EU tells Deutsche Telekom to give more network access

European Union regulators ordered Deutsche Telekom AG, Europe's largest telephone company, to give competitors greater access to its network to spur competition in Germany's broadband Internet market. Rivals including United Internet AG and Freenet AG should get access to Deutsche Telekom infrastructure so they can sell Internet services to consumers, the European Commission said in a statement in Brussels yesterday. Access must be provided at a price approved by the German regulator, the commission said, backing a July 21 proposal from Germany's Federal Network Agency. Deutsche Telekom, facing a third year of falling sales from fixed-line services, has completed the first step of a € 3 billion ($3.9 billion) fiber-optic network in Germany that can be used to transmit large amounts of data and live TV. The company said earlier this year it would only make the investment if it can keep the network to itself long enough to make a profit. „The decision is a hefty blow for Deutsche Telekom,” said Per-Ola Hellgren, an analyst at Landesbank Rheinland Pfalz who rates the company's stock „market perform.” „Deutsche Telekom may have to reconsider its decision to build a new fiber-optic high-speed infrastructure.” Europe's biggest phone companies have been losing market share in domestic Internet markets as low-cost providers slash prices to lure clients. Yesterday's ruling will further increase competition for Deutsche Telekom from broadband providers, which don't have their own phone networks and lease connections from Deutsche Telekom for resale to customers.

The commission said its analysis of Deutsche Telekom's „significant market power” in Germany's broadband market included the company's new fiber-optic Internet network. Deutsche Telekom started showing Germany's top soccer league over the Internet earlier this month and on Aug. 16 added television programs from the country's two state-owned broadcasters to its Web TV package. Deutsche Telekom now faces a „tough strategic decision,” Hellgren said. „If the company stops building the new infrastructure, the company can't offer new services and if the company continues, it has to make all the investments to the benefit of its competitors.”

The constraints set out by Viviane Reding, the EU telecommunications commissioner, are „a classic example of overregulation,” Deutsche Telekom spokesman Mark Nierwetberg said by telephone yesterday. The company's rivals have a bigger share of Germany's broadband market than is the case between former monopolies in other EU countries and their competitors, he said. Arcor AG, the German fixed-line phone unit of Vodafone Group Plc, is demanding access to Deutsche Telekom's fiber-optic network, Frankfurter Allgemeine Zeitung reported yesterday, citing Arcor CEO Harald Stoeber. Arcor wants access to Deutsche Telekom's cable distributor boxes, which transmit Internet signals from the fiber-optic network to individual homes nationwide, Stoeber told the German daily. Arcor aims to build its own fiber-optic Internet network or rent parts of Deutsche Telekom's network to introduce new services such as Internet TV, Stoeber was quoted as saying.

On Aug. 10, Deutsche Telekom shares had their biggest drop in four years after CEO Kai-Uwe Ricke cut sales and earnings forecasts for this year and next. Targets for the combined fixed-line and broadband unit were cut for a second time in three months. The company cut its 2006 operating profit target by as much as 7.2% and its sales prediction by as much as 1.9%. In 2007, operating earnings will be similar to this year's, and sales will show „moderate” growth, Deutsche Telekom said in a statement on Aug. 9. Yesterday, shares of Deutsche Telekom rose 14 cents, or 1.2%, to close at € 11.44 in Frankfurt. The stock reaction was limited as the European Commission's decision had been anticipated by investors, Hellgren said. The cost of insuring Deutsche Telekom's debt against default was little changed, according to credit-default swap prices on Bloomberg. The spread, or the premium demanded by investors to buy bonds versus government debt of similar maturity, on Deutsche Telekom's 4% bonds due in January 2015 widened 1 basis point to 93 basis points, according to Fortis Bank prices. One basis point is 0.01 percentage point.

The system being built by Deutsche Telekom, using very high-speed digital subscriber line technology, or VDSL, will eventually cover 50 cities using 18,000 kilometers (11,200 miles) of cables. Deutsche Telekom tried earlier to argue the fiber-optic system is a new market. The EU disagreed, saying that under a 2003 market-opening law such services must be regulated. The price for access to Deutsche Telekom's infrastructure, or bitstream access, „should prevent any margin squeeze and should therefore be sufficiently below Deutsche Telekom's retail prices,” the commission said. Deutsche Telekom yesterday has 62% of the market for DSL packages, the most popular high-speed Web service, and 60% of the overall broadband access market in Germany, the commission said. Its EU peers on average managed a market share of 50%, the commission said. Prices of DSL packages fell 9.3% worldwide in the second quarter from a year earlier, according to UK-based researcher Point Topic. Some companies in Europe and North America cut tariffs by as much as 50%, Point Topic said Aug. 9. (Bloomberg)