Group strategy

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. We see ourselves as a driving force for a modern and competitive digital Europe. Our leadership goal covers four dimensions: best network, best service, best products, and preferred provider for business customers. Furthermore, we work towards making the information and knowledge society accessible to all, and endeavor to reconcile economic, ecological, and social aims in the interests of sustainable economic activity. In this way we strive to make a positive contribution to sustainable development at all levels of the value chain. The key action areas for our sustainability management focus on both its importance for our business success and the expectations of our stakeholders. 12 For more information, please refer to the section “Corporate responsibility”.

As the following graphic shows, our Leading European Telco strategy is based on four areas of operation which are derived from our leadership goal and focus on our customers, as well as on three supporting areas of operation which provide the framework for our internal activities.

Chart: Leading European Telco corporate strategy

STRATEGIC AREAS OF OPERATION

Integrated IP networks

Our core business is setting up, operating, and marketing networks and communication services. We aim to offer our customers the best network and fastest possible connection. Above-average network quality is therefore a differentiator for us, with which we can clearly set ourselves apart from the competition. We regularly perform outstandingly in independent network tests: proof that we are systematically upgrading our networks and remain quality leader, despite rising competitive pressure. The built-out of our networks also serves our corporate and social aims: A modern network makes our products and services attractive for a larger number of potential customers and thus increases our revenue potential. Modern networks and systems also improve our energy efficiency. At the same time, we give more people access to modern information and telecommunications services. For more information on our outstanding network, please refer to the section “Highlights in the 2016 financial year”.

Step by step we are migrating our entire fixed network to the Internet Protocol (IP) for all customers. In the long term, an integrated, pan-European IP network will allow us to meet our customers’ wishes quickly, flexibly, and economically. The gradual migration to modern IP networks was completed in Croatia and Montenegro in 2015, and was also almost fully completed in Hungary in the reporting year. In Germany and our other integrated national companies, this transformation is well underway and is set to be virtually complete by 2018. The establishment of a new Board of Management department for Technology and Innovation, headed by Claudia Nemat, underscores the importance we place on uniform network production and management. As technology, IT and innovation increasingly converge, this lays important groundwork for the ongoing digitization of our telecommunications networks. 9   For information on our progress with building out the network, please refer to the section “Development of business in the operating segments.”

We continue to invest in our fixed networks to provide the best possible broadband coverage and remain competitive. We are bringing optical fiber closer to our customers with the FTTC (fiber to the curb) technology and in doing so, increase bandwidths. In Germany, we are planning to be able to offer approximately 80 percent of the population a download bandwidth of at least 50 Mbit/s – thanks, for example, to vectoring technology.

In mobile communications, we intend to further roll out our LTE networks: In Germany, we plan to cover approximately 95 percent of the population with LTE by 2018; in our European national companies, coverage is to reach between 75 and 95 percent. Furthermore, we want to provide substantially more Wi-Fi HotSpots in Germany and build an even denser mobile communications network using high-performance small cells. In the United States, our 4G/LTE network covered around 314 million people at the end of 2016.

As a leading telecommunications provider, we are actively involved in developing and standardizing the fifth generation mobile communications standard (5G). 5G will open the door to entirely new and flexible use cases. The key components of the 5G concept are the deployment and distribution of computing power in the network, dedicated network layers for individual applications, and the seamless integration of fixed-network and mobile communications technologies. 5G provides the basis for future technologies such as virtual reality, autonomous driving, and the Internet of Things. We anticipate that 5G will be ready from 2020.

Best customer experience

With our award-winning network, integrated products, and service excellence, we are creating an outstanding customer experience. We delight our customers with expertise, simplicity, and speed. Also for this reason, we continuously improve our processes and IT systems.

