Pat more Ce BIT: DT iron grip on the German phones: The German Governm/DT/Siemens/NN current and ?future partnership may be hard to break by newcomers, ?CSCO, who want to break in:
March 19, 1998
Customers' Apathy Keeps
Telekom's Rivals at Bay
By GAUTAM NAIK and MATT MARSHALL
Staff Reporters of THE WALL STREET JOURNAL
BONN -- The dozens of new competitors who crave a slice of Germany's $60 billion phone market face a surprising hurdle: the indifference of millions of residential customers.
The eager challengers to Deutsche Telekom AG might have expected a better reception when the world's third-largest telecommunications market opened to competition in January. After all, Germans have griped for years about the high prices and poor service of the former phone monopoly. But so far the number of defections to rival companies amounts to a trickle. Of the roughly 155 million calls made daily in Germany, about 153 million still run on Deutsche Telekom's lines. And while angst may explain why some cling to the status quo, for most it seems to be a matter of ignorance and apathy.
Viag, o.tel.o Seek Bigger Share of Germany's Telecom Market
"People need to be taught that competition exists," says Harald Stoeber, the chairman of Mannesmann Arcor, the biggest rival to Deutsche Telekom, in an interview at his office in Eschborn, on the outskirts of Frankfurt. "We have to build trust. It will take two or three years."
It will also take ingenuity. For big as the prize is -- Germany's 36 million residential customers are responsible for 60% of the country's phone traffic -- the marketing hurdles seem bigger. Competitors must contend with Germany's unusual restrictions on advertising, the enormous firepower of Deutsche Telekom and a relatively undeveloped consumer culture attached almost umbilically to the 120-year-old telephone titan.
"The problem of customers' loyalty to Deutsche Telekom is a dangerous one," says Georg Obermeier, chairman of Viag AG, which has teamed up with British Telecommunications PLC and the Norwegian company Telenor AS to form Viag Interkom GmbH, based in Munich. "Loyalty is a typical German feature," he adds. "We'll have to work hard, using a Marlboro marketing approach."
It will be a challenge, certainly, to make customers associate dialing Dusseldorf with a cattle drive and the rough-hewn cowboys of the American West. Phone service is far more prosaic -- and complicated -- than cigarettes. That's partly why new phone carriers have never found it easy to sign up households. Despite cheaper alternatives in the U.K., BT still controls 90% of residential phone lines. In the U.S., it was years before MCI Communications Corp. and Sprint Corp. stole significant long-distance market share from AT&T Corp. Even today, for all the incessant shilling of TV and print advertising, about 65% of American households haven't sub scribed to a discount phone plan.
"Companies spend billions of dollars marketing these programs and get little reaction for them," says Brian Adamik, analyst at Boston-based Yankee Group.
Germany has nothing like America's consumer-driven culture. It actually appears to have millions of uninterested customers: A Yankee Group survey found that 36% of Deutsche Telekom customers weren't willing to switch at all, while 46% said they were "undecided." A Price Waterhouse survey showed that only 40% of Germans would consider changing phone carriers.
Forget apathy: German phone companies don't even have the marketing freedom enjoyed elsewhere. Stringent privacy laws forbid companies from cold-calling potential customers and persuading them to switch. Phone operators can't advertise their prices by comparing them with rates offered by others.
Such rules "are a nightmare," says Ulf Bohla, chairman of o.tel.o., the third main German competitor, in an interview. "You have to think up different distribution strategies."
It may even be tough to lure away big-spending consumers from Deutsche Telekom, partly because many consumers are already confused by the existing complex tariff system, and a barrage of alternative offers isn't necessarily welcome. Alexander Lambsdorff, an official in the Foreign Ministry in Bonn, runs up monthly home bills of 400 marks or so that would decline substantially if he joined one of the phone rivals. But he's sticking with Deutsche Telekom. "They're all sending me junk mail -- o.tel.o, Mannesmann Arcor, you name it. I just don't have time to look at this stuff."
The Burden of Confusion
Phone prices are determined not only by time of day, but the specific distance called and other criteria. Deutsche Telekom's own rate plan lists more than a hundred prices, which vary by discount, the number of calling "units," and whether the call travels on a regular line or a high-speed one. "Competition puts a lot of burden on customers," notes Mr. Bohla, the o.tel.o chief. "They have to learn to deal with it."
Part of that burden is confusion. Deutsche Telekom recently ran an ad campaign touting price reductions of up to 46%. But many of the big discounts were available only for overseas calls placed in the middle of the night. Thus, Deutsche Telekom had cut its prices overall by only 4% on average, a spokesman for o.tel.o points out. Deutsche Telekom partly concedes the point, but argues that there have been plenty of large cuts made for domestic calls during regular hours -- for example long-distance calls placed for four minutes or longer, which are up to 33% cheaper.
"I get the feeling that every company is trying to out-trick the other," says Boris Zlender, the owner of a small carpet-distributing business in Duesseldorf. "Now Deutsche Telekom says it will cut its rates. It's all too confusing." He isn't switching either.
Even many customers willing to try an alternative carrier aren't doing so wholeheartedly. Rather than sign a contract and switch outright, they punch a five-digit code and use a rival carrier only for certain long-distance calls.
The Early Lead
Mannesmann, whose investors include AT&T and AirTouch Communications Inc. of the U.S., has more than 500,000 residential calls traveling over its network each day. But it won't disclose how many of those calls are placed by fully switched customers. "The number is meeting our expectations," a spokeswoman says. The danger is that many of Mannesmann's customers could use another carrier's lines just as easily, making it tough for the company to anticipate future revenue.
