Germany’s ‘conservative’ consumers have little appetite for data

Operators are investing in the hope of stimulating consumption

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With their strip lights and stacks of cheap goods, Germany’s discount supermarkets are a reminder that the nation prizes parsimony.

Telecoms is no exception; prices for voice and data services have been declining steadily in recent years because of intense competition as well as pressure from “over-the-top” businesses such as WhatsApp that provide free services over the internet.

It appears that German consumers lag behind other countries when it comes to paying for telecoms.

Peter Nielsen, an analyst at Kepler Cheuvreux, says: “Germans historically have one of the lowest usages of voice calls. Germans speak less [on the phone]. They also use data less. We ascribe this to traditional German cautiousness and conservatism.”

However, as telecoms companies have invested in modernising their networks, customers have started using more data.

“I think what you’re seeing is, as the coverage becomes more complete — if you can use [your phone] even when you’re in your summer house — people start to use the data more,” says Mr Nielsen.

There has been a revival of confidence in German telecoms this year. Since Telefónica’s takeover of E-Plus last year, creating Germany’s largest mobile operator by customer numbers, mobile prices have stayed stable.

Analysts say network operators have focused on retaining customers while the virtual operators, which lease network capacity from another telco, have raised fees to close the gap with the big three providers.

Deutsche Telekom, Europe’s biggest phone company by revenue, expects free cash flow to rise by about 10 per cent annually to 2018. Deutsche Telekom’s revenue in Germany continued to fall last year, but the rate of decline slowed and sales in its home market are expected to stabilise next year.

Telefónica Deutschland reported a 13.5 per cent increase in core profit, in the second quarter. The business benefited from rising mobile data consumption, with more customers adopting higher value tariffs.

In February, Telefónica Deutschland introduced a data automatic feature, giving customers who exceed their mobile data limit an extended data allowance for an additional monthly fee.

Selling customers more data while they are still in their contracted terms is “one of the million dollar questions that have been puzzling mobile operators for years”, say analysts at Berenberg. The tactic has yielded “impressive early results”, they add.

However, of the three main operators, Vodafone faces the greatest challenge. This month, Hannes Ametsreiter, outgoing chief executive of Telekom Austria, will become head of Vodafone’s German unit.

Germany is Vodafone’s largest country by sales, but the business has suffered from declining service revenue as it has lost customers to Deutsche Telekom.

Mr Nielsen says that Vodafone made the mistake of neglecting to upgrade its network. “They’ve suffered from that in subsequent years — they really lost customers, not only to Deutsche Telekom but to others.”

Now, even though Vodafone is investing heavily in Germany, it is still underperforming the rest of the market, he adds. “It takes a little while from when you upgrade for the perception to spread among customers.”

Uncertainty surrounded Vodafone’s German business after the disclosure in June that it was in talks to swap assets with Liberty Global — any such move would have attracted opposition from Deutsche Telekom.

Liberty owns Unitymedia, Germany’s second largest cable operator, and a deal with Vodafone would allow it to combine with Kabel Deutschland, the market leader, which Vodafone bought two years ago. However, Vodafone confirmed last month that talks with Liberty had been terminated.

Deutsche Telekom’s long-term strategy is to be Europe’s leading telecoms provider, offering a “quadruple play” of TV, internet, mobile and fixed line in one package. While earnings from T-Mobile US have boosted revenue, the German telecoms group regards the US unit as influential in the North American market rather than a long-term part of the business.

“The European business is sufficiently cash generative, so if [the US unit is] sold, that wouldn’t have any negative impact. It doesn’t really matter — it’s just a financial investment,” says Stefan Zehle, an analyst at Coleago, a consultancy.

After last year’s consolidation, analysts expect a stable German telecoms market in the coming years, with an emphasis on improving the quality of services rather than competing on price to poach customers.

This year, all the operators have spent heavily on new spectrum in an auction of radio frequencies. Vodafone bid €2.1bn, the highest figure of any of the three, for the biggest slice. The low frequency 700MHz band can be used to extend mobile broadband coverage to rural areas, meeting a German government target of rolling out fast internet access countrywide by 2018.

Telecoms operators are hoping that, despite their frugal habits, German consumers will acquire sufficient appetite for data to boost revenue and help them recoup their investment.

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