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Telefonica’s acquisition last week of Telecom Italia’s German broadband (DSL) business, Hansenet, has upped the stakes in Germany’s increasingly integrated telecoms sector. Telefonica paid EUR900 million for the business and is expected to integrate it with its own fixed-line arm Telefonica Deutschland, which itself was rolled into Telefonica’s local mobile business, O2 Germany, earlier this year. The addition of Hansenet – which trades in Germany under the ‘Alice’ brand – will increase Telefonica’s German broadband customer base from 200,000 to 2.4 million, instantly establishing it as a major competitor to Deutsche Telekom’s T-Online, the market leader, and United Internet, Germany’s leading ISP.   

Once the acquisition is finalised, Telefonica O2 Germany – as the combined unit will be known – will become the number three player in the German market in terms of revenue (after T-Mobile and Vodafone) with annual revenues approaching EUR5 billion. The acquisition should also provide a major boost for O2 Germany, which is languishing in fourth place in Germany’s mobile market and has to date been unable to compete with Deutsche Telekom’s T-Mobile and Vodafone Germany in terms of bundled fixed and mobile offerings. The move also leaves third-placed E-Plus – owned by Dutch firm KPN – as the only German mobile network without a fixed-line broadband business.

As the German incumbent operator, Deutsche Telekom continues to dominate both mobile and fixed-line. Its market share in both has remained stable for some years, around 36 percent in mobile (T-Mobile) and 46 percent in broadband (T-Online). Its German mobile and fixed-line divisions were reported as a combined entity for the first time in 3Q09, reflecting the operator’s drive to more closely integrate the two units. Quarterly revenues at the new unit declined 2 percent year-on-year to EUR6,471 million, as revenue growth in mobile (up 1.4 percent) failed to compensate for declines in fixed-line (down 3.5 percent), a segment that also incorporates Deutsche Telekom’s legacy PSTN business. 
According to official figures from BNetzA, the German regulator, T-Online had 11.3 million broadband customers in 3Q09, while its DSL competitors had 10.8 million, and cable operators had 2.5 million, creating a total market of around 24.6 million. However, the market has been in steep decline for the last year. Broadband net additions at T-Online, for example, dropped to 400,000 in 3Q09 compared to 700,000 in the year-earlier quarter, though its share of net additions remained stable. The slowing of the market appears to have prompted consolidation in Germany’s fragmented broadband market; Telefonica’s acquisition of Hansenet follows United Internet’s EUR123 million purchase of Freenet’s DSL business in May. Further M&A activity is expected in the coming months.

Meanwhile, Vodafone reported this week that its service revenue in Germany declined 4.8 percent in the six months to 30 September (to £3,942 million), but still outperformed the firm’s total European division, which posted a 5.1 percent decline overall. Vodafone said that its revenue in Germany was hit by new mobile termination rate cuts that came into effect in April 2009, lower roaming income, and ongoing competitive pressures. However, this was partly offset by a return to quarterly growth (in 3Q09) of its fixed-line arm, Arcor, which it said also improved its share of broadband net additions by 2 percent. Its mobile arm, by contrast, continued to lose customers to competitors in 3Q09 according to our data.

Vodafone Germany is the UK-based firm’s largest European mobile market in terms of both revenue and customers. Like Telefonica and Deutsche Telekom, Vodafone has made moves this year to closer align its mobile and fixed-line arms and is in the process of creating a single, common brand which is likely to see the Arcor brand phased out. Vodafone has been linked to numerous attempts to scale its German fixed-line business this year; as well as being linked with Hansenet at one point, it has also reportedly been in talks to acquire Kabel Deutschland (KDG), Germany’s largest cable operator.

Matt Ablott, Analyst, Wireless Intelligence

Telefonica’s acquisition of Hansenet reflects the growing appetite for consolidation in Germany’s telecoms sector, as well as the need for operators to offer integrated (fixed and mobile) offerings. While O2 is only a tier-two player in Germany’s mobile market, it is performing well against larger competitors and took the largest share of mobile net additions in the third-quarter, according to our data. The addition of Hansenet should continue this good progress, allowing O2 to benefit from cross-selling and bundled offerings. Both Deutsche Telekom and Vodafone Germany are pursuing similar strategies by combining their respective mobile and fixed units (though its worth noting that their fixed/mobile convergent offerings have struggled to attract many users to date). E-Plus, meanwhile, is highly likely to figure in future M&A activity in the broadband sector in order to achieve parity with its so-called ‘integrated’ operator rivals (which include fixed-line, MVNOs as well as mobile players). But growth in the German fixed-line broadband market is slowing sharply and operators may soon switch their attention to promoting mobile broadband, which is showing signs of strong early adoption. Until this switch occurs, integrated operators must be wary of cannibalisation between their fixed and mobile broadband businesses and monitor price elasticity carefully.