also affect its business strategy, including plans to improve its network.

Our Systems Solutions operating segment also faces challenges. Continued strong competition and persistent price erosion are adversely affecting traditional ICT business. In addition, the technological shift toward cloud solutions and digitalization in the IT sector is prompting new, strongly capitalized, competitors to enter the market. The introduction of IP technology in telecommunications business is enabling price reductions, which poses a risk of revenue losses and declining margins at
T-Systems.

The Group Development operating segment reported on risks and opportunities for the first time in the reporting year. T-Mobile Netherlands, Deutsche Funkturm (DFMG), and Deutsche Telekom Capital Partners (DTCP) and our equity investments in BT and Ströer SE & Co. KGaA are assigned to this segment. Our approach of integrated, value-driven management aims to give our subsidiaries and equity investments the level of entrepreneurial freedom they need and thus to promote their strategic further development. The Group functions of Mergers & Acquisitions and Strategic Portfolio Management have also been assigned to Group Development. The economic future of the units assigned to the Group Development segment harbors both operational opportunities and risks.

New consumer credit regulations in the Netherlands. The Supreme Court of the Netherlands (Hoge Raad der Nederlanden) found in the final instance that mobile contracts that are bundled with a free or discounted device such that the price of the device is not apparent for the customer, are to be treated as consumer credit or installment purchases. Accordingly, such contracts are subject to Dutch consumer credit law. Contracts that do not comply with these specific consumer credit regulations can thus be rescinded. As a result, two individual cases against T-Mobile Netherlands and its competitor KPN were decided in the plaintiffs’ favor; adequate provisions for this risk have been recognized at T-Mobile Netherlands. To ensure it complies with the legal situation in future, T-Mobile Netherlands applied for a license for 2017 to issue consumer credit. This license it received is valid with effect from January 1, 2017.

Opportunities relating to the market and environment. The telecommunications and IT market is extremely dynamic and highly competitive. The economic conditions affect our actions and impact on our Company indicators. We generally expect the situation to develop as described in the section “Market expectations”. See the section “Forecast.”

In the following section, we present the risks and opportunities that we believe will allow us to achieve market growth and that could be significant for us in terms of our future financial position and results.

Risks relating to innovations (substitution). Innovation cycles are getting shorter and shorter. This confronts the telecommunications sector with the challenge of bringing out new products and services at shorter and shorter intervals. New technologies are superseding existing technologies, products, or services in part, in some cases even completely. This could lead to lower prices and revenues in both voice and data traffic. These substitution risks could impact our revenue and earnings, in particular in the Europe and United States operating segments. We deal with the impact of substitution risks by offering package rates, for example: We offer new and existing customers integrated solutions from our product portfolio.

Opportunities relating to innovations. In addition to the risks described, ever shorter innovation cycles enable us to drive the digital transformation of our society and to provide consumers and business customers with our own innovations – thus answering the questions of tomorrow today. That is why our innovation and product development activities are decisive when it comes to identifying opportunities and making the most of them in an increasingly competitive environment. In order to guarantee this, and do justice to the growing convergence of networks and IT, we combined the technology, innovation and IT functions in our new Board of Management department Technology and Innovation. For more information on our innovation activities, please refer to the section “Innovation and product development.”

Risks relating to strategic transformation and integration. We are in a continuous process of strategic adjustments and cost cutting initiatives. If we are unable to implement these projects as planned, we will be exposed to certain risks. In other words, the benefit of the measures could be less than originally estimated, take effect later than expected, or not at all. Each of these factors, individually or in combination, could have a negative impact on our business situation, financial position and results of operations.

RISKS AND OPPORTUNITIES RELATING TO REGULATION

In the following section, we describe the main regulatory risks and opportunities that, as things currently stand, could affect our results of operations and financial position, and our reputation.

Regulatory risks arise from telecommunications-specific statutory regulations at the European and national level, and from the consequent powers of national authorities to regulate or intervene in the market and limit our freedom as regards product design and pricing. Deregulation can give rise to regulatory opportunities. Regulatory intervention, which we can only anticipate to a limited extent, may exacerbate existing price and competitive pressure. There are concerns that regulation in Germany and other European countries may also impact revenue and earnings trends in the medium-to-long term.

Areas in which national regulators may intervene

European and national laws and regulations grant national regulators extensive powers of intervention. A case in point at the European level is the EU Regulation concerning the single market for electronic communications, which was enacted on October 27, 2015. It comprises regulations on international roaming, net neutrality, and disclosure obligations and restricts our product-design options, mainly as regards retail products. The Body of European Regulators for Electronic Communications (BEREC) has published guidelines for implementing this regulation. Risks arise from how the national regulators interpret both the regulation and these guidelines. In Germany, for example, the Federal Network Agency has wide-ranging powers under law to require products to be adjusted in order to enforce the regulation and to impose fines in cases of non-compliance.

Our Group companies in Germany and abroad continue to be subject to comprehensive regulation of wholesale products, obligating us to make our network and services available to our competitors. The national regulators regularly check and determine the corresponding terms, conditions and prices of these wholesale offerings. The key wholesale products subject to regulation are unbundled local loop line, bitstream products, leased lines, termination rates and the associated services. In addition, European and national consumer protection regulations apply. In Germany, for instance, the Transparency Regulation came into force on June 1, 2017, the main objective of which is to enhance transparency and cost control with telecommunications services. In this context, the Federal Network Agency introduced a system that enables consumers to measure the bandwidths available on their fixed-network and mobile lines.

