Risks and opportunities

In the following section, we present all risks and opportunities that have been identified as significant for the Group and, 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 subsequently presented.

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

Corporate risks        
  Probability of occurrence Risk extent Risk level 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 page regulation      
Operational risks        
Personnel, Germany and Systems Solutions medium small low
Risks relating to IT/NT network operations, Germany very low large medium
Risks relating to IT/NT network operations, United States very low 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 page 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 economic and political developments of the last few months that uncertainties have grown as regards global economic growth and the economies of our footprint countries. Current forecasts of future economic development vary widely in both bandwidth and volatility. In many countries, the benefits of international economic integration have failed to reach parts of the population or, at least, they are not aware these benefits exist. Upcoming elections in Europe could result in further countries wanting to leave the European Union. Nor can we rule out an increase in protectionism, with potential long-term negative effects on world trade. What is more, geopolitical crises, resulting for example from the increased terror threat or large numbers of refugees, may have an adverse effect on the economies of the countries in which we operate. While the political situation in Greece has essentially stabilized, risk factors remain, including the slim parliamentary majority of the governing coalition and potentially growing resistance to austerity policies. Against this backdrop, a renewed escalation toward a political crisis cannot be entirely ruled out.

Risks to economic development could manifest themselves in different ways in some of our countries. Consumers and business customers could rein in their consumption if the economy slows sharply again and uncertainty continues to rise. Government austerity measures could also have negative effects on demand for telecommunications services, if public-sector demand declines or disposable incomes in the private sector diminish.

Risks relating to the market and environment

The main market risks we face include the steadily falling price levels 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 above-average growth in the market shares of regional network operators, particularly in Germany, and an increase in their market coverage through the build-out of proprietary infrastructure. 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 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. After all, the information and communications technology market is impacted by continued strong competition, persistent price erosion, long sales cycles and restraint in the awarding of projects. This creates a potential risk of revenue losses and declining margins at T-Systems.

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. As a consequence, contracts that do not comply with these specific consumer credit provisions can be rescinded. T-Mobile Netherlands is currently examining the consequences of this decision. At present the full financial impact of this cannot be assessed with sufficient certainty. To ensure it complies with the legal situation in future, T-Mobile Netherlands applied for a license for 2017 to issue consumer credit. The license it received is valid with effect from January 1, 2017.

Opportunities relating to the market and environment

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 risks and opportunities that we believe will allow us to achieve market growth and that could be significant for 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 help shape the digital future and 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. 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 risks. In other words, the benefit of the measures could be less than originally estimated, or the measures could take effect later than expected, or not at all. Each of these factors, on their own or combined with others, 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 our main regulatory risks and opportunities which, as things currently stand, could affect our results of operations and financial position, and our reputation. These risks and opportunities comprise changes in regulatory policy and legislation, in the awarding of the spectrum we require for current and future services, and in regulatory decisions regarding specific products or prices.

Our German and international companies remain subject to sector-specific market regulation. The national regulatory authorities have extensive powers to intervene in our product design and pricing, with significant effects on our operations. We can only to a limited extent anticipate such regulatory interventions, which may additionally increase existing price and competitive pressure. There are concerns that regulation in Germany and other European countries may continue to impact medium - to - long term growth in revenue and earnings.

Changes in regulatory policy and legislation

EU legal framework for telecommunications. On September 14, 2016, the European Commission published legislative proposals for revising the EU legal framework for telecommunications, which were passed on to the European Parliament and Council for further discussion. 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 passed in the first half of 2018. The corresponding provisions will then have to be transposed into national law, a process that will take at least a year. It is currently difficult to predict the outcome of this extensive legislative process; overall, we expect it to result in both opportunities and risks.

On October 27, 2015, the European Parliament and the European Council passed the EU Regulation concerning the single market for electronic communications. It contains provisions on international roaming, net neutrality, and obligations to provide information.

