Deutsche Telekom CEO Discusses Effects of Price Erosion

Aug.10.06 | About: Deutsche Telekom (DTEGY)

One of many depressing comments from Deutsche Telekom (DT) CEO in the company's conference call with analysts:

But let me start with a short overview of what is happening in the German market where the increasing competition has led to strong price erosion in all three divisions. The worsening situation domestically is reflected in the material changes that industry analysts and we our self have made in the forecast. The impact of all of this is that the assumptions underlying the business plans that we discussed with you at the end of last year have altered significantly. For example, the domestic mobile business we had, growth of 10% over two years. This has now been reduced to a growth forecast of only 1%, which translates into less revenues of €4 billion in 2006 alone and in addition, we have to deal with the ever increasing regulatory interventions from Brussels.

In the domestic fixed line business there has been an acceleration in the decline in DSL prices. We are already below €5 in terms of rate DSL internet user charge, a figure we had not anticipated on reaching until the end of 2007. The increase in line losses principally due to customers wanting bundled Internet and voice offerings, have continued at a quarterly rate of around 500,000. You will recall that I drew attention to this in May as our ability to respond had been materially effected by the delay in completing the T-Online merger. The total effect of the DSL price cuts, excess lines losses, voice over IP and international carrier services, revenues have been adversely impacted by €0.4 billion. And in the business customer divisions, we have seen the legacy data market decline by 9% rather than the expected 5% due to price reduction.

In total price decreases across the businesses amount to decline revenues of €0.3 billion. Against this background of a major slowdown in growth and increased competition domestically the management of Deutsche Telekom is quite clear that defending market share is a priority. Specific measures to deliver on this commitment include, in mobile the introduction in the coming weeks of new low priced bundled tariff packages that are aimed at insentivising customers to use in mobile instead of a fixed line phone. To achieve this we really introduced tariffs with an average price per minute of less that €0.10. We have seen in other markets that elasticity kicks in when the fixed to mobile ratio is between 3 to 5, fixed line -- to be substituted. It is our firm intention that we will have tariffs within the range this year, in addition we have also reduced significantly the prices for mobile data on HSTPA and WiFi, we have reduced by up to 16% the prices of our high end products that gives the customer 5GB of data volume plus 200 monthly hours of WiFi.


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