Telekom Streamlines as Germany's Giant Feels the Pinch

Deutsche Telekom is the latest telecommunications company to feel the pressure of intensifying competition in Europe. The German firm, Europe's largest communications group, recently announced a 4 percent fall in half-year profits. Shares in Deutsche Telekom -- which owns T-Mobile -- nose dived by 11 percent after the announcement earlier in August.

The firm says the profit shortfall is due to a poor performance in Germany and has pledged to take aggressive action to win back customers. But will this be enough to halt the company's slide?

Deutsche Telekom anticipates its operating profit for the year could be more than a billion euros ($1.3 billion) lower than previously anticipated. The company said in a statement last week that its bottom-line net profit declined by 14 percent to 1.01 billion euros in the period from April to June, despite a three-percent rise in revenues to 15.13 billion euros.

In Germany, Deutsche Telekom's overall sales have fallen by 4 percent in the past six months. First half sales of its German mobile arm dropped by 3 percent in the first half of the year and its fixed-line business lost a million customers over that period.

Cuts in earning and sales forecasts

Because of these results, Deutsche Telekom has been forced to issue a profit warning. And Deutsche Telekom's chairman, Kai-Uwe Ricke, said the company will cut its earnings and sales forecasts for this year and next year.

"Deutsche Telekom is transforming in a telecommunication market, a worldwide telecommunication market, which is ever-changing," Ricke said. "And this transformation is huge. It's a challenge. It's a marathon."

Ricke said he and his team are ready to take on the challenge. The company's strategy is to take a much more aggressive approach to competition in its key domestic markets in the second half of this year.

Many customers have switched to cheaper phone and Internet providers, and Deutsche Telekom wants to win them back. Ricke said costs and prices will be slashed in order to defend the company's domestic market share.

Attack is the best form of defense

"Deutsche Telekom has to do its homework in the German marketplace," Ricke said. "That means we must rigorously defend our market share. It has to do with pricing, it has to do with products, it has to do with service, it has to do with things we have in our pipeline, and what we are going to roll out over the next few weeks."

That means offering simpler packages with lower prices. For example, new bundled offers from T-Mobile in Germany will soon cost less than 10 euro cents per minute, regardless of which network people call.

Deutsche Telekom has also started marketing a merged fixed-line and mobile service to try to stop people canceling their Deutsche Telekom traditional phone lines.

The company also plans to invest differently to increase its cash flow. And it will spend an extra 1.2 billion euros on marketing and products this year. That's in addition to a 3-billion-euro investment in a fiber-optic network to broadcast live TV programs, such as Germany's Bundesliga soccer league matches, over the Internet. Ricke is hopeful that all this will stave off competition from Vodafone and other competitors.

Foreign stability remains key

Deutsche Telekom's international business units have been more successful than its domestic market and are solely responsible for the company's sales growth.

T-Mobile in the UK, for example, added more than 360 thousand subscribers over the second quarter. And revenues generated outside of Germany have risen by a total of 4 percent to 3.6 billion euros.

But telecommunications analyst Ovum said Deutsche Telekom has underestimated its competition for too long, that it can't hide behind its overseas growth now, and that there's certainly no "quick fix" for its domestic problems.

So is this program of price cuts and innovations coming too late? And will competitors such as Vodafone follow suit? It may well signify the beginning of a telecommunications price war in Germany -- which for customers at least, would be great news.