Why should René Obermann bother? The former industrial clerk made his millions in his twenties when he founded – then later sold to Hong Kong conglomerate Hutchison Whampoa, the founders of Orange – his own mobile-phone company that he’d set up while at university. Instead of trying to drag Germany’s union-driven workforce out of the dark ages he could be having a far easier life. But 46-year-old Obermann is ambitious. He’s also one of a new raft of unashamedly dynamic German entrepreneurs that understand and thrive in the fast-moving cross-border world of mega-mergers and deals.
Yet, as he glances out of his sleek futuristic Bonn office and gazes across the Rhine, he must feel doubt sometimes.
Obermann – nicknamed The Doberman or Bulldozer by some employees – is the CEO of a mammoth-sized company struggling to change into something far nimbler and dynamic. T-Mobile is Deutsche Telekom’s mobile communications brand with some 124 million customers spread across Germany, Europe and the United States. Yet the potential for real corporate change is limited, as we shall see. Meanwhile Europe’s biggest telecoms player is trying to slash costs in order to implement its vast 4G investment program.
In September Deutsche Telekom AG signed a cheque to merge its own troubled T-Mobile service with France Telecom’s Orange, giving them almost 40 percent of the total UK market. It was hardly the deal of a lifetime. Although the combined annual cost savings are considerable – estimated to be around £445m – alliances are needed because the cost of constructing the next generation of broadband technology across Europe is formidably steep (at least £250bn).
One big argument for the Orange/T-Mobile merger was that only large companies with the kind of huge cost-efficiencies could handle such investment. Yet though the ink is barely dry on the cheque, this deal could still be thwarted. Wrangling about broadcast spectrum allocation between the UK’s mobile networks could delay or even spike the deal. And inevitably UK’s Office of Fair Trading (OFT) is likely to demand an enquiry too » (consumer groups are already complaining about the merger with the usual competition worries raising their head).
Table thumper
There’s little doubt that Obermann is the right man for the job. He’s not a legacy man burdened with decades-old working practices and subservience to Germany’s dominant unions (his predecessor Kai-Uwe Ricke was far more conciliatory though he was hampered by the German government’s refusal to sponsor lay-offs). No surprise then that this union scourge has found it difficult to adjust to the sprawling bureaucratic culture of a German monolith. This monolith is also a problem child. Most technology companies are inherently mobile and supposedly cutting edge. Deutsche Telekom though is a lumbering beast doing its best to trim weight to gain speed.
However Obermann is supported by the five percent stake private equity player Blackstone have in the company (an unusual relationship historically but one that appears to be working so far supplying much market focus).
Although he’s not short on management experience – he served as Chief Executive Officer of T-Mobile Deutschland from April 2000 to March 2002 as well as its managing sales director from April 1998 to March 2000 – Obermann lacks political experience. On a one-to-one basis Obermann appears mild-mannered. That view though is not shared by unions who view him as a table-thumper. And that is where his lack of political experience may undermine him yet.
State metamorphosis
Deutsche Telekom now employs more than 230,000 people. The company itself has undergone profound changes. Back in the mid 1990s it was a state-owned monopoly known as Deutsche Bundespost though in 1996 it was privatised. The dot com bubble then saw the company’s valuation soar. At one point Deustsche Telekom was valued at more than €100 a share, only to burn to earth a few months later to €12 a share (it currently trades at around €9.40). During 2005 trading conditions worsened.
Customers deserted the company in droves to cheaper competition but Deutsche Telekom finally found the moxie to lay off more than 30,000 workers, however these moves cost ex CEO Kai-Uwe Ricke his job. After much agonising, Obermann, came onboard as CEO in late 2006. So it has been a difficult transformation from state-backed monopoly to cutting edge global tech player and a metamorphosis that has a long way to go yet.
Currently Deutshce Telekom retains several scattered subsidiaries with interests in Slovakian T-Slovak Telekom, Croatian T-Hrvatski Telekom.
Obermann’s brief is to pull this mobile-phone operator together complete with all its many disparate parts. Outsourcing to lower-paying subsidiaries is part of the plan. It’s also part of his job to hike consumer interest in mobile internet as voice and text revenues decline. “This once expensive hobby has turned in to big business,” he said at Nokia World in Stuttgart in September. “The figures are impressive. Data traffic increases by several hundred percent year on year. The trend will continue, however, it’s excess revenue at the moment. It’s not enough yet to compensate for the loss in voice and text revenue. We must create new growth, beyond excess.”
