Less is more

Very limited posting today as I battled with some tricky stuff from Deutsche Telekom - a decent set of results, coupled with a big cut in 2006 forecasts due to an ambitious EUR1.2bn marketing and brand management revamp in search of higher growth, plus a four-hour webcast in the afternoon. A one-man-band like me gets somewhat overwhelmed in these circumstances, but I dutifully published my note, with only two typos, so overall it was a relatively good day. Watching the webcast, I was struck by a couple of things.

Firstly, it hit me that DT is trying, somewhat later than some of its competitors, but reasonably convincingly, to convey the idea that it understands Web 2.0 and speaks the same language as many of its critics. Walter Raizner, head of Broadband and Fixed Networks, at one point in his presentation stated in cringeworthy fashion that DT wanted to become "the eBay of telecommunications." This, however, was probably a bridge too far.

The other thing that struck me was the sense that today's strategy presentations laid bare the kind of inherent and irreconcilable conflicts which arise when integrated incumbents try to adopt disruptive models. Mr. Raizner painted a picture of converged services (one phone, one number, one bill) wherein his division is going to take advantage of the 10:1 pricing asymmetry between fixed and mobile networks (duh!) and generate subscriber loyalty and usage growth. Simultaneously, Rene Obermann made the case for continued growth from multiple SIM ownership and fixed/mobile substitution. Clearly these two agendas do not coexist easily within the same strategy. It's not as if DT is unique in this respect - it's just interesting to see the inconsistencies highlighted so clearly. One tenacious analyst pointed out, as if he needed to, that there is a risk that DT sees a reverse migration, from mobile to "converged service" minutes, which would be counterproductive. Management seemed to squirm at this point, reiterating, somewhat anemically, that they genuinely believed in their respective growth strategies.

I genuinely appreciate the position that the DT management are in: in the current market climate, this sort of transformation message has to be conveyed to maintain credibility, but it's damned hard to get it right. At the same time, I think it's interesting that the revised 2007 EBITDA guidance is not all that much above what consensus (or my own) forecasts were before today's "groundbreaking" announcement, though the 2007 revenue number the company is pointing to is 5% above previous consensus. The company has outlined all manner of concrete targets for triple play subs, web'n'walk handsets, etc., in an attempt to put meat on the bones, but it seems to me that investors may have some serious trouble accepting the revenue uplifts two years out, in light of all the uncertainties and dislocations confronting the industry. Nevertheless, Kai-Uwe Ricke was quick to point out that in its investment decisions, the company is moving philosophically from a focus on EBITDA to "shareholder value creation" and return on capital employed - a convenient swap when the top line forecasts jump but EBITDA remains in line with previous expectations, and you're facing a near-term capex spike. Less is, apparently, more, after all.