Market expectations

GERMANY

Although the market for telecommunications services in Germany recorded a slight decline of 0.4 percent in 2016 (source: Bitkom), EITO (European Information Technology Observatory) expects it to stabilize in 2017. This anticipated trend is attributable to increasing demand for mobile data volumes and higher speeds as well as to demand from business customers for high-bit-rate connectivity, both of which will potentially compensate for declining revenue from traditional fixed-network telephony. In terms of a broader-based ICT market that includes IT services as well as telecommunications, EITO expects to see growth of 1.5 percent in 2017. This will be mainly attributable to growth of 2.7 percent in the IT market, especially due to strong demand for services for business customers (e.g., outsourcing, project business, consulting) as well as in software (virtualization and Software as a Service).

Innovative integrated products and attractive supplementary services – such as TV and music options, and smart home – are becoming increasingly important for our competitive position with consumers, while cloud services, security applications and solutions for Industry 4.0 are gaining in significance with business customers. We are also setting ourselves apart from other providers with our download and upload bandwidths, and the mobile data volumes we include in our rate plans.

The mobile communications market in Germany is dominated by three providers, each with its own network infrastructure, who deploy 4G/LTE technology to ensure that the majority of the population has access to high-speed mobile Internet. The fixed-network broadband market is a different matter: It is characterized by a large number of competitors – from national to regional providers – with differing infrastructures. We are assuming not only that the number of cable network operators will continue to rise, but that the number of providers of DSL and fiber-optic networks will increase, too.

UNITED STATES

The U. S. mobile market continues to be characterized by intense competition among the major mobile carriers. Competitive factors within the U. S. mobile market include dynamic changes in pricing, voice market saturation, service and product offerings, customer experience, network quality, development and deployment of technologies, availability of spectrum licenses, and regulatory changes. The mobile postpaid market in the United States is embracing device financing options, such as T-Mobile US’ equipment installment plans and device leasing through JUMP! On Demand, allowing customers to subscribe for wireless services separately without the purchase of or payment for a bundled device. Additionally, data services continue to be a growth driver despite the high level of competition, supporting further network investment by the major mobile carriers in the US mobile market.

EUROPE

The next two years are expected to see a slight contraction in traditional telecommunications business in our European markets. Analysys Mason, an industry analyst, forecasts declines of 1.1 percent in 2017 and 0.9 percent in 2018. Persistent competitive and price pressure – in particular from new providers, such as Digi in Hungary and SWAN in Slovakia, who pursue an aggressive pricing policy – will have a negative impact on the markets of our Europe operating segment. As far as fixed-network business is concerned, the expected ongoing upward trend in the broadband and pay-TV markets will only partially make up for the declines in voice telephony. Competition between the traditional telecommunications industry and alternative broadband providers, e.g., cable network operators, will likely intensify, especially due to further mergers with mobile network operators. We also expect to see further substitution of traditional telecommunication services such as text messaging and voice telephony by Internet-based service providers (OTT players), along with a corresponding increase in data volumes.

The trend toward integrated business models, i. e., the convergence of fixed-network and mobile offerings (FMC), will probably continue in Europe. As a result, the markets for fixed- or mobile-only network operators look set to shrink. At the same time, we expect to see growing pressure – especially on mobile-only providers – to expand their infrastructures to include the access technologies that are currently absent, whether through the establishment of their own networks or via partnerships and/or mergers.

The economic parameters in our European markets will possibly continue to improve during the forecast period. Oxford Economics, an industry analyst, expects all the countries in this operating segment to post GDP growth and lower unemployment rates over the next few years. Fiscal interventions like those in Greece will have negative effects on telecommunications markets. Decisions taken by national regulators and the European Union will be another negative factor impacting markets, and our revenue streams, in the coming year. Depending on what form it ultimately takes, the EU Roaming Regulation, in particular, could have considerable negative consequences when it comes into force in June 2017.

SYSTEMS SOLUTIONS

The ICT market is expected to see renewed growth in the next two years in line with the recovery of the global economy. Persistent cost pressure and intense competition will remain features of the ICT market. At the same time, we expect the digital transformation to stoke demand for solutions for cloud services, big data, smart network services such as Industry 4.0, the Internet of Things, and M2M as well as for the mobilization of business processes and ICT security.

We estimate that the ICT markets will develop along divergent paths in the telecommunications and IT services market segments.

  • Telecommunications: The highly competitive telecommunications market remains challenging. Innovative change, intense competition, ongoing price erosion, and the interventions of national regulators are all likely to diminish total market revenues, even though both mobile data services business and the Internet of Things will continue to grow in the coming years.
  • IT services: After strong growth in the reporting period, we expect the market for IT services to continue growing steadily in 2017 and 2018. At the same time, the market is undergoing a radical transformation, e.g., due to ongoing standardization, demand for smart services, and the changes being wrought by cloud services in the outsourcing segment. Further challenges have arisen in the shape of ongoing digitization, the growing importance of ICT security, big data, and increasing mobility. Traditional ICT business is likely to decline due to price competition, while cloud services, mobility, and cyber-security should record double-digit growth. Against this backdrop, we intend to continue increasing our investment spending in growth markets such as digitization, cloud services, cyber-security, and intelligent network solutions for the healthcare sector or the automotive industry.

GROUP DEVELOPMENT

The Group Development operating segment we established on January 1, 2017 covers a number of different markets, mainly those in which our companies T-Mobile Netherlands and Deutsche Funkturm (DFMG) are active.

  • The mobile communications market in the Netherlands has been marked by high price and competitive pressure for quite some time, and these conditions look set to continue. One of the main trends contributing toward this is the growing convergence of fixed-network and mobile products (FMC). The merger of Vodafone and Ziggo, for instance, has created another strong and ambitious nationwide FMC provider alongside incumbent KPN. In particular, the trend toward convergence products should also keep up the pressure on mobile-product prices that has been around for some time. What is more, both the strong discount segment, comprising mobile providers’ secondary brands, and MVNOs should continue to make for lively competition.
  • With some 27,000 locations, DFMG is the biggest provider of passive wireless infrastructure for mobile communications and broadcasting in Germany. Mobile communications are by far the company’s largest business area. Over the next two years, we anticipate that demand for additional network capacities will rise, which in turn should increase demand from mobile network operators for extensions to existing mobile sites or for the construction of new ones. This positive trend is likely to be partially offset by the ongoing consolidation of our customer Telefónica’s network, shrinking VHF demand from broadcasters, and gradual decommissioning of the public authorities’ analog network.