Crossroads

At the intersection of technology, finance and the Pacific Rim.

Monday, October 23, 2006

German Broadband

As noted in the class, Europe and Asia have lagged behind the US in the introduction of competition in their telecom industry. In part, sheer size may be one explanation. With the larger scaled economy, the US may be in a position to allow greater number of competitors in the industry. These competitors will often compete on a local or regional basis and then aggregate and expand through M&A. This process in itself helps builds competition since companies are constantly striving to increase firm value. A second reason is finance: as we have noted, it is expensive to build a telecom network (even wireless); but as we have seen in cases like Clearwire, it is entirely possible for an entrepreneur in the US to raise hundreds of millions of dollars--not just Craig McCaw, but many others as well. The capital markets are tuned for entrepreneurial finance. A third reason is regulatory: less of a "license" regime where firms are selected by bureaucrats, and one more tuned to "open systems".

This article in the Herald Tribune suggests that the broadband landscape is changing in Germany. A number of new start-ups backed by private equity and cities are challenging the dominance of Deutsche Telecom. And it appears to be having an effect: Deutsche Telecom's broadband revenue fell by 6% in the first half of 2006, while its operating profits from this sector fell by 11% to 2.5BN Euro. How can you have declining revenue in what should be a rising market?

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