Deutsche Telekom eyes saving billions in broadband upgrade

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Analyst recommends German incumbent look at VDSL plus vectoring to boost speeds. Deutsche Telekom AG is eyeing a possible shortcut in its efforts to boost broadband speeds in Germany that could save it billions of euros.

The German telecom giant, like other former state telephone monopolies in Europe, has been looking for ways to upgrade its domestic fixed-line network to feed growing demand for bandwidth and to fight competition from cable operators, which can offer Internet speeds of 100 megabits per second at relatively low cost.

Deutsche Telekom’s so-called VDSL network, in comparison, can only offer speeds half as fast because the last part of the transmission is still handled by old-fashioned copper wires.

The problem underscores the dilemma facing Europe’s former telecom monopolies, who are under pressure to upgrade networks to cope with an increasingly data-hungry world of video streaming and Internet TV, at a time when their revenues are being crimpled by fierce competition as well as regulation.

One way for Deutsche Telekom to resolve the problem would be to connect households straight to a super-fast fiber optics network, an approach known as fiber-to-the-home or FTTH, which is being rolled out across France and in parts of the U.K., but so far only to a limited extent in Germany.

JP Morgan analyst Hannes Wittig estimates this could cost Deutsche Telekom around 40 billion euros ($49 billion), a large outlay at a time when the company is grappling with slow markets outside Germany and is looking for a solution for its ailing T-Mobile USA wireless unit.

A technology called vectoring, being tested in countries like the U.K. and Austria, may offer an unexpected answer.

Vectoring increases transmission capacity of copper lines, potentially pushing the speed of Deutsche Telekom’s lines up to 100 Mbps and offering a real alternative to cable.

An expansion of VDSL along with the use of vectoring would cost Deutsche Telekom only EUR5 billion to EUR6 billion — a dramatic saving, according to Mr. Wittig from JP Morgan.

Such a relatively cheap solution for German fixed-line expansion would be a boon for shareholders, who mainly invest in Deutsche Telekom shares because of the firm’s high dividend payments. The company hasn’t laid out its dividend strategy beyond 2012 so far, and potentially high investments in Germany may raise the question whether Deutsche Telekom can maintain its current payout level.

In a research note, JP Morgan’s Mr. Wittig argues that Germany’s telecom infrastructure is especially suited to the vectoring technology because Germany has a high density of street cabinets, which bundle the copper lines running out to individual homes.

Deutsche Telekom would only have to connect more of those cabinets to its fiber optics network and use vectoring to boost the speed of the copper lines that connect the cabinets with customers’ houses, Mr. Wittig says.

Deutsche Telekom Chief Executive Rene Obermann said in an analyst call following second-quarter earnings earlier this month that the company’s own ideas about the issue are consistent with JP Morgan’s suggestion.

“We can satisfy most of the customer appetite with VDSL, but (…) in the future we may have to do the vectoring” to improve the network’s speed, Mr. Obermann said.