Fixed-mobile convergence (FMC), i. e., the joint marketing of fixed-network and mobile communications in one product, offers our customers a seamless telecommunications experience – consistently and across different technologies. We therefore intend to significantly expand the range of convergent products we offer. Among other reasons, the aim is to win new customers and retain existing customers, as well as to increase revenue. Around three million customers in Germany had opted for MagentaEins by the end of 2016. We thus met our target of gaining three million FMC customers by 2018 in the 2016 financial year – two years earlier than originally planned. In total, the integrated national companies of our Europe operating segment won around 1.4 million customers for our FMC products as of the end of 2016.

Our customers benefit from our convergent product portfolio, which shows them just how easy and uncomplicated telecommunications can be. Take the EU-Flat Plus mobile flat rate, for example, which is only available to our MagentaEins customers. We had launched our hybrid router in Germany in 2014. It combines the strengths of the fixed network (consistent high capacity) with those of mobile communications (high transmission rates).

By 2018, we plan to improve our customer service, focusing on customers and efficiency. We want to offer our customers an outstanding and consistent service experience on all channels – shop, hotline, and online. We are paying particular attention to expanding our online channel and seamless switching between the different channels. In 2016 we improved customer service in a number of areas. In Germany, for example, we overhauled the mobile and fixed-network portal, the online shop, and the Customer Center to give them a modern look and began work to combine these onto one single platform. Every new fixed-network customer is assigned a personal switch adviser – this is just one of the ways in which we set ourselves apart from the competition as a premium service provider. Our integrated sales and service app, which can handle all important customer issues, has now been rolled out at six of our European national companies, most recently in Austria.

We measure customer retention/satisfaction using the globally recognized TRI*M method. Based on this TRI*M performance indicator, we improve our customer contact processes, and our products and services. We determine the loyalty of our customers towards the Company in surveys. The results are presented as a performance indicator, the TRI*M index, which ranges between minus 66 and plus 134 points. In the reporting year, the value stood at 70.2 points, compared with 68.3 points in the prior year, based on the equivalent basis for calculation. Our aim is to improve this result step by step through 2018.

For our customers, data privacy and security are very important and hence are a vital differentiator in competition. We guarantee our customers that we will handle their data securely and confidentially. We also see data privacy and security as a growing business area, which we want to significantly expand with existing and new security solutions. The new Telekom Security business unit, which bundles all security activities across the Group, went into operation on January 1, 2017. 16

Win with partners

We are an innovative company. We are focusing our own innovative power on our networks, our process landscape, selected platforms for the production and sale of our products, and on our access products. Together with partners, we offer an even wider range of products and services and deliver the digital offerings our customers want. We offer our partners access to a large and attractive customer base, to our established marketing and sales, and to technical wholesale services. In addition, these partnerships offer the chance to set ourselves apart from the competition. For more information on our partnerships, please refer to the section “Highlights in the 2016 financial year”.

We want to be the preferred telecommunications provider when it comes to innovative partners selling their products. For this reason, we have developed a standardized platform, which can be thought of as a power strip (Steckerleiste) that partners can simply plug in to integrate their services. We launched the “Steckerleiste” platform in Albania, Austria and Montenegro in the reporting year. More countries, including Poland and Macedonia, are to follow in 2017.

We are also further developing our TV business and want to drive growth here too. We make attractive content accessible across all screens. We rolled out a new TV platform in the reporting year with the aim of guaranteeing an even better TV experience. EntertainTV has a completely redesigned user interface, new hardware, and innovative features. The service includes more than 300 channels and some 120,000 on-demand titles from partners such as Sky and Maxdome. The new “restart” and “seven-day replay” functions mean live television and video on demand are converging to an ever greater extent. An added benefit for MagentaEins customers is the EntertainTV mobil option, which is included free of charge in their product bundle until December 31, 2017.

With our cloud partner solutions such as Microsoft Azure and Office 365, Salesforce, Informatica, or the VMware vCloud, we provide our customers with an attractive platform offering from a single source: highly integrated and secure. We also operate the Open Telekom Cloud together with our partner Huawei as a stand-out solution “Made in Germany” that offers utmost security at low prices. Our public cloud offering had already attracted more than 65,000 registered customers by the end of the reporting year.