  • International roaming. Under the EU Regulation concerning the single market for electronic communications, surcharges for roaming services within the EU are to be eliminated entirely (Roam like at Home) as of June 15, 2017, following an initial reduction in rates that has been in force since April 30, 2016. While exceptions are possible under the Fair Use Policy, the rules of that policy – published by the European Commission on December 15, 2016 – limit surcharges to only very few cases. The introduction of Roam like at Home will give rise to corresponding revenue losses as well as substantial implementation costs. Furthermore, the European Council and the European Parliament are revising the Roaming Regulation and plan to lower very significantly the regulated price caps for wholesale roaming charges. These reductions will give rise to revenue risks for us and our subsidiaries, also because the international roaming mechanism may be misused in order to circumvent national terms and conditions. We expect the definitive regulation to be published in the first half of 2017.
  • Net neutrality. On August 30, 2016, the Body of European Regulators for Electronic Communications (BEREC) published guidelines for implementing the EU Regulation on net neutrality (Telecoms Single Market Regulation). As expected, BEREC’s interpretation of the regulation was very narrow. It remains to be seen how the national regulatory authorities apply these guidelines in practice.
  • Information requirements. In addition to the provisions on net neutrality, the BEREC guidelines also include far-reaching provisions on obligations to provide information that significantly constrict the legal framework of the EU regulation. Under these provisions, all customers are to be able to access all information on bandwidths; the information would also have to be made available to all existing customers retrospectively. Both of these measures entail corresponding revenue risks. As the guidelines are without legal force, we have to wait and see how they are translated into national law.

At the national level, on December 1, 2016 the lower house of the German national parliament, Bundestag, enacted its Transparency Regulation, the main objective of which is to enhance transparency and cost control with telecommunications services. The regulation will come into force as of June 1, 2017. In this context, the Federal Network Agency launched a measuring system that enables consumers to measure the bandwidths available on their fixed-network and mobile lines. The access bandwidths achieved across Germany were published in June 2016 for the first time and further publications are to follow.

Awarding of spectrum

Risks could arise from the fact that inappropriate auction rules and frequency usage requirements, excessive reserve prices, and disproportionately high annual spectrum fees could jeopardize the acquisition of our respective target 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 spectrum in the 0.8 GHz and 0.9 GHz ranges, as well as to 1.8 GHz, 3.5 GHz, and 3.7 GHz. Allocations of spectrum are currently in preparation in Albania, Greece, the F.Y.R.O Macedonia, Austria, the Czech Republic and Slovakia, with most taking place before mid-2017. A decision on the extension of the rights of use for T-Mobile Czech Republic’s existing 0.9/1.8 GHz spectrum is expected in the first half of 2017. In addition, preparations are in progress there for the award of 3.7 GHz spectrum, which is expected to take place in spring 2017. Within the same time frame, the regional allocations of 3.7 GHz spectrum in Slovakia should be concluded and a new allocation of 1.8 GHz spectrum take place. The Federal Communications Commission (FCC), the national regulatory authority in the United States, began auctioning spectrum in the 0.6 GHz range on May 31, 2016. This Incentive Auction will redistribute existing broadcast spectrum to mobile use in a multistage process of individual reverse and forward auctions. The latest stage, in which 70 MHz of a total of 84 MHz of former broadcast spectrum is up for auction, is still ongoing. The Incentive Auction is due to conclude in the first half of 2017.  For information on spectrum auctions that were completed in 2016 or are still ongoing, please refer to the section “The economic environment”.

Regulatory decisions on products and charges

Retrospective new ruling on rate approvals. In addition to the general regulatory risks already mentioned, the fact that administrative courts may overturn the Federal Network Agency’s rate rulings is a source of further uncertainty in Germany. For more information on the administrative court processes, please refer to the section “Litigation”. In such cases, the regulatory authority then has to decide again on the rates for past periods. It is generally not clear at all whether, to what extent, and in which direction rates will be revised. The settlement agreements concluded in 2015 with plaintiffs concerning the ULL one-time charges, in which the originally approved charges were agreed and the contractual parties undertook to withdraw pending claims, were implemented in full by April 2016. On this basis, we submitted corresponding rate applications to the Federal Network Agency on September 23, 2015 and November 30, 2015, which it approved on November 5, 2015 and February 1, 2016, respectively. As a result, the ULL one-time charges that were originally approved are now legally binding for almost the entire market.

