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Germany: Telecoms and technology profile(IndustryWire Via Thomson Dialog NewsEdge) FROM THE ECONOMIST INTELLIGENCE UNIT Profile articles provide a concise overview of an industry in a particular country. They are designed to brief senior executives on key local players, on demand and consumption, and on supply and production. 2001(a)2002(a)2003(a)2004(a)2005(b)2006(b)Telephone main lines ('000)39,50339,57839,17238,94537,54636,037Telephone main lines (per 100 population)47.948.047.547.245.543.6Mobile subscribers ('000)56,04259,15964,79371,31579,20484,789Mobile subscribers (per 100 population)68.071.778.586.496.0102.7Internet users ('000)36,42930,59434,52836,94339,03340,743Internet users (per 100 population)44.237.141.844.847.349.3Broadband subscriber lines ('000)2,0533,3854,6467,01810,45814,457Broadband subscriber lines (per 100 people)2469(b)1318Personal computers (stock per 1,000 population)380431485558614(a)661Packaged software sales (US$ m)14,02213,67714,12714,999(b)15,84016,762IT hardware spending (US$ m)32,77227,58023,03924,013(b)24,87126,266IT services spending (US$ m)28,88428,61928,50828,929(b)29,51930,818Total IT spending (US$ m)75,67769,87665,67567,941(b)70,23073,846(a) Actual. (b) Economist Intelligence Unit estimates.Sources: Pyramid Research; IDC; Economist Intelligence Unit.Overview Total sales in the German information technology industry amounted to an estimated US$73bn in 2006, equivalent to 3.1% of GDP. According to the most recent data available from the industry association, the Bundesverband Informationswirtschaft, Telekommunikation und neue Medien (Bitkom), there were some 462,000 employees in information technology (IT) companies and 287,000 employees in the production of telecoms goods and services in 2004. Since the liberalisation of the fixed-line telecoms market in 1998, prices have fallen rapidly, and together with the introduction of new technologies, this has driven the sales volume growth. The market penetration for mobile phones and Internet usage is high. The first universal mobile telecommunications service (UMTS) network for high-speed Internet and video-enabled mobile phones went commercial in February 2004. The producers of IT products, such as the world's largest business software producer, SAP, are generally export-oriented. Government involvement in the production of IT goods is restricted to giving incentives for investment. Regarding telecoms services, the regulatory authority and government regulation are seen as generally seeking to strengthen competition in the interest of consumers, despite occasional efforts to favour Deutsche Telekom (DT), the former monopolist, in which the government still holds, indirectly, nearly a one-third stake. Demand Overall sales of IT and telecoms goods and services amounted to about 131bn in 2004, according to the most recent available estimates by Bitkom from October 2005. The organisation also estimated sales in 2005 at 134bn. Sales of computer and telecommunications hardware amounted to 34bn, down from 35bn in 2002. This trend reflects falling prices and increasing market saturation. Estimates by Pyramid Research, a US-based market research company, put the number of personal computers (PCs) per 1,000 people at 661 in 2006. Sales of computer software amounted to 15bn in 2004, according to Bitkom estimates (2005 estimate: 16bn). As in other countries, consumers, including large and sophisticated business organisations, are trying to reduce costs by shifting to open-source software. The Federal Network Agency (FNA, until mid-2005 known as Regulatory Authority for Telecommunications and Posts, RegTP), said in its 2005 annual report that sales of telecoms services alone amounted to 66.8bn in 2004, up from 64.2bn in 2003 and 44.2bn in 1998, the year of telecoms liberalisation. The FNA estimated total sales in 2005 at 68.3bn. Fixed-line services accounted for 25.1bn of total turnover in 2005 and mobile-phone services for 28bn. Demand for fixed-line connections has remained stagnant. The penetration rate is already high, and an increasing number of Germans have unsubscribed from the fixed-line contracts and now rely solely on mobile-phone connections. According to a previous FNA report, there were 1.6m households with mobile-phone connections and no fixed-line connection in 2003. This is encouraged by new mobile-phone contracts that charge less for calls coming from a so-called home zone, thus leading to a pricing structure that more closely resembles fixed-line subscriptions. Specifically, integrated services digital network (ISDN) connections are no longer growing strongly because advanced digital subscriber line (DSL) broadband connections, which allow much faster Internet access, are