Deutsche Telekom AG

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Deutsche Telekom AG

Friedrich-Ebert-AUee 140
53113 Bonn
Germany
Telephone: (49) (228) 181-0
Fax: (49) (228) 181-8872
Web site: http://www.telekom.de

Public Company
Incorporated: 1989 as Deutsche Bundespost Telekom
Employees: 257,058
Sales: EUR 38.14 billion ($43.05 billion) (2001)
Stock Exchanges: New York Frankfurt
Ticker Symbols: DT; DTE
NAIC: 513310 Wired Telecommunications Carriers; 513322 Cellular and Other Wireless Telecommunications; 513340 Satellite Telecommunications; 513390 Other Telecommunications

Deutsche Telekom AG is the third largest telecommunications company in the world and number one in Europe. Headquartered in Bonn, Deutsche Telekom is Germany’s leading provider of fixed-line telephone service. The company’s T-Online International subsidiary is Europe’s number one Internet Service Provider (ISP) with almost ten million subscribers. Deutsche Telekom offers a variety of mobile phone services to some 50 million customers in Europe, Asia, and the United States through its subsidiary T-Mobile International. The company has a broad range of international subsidiaries, including American mobile communication systems providers VoiceStream Wireless and Powertel, and a 59 percent share in Hungary’s former telephone monopoly Magyar Távoközlési. After privatizing Germany’s former telecommunication monopoly in 1995, the German government still owns about 43 percent of Deutsche Telekom.

1833–1933: The Telephone Conquers Germany

The optical telegraph was first introduced in the German state of Prussia in 1833. Thirteen years later, the first telegraph line connected the two biggest cities of the state, Berlin and Potsdam. However, it took another 31 years until the human voice was first successfully transmitted over a wire in Germany. In 1877 the first postmaster of Germany’s united postal system Deutsche Bundespost, Heinrich von Stephan, approved an experiment with two telephones built by American inventor Alexander Graham Bell. For the first time in Germany, voices were transmitted over a distance of more than two kilometers. Von Stephan realized the potential of the new medium and put telephone services under the control of his postal authority, the Bundespost.

By 1880, 16,000 German households subscribed to telephone services. In the following decades, the telephone won more and more acceptance in Germany and the technology was greatly improved. Beginning in 1881, telephone networks were being established in the country’s largest cities such as Berlin, Hamburg, Frankfurt am Main, and Cologne. By 1898 the number of Berlin’s telephone subscribers had climbed up to 46,000—more subscribers than in all of France. From 1912 on, Germany’s telephone cables were laid underground in a constantly expanding cable network.

While in the early times of the telephone callers were connected with each other by a telephone operator, this system was eventually replaced in 1908, when the first automatic telephone connection in Germany was made. Automated systems started replacing operator-based telephony in the following decades. Advances in telecommunications technology made it possible to interconnect local networks and increase their capacity. The 1920s brought self-dialing, long distance, and mobile phone service to Germany. In 1926, for the first time, train passengers traveling between Berlin and Hamburg could call anywhere in the world. In 1933 public telex service was introduced between the two cities.

1933–49: Used by the Nazis and Destroyed by War

After Adolf Hitler came to power in January 1933, the Bundespost became an instrument of the Nazi totalitarian state and, as such, its propaganda machine. Letters and telephone calls were routinely intercepted and used to identify Jews and dissidents. During World War II telephone services of the Bundespost continued to function right up until Allied occupation in all areas of Germany. However, the service was in chaos by the time of Germany’s surrender on May 7, 1945. Of the 3,420 buildings the Bundespost had owned before the war, 1,483 had been completely destroyed or damaged by bombing between 1940 and 1945, as well as during the fighting within Germany before its surrender. Many of its former personnel were dead or missing, and many telephone lines were cut.

