Bye-bye T-Mobile USA, bye-bye 'global player' strategy: Deutsche Telekom plans to offload its troubled US business unit to AT&T so it can focus on its European operations, starting with its home market.
Deutsche Telekom needs to fix problems in its home market
It's been a long, tough and, above all, expensive journey.
With its decision to sell its wireless business in the United States, Deutsche Telekom is essentially ending its ambitious but largely unsuccessful strategy to become a global provider of telecommunications services to businesses and consumers alike.
T-Mobile USA was the last remaining significant piece of the "global player" strategy penned by former Deutsche Telekom CEO Ron Sommer more than 15 years ago. The US wireless unit could soon join the German operator's other failed forays into key foreign markets under Sommer's leadership, including the Global One network alliance with France Telecom and Sprint of the United States, and a string of partnerships with Asian carriers.
Too few customers, too little coverage
That Deutsche Telekom needed to make big changes at its struggling US wireless subsidiary was no industry secret. In the end, the subsidiary failed to deliver the numbers – too few customers, too little coverage and too large a gap to the market leaders AT&T Mobility, Verizon Wireless and Sprint Nextel. To stay in the running, Telekom would need to invest billions of dollars in a next-generation high-speed mobile technology.
Former Deutsche Telekom CEO Ron Sommer spent billions on global expansion...
What did come as a surprise, though, was the exit strategy. Days before the weekend Deutsche Telekom-AT&T announcement, the market was flooded with rumors that the German operator and Kansas-based Sprint Nextel were in advanced talks to combine their wireless operations in the United States. The merger would have combined the resources of the third and fourth-largest US wireless providers to give AT&T and Verizon a run for their money.
Why those talks failed is not known. What is known is that Sprint and Deutsche Telekom had a history of bickering in their earlier partnership in the Global One venture. Perhaps the two simply weren't capable of maintaining a transatlantic relationship – and accepted that.
If approved, the $39 billion (27.5 billion euro) deal with AT&T will end Deutsche Telekom's active involvement in the US wireless market. In exchange for T-Mobile USA, the German operator will receive $25 billion in cash and $14 billion in AT&T common stock. While that would give Deutsche Telekom an 8 percent stake in the US company, making it the largest single shareholder, the Germans would have little influence over AT&T's operational matters.
Many analysts applaud Deutsche Telekom's decision. "It's a judicious move and strategically consistent with where the operator wants to go," Emma Mohr-McClune, a wireless specialist with Current Analysis, told Deutsche Welle. "Deutsche Telekom needs funds for its regional operations and expansion in Europe, and it also needs to remain very focused on fixing problems in its home market where competitors continue to chip away."
Nearly 130 million customers
That's exactly how Deutsche Telekom CEO René Obermann sees the situation, though he describes it slightly differently. "We need new, modern networks for the future and we will invest in these, primarily in Europe," he said in a video message.
Investors also appear to like the move. Deutsche Telekom shares surged more than 15 percent in early Monday trading in Frankfurt.
AT&T is keen to snatch T-Mobile USA for a number of reasons. Chief among them are customers and spectrum. The acquisition would bring AT&T's client base to nearly 130 million customers, accounting for roughly 42 percent of the US wireless market. It would also give the US carrier additional radio spectrum needed to expand its mobile broadband capacity.
... and Deutsche Telekom CEO René Obermann had to pick up the bill
Over the past four years, AT&T's mobile data services traffic has risen 8,000 percent. And looking ahead, the US operator expects demand to grow 8 to10 times what it was last year, driven by the growing popularity of mobile data devices like smartphones and tablet computers.
In anticipation of likely antitrust concerns, AT&T says it will extend coverage of the fourth-generation mobile phone technology, high-speed Long-Term Evolution (LTE), to 95 percent of the US population. Promises like that often soften the resistance of competition watchdogs worried about the impact of market consolidation on prices and services.
AT&T said it was confident the deal would be approved within 12 months.
But should the US Federal Communications Commission and the Justice Department reject the wireless marriage - and that possibility is real - Deutsche Telekom could find itself in a tough spot again.
The German company could be forced to approach Sprint again and somehow find a way to merge T-Mobile USA with the American rival rather than sell it outright to avoid antitrust concerns. Or it could dump billions more into the venture in the hope of turning around its US business.
So, understandably, Obermann isn't cracking open any champagne bottles just yet.
Author: John Blau
Editor: Sam Edmonds