OPERATIONAL RISKS AND OPPORTUNITIES

Personnel

In 2016, 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/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 1,854 civil servants are entitled to return to Deutsche Telekom in this way (as of December 31, 2016). 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.

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., arising from natural disasters or fire, 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 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 Group-wide insurance cover for insurable risks.

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. On the one hand, this will enable efficiency gains, e.g., by reducing the complexity of maintenance and operation, switching off service-specific legacy platforms, and saving energy. On the other hand, 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, more 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.

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, as well as fundamental issues, such as fixed-mobile convergence (FMC), 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 (quality of service) in industrial applications. 5G thus offers not only the immediate opportunity of cost-effectively managing fast growing demands in existing business models going forward, but also opportunities for additional business models by marketing “network capabilities” (e.g., network access, security, identity, storage location, temporary storage, real-time processing, etc.) to relevant partners.

Our T-Systems operating segment covers innovative business areas in the digital transformation of business processes, such as the Internet of Things. These business areas could develop faster than expected. As a pioneer of the digital transformation, we have an opportunity to play a crucial role in setting the market trend – and not simply participating in it – with flagship projects. 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 participating in different projects and contributing our core competencies in data communication, big data, cloud computing, and security. In a number of market areas of the Internet of Things, such as predictive maintenance, we can also boast initial excellent references with international applications.

The Federal Republic has made maximum use of its renewal options for operation of the toll collection system for trucks in Germany. As the existing technology and development partner, we are in a strong position in the new tender process to submit a competitive offer to continue operation of the system thanks to our detailed knowledge and expertise. What is more, we have earned valuable references that will help to give us an edge over our competitors thanks to our participation in other European toll collection projects in Belgium and Switzerland and our involvement in the planned launch of a Europe-wide toll system (EETS).

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 its services and, in some cases, to protect its customers’ and its own information. Failure of T-Mobile US’ or others’ systems, networks and infrastructure may prevent T-Mobile US from providing reliable service, or may allow for the unauthorized use of or interference with its networks and other systems. T-Mobile US’ reputation and financial condition could be materially adversely affected by such system failures, business disruptions, and unauthorized use of or interference with its network and other systems. Remediation costs could include liability for information loss as well as 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 T-Mobile US’ network, enhance its existing offerings, and introduce new offerings to address its current and potential customers’ changing demands. If T-Mobile US is unable to take advantage of technological developments on a timely basis, then T-Mobile US 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 our subscribers, while maintaining its legacy billing system. The implementation may cause major system or business disruptions or T-Mobile US 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 passage of the General Data Protection Regulation (GDPR) in April 2016 established a directly applicable and uniform code of data protection legislation across the EU. 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. Thus our fundamental demands have been met. Additionally, the new data protection legislation closes a major regulatory gap when it comes to service providers outside of the EU. The impact of the GDPR on the competition situation with non-European market players (e.g., Google, Facebook or Apple) in particular remains to be seen. Now it has been adopted, the member states must transpose the Regulation into national law. However, there is a risk that the national governments will fully exploit the scope for special regulations offered by the GDPR. The draft bill presented to harmonize data protection law in Germany with the GDPR is a clear signal that we need to act. National idiosyncrasies must not be allowed to undermine the level of harmonization achieved across a broad range of diverse regulations. As far as sector-specific telecommunications regulation is concerned, the review process for the E-Privacy Directive began, as expected, in mid-2016. With this process we are seeking to create a level playing field that incorporates over-the-top providers in the regulatory framework; in addition, we also hope to reduce sector-specific regulation to the largest possible extent. The announcement that the directive would be translated into a legally binding regulation and its scope widened to include additional providers (such as WhatsApp) showed that at least the first of our demands has already been met. The important thing now is to ensure that the new regulations are harmonized as far as possible with the GDPR.