As U.S., British, and Soviet forces assumed control of government, they also took over postal and telephone services. Between 1945 and 1947, political rifts and eventually the Cold War broke out between the Western allies and the Soviet Union. In 1947 the British and American occupation zones were merged for economic purposes, and administration began to be handed back to the Germans. The Soviets’ refusal to participate in the currency reforms of June 1948 and the Berlin blockade meant that a unified postal structure for all occupation zones was doomed. Postal services in the eastern part of Germany were turned over to the new East German state established by the Soviets in 1949. An elected Parliamentary council from all three western zones met at Bonn on September 1, 1948 to draw up the West German constitution or Basic Law. In April 1949, U.S., British, and French governments guaranteed full powers of self-government to the new West German state. The Bundespost was reborn as a state body under the control of a cabinet ministry and assumed control over posts, telephones, and telegraphs in the new Federal Republic of Germany. The new constitution specifically forbade the privatization of posts and telecommunications.

1950–70: Rebuilding the Network

During the 1950s the Bundespost had to rebuild its communications network and hundreds of post office buildings. Much of prewar Germany’s communications had centered on east-west communication networks between Berlin and western industrial cities. The new West Germany was a long, narrow country in which many lines of communication now ran north-south. West Berlin had become an isolated city in an alien country. After the war, the division into different occupation zones had fragmented communications and delayed the formation of an integrated network.

The reconstruction of the telephone service was accomplished by the end of 1951, but installation of new private telephones was slow. By 1952, there were still only five telephones per 100 inhabitants in Germany, compared to 28 and 11 per 100 inhabitants in the United States and Britain, respectively. By the 1960s, however, Germany’s communications network had been fully restored, and telephone subscribership was on a par with other industrial countries. As postwar Germany’s prosperity rose, the demand for telecommunication services grew. The Bundespost invested in satellite communications; new transatlantic self-dialing facilities from Bonn, Frankfurt, and Munich became available in 1970.

1970–89: First Steps Towards Reform

Attempts to free the Bundespost, including its telephone service, from political control date back to the 1920s. Around that time the government of the Weimar Republic was looking for a structure that would allow the Bundespost a measure of independence as a profit-making organization. In 1924, laws were passed allowing the Bundespost a considerable degree of financial autonomy from government control. The success of this reform, however, was restricted by interference from politicians and trade unions, and was finally reversed altogether by the Nazis.

The issue came up again when Germany experienced an unprecedented economic boom after World War II and many business and consumer groups began criticizing the post office monopoly for inefficiency. A 1970 law formally stated that the monopoly had been effectively superseded by a reservation that prevented the establishment of a rival undertaking, but little changed. In 1973 a further reform, the Postal Organization Act, limited government intervention in the Bundespost “only to what is politically necessary and to facilitate post office management.” Under the new structure, the Bundespost was headed by an executive committee assisted by a supervisory council. The committee, however, remained responsible to the government.

German business continued to complain that the Bundespost’s phone network was inefficient and expensive and that German manufacturers might be disadvantaged by a backward telecommunications market. However, several powerful interest groups opposed change for fear of job losses and disappearance of preferential treatment under a more competitive system that included: the Social Democratic Party; the postal union Deutsche Postgewerkschaft; the Bavarian State Government; large contract suppliers to the Bundespost, including the German electronic giant Siemens AG; and the Bundespost’s employees, who enjoyed the status of civil servants with considerable job security and pension benefits.

Company Perspectives:

Deutsche Telekom is Europe’s largest telecommunications company and one of the worldwide engines of innovation in the industry. Our products and services set standards not only in Germany, but also around the world. We make sure that our customers always have access to state-of-the-art solutions - from high-speed network access services to mobile Internet and beyond - and that they are the first to benefit from the fascinating prospects and possibilities of the communications revolution.

Pressures from both the European Community (EC) and the United States finally forced Bonn to make recommendations about the future of the Bundespost. Under Chancellor Kohl’s Christian Democrat-dominated government, the so-called Witte Commission began to explore the possibility of privatization in 1985 and presented a report in September 1987. The commission recommended the opening of the telecommunications equipment and services market to outside bidders, a change that was likely to be required by EC competition law. The Bundespost would continue to operate in all its present fields, but some competition would be allowed in radio paging, mobile telephones, modems, videotext, and some satellite systems. However, the basic telephone monopoly, which earned 90 percent of the Bundespost’s telecommunications income, would be retained. The commission also recommended that the Bundespost be divided into three businesses: Postdienst (postal services), Postbank (bank services), and Telekom (telecommunications), with a minimal level of political interference above the level of their respective management boards.

