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November 14, 2005

Deutsche Telekom faces protectionism charges

Following Deutsche Telekom AG's recent criticism of Telefonica SA over the "unfair subsidies" it receives from the Spanish government regarding foreign acquisitions, the Bonn, Germany-based carrier is now itself facing similar charges of protectionism after it was revealed that its planned 3bn euro ($3.5bn) high-speed fiber-optic network is likely to be free from government regulation for two to three years.

By CBR Staff Writer

The highly controversial precedent was revealed by the Financial Times, which reported that the new German coalition government scheduled to take power on November 22 has agreed to exempt the network from regulation in order to ensure Deutsche Telekom achieves adequate returns. The time limit of this exemption is not known, although it is likely to be between two and three years.

The move in Germany follows similar deals in Japan and the US. Yet what this actually means is that the Deutsche Telekom will not be required to grant rival companies access to the network.

The German newspaper, Die Welt, has reported that the European Commission has sent a letter to Germany’s Federal Networks Agency stating it has serious concerns about the German regulator’s decision to take a hands-off approach to Deutsche Telekom’s new network. This measure is likely to attract intense criticism from foreign competitors operating in Germany.

Deutsche Telekom is looking to spend 3bn euros ($3.5bn) over two years to upgrade large parts of its network. The upgrade means the carrier will strip out large parts of its old copper wire network and replace it with high-capacity fiber-optic cable capable of speeds of up to 50MBps. The roll-out will then cover 10 unnamed German cities by mid-2006, and by 2007 this will reach 50 of Germany’s largest cities.

The upgrade is part of Deutsche Telekom’s strategy to provide its customers with so-called triple-play services. Triple-play is often regarded as the holy grail for incumbent carriers because it will allow them to offer consumers voice calls, high-speed internet, and television over the same connection.

Triple-play is regarded as a key strategy to fend off intense competition, heavy regulatory pressure, and the move away from fixed-line to mobile phones. In the UK and US, this has largely been the preserve of cable companies, although fixed-line carriers on both sides of the Atlantic are currently scrambling to offer a comparable service.

Deutsche Telekom is lagging behind its European rivals such as France Telecom SA and BT Group Plc. It is upgrading only part of its network to fiber optic, but in the UK, for example, BT is already switching its old analog switched network to an IP-based network. The project, known as the 21st Century Network (21CN), will see BT’s entire PSTN based network replaced with an IP-based network. This $20bn roll-out is already under way, and the first migration of customer lines to the new infrastructure is expected to begin during the second half of 2006. The 21CN is expected to be completed by 2008 or 2009.

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