In addition to the requirements of telecommunications law, our media products are also subject to special European and national regulations under media law. The latter include, in the broader sense, copyright law, regulations concerning the responsibility for published content, and requirements in relation to the content and user interfaces of media distribution platforms. Barring any changes to its shareholder structure (the Federal Republic and KfW being its major shareholders), to the legal situation or to the prevailing opinions of media regulators, it is unlikely that Telekom Deutschland will be granted a license to broadcast radio and television programs.

Changes in regulatory policy and legislation

EU legal framework for telecommunications. On September 14, 2016, the European Commission published legislative proposals for a revision of the EU legal framework for telecommunications. These proposals are currently the subject of discussions between the Parliament and the Council. The legal framework comprises the central EU rules for the telecommunications sector, in particular price and access regulation, the spectrum policy, sector-specific consumer protection rules, the provisions on universal service, and the institutional framework. We expect the new rules to be enacted in mid-2018. The corresponding provisions will then have to be transposed into national law, a process that will take at least a year. At the moment, it is difficult to predict the outcome of this extensive legislative process in many areas. The drafts currently being discussed provide for less regulation of “networks with very high capacity” in cases where competitors invest jointly, as is the case with open co-investment models. Fiber-to-the-building/home (FTTB/H) networks, in particular, could benefit from this. The terms and conditions of this lighter form of regulation are not yet clear, as is the question of whether other commercial access agreements would benefit from it as well. On the other hand, the new legal framework could result in additional obligations in accessing all networks, regardless of whether a company has significant market power (symmetrical regulation). In the area of spectrum policy, the new EU legal framework may create more harmonization, for example, a minimum license term, more legal certainty in the awarding of spectrum. However, these improvements have so far been rejected by the EU Member States. As for consumer protection, there are opportunities for a complete harmonization of obligations at the European level – thus negating the need for additional national regulations – but also a risk of more stringent obligations in individual areas. In particular, regulations for international calls within the EU are being discussed: This could result in a ban on surcharges for such calls above and beyond the price of national calls.

The revision of the EU legal framework for telecommunications forms part of a bouquet of new EU legislation on the single market for electronic communications that provides for amendments to the regulations governing media services – mainly due to the growing importance of Internet offerings – which are competing with the radio and TV services previously focused on (for example, under copyright law and laws for the protection of minors from harmful media). At the national level, too, specific amendments (e.g., to the German Interstate Treaty on Broadcasting) are being discussed in response to the phenomena of digitalization and convergence.

Awarding of spectrum

Risks could arise from the fact that inappropriate auction rules and frequency usage requirements, excessive reserve prices, or disproportionately high annual spectrum fees could jeopardize our planned acquisition of spectrum. By contrast, we see an opportunity in particular in the fact that such spectrum award procedures enable mobile network operators to obtain the optimum amount of spectrum for their future business. We would thus be equipped for further growth and innovation. The upcoming award procedures mainly relate to the auctioning of additional spectrum in the 0.7 GHz, 1.5 GHz and 3.5 GHz/3.7 GHz ranges. In addition, spectrum licenses, especially in the 2.1 GHz range, will expire between 2019 and 2021 in some countries and need to be renewed. Allocations of spectrum are currently in preparation in Albania, Austria, the Czech Republic, Germany, Hungary, Macedonia, Poland, and Romania, with most of them likely to take place between mid-2018 and mid-2019. For information on spectrum auctions that were completed in 2017 or are still ongoing, please refer to the section “The economic environment.”

OPERATIONAL RISKS AND OPPORTUNITIES

Personnel. In 2017, we once again used socially responsible measures to restructure the workforce in the Group, mainly by means of severance payments, partial and early retirement, and employment opportunities for civil servants and employees offered by Vivento Customer Services/Telekom Placement Services, especially in the public sector. We will continue this restructuring in the coming year. If it is not possible to implement the corresponding measures as planned or at all (for example, due to limited interest in severance payments) this may have negative effects on our financial targets. To avoid the risk of high potentials leaving the Group as a result of the staff reduction instruments, we make sure that the arrangement is voluntary on both sides in each individual case.

The right of civil servants to return to Deutsche Telekom also carries risks: When Group entities that employ civil servants are disposed of, it is generally possible to continue to employ them at the Group entity to be sold, provided the civil servant agrees or submits an application to be employed at the respective unit in future. However, there is a risk that they may return to us from a sold entity, for instance after the end of their temporary leave from civil servant status, without the Company being able to offer them jobs. Currently around 1,658 civil servants are entitled to return from outside the Group to Deutsche Telekom in this way (as of December 31, 2017). For information on major litigation in connection with personnel, please refer to the section “Litigation.”

Risks relating to IT/NT network operations. We have an increasingly complex information/network technology (IT/NT) infrastructure, which we constantly expand and upgrade to ensure the best customer experience and consolidate our technology leadership. Outages in the current and also future technical infrastructure cannot be completely ruled out and could in individual cases result in revenue losses or increased costs. After all, our IT/NT resources and structures are the key organizational and technical platform for our operations. The ongoing convergence of IT and NT harbors risks. In order to counter these, we have combined our network, innovation, and IT activities under the new Board department Technology and Innovation.