Our products and services are subject to risks in relation to data privacy and data security, especially in connection with unauthorized access to customer, partner, or employee data. The security and privacy of this data are always our top priority. This also applies to the growing cloud computing business, which is subject to the same rigorous requirements for security and data privacy as all our other products. In order to maintain these high standards and largely exclude risks, we welcome the European General Data Protection Regulation. It has laid the foundation to ensure that the same rules apply for all companies offering their services on the European market. Thus consumers have the same rights and there is a level playing field all over Europe. 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 enable new attack patterns to be detected and new protection systems to be developed.

Cyber-crime and industrial espionage are becoming more and more widespread. Global cyber-attacks like the one launched on the routers of Deutsche Telekom’s customers in late November are evidence of the sheer scale of the threat from the Internet. According to the 2016 Security Report: Decision-Makers, 93 percent of large and medium-sized enterprises in Germany have already fallen victim to IT attacks aimed at gaining confidential data or causing damage. We are addressing these risks with comprehensive security concepts. We will continue to engage in partnerships, e.g., with public and private organizations, in order to create greater transparency, and thus be in a stronger position to tackle the threats. With the Security by Design principle we have established security as a fixed component in our development processes for new products and information systems. In addition, we conduct intensive mandatory digital security tests and regularly submit to external appraisals – in the shape of security and data-protection audits – in accordance with internationally recognized norms and standards.

We plan to accelerate our growth using IT security solutions. That is why we established the Telekom Security business unit, which unites all of the Company’s security services units under the aegis of T-Systems. Some 1,200 experts are working to develop integrated security concepts for customers and to offer the security solutions required for this from a single source: From secure cloud and secure e-mail, through to Cyber Defense as a Service, for which our experts and situation center are available 24/7.

We plan to win market shares in the growth area of security with our end-to-end security portfolio MagentaSecurity and to drive forward the megatrends of Internet of Things and Industry 4.0 with new security concepts. We are also continuing to expand our partner ecosystem in the area of IT security.  We provide regular updates on the latest developments in data protection and data security on our website at www.telekom.com/en/corporate-responsibility/data-protection-data-security.

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 more quickly and extensively than they could just a few years ago. 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 See section “Corporate responsibility,”. 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, Bitkom, Econsense, and BAGSO; stakeholder dialog formats organized by us, such as the CR Forum and Dialog Days on sustainability in procurement; and our various publications, such as the press review and newsletter.

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 protection, or work standards in the supply chain 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.
  • 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. ICT products and services offer 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 maintain worldwide emissions at the level of 2015 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. See section "Corporate responsibility“.


    Among the risks that climate change harbors, meteorological extremes are one we are already experiencing. 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. Beyond that, in 2015 four of our subsidiaries (Magyar Telekom in Hungary, OTE S. A. in Greece, T-Mobile Austria, and T-Mobile Netherlands) covered 100 percent of their electricity requirements with renewables, thus actively reducing climate risks.

  • Suppliers. We see more sustainability in our supply chain as an opportunity – for our reputation and our business success. Thus through a development program, we help strategic suppliers to introduce business practices that are socially and ecologically acceptable and economically efficient. The program showed measurable successes again in the reporting year. Better working conditions at our suppliers reduce the number of work-related accidents and the turnover rate. This increases productivity, while at the same time lowering costs for recruitment and training. Thus not only do we strengthen CR performance at our suppliers, we also significantly reduce identified risks. As part of 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. However, the reporting of NGOs or media can give rise to risks to the Company’s reputation, but also to supply risks. We reduce these risks by systematically reviewing our suppliers. See section “Corporate responsibility”. In the renowned RobecoSAM sustainability rating we scored 98 out of 100 points for our supply chain management in the reporting year, five points higher than in the prior year. Our partnerships with suppliers that comply with international sustainability standards ensure a high level of product quality and reliable procurement.

