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Summary

Announcements around plans to invest in fiber-optic expansion by German operators have filled the news in the past 10 months (note that Ovum’s definition of fiber-optic is FTTH/B and excludes other forms such as fiber to the cabinet). Vodafone Group started the ball rolling in September 2017 when it outlined a €2.1bn plan for investment in fiber-optic and improvement of existing cable networks. Following Vodafone’s move, the country’s incumbent, Deutsche Telekom (DT), initiated FTTH measures even though demand remains low in Germany. The FTTx household penetration rate is under 2% and until recently it was clearly at the bottom of the agenda for service providers with scale in the country. Following the M&A agreement in May 2018 between Vodafone and Unity Media, DT decided to accelerate its measures with its latest announcements about Stuttgart and Saxony becoming DT’s next high-speed hubs through investment in FTTH. Stuttgart is one of three regions where Vodafone’s acquisition of Unity Media will give it coverage that it currently lacks. In the long run these investments will translate into fiber growth in the market, but the German consumer remains conservative with a lack of incentive for the time being.

DT pulls out the big investment guns for a “network of the future”

Vodafone Germany laid out its investment plans of €2.1bn into fixed broadband expansion last September. These were inclusive of fiber-optic rollout in business parks and to private homes, as well as improvement of cable speeds in rural areas. The incumbent, DT, responded with a conservative assessment of fiber demand in the country (November 2017, pilot project of smaller towns in Germany for fiber build out).

Since the beginning of 2018 and the announcements around the Vodafone/Unity Media merger, capex into fiber expansion has increased substantially, and DT has drawn up a similar plan to Vodafone’s so-called “gigabit investment plan.” DT is to invest up to €1.1bn for Stuttgart (one of three cities where Unity Media will complement Vodafone’s existing footprint) and five surrounding suburbs alone where 1.25 million households, business parks, and schools will be passed with FTTH.

Although the incumbent regularly invests billions of euros into fixed broadband expansion, so far these have been limited to upgrading existing legacy network via vectoring and Gfast as the company did not see value in FTTH/B expansion. With competition heating up, the strategy has clearly been amended to match and DT is finally talking real fiber, not just to the cabinet.

Ovum believes that this change of strategy is enhanced by the M&A activity. Although some investments were set out prior to this agreement, for example DT’s joint-venture with EWE Tel from December 2017, much points to the direction that every action has an equal and opposite reaction: DT has once again come under pressure to defend market share. We are reminded of its FMC launch which came as a response to Vodafone’s acquisition of Kabel Deutschland five years ago.

Such change of strategy will have to prove its return on investment (RoI). Fiber subscriber growth will only take off in the long term. The qualifying factor for investments that operators should consider is whether customer demand for FTTx has changed. If demand is low and factors that increase such demand (such as affordability/availability of VR headsets) remain as before, then mere investment into a technology will not drive uptake. The operator’s previous decision to focus on vectoring relied on the fact that for the time being the German consumer is satisfied with speeds that VDSL and Gfast supply.

Appendix

Author

Armita Satari, Analyst, Europe

armita.satari@ovum.com

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