Risks could arise in this area relating to all IT/NT systems and products that require Internet access. For instance, faults between newly developed and existing IT/NT systems could cause interruptions to business processes, products and services, such as smartphones and Entertain. In order to avoid the risk of failures, e.g., due to natural disasters or fires, we use technical early-warning systems and duplicate IT/NT systems. The Computer Emergency Response Team (CERT) at T-Systems is in charge of protecting our corporate customers’ servers. In cloud computing, all data and applications are stored at a data center. Our data centers have security certification and meet strict data protection provisions and the EU regulations. All data relating to companies and private persons is protected from external access. Constant maintenance and automatic updates keep the security precautions up to date at all times. On the basis of a standardized Group-wide Business Continuity Management process, we also take organizational and technical measures to prevent damage from occurring or, if we cannot, to mitigate the subsequent effects. We also have insurance cover for insurable risks. 9

Opportunities relating to IT/NT network operations. The IP transformation (all IP) offers many opportunities. A logical network is being created that speaks a single language and, in technical terms, functions largely independently of the services transmitted. This will enable efficiency gains, e.g., by reducing the complexity of maintenance and operation, switching off service-specific legacy platforms, and saving energy. In addition, all IP will generate growth potential in the short-to-medium term by improving existing services (e.g., better voice quality, more customer self-service, greater configuration flexibility) and, in the medium-to-long term, by providing an indispensable basis for convergence products and the Internet of Things (IoT) and by shortening the time to market for new products. 13

But the all-IP network can do more. It is the network infrastructure cloud underpinning not only the virtualization of functions and services, but also joint production across borders (Pan-Net). This will also create opportunities for enhancing efficiency and for growth. The idea of developing services only once and then marketing them in different countries simultaneously promises more than just synergies – it is a chance to get those services to market faster and more cost-effectively.

5G is the next-generation telecommunication network. Not only are we involved in a large number of different organizations and forums, we are also working intensively in collaboration with research institutions and industry to develop this future standard, which will address a whole array of challenges facing telecommunication networks. These include purely technical requirements, such as achieving a substantial increase in capacity, bandwidth, availability, and lower latency. 9

In addition, there are fundamental issues, such as machine-to-machine communication on a large scale in the Internet of Things (IoT) and the growing need for reliability, security, and guaranteed resource allocation in industrial applications. 5G thus offers not only the immediate opportunity of cost-effectively managing rapidly increasing demands in existing business models going forward, but also opportunities for further business models by marketing network capabilities (e.g., network access, security, identity, storage location, temporary storage, real-time processing) to relevant partners. We are already working on implementing the first use cases for mobile edge computing, in which data is processed in a decentralized manner (at the edges of the network). Together with other technologies like the Narrowband Internet of Things (NB-IoT) and artificial intelligence (AI), 5G and edge computing provide the underpinnings for the further digital transformation of society. 12

The utilization of large data volumes (big data) can improve and speed up decision-making processes by enhancing transparency. It does so by shifting the basis for decisions from hypotheses to facts and, for example, enabling correlations to be recognized.

Our Systems Solutions operating segment covers innovative business areas in the digital transformation of business processes, such as the Internet of Things and cyber security. These business areas could develop faster than expected. As a pioneer of the digital transformation, we have an opportunity not only to participate in, but also actively shape, the market trend through a variety of projects in the fields of healthcare and mobility solutions. In the ramp-up phase of these new business models based on M2M communication and big data, our partner-oriented approach is a highly promising way of contributing our core competencies – in data communication, big data, cloud computing, and cyber security – to various projects. What is more, we already have initial references in areas of the Internet of Things market, e.g., predictive maintenance. 12

As the previous technology and development partner for toll collection business in Germany, we already have a strong competitive position. What is more, we have earned valuable references – in other European toll collection projects in Belgium and Austria and through the planned launch of a Europe-wide toll collection system (Toll4Europe) – that will help to give us an edge over our competitors.

Risks relating to the existing IT architecture in the United States. T-Mobile US relies upon its systems and networks, and the systems and networks of other providers and suppliers, to provide and support services and, in some cases, to protect their customers’ information. Failure of T-Mobile US’ or others’ systems, networks and infrastructure may prevent them from providing reliable service, or may allow for the unauthorized use of or interference with their networks and other systems. T-Mobile US’ reputation and financial condition could be materially adversely affected by such system failures, business disruptions, due to natural disasters or other technical reasons and unauthorized use of or interference with its network and other systems. Remediation costs could include liability for information loss as well as recovering or repairing infrastructure and systems.

Future viability of the IT architecture in the United States. In order to grow and remain competitive with new and evolving technologies in its industry, T-Mobile US will need to adapt to future changes in technology, continually invest in its network, enhance its existing offerings, and introduce new offerings to address current and potential customers’ changing demands. If T-Mobile US is unable to take advantage of technological developments on a timely basis, then it may experience a decline in demand for its services or face challenges in implementing or evolving its business strategy. T-Mobile US is in the process of implementing a new billing system, which will support a portion of its subscribers, while maintaining its legacy billing system. The implementation may cause major system or business disruptions or the company may fail to implement the new billing system in a timely or effective manner.

Opportunities relating to the IT architecture in the United States. T-Mobile US is making significant investments in its IT infrastructure. If this results in a significant improvement in processes, then the savings made could be higher than previously assumed.

Procurement. As a service provider and an operator and provider of telecommunications and IT products, we cooperate with a variety of suppliers of technical components, such as software, hardware, transmission systems, switching systems, outside plant, and terminal equipment.