marketed together with traditional phone lines. The number of mobile-phone users has increased sharply, and according to Pyramid, there were an estimated 103 mobile phone lines per 100 people in 2006. According to the FNA, mobile-phone subscriptions this decade have more than tripled, from 23.4m in 1999 to 79.2m in 2005. Third-generation (3G) mobile phones, which allow data transfer at a faster rate than previous generations of mobile phones (for example, for Internet access), came on the market in early 2004, and by the end of the year the network covered 70% of the territory. According to FNA estimates published in its annual activity report in December 2005, some 2m mobile-phone customers used 3G services at the end of 2005. Sales of 3G-enabled mobile phones have increased substantially, but actual subscriptions remain relatively weak. Subscriptions are partly driven by laptop modems, but the relatively low Internet access rate of 384kbit/secondsubstantially below the typical broadband connection of around 2mbit/secondstill keeps demand down, although new technological developments are expected to boost access speed for 3G subscribers. Demand for voice over Internet protocol (VoIP) services, an Internet-based service providing voice communications services, has increased substantially, albeit from a low base. According to the FNA report from December 2005, some 250,000 subscribers were making regular use of such services at the end of 2004, and the figure is estimated to have doubled by the end of 2005. In 2006 there were an estimated 49.3 Internet users per 100 people, according to Pyramid. Most of these were still using slow narrowband connections, but the number of broadband subscriptions has also been rising sharply, to an estimated 18 per 100 people. This would put Germany in 17th place among the 52 major countries covered by Pyramid's data. According to a survey by the European Commission's Information Society Benchmarking Report, Germany's rank in terms of broadband penetration in July 2005 was only 13th out of the 25EU member states. This is sometimes attributed to the fact that broadband forms other than DSL are still underdeveloped in Germany. However, the reason may simply have been a slow start, as there are indications that broadband demand is now strengthening. In addition, the relatively low price of broadband connections in Germany, according to the Commission's report, suggests that lack of competition does not seem to be a major problem. According to the FNA annual report, competitors of the former national telecoms monopolist, Deutsche Telekom, operated nearly 40% of broadband connections in 2005, about double their market share in 2004. The low penetration of cable television via broadband is largely attributable to technical problems. Wireless local area network (WLAN) access, allowing high-speed, cable-free Internet access in public spaces such as airports, is becoming more popular. There were 6,000 such spaces (excluding spaces not accessible to the general public, such as intra-company WLAN networks) at the end of 2004. 2001(a)2002(a)2003(a)2004(a)2005(b)2006(b)Nominal GDP (US$ bn)1,892.62,025.12,444.32,744.22,791.7(a)2,897.1Population (m)82.482.582.582.582.582.6GDP per head (US$ at PPP)26,26327,07727,59728,70629,75929,888Private consumption per head (US$)13,67314,46517,56219,63619,95220,389Number of households ('000)38,45638,720(b)38,931(b)39,166(b)39,36239,547(a) Actual. (b) Economist Intelligence Unit estimates.Source: Economist Intelligence Unit.Pricing ItemPrice (US$)% of monthly personal disposable incomeAffordability rankTelephone line, monthly rental (av)19.941.1214 out of 51Telephone, charge per local call from home, 3 mins (av)0.160.0110 out of 48Personal computer, 512 MB RAM (av)1,57988.644 out of 57Note. Affordability rank: for each country the price of an item as a percentage of monthly personal disposable income is calculated. Countries are ranked according to these percentages. The most affordable country will have the lowest percentage and be ranked first.Although the focus of the German manufacturing industry is clearly on advanced traditional technology rather than genuine high-tech products, there are a number of major players in the high-tech field, some of them world leaders. Many IT companies in Germany focus on more research- and service-intensive industrial uses and specialised high-end products rather than on mass production. There are few government restrictions on imports or exports of technology (related primarily to defence technology), and German companies compete at the global level. For the leading companies, exports are much more important than the domestic market. Companies investing in new high-tech plants can often benefit from substantial subsidies, not