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 handsets. In mobile communications, this affects projects like the build-out of the mobile communications infrastructure and the use of mobile handsets. In the fixed network, it affects sales of traditional 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
Monthly charges for the unbundled local loop
Claim for damages in Malaysia despite an earlier, contrary, legally binding arbitration ruling
Patents and licenses
Reduction of the Company's contribution to the civil-service pension of the former Deutsche Bundespost
  • Toll Collect arbitration proceedings. The principal members of the Toll Collect consortium are Daimler Financial Services AG and Deutsche Telekom AG. In the arbitration proceedings between these principal shareholders 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. After the hearings in spring 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 took place in 2015 and 2016. There is no reason to adjust the provisions for risk recognized in 2014 in the statement of financial position.
  • Prospectus liability proceedings. There are around 2,600 ongoing actions filed by around 16,000 alleged buyers of T-Shares sold on the basis of the prospectuses published on May 28, 1999 (second public offering, or DT2) and May 26, 2000 (third public offering, or DT3). The plaintiffs assert that individual figures given in these prospectuses were inaccurate or incomplete. The amount in dispute totals approximately EUR 80 million. 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 has 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. In the model proceedings (Musterverfahren) on the second public offering (DT2) on July 3, 2013, the Frankfurt/Main Higher Regional Court issued a decision and ruled that the disputed stock exchange prospectus did not contain any errors. In a decision dated November 22, 2016, the Federal Court of Justice confirmed the ruling of the Frankfurt/Main Higher Regional Court in all its key points. This brings the DT2 model proceedings to an end.


    On May 16, 2012, the Frankfurt/Main Higher Regional Court had ruled in the model proceedings (Musterverfahren) on the third public offering (DT3) that there were also 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 DeTeMedien GmbH, a wholly owned subsidiary of Deutsche Telekom AG, 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 refunds from DeTeMedien GmbH and, to a certain extent, from Deutsche Telekom AG as joint and several debtor alongside DeTeMedien 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, 15 actions are still pending for a remaining amount in dispute of around EUR 104 million plus interest. 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.
  • Claims relating to charges for the shared use of cable ducts. In 2012, Kabel Deutschland Vertrieb und Service GmbH (KDG) – now Vodafone Kabel Deutschland GmbH – 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, KDG’s claims amounted to around EUR 407 million along with another around EUR 34 million for the alleged benefit from additional interest, plus interest in each case. 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. For charges allegedly paid in excess between 2009 and 2012, the plaintiffs are claiming a refund for a total amount of around EUR 189 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.
  • Monthly charges for the unbundled local loop (ULL). In light of the new rulings issued and the withdrawal of claims following the implementation of settlement agreements with (former) plaintiffs, See the section "Risks and opportunities relating to regulation”. we deem the remaining risk from the proceedings concerning the ULL monthly and one-time charges to be low. In the future, therefore, we will not report any further about the proceedings still pending.


    Furthermore, several competitor companies have requested the revocation of decisions made by the Federal Network Agency in favor of Deutsche Telekom or Telekom Deutschland GmbH. If these applications were to be successful, they would normally require a new decision by the Federal Network Agency.

  • 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 first-instance proceedings in this matter are scheduled to start spring/summer 2017. 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.
  • Reduction of the Company’s contribution to the civil-service pension of the former Deutsche Bundespost. 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). The Act on the Legal Provisions for the Former Deutsche Bundespost Staff states that the obligation to contribute to the Civil Service Pension Fund may be reduced to a level that is in line with the market and a peer company if a former Deutsche Bundespost company bound by such payment obligations can provide evidence to the German government that the payment would constitute an unreasonable burden on its competitiveness. Deutsche Telekom 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 an appeal with the responsible administrative court seeking reimbursement of a portion of the paid contributions and a reduction of the contributions to be paid in future. In the ruling dated October 2, 2015, the competent administrative court dismissed the claim of Deutsche Telekom for a reduction in the payment obligation. Deutsche Telekom filed an appeal against this ruling in November 2015.