The report drew criticism from both sides; while liberals condemned it for not going far enough, opponents claimed it went too far. As a result, the original proposals were heavily altered before the new law passed the Bundestag, Germany’s parliament, in 1989. Deutsche Bundespost, was divided into three separate companies: Deutsche Bundespost Postdienst, Deutsche Bundespost Postbank, and Deutsche Bundespost Telekom. Each company had its own board of management and separate accounts. However, a common directorate was added between the three businesses and a proposal for incentive-based pay was limited. The Ministry of Posts and Communication still had ultimate supervisory and regulatory authority in the public interest.

1990–94: The Telephone Reunification of Germany

What the postal reformers could not foresee was the collapse of East Germany in November 1989 and Germany’s reunification in October 1990. German reunification brought with it the integration of East Germany’s own telecommunications monopoly, Deutsche Post, into the Bundespost. It soon became apparent that the necessary infrastructure investment was much larger than previously anticipated. Only 10 percent of East Germany’s households had a telephone, compared to 98 percent of West Germany’s. East Germans who applied for a telephone line often waited ten years and longer to get it. By 1989 the number of applications had risen to 1.3 million. More than 3,500 small East German towns were left without a public phone. Every call to West Germany was channeled through one of 15 connection centers to East Berlin’s foreign connections office which was equipped with 111 lines to the West. Moreover, much of the existing East German telephone equipment predated World War II. Small wonder this bottleneck brought the quickly increasing telephone communication from East to West close to breakdown.

Within six months Deutsche Bundespost Telekom launched its ambitious Telekom 2000 program, a seven-year investment plan of DM 60 billion. The program not only aimed for bringing the telecommunications network of former East Germany up to Western standards, but also for installing a state-of-the-art infrastructure good enough to meet the demands of the year 2000 and beyond. Telekom emerged as one of the biggest employers in eastern Germany. The company took over almost all employees from Deutsche Post’s Telekom division. Up to 4,000 of Deutsche Bundespost Telekom’s employees were sent to eastern Germany to support their new colleagues.

To make telephone connections available quickly, Telekom made it a priority to establish a mobile telecommunication infrastructure in the eastern part of Germany. Its C- and the new digital D1-cell phone networks reached 80 percent of the population in the eastern German states by the end of 1991. Three years later former East Germany was covered by Telekom’s digital mobile phone network. In August 1992 uniform area codes were introduced for the whole country. In mid-1991 Telekom established a digital overlay-network over the existing analog long-distance network. The first digital connection centers were set up in eight eastern German economic centers. From there the digital network was gradually expanded and by 1993 the number of telephone connections between East and West had grown from under 1,000 to 30,000.

In the final phase of the program Telekom technicians worked around the clock to finish the task. It took some 40,000 kilometers of optic fiber cable to build the new digital long-distance network and over ten million kilometers of copper cable to expand the 1,500 local networks. By 1997, Telekom 2000 had reached its goals. The telephone network in the eastern German states was fully digitized and the number of telephone connections had quadrupled since 1990. According to Deutsche Telekom, the former East Germany had the most modern and efficient telecommunications infrastructure in the world.

The enormous costs of updating the former East German telephone system caused many opposition politicians to drop their objections against privatizing Deutsche Bundespost. Privatization was increasingly regarded as a way to make profits and increase efficiency, and the support of the Social Democrats for the two-thirds majority vote in the Bundestag necessary to make changes in the constitution became more likely. In September 1991, the Social Democrat party said it would support privatization under certain circumstances. The negotiations that followed went slowly. Whenever a compromise was in sight, the party added new demands to its list.