In 2016 we established a new alliance, ngena (Next Generation Enterprise Network Alliance), together with our partners CenturyLink, Reliance, and SK Telecom. ngena aims to provide services to international business customers from 2017 as an independent company and attract a further 20 partners in the coming years. All members of ngena ensure network access in their markets. ngena links the individual networks to create a global network using Cisco cloud and virtualization technology and offers this global network to ngena’s members as a platform. Using this “sharing economy” business model, ngena aims to secure a competitive advantage in corporate customer network business.

Lead in business

The strengthening of our position on the business customer market is an important step on our journey to become the leading telecommunications company in Europe. In addition to traditional IT and telecommunications business, we will continue to focus increasingly on platform-based services (in the area of the Internet of Things, for example) and cloud services.

In particular, business in IT and telecommunications services from the cloud is growing unabatedly and in response, we are constantly expanding our cloud ecosystem to include technology partners who are in turn market leaders. We are already one of the leading providers in Europe with our scalable cloud platforms and we are growing faster than the market in the area of public cloud computing.

The Market Unit of our corporate customer arm, T-Systems, comprises three divisions that are closely aligned with the needs of our customers: the IT Division, the TC Division (Telecommunications), and the Digital Division. The Digital Division will be an especially important growth driver: We expect substantial double-digit growth rates through 2018 with platform-based solutions in the healthcare, mobility, and industry business areas, as well as with our own and partner cloud products. We plan to generate more than half of T-Systems’ external revenue in such digital growth areas by 2018. In 2016, the annual average stood at around 48 percent. 3

SUPPORTING AREAS OF OPERATION

The supporting areas of operation provide the framework for our internal activities.

Transform portfolio. In 2016, we steadily continued to develop our portfolio of investments with a view to our strategic target. The portfolio of business areas that cannot be developed adequately in the Group has been streamlined systematically. For example, we expect to add substantial further value by selling Strato AG to United Internet AG, which was agreed in December 2016. To ensure the efficient management of our investments in BT, T-Mobile Netherlands, DFMG (Deutsche Funkturm) and Deutsche Telekom Capital Partners going forward, we have created the new Group Development operating segment. With a 12-percent financial stake, we remain BT’s largest shareholder and continue to participate in the development of the company and the UK telecommunications market. In future, we plan to support and intensify the partnership and thus increase the value of our investment. At T-Mobile Netherlands, our focus is on repositioning the business in the market with the aim of reversing the current downward trend in revenue and earnings. The acquisition of the fixed-network operations from Vodafone Netherlands means we are now in a position to offer fixed-network and convergence products in the Netherlands as well. DFMG will continue to concentrate heavily on its biggest customer within the Group, Telekom Deutschland, but the company will also redouble its efforts to expand third-party business and tap growth areas.

Evolve financial targets & efficiency. Our finance strategy ensures that our balance sheet ratios remain sound. We want to earn our cost of capital in the medium term and cost-effectively manage our non-current assets in terms of utilization and replacement investments. We are sticking to our strict cost discipline.

Encourage leadership & performance development. The digital transformation makes work more flexible, more virtual and more participative. Our managers are the architects of the digital transformation and support our employees as we move into the new digital age. They do so on the basis of our leadership principles “Collaborate,” “Innovate,” and “Empower to perform,” our Guiding Principles, and our leadership model “Lead to win,” which is based on a continuous dialog between manager and employee. At the heart of this is feedback on performance and development, a direct link between performance assessment and incentives, and the determination of personal development paths. 8For more information on the priorities of our HR work, please refer to the section “Employees”.

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

To be the leading European telecommunications provider.

  • As one of the leading providers, we already have very high-performance networks and offer outstanding service for our customers.
  • Our networks are integrated and employ uniform technical standards.
  • We provide the platforms for successful partnerships in the consumer and business customer segments.
  • At heart we are a telecommunications provider – that also offers selected connectivity-based, scalable ICT business models.