T-Systems Ought To Be More Disruptive To Tackle Growth Opportunities

Dan Bieler, Frederic Giron, Brownlee Thomas, Ph.D., Stefan Ried, Christopher Mines, Pascal Matzke, Jennifer Belissent, Ph.D.

T-Systems hosted its 2012 analyst and sourcing advisor event recently. To be sure, T-Systems remains one of the most advanced true ICT providers in the European market. But T-Systems ought to demonstrate more clearly how it can support and enhance business process for its customers and improve the customer experience for its customers’ customers. Of course T-Systems is not alone. The ICT industry needs to emphasize proven capabilities in delivering enterprise-grade ICT solutions ranging from co-management of infrastructure resources to full outsourcing.

T-Systems, like many of its competitors, is busy making sure that it does not bleed too much in what T-Systems calls the red ocean, i.e., the highly competitive market segment of legacy services. That's a good start. At the event, T-Systems communicated very clearly the progress at its internal production factory. This aspect is critical for streamlining and standardizing the portfolio, boosting margins, and developing products and services that the revamped sales team then can actually sell. One tangible outcome of this effort shows through in the high customer satisfaction level and deal wins like BAT, OMG, and Georg Fischer. Importantly, T-Systems also has put in place a rigorous certification framework for ensuring quality of service with suppliers.

However, T-Systems still needs to convince in areas of the blue ocean, i.e., the emerging innovative market segment. Like many of its competitors, T-Systems is not finding this easy. Why? Because T-Systems continues to prop up its legacy business: selling technology solutions.

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Deutsche Telekom in arranged marriage for T-Mobile USA through reverse acquisition by MetroPCS

 

Deutsche Telekom is leading its daughter T-Mobile USA down the aisle for a second time in less than two years after the previous marriage attempt with AT&T collapsed in light of regulatory objections (see http://goo.gl/hgCrm). But T-Mobile USA will not leave the house altogether. Should the deal go through, Deutsche Telekom will own 74% in the NewCo. The NewCo will operate as one company with two brands, similar to how Everything Everywhere was run. MetroPCS Shareholders will own the remaining 26%.

The financial plan is that scale effects will translate into $6-7 billion of cost synergies from enhanced scale and scope. Deutsche Telekom pitches the deal as creating a wireless value leader in the non-contract (pre-paid) segment, with the goal of targeting a growing market segment. The ambition for the NewCo is to generate compound annual growth rates of 3-5% for revenues, 7-10% for EBITDA and 15-20% for free cash flow over the next five years.

The deal raises several issues for me:

  • Targeting a market opportunity requires ongoing investments. In my view, the goal for growth looks ambitious based on the proposed value proposition. Whilst I do see a market opportunity for unlimited data plans (i.e. NewCo’s value proposition), I believe that ongoing investments beyond the existing ones are required to ensure QoS and customer experience. The completed network modernization to the tune of US$4 billion LTE investment including site upgrades and spectrum re-farming provides a good starting point. But more capex is required in the years ahead as data traffic continues to explode. In turn, this could undermine free cash flow growth ambitions.
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