Key Dates:

1877:: Heinrich von Stephan puts telephone services under the control of his postal authority.
1912:: Germany’s telephone network is laid underground. 1933: The Nazis take over control of the Post Office.
1949:: Deutsche Bundespost assumes control over posts, telephones, and telegraphs in the new Federal Republic of Germany.
1989:: New legislation passes the German parliament, and Deutsche Bundespost Telekom is established.
1990:: The telecommunications companies of former East and West Germany are merged.
1994:: The Posts and Telecommunications Reorganization Act passes the governing bodies. 1995: Deutsche Bundespost Telekom becomes a public stock company and is renamed Deutsche Telekom AG.
1996:: Deutsche Telekom shares are traded at the New York Stock Exchange for the first time.
1997:: The telephone network in the eastern German states is fully digitized.
1998:: The German fixed-network telephone market is opened to competition.
2001:: Deutsche Telekom takes over American mobile phone service providers VoiceStream and Powertel.

Helmut Ricke, Telekom’s CEO since 1990, and his management team decided to move ahead and completely reorganize Telekom. In September 1992 the company abandoned the government agency structure, and six months later Ricke presented a more customer-focused organization. Throughout the company he established separate divisions for private and business customers and a third one for key accounts. In mid-1993 Telekom spun off its mobile telecommunications business as a private company, Deutsche Telekom Mobilfunk GmbH (DeTeMobil), allowing it to better compete in the already liberalized market for mobile phone services. Meanwhile, the Christian Democrat Minister of Postal Services and Telecommunications, Christian Schwarz-Schilling, who had worked relentlessly for postal reform, resigned suddenly and was succeeded by Wolfgang Botsch.

The final impulse for Telekom’s privatization came from the EC. At a meeting in Brussels in May 1993 Botsch and his European colleagues decided to open their markets for network-based telephone communication to competition by 1998. Six months later a new proposal for postal reform was presented in Bonn. The postal workers’ union fought Telekom’s privatization until the end and organized a major strike in late spring of 1994. However, in July 1994 the Posts and Telecommunications Reorganization Act passed the Bundestag and the Bundesrat, the German parliament’s upper house. However, the law required the German government to be the majority shareholder in the former Bundespost companies for at least five more years and extended the monopolies for postal and phone services until the end of 1997. On January 1st, 1995, Deutsche Bundespost Telekom was transformed into a public stock company and renamed Deutsche Telekom AG.

Just a few weeks before Telekom’s transformation into a public stock company, Helmut Ricke, who had put the reunited Deutsche Telekom on the track to privatization, resigned as CEO. Ex-Sony manager Ron Sommer became the company’s new chairman, and his first big task was to attract investors who would buy Telekom shares at the company’s initial public offering (IPO). As a monopolist, Deutsche Bundespost Telekom had been a profitable business with considerable yields for the German federal budget. However, its capital base had suffered badly in the early 1990s because of the necessary infrastructure investments. An additional burden was the cost for its civil servants for whom Telekom had to pay the difference between the retirement benefits they received from public funds and 75 percent of their final salary. In 1994, the company’s budget for retirement benefits exceeded the budget for basic salaries by 50 percent.

Deutsche Telekom launched a huge image campaign to attract private German investors, including a new “T” logo and brand name. Telekom’s top management courted the world’s largest banks as well as other large institutional and private investors. In the United States alone, Telekom organized 17 “road shows.” Both measures were extremely successful. Within two years of its introduction, the pink “t” was recognized by nine out of ten Germans as Telekom’s logo. Some 400,000 Germans bought Telekom shares which were termed T-Aktien or T-Shares. Some banks placed orders worth between DM 500 million and DM 1 billion.

On November 18th, 1996, the largest European IPO to date took place. After the first Telecom stock quote was announced at Germany’s major stock exchange in Frankfurt am Main, the CEO, together with CFO Joachim Kroske, jetted to New York to be present at an IPO party at the Guggenheim Museum where Liza Minelli sang “Money Makes the World Go Round” under a dome of pink light. The heavily oversubscribed shares debuted at 19 percent over issue price on the first trading day. The more than 700 million T-shares sold to private investors accounted for about one-quarter of Deutsche Telekom’s share capital. The rest was still held by the German government. An agreement guaranteed that the German government could only sell shares to third parties if Deutsche Telekom agreed.