Supply risks cannot be entirely ruled out. Delivery bottlenecks, price increases, changes in the prevailing economic conditions, or suppliers’ product strategies may have a negative impact on our business processes and our results. Risks may result from the dependence on individual suppliers or from individual vendors defaulting. We employ organizational, contractual, and procurement strategy measures to counteract such risks.

Data privacy and data security. The General Data Protection Regulation – which introduces more stringent data privacy requirements across the EU – will come into force on May 25, 2018. For our Company, the new regulation will not entail any fundamental changes, given that new procedures such as the Privacy Impact Assessment – for evaluating and documenting the risks posed by data processing – are already well established in our organization. Still, we used the introduction of the General Data Protection Regulation as an opportunity to thoroughly re-assess data privacy in a three-phase project. In the first phase (2016), we specified the legal framework, setting it down in binding interpretations for our Group. The second phase was completed in 2017: We launched implementation projects in all our European Group companies and evaluated our IT systems and processes in relation to the General Data Protection Regulation. In the third phase (2018), we will carry out readiness checks. In this way, we will ensure that data privacy is implemented in a consistent manner across the Group using common requirements and processes. That will enhance efficiency, promote data privacy in Group-wide projects and improve international collaboration.

The General Data Protection Regulation is a milestone on the way to a true single European market in which the same rules apply to all players. The newly adopted rules assure Europe a high level of data protection and, at the same time, will pave the way for new digital business models. The fundamental demand for a level playing field for all market players in the EU has thus been met. In addition, the new data protection legislation closes a major regulatory gap when it comes to service providers outside of the EU. The General Data Protection Regulation will also apply to non-European market players (e.g., Google, Facebook, and Apple) targeting customers in the EU, and will thus enhance the overall competitive situation. In order to preserve the level playing field achieved by the General Data Protection Regulation, it is particularly important that the EU member states do not make excessive use of the freedom granted them to implement additional dedicated regulations at the national level; instead, they should do so only where absolutely necessary. In the revised version of the Federal Data Protection Act, which will come into force on May 25, 2018, German legislators have responded to some of the criticisms leveled at their initial drafts and reduced the number of special regulations for the non-public sector. 16

Regrettably, lawmakers also missed some opportunities: For instance, until such time as the E-Privacy Directive has been revised, data stored by telecommunications providers will remain subject to stricter, dedicated regulations. Telecommunications providers in Europe thus still have a competitive disadvantage in some areas – one that the new regulations that have thus far been made public will only partially alleviate. As telecommunications providers’ data processing options are substantially restricted compared with what is possible under the General Data Protection Regulation, it is unlikely that big-data applications in the field of telecommunications will be able to realize their full potential. According to the current draft of the planned E-Privacy Regulation, it will be possible to process metadata only with the customer’s approval. The General Data Protection Regulation does not contain compatible options for processing such data using pseudonyms. That will rule out various service models that may be useful to consumers, but cannot be implemented with anonymized data, such as services for finding parking spaces and avoiding accidents, tailored TV programming, or telemonitoring services in the healthcare field.

With regard to IT security, we are faced with numerous new challenges. In recent years, the focus has shifted from prevention to analysis. This is where our early warning system comes in: It detects new sources and types of cyber-attack, analyzes the behavior of the attackers while maintaining strict data privacy, and identifies new trends in the field of security. Along with the honeypot systems, which simulate weaknesses in IT systems, our early warning system includes alerts and analytical tools for spam mails, viruses, and Trojans. We exchange the information we obtain from all these systems with public and private bodies to detect new attack patterns and develop new protection systems. 16

Cyber crime and industrial espionage are on the rise. We are addressing these risks with comprehensive security concepts. In order to create greater transparency and thus be in a stronger position to tackle these threats, we are relying more and more on partnerships, e.g., with public and private organizations. By means of the Security by Design principle we have made security an integral part of our development process for new products and information systems. In addition, we carry out intensive and mandatory digital security tests. 17

We are continually striving to accelerate our growth through IT security solutions. To this end, we have combined all our security units within T-Systems. We want to leverage this end-to-end security portfolio to secure market shares and score points with security concepts on the back of megatrends like the Internet of Things and Industry 4.0. We are also continuing to expand our partner ecosystem in the area of cyber security. For an overview of the Magenta Security portfolio along with the latest information on products and upcoming events – such as Deutsche Telekom’s annual Magenta Security Convention – please refer to https://security.telekom.com. We provide regular updates on the latest developments in data protection and data security on our website at https://www.telekom.com/en/corporate-responsibility/data-protection-data-security. For information on how we will continue to shape this strategic area of operation, please refer to the section “Group strategy.”

RISKS AND OPPORTUNITIES ARISING FROM BRAND, COMMUNICATION, AND REPUTATION

Negative media reports. An unforeseeable negative media report on our products and services or our corporate activities and responsibilities can have a huge impact on the reputation of our Company and our brand image. Social networks have made it possible that such information and opinions can spread much faster and more widely. Ultimately, negative reports can impact on our revenue and our brand value. In order to avoid this, we engage in a constant, intensive and constructive dialog, in particular with our customers, the media, and the financial world. For us, the top priority is to take as balanced a view as possible of the interests of all stakeholders and thereby uphold our reputation as a reliable partner.