Is the future Orange?
But some markets are more difficult than others. The British telecoms market is certainly an eyesore for Obermann. Recently he was plotting to withdraw from the UK altogether with a sale. However O2 owner Telefónica and Vodafone had slashed their value on T-Mobile forcing Obermann to turn to Orange. As mentioned, a merger was put together but competition issues are now looming, particularly when you take into account Virgin Mobile, which also runs on T-Mobile’s network. But many consumers should consider themselves lucky. If T-Mobile ended up being bought by market leaders O2 or Vodafone, then competition would seriously have been hampered even further.
Part of the problem in the UK is returns. They’re low, compared to continental Europe. Throw in other providers like Asda and Carphone Warehouse and you have a formidably competitive market, and one that probably many European consumers would wish on themselves, if they could. Merger delays look certain. One outcome could be that Orange and T-Mobile will have to sell some of its mobile phone spectrum in the UK. Last month the top five UK mobile phone networks Orange, T-Mobile, Vodafone, O2 and Hutchison 3G UK all met Lord Mandelson. A deal was finally agreed where the networks had caps imposed on them. Either way, it’s not the result Obermann would like.
US presence
Over in the US, Deutsche Telekom has several challenges too. However the market is rather more straightforward stateside for Deutsche Telekom. Europe’s largest phone company there competes with just three main national players for around 300 million households while back in Europe at least 50 operators still battle it out (which is good news of course for competition) for dominance. The US market is hugely important for Obermann. Deutsche Telekom receives almost 25 percent of its revenue from T-Mobile USA. However Deustche Telekom was late, it admits, in building its third-generation offering in the US and its market share has suffered as a consequence as key rivals AT&T Inc and Verizon establish their contract base. Obermann’s strategy though remains open here as the Obama administration could auction off more licences, or it could buy into more partnerships. Whatever route it takes, it knows that expansion plans for its fourth generation broadband network are pivotal as web-equipped ‘phones gain market dominance.
Clouds above and below
The mobilisation of personal social networking is a key part of T-Mobile’s corporate activities with offerings like Web’N’Walk, for example. However recently T-Mobile customers have endured hardware failures. Hundreds of thousands of T-Mobile customers using their Microsoft-built Sidekick phones were left without access to data services that deliver much of their mobile services including calendars, photos and address books. Some reports suggest some customers may have endured data loss.
The Sidekick ‘phone is made by a Microsoft subsidiary and everything that users install on theses devices is stored in a virtual ‘cloud’. “Regrettably,” said the customer services letter sent to all T-Mobile Sidekick customers, “based on Microsoft/Danger’s latest recovery assessment of their systems, we must now inform you that personal information stored on your device – such as contacts, calendar entries, to-do lists or photos – that is no longer on your Sidekick almost certainly has been lost as a result of a server failure at Microsoft/Danger.”
The letter went on: “That said, our teams continue to work around-the-clock in hopes of discovering some way to recover this information. However, the likelihood of a successful outcome is extremely low. As such, we wanted to share this news with you and offer some tips and suggestions to help you rebuild your personal content…” These ‘outage’ experiences do little to instill loyalty in customers and this basic lack of competence is just the sort of thing that would ignite a nuclear reaction from Obermann. Obermann has agreed to compensate customers but, at the time of print, these details were still being finessed.
Giving Verizon and AT&T a fright
Despite all the numerous setbacks Obermann could still be preparing to give the competition a nasty kick up the behind. UBS analysts sent clients out a note last month outlining some of the potential consequences for telcos like Verizon, AT&T and Sprint should Obermann decide to slash price cuts on its US wireless messaging and data services. Obermann knows he’s trailing and is therefore more willing to take the fight to the competition.
UBS analyst John Hodulick says T-Mobile could snip its $100 per month unlimited plan to possibly $50 a month which “would be disruptive not just to the postpaid players, but also to the unlimited prepaid market and to wireless connections.” It’s by no means certain but it is indicative of a market that needs stirring up. The three main US giants have a fairly comfortable time of it with limited competition, helped by hugely popular high profile products like Apple’s iPhone which has fermented huge interest in mobile wireless technology.
Certainly Obermann needs some good news here. But at home he needs to show the unions not just stick but carrot too. Recently Obermann talked about the opportunity to create up to one million new jobs by 2020 with the deployment of fibre-optic and mobile networks. He’s learning the political game, finally.