While investors were told that new T-shares would not be issued in 1997 and 1998, a second batch was issued in mid-1999, raising EUR 15 billion for the company. The government’s stake decreased to about two-thirds of the total share capital after that transaction. As in the IPO, Telekom was the beneficiary of the new stock offering, and the money was used to boost the company’s capital base. In early March 2000 the T-shares reached an all-time high of seven times the initial issue price. Three months later the third issue was launched, this time to benefit Deutsche Telekom’s major shareholder, the government, which had “parked” its shares at the Kreditanstalt für Wiederaufbau, a government-dominated development bank. The government’s stake now stood at 60 percent.

1998: Market Liberalization Spurs New Strategy

On January 1st, 1998, the German fixed-network telephone market was opened to competition. Almost immediately, the average cost for long-distance calls dropped by up to 30 percent. German consumers jumped at the opportunity—although with a healthy portion of skepticism. While they took advantage of “call-to-call” offers from Telekom’s competitors for longdistance calls, they were hesitant to completely switch to a new provider.

From the beginning, Deutsche Telekom fought fiercely against its competitors—by any means available. For example, the company placed newspaper ads asking businesses with large phone systems, such as hotels, to make the use of alternative providers impossible. The company also warned customers that it would charge high “compensation fees” should they switch to other providers. Telekom’s competitors, which mostly depended on the former monopolist’s infrastructure, were not only charged for renting the phone lines but were also charged high “takeover fees” not always related to real cost when customers switched to a new phone company. When customers nonetheless decided to switch, Deutsche Telekom took a great deal of extra time to connect them with their new provider of choice, competitors complained. Finally, Deutsche Telekom challenged every directive made by the newly established regulation agency Regulierungsbehorde für Telekommunikation und Post in appeals court. About 250 such lawsuits were pending by mid-2001, and it was estimated that resolutions might take another three to five years.

Two years after the market was opened, about 50 companies competed with Deutsche Telekom. About two-thirds of all longdistance calls in 1999 were placed with an alternative “call-by-call” provider, saving customers up to 85 percent. However, Telekom recaptured about half of the competition’s revenues through network usage fees. Thus, the company’s long-distance market share in terms of revenues was around 90 percent. Furthermore, roughly four-fifths of German customers preferred Deutsche Telekom as their basic phone company and did not plan to switch providers.

In the face of fundamental changes in the market for telecommunications, with mobile telephony and Internet-based applications on the rise, Deutsche Telekom decided to focus on four growth areas and do away with activities that were not in line with them. The new growth plan was given the acronym TIMES, identifying new markets as telecommunications, information technology, multimedia, entertainment, and security services. Deutsche Telekom announced that they would concentrate on mobile phone and Internet-based communication and data transfer, broadband network access, and systems applications software development. The company set up a subsidiary to sell a significant part of Deutsche Telekom’s real estate and sold part of the shares the company held in German cable TV networks.

1990s: Rocky Road to International Growth

In June 1995 Deutsche Telekom announced a strategic alliance with French carrier France Telecom and American phone company Sprint called Global One. However, five years later the alliance which ex-CEO Ricke had pushed through against strong resistance, fell apart. Another deal fell through in 1999 when Olivetti SpA—not Deutsche Telekom—took over Telecom Italia. Instead, Deutsche Telekom acquired French fixed-line carrier Siris SAS and British mobile phone company One-2-One.

In May 2001 Deutsche Telekom finalized the takeover of American mobile phone service providers VoiceStream Wireless Corporation and Powertel, Inc. The transaction was financed by issuing 1.12 billion “T-Shares,” a move that ultimately diminished the German government’s stake in the company to about 43 percent. The new partnership enabled Deutsche Telekom to offer frequent travelers between Europe and the United States one phone number and one rate for voice and data services.