Sustainability challenges and opportunities. For us, comprehensive risk and opportunities management also means considering the opportunities and risks arising from ecological or social aspects or from the management of our Company. To this end, we actively and systematically involve all relevant stakeholders in the process of identifying current and potential risks and opportunities. We also participate in a number of working groups and committees. In parallel with our ongoing monitoring of ecological, social and governance issues, we systematically determine our stakeholders’ positions on these issues. The key tools we use here are: our year-round open online materiality survey for all stakeholders; our bi-monthly NGO report, which systematically analyzes press publications of the NGOs relevant for us; our involvement in working groups and committees, countless national and international business associations, and social organizations, e.g., GeSI, BID, Bitkom, Econsense, and BAGSO; stakeholder dialog formats organized by us, such as this year’s ICT and Climate Stakeholder Day under the motto “The Impact of ICT on climate change – curse or blessing”; and our various publications, such as the press review and newsletters. 13

We have identified the following as our main sustainability management issues:

  • Reputation. How we deal with sustainability issues also entails both opportunities and risks for our reputation. A high level of service quality is one of the most important factors for improving customer perception. Customer satisfaction has been embedded in our Group management as a non-financial performance indicator to underline the importance of this issue. Transparency and reporting help to promote the trust of other external stakeholders in our Group. Our annual and CR reports also serve this purpose. However, issues such as business practices, data privacy, and work standards in the supply chain and conduct in relation to human rights also entail reputational risks: If our brands, products, or services are connected with such issues in negative media reports, this can cause substantial damage to our reputation. As part of our sustainability management activities, we continuously review such potential risks and take measures to minimize them. We also ascertain how our products and services make a positive contribution to sustainability in order to enhance our reputation.
  • Climate protection. We pursue an integrated climate strategy, which means focusing not only on the risks that climate change poses for us and our stakeholders, but also on the opportunities it presents. By 2030, ICT products and services will have the potential to save up to ten times as much in CO2 emissions in other industries as the ICT sector itself generates (according to the GeSI SMARTer2030 study). This creates an opportunity to save 20 percent of global CO2 emissions in 2030 and to keep worldwide emissions at 2015 levels with simultaneous economic growth. The additional revenue potential here amounts to USD 6.5 trillion, USD 2.0 trillion of which is for the ICT industry alone. Further, ICT solutions can save a total of USD 4.9 trillion in costs. To give a specific example: The broadband roll-out in Germany has the potential to save an aggregate amount of 19 million metric tons of CO2 between 2012 and 2020. What is more, the economic momentum triggered by rolling out broadband can create an aggregate number of 162,000 new jobs and increase GDP by EUR 47 billion between 2015 and 2020. We are supporting this trend by evaluating our product portfolio to identify sustainability benefits. In addition, we want to continuously improve the ratio of the emissions that our products and services save to those generated by our own value chain. In 2016, for example, we saved 33 percent more emissions in Germany than we produced. Further information can be found in our 2017 CR report, published in April 2018. 13

    Climate change risks are already visible in the form of increasingly extreme weather conditions. This is having a direct effect on our stakeholders, e.g., our customers, suppliers, and employees. We can take preventive action in this area by reducing our own CO2 emissions, which is one of the reasons we set ourselves the goal of achieving a 20 percent reduction in our Group-wide emissions – leaving aside our United States operating segment – by 2020 (baseline: 2008). Climate protection also carries financial risks, whether from the introduction of a levy on CO2 emissions or an increase in energy costs. The measures we are taking to counter these risks include measuring our own energy efficiency and finding ways to improve it. Further, in 2016 four of our subsidiaries (Magyar Telekom in Hungary, OTE in Greece, T-Mobile Netherlands, and Hrvatski Telekom in Croatia) covered 100 percent of their electricity requirements with renewable energy, while a further two (T-Mobile Austria and T-Systems Netherlands) almost met this target, thus reducing climate risks.
  • Suppliers. We see more sustainability in our supply chain as an opportunity – for our reputation and our business success. Apart from the general risks associated with our global procurement activities, we can be exposed to country- and supplier-specific risks. These include, for example, the use of child labor, the conscious acceptance of environmental damage or inadequate local working and safety conditions. We reduce these risks by systematically reviewing our suppliers. Our partnerships with suppliers that comply with international sustainability standards ensure a high level of product quality and reliable procurement. We have a special development program in place to help strategic suppliers introduce business practices that are both socially and ecologically acceptable while remaining economically efficient. This program showed measurable successes again in the reporting period and has three major advantages: It has a positive impact on our suppliers’ working conditions, enhances their profitability, and makes the economic relevance of sustainability clear for both sides, i.e., for our suppliers and for the Group alike. For instance, better working conditions at our suppliers reduces the number of work-related accidents as well as the personnel turnover rate. That, in turn, ensures high product quality and increases productivity, while at the same time lowering costs for recruitment and training. Thus, not only are we strengthening our suppliers’ profitability and CR performance, we are also significantly reducing identified risks. 8 For further information on occupational health and safety, please refer to the section “Corporate responsibility and non-financial statement.”

Health and environment. Mobile communications, or the electromagnetic fields used in mobile communications, regularly give rise to concerns among the general population about potential health risks. This issue continues to be the subject of public, political, and scientific debate. Acceptance problems among the general public concern both mobile communications networks and the use of mobile terminals such as smartphones, tablets, and laptops. The discussion also has repercussions for the build-out of mobile communications infrastructure and the use of mobile devices. In the fixed network, it affects sales of traditional IP and DECT (digital cordless) phones and devices that use Wi-Fi technology. There is a risk of regulatory interventions, such as reduced thresholds for electromagnetic fields or the implementation of precautionary measures in mobile communications, e.g., amendments to building law or labeling requirements for handsets.