least because IT investments in a region are considered particularly prestigious, so that politicians are often eager to help. This was the case for an expansion at the production facilities of a US-based producer of microprocessors, Advanced Micro Devices (AMD), in Dresden, Saxony, which is receiving government subsidies of 546m, the highest possible level under EU subsidy rules. The government is seeking to promote the use of IT and has set up a series of programmes for this purpose. It is also building e-government services, although it is still behind world leaders in this field. Germany tied for 12th out of 60 countries in the Economist Intelligence Unit's 2005 e-readiness rankings (up from 13th position in 2004). E-readiness is judged on how conducive a business environment is to Internet-based commercial opportunities, taking into account such factors as telephone penetration, online security and intellectual property protection. Key playerstechnology Siemens is the leading German high-tech company. It covers a broad range of activities, including computer production, mobile-phone manufacturing and network solutions (in addition to its activities in rail transport, automation, medical instruments and electricity generation). Fujitsu Siemens, founded in 1999, is Germany's largest PC manufacturer. Siemens, which became listed on the New York stock exchange in 2001, in addition to its listing in Frankfurt, had sales of 87bn in 2006 and 475,000 employees, of whom 161,100 were in Germany. Siemens sold off its computer chipmaking subsidiary, Infineon, through an initial public offering in 1999. Infineon had a turnover of 7.9bn in the year ending September 2006 and employed approximately 42,000 people. AMD of the US operates two microchip factories in Dresden, which employ a combined 3,000 people. In May 2006 AMD said it would spend US$2.5bn to upgrade and expand the two facilities. Carl Zeiss AG, which specialises in optical products, is another important German high-tech firm. The company had sales of 2.4bn in the financial year 2005/06, with 11,250 employees. Many international software companies, including Microsoft, have a strong presence in Germany. SAP is the most important German software company, producing business software solutions. In this field, the company is the world leader, although it is coming under increasing pressure from Microsoft. SAP, which was founded in 1972 by former IBM employees, had sales of 9.4bn and 38,400employees in 2006. Many industrial companies offer software services related to their products. Supplytelecoms The telecoms market was liberalised on January 1st 1998, but the former national monopolist, Deutsche Telekom (DT), continues to have a strong hold on most markets. Nevertheless, there were 2,304 companies offering telecoms services in early 2005 (the latest available figures). Judging by the telecoms component in the harmonised consumer price index for Germany, the introduction of competition led to a sharp decline in prices for telecoms services between 1998 and 2000, with stagnating prices in the following years. Policy is still evolving, and new measures to boost competition are being added. For example, in April 2003 consumers were given the option of making local calls through other operators by dialling special numbers. Competition remains strong in the mobile-phone market, with four major operators. A changed Telecommunications Law, in effect since June 2004, will make it easier for competitors of DT to sell broadband connections to clients without having to install their own cable network, although there will be a transition period of four years, during which conditions will remain favourable for the company. The law was amended again in December 2006 to ban competitor access to a new high-speed telecoms cable network, in which DT had invested 500m to install. The new VDSL network allows DT to offer television (including high-definition television) access through its telecoms connection in ten cities, and under the protection of the new amendment, it planned to expand the network to 50 cities. The European Commission responded to the change in legislation by threatening Germany with legal action. In early February 2007 DT announced that it was abandoning its expansion plans to limit costs, by concentrating on an upgrade of its current ADSL network. Although regulation is normally designed to introduce greater competition, the amendment rekindled concerns that the government may occasionally favour the interests of DT, because it still holds 32% of the shares in the company, either directly (15%) or indirectly (17%, held through the government development bank, Kreditanstalt fur WiederaufbauKfW) and eventually wants to divest these holdings at a favourable price. In