By mid-2000, the situation at the world’s stock markets had become unfavorable. Share prices dropped in connection with the so-called burst of the Internet bubble, and Deutsche Telekom postponed the IPO of its subsidiary T-Mobile International AG, which the company had founded in the same year. The T-shares themselves came under pressure as investors lost their confidence in the stock market. In September 2001, five years after Deutsche Telekom’s IPO, its shares were valued below the initial share price for institutional investors. Consequently, the company’s plan to use its shares as an “acquisition currency” for international acquisitions came to a halt.

The company’s IPO enabled Deutsche Telekom to get rid of about half of its DM 125 billion of debt. Although it did not seem as if Deutsche Telekom was seriously threatened by competitors in its home market, the company was struggling with self-made problems. Some 190,000 employees kept personnel costs high. In 1997 alone, the company had encountered DM 2 billion losses from bad investments in Malaysia and Indonesia, the Global One alliance, and from selling telephones and fax machines. In 1998 mobile phone services accounted for about one-fifth of Deutsche Telekom’s revenues. Rival Vodafone-owned Mannesmann, however, had become Germany’s mobile phone market leader and made handsome profits while Deutsche Telekom lost money, mainly through its foreign subsidiaries. In 1999 and 2000 Deutsche Telekom’s profits dropped dramatically, due to decreasing revenues from fixed-line network business.

In late 1999 Deutsche Telekom’s Internet service provider T-Online was reorganized as T-Online International AG. The company was profitable in 1999, but slipped into the red in 2000, due mainly to the flat rate the company introduced for unlimited Internet access. At a time when many dot-coms went bankrupt in the United States, T-Online was planning to push up online advertising revenues and to develop online content that users would be willing to pay for—a business model that in general had not been successful. To generate more e-commerce traffic, T-Online cooperated with auto maker Daimler-Chrysler and tourism companies TUI and C&N.

In the first quarter of 2001 Deutsche Telekom once again restructured its business organization. Corresponding with the company’s new strategy, all activities were organized in four business divisions: T-Mobile, T-Online, T-Systems, and T-Com. In the new systems applications field, Deutsche Telekom took over software systems developer debis Systemhaus GmbH from DaimlerChrysler AG. In the area of network access the company focused on winning new customers for its highspeed digital ISDN and broadband T-DSL services. Deutsche Telekom was also working on T-NetCall, a new service for Internet-based phone calls between PCs and from PC to phone.

In 2001 a group of shareholders filed a lawsuit against Deutsche Telekom for undervaluing its real estate. The company had allegedly written down the balance-sheet value of its real estate by EUR 2 billion, which reduced profits for the year 2000 by EUR 1.5 billion—based on German accounting law. In September 2001, the federal administrative court ruled that some of Deutsche Telekom’s “interconnection-fees” to its competitors were illegal. A month later another court ruling required Deutsche Telekom to make its local network accessible to competitors for much less than the company had charged. At the time Deutsche Telekom still owned 98 percent of all phone lines to households. Despite market liberalization and despite many difficulties, Deutsche Telekom was still Germany’s number one phone company and a leading force in the world’s evolving telecommunications market.

Principal Subsidiaries

DeTeLine Deutsche Telekom Kommunikationsnetze GmbH; T-Mobile International AG; Deutsche Telekom Mobile Holdings Ltd. (U.K.); T-Online International AG (81.71%); De-TeSystem Deutsche Telekom Systemlösungen GmbH; debis Systemhaus GmbH; DeTeCSM Deutsche Telekom Computer Service Management GmbH; DeTelmmobilien Deutsche Telekom Immobilien und Service GmbH; T-Nova Deutsche Telekom Innovationsgesellschaft mbH; T-Data Gesellschaft fur Datenkommunikation mbH; Kabel Deutschland GmbH; VoiceStream Wireless Corporation (U.S.); Powertel, Inc. (U.S.); One-2-One (U.K.); SIRIS S.A.S. (France); max.mobil Telekommunikation Service GmbH (Austria); MAT A V Magyar Tàvoközlési Rt. (Hungary; 59.49%); Slovenské Telekomunikácie a.s. (Slovakia; 51%); HAT-Hrvatske telekomunikacije d.d. (Croatia; 35%); MTS, OJSC Mobile TeleSystems (Russia; 36.2%).