Over the past few years, recognized expert organizations such as the World Health Organization (WHO) and the International Commission on Non-Ionizing Radiation Protection (ICNIRP) have repeatedly reviewed the current thresholds for mobile communications and confirmed that – if these values are complied with – the use of mobile technology is safe based on current scientific knowledge. The expert organizations, currently the ICNIRP, regularly review the recommended thresholds on the basis of the latest scientific findings.

We are convinced that mobile communications technology is safe if specific threshold values are complied with. We are supported in this conviction by the assessment of the recognized bodies. Our responsible approach to this issue finds expression in our Group-wide EMF Policy, with which we commit ourselves to more transparency, information, participation, and financial support of independent mobile communications research, far beyond that which is stipulated by legal requirements. We aim to overcome uncertainty among the general public by pursuing an objective, scientifically well-founded, and transparent information policy. We thus continue to see it as our duty to maintain our close and successful dialog with local authorities, over and above the statutory requirements. This also applies since our longstanding collaboration with municipalities to build out the mobile network was enshrined in law in 2013; previously, this collaboration was based on voluntary self-commitments by the network operators.

LITIGATION

Major ongoing legal proceedings. Deutsche Telekom is party to proceedings both in and out of court with government agencies, competitors, and other parties. The proceedings listed below are of particular importance from our perspective. If, in extremely rare cases, required disclosures on the significance of individual litigation and anti-trust proceedings are not made, we concluded that these disclosures may seriously undermine the outcome of the relevant proceedings.

Major ongoing legal proceedings
 
Toll Collect arbitration proceedings
Prospectus liability proceedings
Claims by partnering publishers of telephone directories
Claims relating to charges for the shared use of cable ducts
Claim for damages in Malaysia despite an earlier, contrary, legally binding arbitration ruling
Patents and licenses
  • Toll Collect arbitration proceedings. In the arbitration proceedings between the principal shareholders of Toll Collect (Daimler Financial Services AG and Deutsche Telekom AG) and the consortium company Toll Collect GbR on one side and the Federal Republic of Germany on the other concerning disputes in connection with the truck toll collection system, Deutsche Telekom received the Federal Republic of Germany’s statement of claim on August 2, 2005. The Federal Republic is claiming some EUR 3.33 billion in lost toll revenues plus interest due to the delayed commencement of operations as well as contractual penalties in the amount of around EUR 1.65 billion plus interest. The Federal Republic’s main claims – including contractual penalty claims – thus total about EUR 4.98 billion plus interest. In spring 2017, the principal shareholders asserted counterclaims based on breaches of duty by the Federal Republic of Germany in relation to the delay in the start of toll collection. After hearings in 2014, we reassessed the proceedings, updated Deutsche Telekom’s share of the amount at risk, and recognized adequate provisions for the risk in the statement of financial position. Further hearings were held in the following years, none of which prompted us to change the provisions recognized in 2014.
  • Prospectus liability proceedings (third public offering or DT3). There are around 2,600 ongoing lawsuits from some 16,000 alleged buyers of T-Shares sold on the basis of the prospectus published on May 26, 2000. The plaintiffs assert that individual figures given in this prospectus were inaccurate or incomplete. The amount in dispute totals approximately EUR 80 million plus interest. Some of the actions are also directed at KfW and/or the Federal Republic of Germany as well as the banks that handled the issuances. The Frankfurt/Main Regional Court had issued certified questions to the Frankfurt/Main Higher Regional Court in accordance with the German Capital Investor Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz – KapMuG) and has temporarily suspended the initial proceedings. On May 16, 2012, the Frankfurt/Main Higher Regional Court had ruled that there were no errors in Deutsche Telekom AG’s prospectus. In its decision on October 21, 2014, the Federal Court of Justice revoked this ruling, determined that there was a mistake in the prospectus, and referred the case back to the Frankfurt/Main Higher Regional Court. On November 30, 2016, the Frankfurt/Main Higher Regional Court ruled that the mistake in the prospectus identified by the Federal Court of Justice could result in liability on the part of Deutsche Telekom AG, although the details of that liability would have to be established in the initial proceedings. Both Deutsche Telekom AG and some of the individual plaintiffs in the model proceedings have brought an appeal before the Federal Court of Justice against this decision. We continue to hold the opinion that there are compelling reasons why Deutsche Telekom AG should not be liable for damages. An adequate contingent liability has been recognized and is shown in the notes to the consolidated financial statements. Adequate provisions for this risk were recognized in the annual financial statements of Deutsche Telekom AG, which are prepared in accordance with German GAAP.
  • Claims by partnering publishers of telephone directories. Several publishers that had set up joint ventures with the then DeTeMedien GmbH – formerly a wholly owned subsidiary of Deutsche Telekom AG and now named Deutsche Tele Medien GmbH – to edit and publish subscriber directories, filed claims against DeTeMedien GmbH and/or Deutsche Telekom AG at the end of 2013. The plaintiffs are claiming damages or a refund from Deutsche Tele Medien GmbH and, to a certain extent, from Deutsche Telekom AG as joint and several debtor alongside Deutsche Tele Medien GmbH. The plaintiffs base their claims on allegedly excessive charges for the provision of subscriber data in the joint ventures. The amounts claimed by the 81 original plaintiffs totaled around EUR 470 million plus interest at the end of 2014. After an agreement was reached with the majority of the publishers in October 2015 to settle the disputes and a number of claims were since dismissed conclusively, 13 actions are still pending for a remaining amount in dispute of around EUR 99 million plus interest. In ten of these proceedings, the plaintiffs lodged appeals with the Federal Court of Justice after their claims were dismissed by the court of appeal. The remaining three claims have been suspended. Five publishers whose civil actions are still pending have been pursuing their claims in parallel since June 2016 through administrative court actions against the Federal Network Agency. Two of these actions were dismissed by the court of first instance.
  • Claims relating to charges for the shared use of cable ducts. In 2012, Kabel Deutschland Vertrieb und Service GmbH – now Vodafone Kabel Deutschland GmbH (VKDG) – filed a claim against Telekom Deutschland GmbH to reduce the annual charge for the rights to use cable duct capacities in the future and gain a partial refund of the payments made in this connection since 2004. According to its latest estimates, VKDG’s claims amounted to around EUR 540 million along with around EUR 11 million for the alleged benefit from additional interest, plus interest in each case. Claims prior to 2009 are no longer being asserted by VKDG. After the Frankfurt/Main Regional Court had dismissed the complaint in 2013, the Frankfurt/Main Higher Regional Court also rejected the appeal in December 2014. In the ruling dated January 24, 2017, the Federal Court of Justice reversed the appeal ruling and referred the case back to the Frankfurt/Main Higher Regional Court for further consideration. In similar proceedings, Unitymedia Hessen GmbH & Co. KG, Unitymedia NRW GmbH and Kabel BW GmbH demanded in January 2013 that Telekom Deutschland GmbH cease charging the plaintiffs more than a specific and precisely stated amount for the shared use of cable ducts. The plaintiffs are now demanding a refund of around EUR 570 million plus interest. The claim was dismissed in the first instance by the Cologne Regional Court on October 11, 2016. The plaintiffs have appealed against this decision. At present the financial impact of both these proceedings cannot be assessed with sufficient certainty.
  • Claim for damages in Malaysia despite an earlier, contrary, legally binding arbitration ruling. Celcom Malaysia Berhad (Celcom) and Technology Resources Industries Berhad are pursuing actions with the state courts in Kuala Lumpur, Malaysia, against eleven defendants in total, including DeTeAsia Holding GmbH, a subsidiary of Deutsche Telekom AG. The plaintiffs are demanding damages and compensation of USD 232 million plus interest. DeTeAsia Holding GmbH had enforced this amount against Celcom in 2005 on the basis of a final ruling in its favor. The main proceedings in the court of first instance began in January 2018. At present, we cannot assess their financial impact with sufficient certainty.
  • Patents and licenses. Like many other large telecommunications and Internet providers, Deutsche Telekom is exposed to a growing number of intellectual property rights disputes. There is a risk that we may have to pay license fees and/or compensation; we are also exposed to a risk of cease-and-desist orders, for example relating to the sale of a product or the use of a technology.