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

Proceedings concluded

  • Claims for damages concerning the charges for the provision of subscriber data. In 2005, Deutsche Telekom AG received a claim for damages of approximately EUR 86 million plus interest from telegate AG. telegate AG alleged that Deutsche Telekom AG charged excessive prices for the provision of subscriber data between 1997 and 1999. Also in 2005, Deutsche Telekom AG received a claim for damages from Dr. Harisch, the founder of telegate AG. This claim amounted to around EUR 612 million plus interest. Both claims have since been dismissed conclusively. On April 12, 2016, the Federal Court of Justice dismissed the complaint against non-allowance of appeal filed by telegate AG, thus concluding these proceedings.
  • Claim for compensation against OTE. In May 2009, Lannet Communications S. A. filed an action against OTE claiming damages of around EUR 176 million plus interest arising from the allegedly unlawful termination of services by OTE – mainly interconnection services, unbundling of local loops, and leasing of dedicated lines. On April 8, 2016, the relevant court in Athens ruled in favor of OTE and obligated the plaintiff to withdraw its claim. The decision has now become final and legally binding, the proceedings have thus been terminated.

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. In 2015, independent auditors certified our anti-trust compliance management system as being effective in accordance with IDW AuS 980. 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, Orange Slovensko, SWAN, and Slovanet filed damage actions against Slovak Telekom with the civil court in Bratislava in 2015, claiming compensation for damages of EUR 247 million, EUR 53 million and EUR 62 million respectively, plus interest. These claims seek compensation for alleged damages due to Slovak Telekom’s abuse of a dominant market position, as determined by the European Commission. Whereas Slovanet’s claim has not yet been served on Slovak Telekom, the latter has submitted a detailed defense as regards Orange Slovensko and SWAN, rejecting in full the claims for damages in both cases. In parallel, Slovak Telekom is conducting negotiations with Orange Slovensko with a view to reaching an out-of-court settlement. We have recognized adequate provisions for this risk in the statement of financial position. At present we cannot assess the financial impact of the other proceedings 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 and interest rates. Our financial risk management aims to contain these risks through ongoing operational and finance activities. To contain the risks, we use selected derivative and non-derivative hedging instruments (hedges), depending on the risk assessment. However, we hedge only those risks that affect our Group’s cash flow. We use derivatives exclusively as hedging instruments, i. e., not for trading or other 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 "Corporate risks“.

Liquidity risk. To ensure the Group’s and Deutsche Telekom AG’s solvency and financial flexibility at all times, we maintain a liquidity reserve in the form of credit lines and cash as part of our liquidity management. This liquidity reserve is to cover the maturities of the next 24 months at any time. 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 below shows the development of the liquidity reserve in relation to maturity dates. As of the end of 2016 and also in the preceding quarters, we clearly met our targets for the liquidity reserve to cover maturities due in the respective coming 24 months.

Chart: Liquidity reserve and maturities

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 at December 31, 2016. None of these lines of credit had been utilized as of December 31, 2016. 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. As a rule, we only conclude transactions with regard to financing activities with counterparties that have at least a credit rating of BBB+/Baa1; this is connected with an operational credit management system. We continuously monitor accounts receivable in operations in a decentralized manner, i. e., at the individual units. Our business with corporate customers, especially international carriers, is subject to special solvency monitoring.

For derivative transactions, we agreed with counterparties as part of collateral agreements that, in the event of insolvency, all existing contracts will be netted and only a receivable or liability in the amount of the balance will remain. We reduce the credit risk arising from derivative transactions further by exchanging collateral. For receivables balances for existing collateral agreements, we receive security from the counterparty in the form of readily available cash; in the event of payables balances, we provide such security in return.

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 (i. e., if the cash flow is not denominated in the functional currency of the respective Group company). Foreign-currency risks that do not influence the Group’s cash flows (i. e., the risks resulting from the translation of assets and liabilities of foreign operations into the Group’s reporting currency) are generally not hedged, however. We may nevertheless also hedge this foreign-currency risk under certain circumstances.

Interest rate risks. Our interest rate risks mainly result from interest-bearing liabilities, primarily in the eurozone and the United States. The interest risks in euros 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: 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. This consistently resulted in a fixed-income net position in the United States. 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. As a result, these risks can impact 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, 2016, 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, 2016, the Federal Republic and KfW Bankengruppe jointly held approximately 32.0 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 Deutsche Telekom AG shares by the Federal Republic or KfW, or any speculation to this effect, could have a negative impact on the price of the T-Share.

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.