German DSL demand high, but funding is low - Industry Trend or Event

CommunicationsWeek International, April 16, 2001 by Michelle Donegan, Peggy Salz-Trautman

The investment community's increasing reluctance to fund telecoms infrastructure projects is taking its toll in Europe's main market for digital subscriber line (DSL) services. Operators in Germany are putting network expansion plans on hold until the financial climate improves.

Atlantic Telecom plc, of Aberdeen, has cut nearly all of its experienced DSL management team, originally acquired with First Telecom. The team, which had steered DSL rollout in Germany, included Mark Daeche, one of the founders of First Telecom. "They've gotten rid of everyone who knows how to do DSL [in Germany]," said another former Atlantic DSL executive.

Alex Stadler, chief executive of riodata in Morfelden-Walldorf. Germany, said the financial markets are "indiscriminately punishing the whole telecoms sector since [3G auctions]," and now the focus is on DSL.

"The market has deteriorated slowly so no one saw the downturn, but it's there now," he said.

Previously, the market encouraged operators to "build first and wait for sales to catch up," Stadler said. "Now the business model the markets want to see is one based on services and customers up front," he added.

Foreign, smaller operators hit

According to one operator, the current situation puts the squeeze primarily on operators that have foreign parents and those who lack their own infrastructure. "There was a window of opportunity open about six months ago that has since closed, locking out newcomers and any company without a fully funded business plan," a senior executive at one provider said. "We were lucky in that we got in early."

Atlantic will cap DSL infrastructure builds in Germany and the Netherlands and will only roll out DSL in the Manchester area in the U.K. The operator's smaller, more targeted DSL rollout plan is an effort to preserve cash while the financial markets are strained over the text year and even into the financial year ending March 31, 2003.

"While the market is valuing us at a substantial discount, we're looking for what revenue we can generate from existing infrastructure," said Susy Atkinson, director of corporate affairs at Atlantic. "This is not a change of strategy."

But riodata, which had originally intended to build to 100 cities by May this of year, has since scaled back its plans and pushed the deadline to the end of 2002. "We feel free to scale according to market conditions," Stadler said.

Streamgate AG, a Munich-based DSL provider that has been active on the market since lastyear, sees that "companies are struggling more than ever despite a fantastic demand for DSL," according to Joachim Skora, executive board member in charge of sales and marketing. The company, which is tight-lipped about its investors, asserted that cash is not an issue in its roll out, which will cover 40 "bigger city areas" in Germany by the end of 2001.

"For now we are building our own infrastructure and that's what you need to have," Skora said, adding that "being independent of the incumbent makes for a more solid and stable business plan."

Not all are suffering yet. Cologne-based QS Communications AG "had the infrastructure and the money." which is why it claims it isn't feeling the crunch, said Karl-Heinz Angsten, a QSC spokesman. The company, which Morgan Stanley Dean Witter analysts have called "the last man standing" with regards to having the wherewithal to pursue a full scale DSL roll out in Germany under current conditions, has completed the first phase of its roll out to more than 800 offices and is now focused on signing up customers and increasing traffic.

QSC expects consolidation during 2001, and it increasingly expects other operators to cooperate to provide DSL services. At year-end 2000, QSC had sold 9,090 lines and expects to have 40,000 to 50.000 lines sold in 2001.

According to analysts at Morgan Stanley Dean Witter, the nearest alternative carrier competitor remains Highway One, which has an estimated 700-1,000 lines in service. Another operator, KKFNet, is understood to have sold approximately 500 lines, but appears to be revisiting its business plan to provide to just a niche market.

Falling behind expectations

Until now, Germany had been expected to lead the way in European broadband access. In March, Zona Research Inc., of Redwood City, California, was projecting that the country would have converted 500,000 lines to broadband by year-end, after the United States with 2.3 million lines and Korea with 2 million lines.

Now, figures from Jupiter Media Metrix Inc., headquartered in New York, shows that Germany has less than 1% broadband penetration, compared with 2.3% in Nordic countries (see table). Jupiter MMXI projects Germany will reach 17% broadband penetration by 2005, still well behind Nordic countries' penetration of 30%.

             Percentage of households with Broadband access
               2000
Nordic region   2.3
Germany         0.9
U.K.            0.3
France          0.6
Italy           0.1
Spain           0.2
Source: Jupiter Media Metrix, Inc.