* KPN begins push to grow share from about 15 to 20 pct
* Leaders Vodafone, Deutsche Tel seek to protect high-end
* German mobile market seen in a land grab phase
* German leaders have op margin 35-40 pct vs UK's 22-23 pct
By Harro Ten Wolde and Leila Abboud
FRANKFURT/PARIS, April 4 A turf war has broken
out among Germany's mobile operators as KPN seeks to
close the gap on Vodafone and Deutsche Telekom, raising the
prospect of a once-cosy market descending into the
profit-crunching battle found elsewhere in Europe.
As German consumers catch up with the rest of the continent
by switching to smartphones from basic mobiles, the country's
four operators are revamping tariffs to focus more on mobile
Internet and hiking spending on advertising campaigns.
The stiffer competition has surprised investors, who only a
few months ago saw Germany as a haven of growth and high margins
in a sector struggling to grow in France, Britain, Spain and
Italy because of regulatory pressure, price wars and recession.
Lothar Schroeder, vice-chairman of Deutsche Telekom's
supervisory board, said Germany's mobile market was
headed for a reckoning.
"Telecom operators are fighting a fierce battle for market
share. That is because there is hardly anything to gain on the
cost side," he said, referring to how companies have already cut
costs to boost profit margins.
Given its size, a deterioration in the European Union's
largest mobile market - with 114.2 million subscribers at the
end of the third quarter - would weigh heavily on market leaders
Deutsche Telekom and Vodafone, as well as Telefonica
, which last year floated 20 percent of its German arm
O2, and KPN's E-Plus unit.
Although investor attention has focused more on Germany's
fixed-line telecoms market recently, where Deutsche Telekom is
losing broadband customers to cable and Vodafone has looked at
buying Kabel Deutschland, fourth-quarter results at
all four mobile operators showed weaker trends.
Bernstein Research predicts regulation and price competition
will cause German mobile service revenue to fall 0.7 percent
this year, 2.6 percent in 2014, and 2.5 percent in 2015.
KPN and Telefonica share around 32 percent of wireless
revenues in Germany by focusing on urban, budget-conscious
customers who usually pay for their own phones.
Meanwhile Deutsche Telekom and Vodafone, which each took 34
percent of 2012 mobile service revenue, slug it out for one or
two-year contract customers who want help buying their mobiles.
Both have also spent billions on building superfast 4G mobile
networks, and are signing up customers to more expensive offers.
The equilibrium is being upset by KPN's ambition, outlined
in February, to boost its long-term market share to 20 percent
by going beyond its stronghold in pre-paid business, where users
typically buy only voice and texts and little mobile data.
KPN embarked on this course out of necessity, after it
failed to sell its German unit to Telefonica last year and could
not afford the best 4G mobile spectrum in the 800 megahertz
band, leaving it at a disadvantage to bigger rivals. KPN will
sacrifice profit for higher share, saying operating margins will
be below 30 percent this year from 39 percent in 2012.
The Dutch group pledges a "long-term" margin recovery to
30-35 percent but has given no specifics on timing.
KPN also hiked TV ad spending in Germany by 62 percent in
the first three months of 2013, according to research firm
Nielsen. Deutsche Telekom and Vodafone more than doubled theirs.
Just how ugly it gets will likely depend on how aggressively
KPN woos higher-spending customers from Vodafone and Deutsche
Telekom, and how the big players respond.
"KPN could be going on the offensive to make a nuisance of
themselves in the aim of getting another bid for the company,"
said Espirito Santo analyst Nick Brown. "But in the meantime KPN
can cause a lot of pain even if their network quality is worse
than competitors. Germany is in a land grab phase."
Vodafone and Deutsche Telekom enjoy operating profit margins
in Germany of 35-40 percent, while Telefonica's are at 26
percent and improving. In contrast, France's big carriers have
mobile margins in the low 30s, while the three largest operators
in Britain had operating margins at 22-23 percent last year.
In response to questions from Reuters, KPN said in an email
it did not "intend to go to war" on prices but would aim to sign
up more "cost-conscious" contract customers by emphasizing
mobile data and selectively subsidising smartphones.
Telefonica's 02 Germany is also looking to grow with its new
Blue tariffs launched in March, which pair unlimited calls and
texts with a chunk of data of between 50MB to 500MB on 3G and
2GB to 5GB in 4G for between 19.99-49.99 euros per month.
CEO Rene Schuster told Reuters in February he was surprised
at how quickly the German market was changing.
Analysts from Jefferies and Bernstein say O2 is better
placed than KPN to win long-term because of its planned 4G
roll-out and its focus on quality services as well as value.
One important catalyst allowing KPN and Telefonica to go on
the attack is Germany's reduction by nearly half this year of
so-called mobile termination fees (MTRs) that operators charge
each other each time a customer ends a call on their network. As
MTRs drop, it gets cheaper for challenger mobile operators to
cut prices since they will owe less in fees.
Deutsche Telekom and Vodafone have said they are confident
of keeping their best customers thanks to their 4G networks.
Vodafone CEO Vittorio Colao vowed in February to protect its
position in Germany, but played down the threat and signalled it
would not slash prices or splash out on phone subsidies.
"We are not willing to give up customers who have long-term
value with us," said Colao. "But we are also really focused on
the value that these markets have to create and the capital
amount that is put on those markets."
Deutsche Telekom has flagged to investors that it may have
to spend an additional 200 million euros in marketing costs,
including mobile subsidies, to stabilise market share this year.
A Germany-based fund manager, who owns shares in the four
operators, recognised the tougher climate, but was optimistic
reason would prevail among the competitors.
"I don't expect to see in Germany what we have seen in
France or in the Netherlands," he said. "It would not serve the
interests of any of the four players. They earn margins of 25-40
percent in the German market, which makes it a nice cash cow."