Further, Deutsche Telekom intends to defend itself and/or pursue its claims resolutely in each of these proceedings.

Proceedings concluded

  • Reduction of the Company’s contribution to the Civil Service Pension Fund. Deutsche Telekom complies with its obligation to pay contributions to the Civil Service Pension Fund in accordance with the German Act on the Legal Provisions for the Former Deutsche Bundespost Staff (Postpersonalrechtsgesetz) and previously filed an application with the responsible Federal Ministry of Finance to have its contribution obligations reduced. After this application was rejected, Deutsche Telekom filed a suit with the competent administrative court in Cologne. This suit was dismissed, as was the appeal lodged against the dismissal. As Deutsche Telekom AG has refrained from further litigation in this matter, the proceedings have been terminated and the judgment is now final.

ANTI-TRUST PROCEEDINGS

Like all companies, our Group is subject to the regulations of anti-trust law. Given this, we have in recent years significantly expanded our compliance activities in this area too. Most recently, independent auditors certified our anti-trust compliance management system as being effective in accordance with IDW AuS 980 in 2015. Nevertheless, Deutsche Telekom and its subsidiaries, joint ventures, and associates are from time to time subject to proceedings under competition law or civil follow-on actions. In the following, we describe major anti-trust proceedings and the resulting claims for damages.

Claims for damages against Slovak Telekom following the European Commission’s decision to impose fines. The European Commission decided on October 15, 2014 that Slovak Telekom had abused its market power on the Slovak broadband market and as a result imposed fines on Slovak Telekom and Deutsche Telekom. The fines were paid in January 2015. Slovak Telekom and Deutsche Telekom challenged the European Commission’s decision on December 29, 2014 before the Court of the European Union. Following the decision of the European Commission, competitors filed damage actions against Slovak Telekom with the civil court in Bratislava. These claims seek compensation for alleged damages due to Slovak Telekom’s abuse of a dominant market position, as determined by the European Commission. At present, three claims totaling EUR 174 million plus interest are still pending. At present, we cannot assess the financial impact with sufficient certainty.

FINANCIAL RISKS

Liquidity, credit, currency, interest rate risks

With regard to its assets, liabilities and planned transactions, our Group is particularly exposed to liquidity risks, credit risks, and the risk of changes in exchange rates and interest rates. To contain these risks, we use selected derivative and non-derivative hedging instruments (hedges), depending on the risk assessment. As only risks with an impact on cash flows are hedged, derivative financial instruments are used solely for hedging and never for speculative purposes. The following risk areas – liquidity, credit, currency, and interest rate risks – are evaluated after implementation of risk containment measures. For the evaluation, please refer to the table.