Still, Mannesmann has the early lead in the residential market. It expects to invest up to four billion marks ($2.2 billion) in its network over the next five years and win 10% of the long-distance market, according to Mr. Stoeber, the chairman. It expects initially to earn more revenue from corporate customers than from households, "but two years from now, 50% of our revenues could come from the residential business and 50% from corporate customers," Mr. Stoeber says.
Other carriers are lagging a bit. O.tel.o, a venture between utility company RWE and industrial group Veba AG, has signed up 800 businesses, but it launched residential service only last week, undercutting Deutsche Telekom's prices by 15% to 20%. "We envision we'll get 12% to 17% of the market we serve by 2005, excluding local calls," says Mr. Bohla, the chairman of o.tel.o.
Like o.tel.o, The third rival, Viag Interkom, hopes to take advantage of the rampant customer confusion with a simple offer -- only two prices for two different times of day. But the company is already running three months late and won't begin offering service until May. And it is unclear how consumers will respond to its unusual game plan -- to mesh a traditional "fixed" network with a separate mobile-phone one. The idea is that a customer will own a single mobile phone, with one number, that can be used to place higher-priced wireless calls while on the road, and cheaper calls while at home.
Latecomer's Advantage
Marrying two different technologies is a complex task, and the company will initially provide service in only eight German cities. It hopes to cover the entire country by 2001. "We have the advantage of a latecomer," insists Mr. Obermeier, during a conversation at Viag's headquarters in Munich. "The technical problems," he says, "are normal for a new business and solvable."
And what does Deutsche Telekom make of all this? "Many people don't like us because we treated them badly for dozens of years," acknowledges Chairman Ron Sommer, during a recent interview at his plush office in Bonn. "But we've worked very hard to be ready for competition. We're going to be a zero-defect company."
Fighting words -- but Deutsche Telekom has certainly come a long way in refurbishing its once-clunky image. Although it recently reported poor results because of problems in certain overseas operations -- an investment in Asia and weak performance at Global One, its venture with France Telecom SA and Sprint -- the former German monopoly is a force to be reckoned with at home.
Deutsche Telekom's 1.6 million kilometers of phone lines snake into virtually every house and business in Germany. It has the indirect backing of the government, which sees it as a major force in the economy and still owns 61% of its equity. And, unlike its rivals, it knows the pattern and volume of calls placed by residential customers -- marketing intelligence that will prove invaluable.
'A Seed of Doubt'
"Customers are bombarded with Deutsche Telekom messages saying, 'We're changing,' " notes James Riddiough, London-based telecom analyst at Price Waterhouse. "There's a seed of doubt being sown in people's minds" that may persuade them to stay with the former monopoly, he adds.
Investors have turned more optimistic lately. New regulations favoring competitors pushed down Deutsche Telekom's shares late last year to the 30-mark level -- the price at which it went public in 1996 -- where they stagnated until January. But after three months of competition, Deutsche Telekom's shares have actually risen by about 30%, perhaps an indication that investors aren't too worried about new competitors.
Mr. Sommer asserts that Deutsche Telekom is changing internally as well. "In the past, when people called our directory assistance, the operator would yell at them," says Mr. Sommer, who previously spearheaded Sony Corp.'s European operations. "Now they're efficient and friendly."
Perhaps. But as part of its makeover, Deutsche Telekom has also adopted a newly combative style. For rivals, at least, that's proving decidedly unfriendly.
When Deutsche Telekom recently proposed charging customers a $50 fee when they switched to another carrier, competitors howled in protest. Consumer advocates recommended that households adopt a wait-and-see attitude -- which they did. "The switching fee has definitely caused insecurity among customers," says Barbara Koegler, a spokeswoman for Mannesmann Arcor.
Giant Dragged to Court
Other squabbles have erupted, making it tougher for new entrants to sign up residential customers. TelePassport Service Gmbh, a tiny Frankfurt-based operator that uses Deutsche Telekom's lines to offer its own service to homes and businesses, recently dragged the German giant to court. TelePassport alleged that Deutsche Telekom had sent letters and made phone calls to some customers who wanted to sign up with TelePassport, and asked them to stay put.
Deutsche Telekom "offered them [a certain amount of] free service if they didn't switch," says Georg Hofer, TelePassport's managing director, brandishing one such letter he claims Deutsche Telekom sent a customer. "But we got injunctions" preventing Deutsche Telekom from mailing additional come-ons, as well as calling customers, he adds.
A spokesman for Deutsche Telekom says "there's no official marketing campaign to work in this manner," and suggests it could have occurred at one of its local offices.
About 120,000 customers use TelePassport's service today. But the truly valuable ones -- those that are fully switched, or "pre-selected," and therefore make all calls via TelePassport -- are mainly businesses. Most residential customers prefer to use the company's service only on a call-by-call basis. The reason: Deutsche Telekom charges TelePassport a special fee for handling a pre-selected customer; to offset that, TelePassport requires pre-selected customers to sign a one-year to three-year contract.
Although business is good, "there's a set of customers out there who don't want to sign contracts," concedes Benjamin Heckscher, an executive in charge of business development at TelePassport.
Deutsche Telekom is counting on one other advantage to help it shore up the residential business for years to come: Some 67% of the 60 billion phone calls made each year in Germany are made to local destinations. However, because of hefty infrastructure costs and low margins, rivals aren't rushing into the local-calling business. The upshot: Few competitors will be able to match Deutsche Telekom's full suite of local and long-distance offerings, and millions of Germans may be loath to switch.
People like Fee Altmann, a 27-year-old resident of Bonn who makes plenty of local calls, but only a few to distant places. "Is saving eight pfennig per minute really worth it?" she says. "Besides, I can never remember the number [for the competition.] What was it again?"
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