Article

Deutsche Telekom stumbles a bit, but don't blame the economy

Michael Morisy
Leading telecoms are claiming that currency woes and the global recession are hurting their performance, but some analysts believe that these carriers are simply struggling to adjust to an increasingly competitive environment.

Deutsche Telekom, parent company of T-Mobile, became the first major European telecommunications provider to

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issue a profit warning in 2009, citing not only the competitive landscape but also the impact of the "economic slowdown" and currency woes, with a weak zloty in Poland and weak sterling in the U.K.

"It'd be unfair to put all the blame on the recession," said Emeka Obiodu, a senior analyst with consultancy firm Ovum. "For example, in the U.K., for most of 2008, [Deutsche Telekom's] key rivals outperformed them."

Indeed, while some major infrastructure projects have been delayed or put on hold, most consider telecommunications to be a relatively safe, resilient bet. As analyst Stéphane Téral previously told SearchTelecom, "This is a financial crisis that has nothing to do with telecom."

Obiodu said that the competitive market varies drastically from area to area.

"For example, in the U.K., where they are competing with the Apple iPhone, they need to figure out how to not spend more money," he said, focusing on delivering services at a lower cost to keep margins high.

In the U.S., the T-Mobile brand needs to drive customer growth.

But the profit warning seemed to shake the market's confidence in the telecom industry's ability to sail through the recession. The Wall Street Journal reported that Deutsche Telekom shares fell 7.2%, while the news also weighed down the stocks of BT Group PLC, France Télécom SA, and Telefónica SA.

Obiodu conceded that the economic environment is playing some part in carrier fortunes by delaying capital projects and dampening consumer spending, for example. But currency rates will have little long-term effect on the health of Deutsche Telekom or other carriers, both domestic and international.

"We are seeing that T-Mobile's main concern [should be] matching the competitors," he said, rather than focusing on macroeconomic issues largely out of the company's control that will have little to do with long-term success.

Tom Nolle, president of CIMI Corp., agreed that competition was a problem but said it was dangerous to signal it as the only looming threat.

"It's not as simple as saying it's a competitive problem," Nolle said. "The difficulty is it's a monetization problem."

In the European Union, wireline service providers have failed to maintain revenue growth, Nolle said. They have turned to wireless as a means of growing revenue, but a stiff regulatory environment with strong requirements for access sharing has fostered a boom in competition without corresponding growth in infrastructure.

"You've got a dysfunctional ecosystem, and we're starting to see the ramifications of that in a lot of seemingly disconnected ways," he said.

While investors are not particularly happy with Deutsche Telekom's performance, other major domestic carriers have received mixed reviews as well.

In AT&T's first-quarter earnings report, for example, the North American carrier saw its overall earnings down 9.7% year over year, even as wireless data revenues climbed 38.6%.


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