Liquidity risk. To ensure the Group’s and Deutsche Telekom AG’s solvency and financial flexibility at all times, our system of liquidity management includes a liquidity reserve, in the form of credit lines and cash, that is sufficient to cover bonds falling due and long-term loans for at least the next 24 months. For medium- to long-term financing, we primarily use bonds issued in a variety of currencies and jurisdictions. These instruments are generally issued via Deutsche Telekom International Finance B. V. and are forwarded within the Group as internal loans.

The graphic on the next page shows the development of the liquidity reserve in relation to maturity dates. As of the end of 2017 and in the preceding quarters, we clearly met our targets for the liquidity reserve to cover at least the maturities due in the next 24 months.

In addition to the reported liabilities to banks, Deutsche Telekom had standardized bilateral credit agreements with 22 banks for a total of EUR 12.9 billion as of December 31, 2017. As of December 31, 2017, EUR 0.2 billion of these credit lines had been utilized. According to the credit agreements, the terms and conditions depend on our rating. The bilateral credit agreements have an original maturity of 36 months and can, after each period of twelve months, be extended by a further twelve months to renew the maturity of 36 months. From today’s perspective, our access to the international debt capital markets is not jeopardized.

Credit risk. In our operating business and certain financing activities, we are exposed to a credit risk, i.e., the risk that a counterparty will not fulfill its contractual obligations. To keep this credit risk to a minimum, we conclude transactions with regard to financing activities only with counterparties that have at least a credit rating of BBB+/Baa1; this is linked to an operational credit management system. In addition, we have concluded collateral agreements for our derivative transactions. These ensure that, on a daily basis, we receive compensation payments in the amount of the receivables due from contract banks and that we make compensatory payments in the case of liabilities due. In cases of insolvency, the collateral agreements stipulate that all contracts in force are offset against each other, leaving a net receivable or liability. We continuously monitor accounts receivable in operations in a decentralized manner, i.e., at the individual units. Our business with corporate customers, especially with international carriers, is subject to special solvency monitoring.

Currency risks. The currency risks result from investments, financing measures, and operations. Risks from foreign-currency fluctuations are hedged if they affect the Group’s cash flows. However, foreign-currency risks that do not influence the Group’s cash flows (e.g., risks resulting from the translation of assets and liabilities of foreign operations into the Group’s reporting currency) are not hedged.

Interest rate risks. Our interest rate risks mainly result from interest-bearing liabilities, primarily in the eurozone and the United States. Interest risks are managed as part of our interest rate management activities, in the course of which the maximum permissible negative deviation from the planned finance costs is determined – this is termed the risk budget. To ensure compliance with the risk budget, we manage the composition of the liabilities portfolio (ratio of fixed- to variable-interest debt instruments and average fixed-interest period) by issuing primary (non-derivative) financial instruments and, where necessary, also deploying derivative financial instruments. Regular reports are submitted to the Board of Management and Supervisory Board. For additional explanations, please refer to Note 36 “Financial instruments and risk management” in the notes to the consolidated financial statements.

Tax risks

We are subject to the applicable tax laws in many different countries. Risks can arise from changes in local taxation laws or case law and different interpretations of existing provisions. These risks can impact both our tax expense and benefit as well as tax receivables and liabilities.

Other financial risks

This section contains information on other financial risks that we consider to be immaterial at present or cannot evaluate based on current knowledge.

Rating risk. As of December 31, 2017, Deutsche Telekom’s credit rating with Moody’s was Baa1, while Fitch and Standard & Poor’s rated us BBB+. All three agencies gave us a “stable” outlook. A lower rating would result in interest rate rises for some of the bonds issued by us.

Sales of shares by the Federal Republic or KfW Bankengruppe. As of December 31, 2017, the Federal Republic and KfW Bankengruppe jointly held approximately 31.9 percent in Deutsche Telekom AG. It is possible that the Federal Republic will continue its policy of privatization and sell further equity interests in a manner designed not to disrupt the capital markets and with the involvement of KfW Bankengruppe. There is a risk that the sale of a significant volume of shares by the Federal Republic or KfW Bankengruppe, or any speculation to this effect, could have a negative impact on the price of the T-Share.

Our CR strategy enhances the value of our Company in the long term, which also has a positive effect of reducing business risks. Investors with a long-term horizon acknowledge this approach. In the capital markets, this is evident, for example, in the proportion of T-shares held by investors that base their investment decisions, at least in part, on sustainability criteria. As of September 30, 2017, around 18 percent of all T-Shares were held by SRI (socially responsible investment) investors, and almost 3 percent were held by investors who manage their funds primarily in accordance with SRI aspects.

Impairment of Deutsche Telekom AG’s assets. The value of the assets of Deutsche Telekom AG and its subsidiaries is reviewed periodically. In addition to the regular annual measurements, specific impairment tests may be carried out, for example where changes in the economic, regulatory, business or political environment suggest that the value of goodwill, intangible assets, property, plant and equipment, investments accounted for using the equity method, or other financial assets might have decreased. For a detailed explanation, please refer to the section “Summary of accounting policies – Judgments and estimates” in the notes to the consolidated financial statements. These tests may lead to the recognition of impairment losses that do not, however, result in cash outflows. This could impact to a considerable extent on our results, which in turn may negatively affect the T-Share price.