November 2004 FNA announced regulations to facilitate market access for companies offering VoIP In August 2000 (at the height of the IT bubble) the government auctioned six sets of 3G universal mobile telecommunications service (UMTS) mobile-phone licences for a total 50.8bn. Since then, two operators have handed back their licences, citing financial problems and doubts about the profitability of their investment, so that only four operators remain. The start of UMTS services was delayed several times, because of network problems and the complexities of building handsets compatible with both UMTS and previous standards, but these problems have now been overcome. In February 2004 the UK's Vodafone was the first company to offer UMTS services, and by the end of the year some 70% of the German territory was covered by UMTS services. The telephone infrastructure is of a generally high standard, and a large share of the population can buy access to DSL broadband. DSL is still mainly offered through Deutsche Telekom, although competitors have increased their market share substantially, mostly offering package deals using Deutsche Telekom's connections. The FNA estimated that these competitors operated about 2.5m of the 10.4m DSL lines in Germany at the end of 2005, nearly triple the amount at end-2004. Despite a fairly high cable television penetration, cable access is rarely used for broadband Internet services. This is because the cable network is outdated, partly because the ownership structure (comprising a large number of small and medium-sized companies operating the "last mile") has discouraged investments. Substantial investment has been made, however, and the number of cable connections capable of supporting broadband is growing. Some 6m of the nearly 20m (approximately 30%) households with cable TV access had cable connections capable of broadband use at end-2005, and the FNA predicts the proportion will increase to 45% by the end of 2007. Nevertheless, only 240,000 were actually using this function, up from just 70,000 in 2003, according to the FNA annual report. The long-distance cable television network, previously owned by Deutsche Telekom, has been sold off to increase competition. In April 2004 Kabel Deutschland, the biggest regional provider, acquired four smaller regional operators, increasing the number of cable subscriptions managed by Kabel Deutschland from 10m to 17m. Digital television is also expanding, but from a low level. Key playerstelecoms Deutsche Telekom remains by far the most important player in the German telecoms industry, but its market share is declining. According to estimates by the FNA, it held a market share of around 47% in the market for fixed-line narrowband connections (in minutes) in 2005 and around 60% in the market for broadband service subscriptions (in the number of lines), down from 91% in 2003. The company has a strong global presence in the mobile-phone market, under its T-mobile brand, including in the US. The company went public in 1996 and was the first German company to seek to sell its shares directly to middle-income households. In 2005 Deutsche Telekom had a worldwide turnover of 59.6bn. As of February 2007, the federal government still held 32% of Deutsche Telekom shares, either directly or indirectly. In April 2006 Blackstone, one of the world's leading private equity groups, acquired a 4.5% stake in DT from the government for 2.68bn. UK-headquartered Vodafone is the largest competitor of Deutsche Telekom on the mobile-phone market and the biggest mobile-phone operator worldwide in terms of revenue. In 2000 Vodafone acquired the German operations of Mannesmann in the biggest crossborder hostile bid in history. Mannesmann obtained the first private mobile-phone licence in Germany in 1989, and commercial operations started in 1992. At the end of 2005 Vodafone had a mobile-phone market share of 36.8%, just behind Deutsche Telekom's 37.3%, but well ahead of E-Plus with 13.6% and O2 with 12.3%, although the latter two are gaining market share. O2 has nearly doubled its market share since 2000. Useful web sites Bundesverband Informationswirtschaft, Telekommunikation und Neue Medien (Bitkom), industry association of the IT&T industry: www.bitkom.org Bundesnetzagentur, regulator for network industries (including detailed market observation reports) : www.bundesnetzagentur.de Deutsche Telekom: www.telekom.de Kabel Deutschland, the leading German cable subscription provider: www.kabeldeutschland.de SAP: www.sap.com Siemens: www.siemens.com Verband der Anbieter von Telekommunikations- und Mehrwertdiensten (VATM), association of telecoms companies (Deutsche Telekom competitors): www.vatm.de SOURCE: The Economist Intelligence Unit Copyright 2007 Economist Intelligence Unit |