German mobile market no longer a haven as competition heats up
* 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 (Reuters) - 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."
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