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United Internet & The German Fiber Market

Former Director at 1&1 Versatel

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Executive Bio

Former Director at 1&1 Versatel

The executive has over 20 years in the European telecom industry and enjoyed over 8 years working at Versatel during the PE ownership of Apax Partners and KKR. He led sales during the first years of post-United Internet deal. The executive left Versatel to become the lead partner for the fixed net and fibre practice at a leading strategy consultant.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

What was the reason you left Versatel?

The whole time I knew Versatel, it was a very entrepreneurial company driven by private equity companies, with a very strict but very goal-oriented management. This changed considerably with the sale to United Internet. Mr. Dommermuth is to be admired. He's a great entrepreneur but he has a highlander principle, so it only can be one. All decisions needed to be done in Montabaur. Being a very busy person, sometimes we had to wait weeks for a decision. This was not motivating. So on the whole, many people left and, eventually, I did the same.

Has this changed today or do you still talk to some of your old Versatel colleagues?

I personally believe Mr. Dommermuth was highly disappointed about the acquisition and how it went after because he had other high hopes of what he wanted to achieve and then was confronted with reality.

I think it has changed because most of them managed to find their role within the UI Group in a way, as the infrastructure player around the core business. However, there's still a lot of challenges which are not solved. I saw lots of management changes in the last couple of years, especially in terms of sales, but also in technology and operations department. I think it was two years back in a workshop at Versatel – it was a technical workshop with external or internal managers – and the few people I knew, they were all very, very frustrated because there was so much knowledge, know-how and experience gone over the time. So that’s my impression.

Regarding the fiber penetration in Germany, all the time people speak about now is the right time fiber is coming big time to the market and I think this has basically been a disappointment every time. What are the reasons for it and is now the time that this is coming or how do you see it?

It's true. We were one of the first providers in the market to start betting on fiber and it seems we were way too early, which is a problem. We were doing so just because Versatel was the third biggest DSL player in the market with our own DSL network. The only thing Versatel owned was a large fiber infrastructure inherited by former acquisitions but not utilized at all. We thought it was a good idea and fiber was the way to go for the future. This was the change we implemented in a project called Transform over the years 2012 to 2014. After the acquisition through United Internet, we were very focused and tried to invest and penetrate the fiber footprint.

But the problem is, it’s like the term digitalization. Polytech companies, everybody wants it but many people have a different understanding and only very few really understand it. When it comes to cost and who's going to pay then that's a different story. I think that's the same as fiber. We started and I think there was a right decision and I think it's still valid today to start with business networks because private people, there's only very few who really want to have fiber unless it costs the same. It’s very cost focused for many people, especially with the private residential business market.

You probably may know that people are hunting for a €5 discount in their mobile contracts and it's the same when you have to pay €30 euros for these contracts with 50Mb. An ordinary private household will not have any problems with 50Mb unless you have Netflix HD and you have two kids who are 15, 16-year-olds who are watching YouTube at the same time in high definition. I would say 95% of private households have no problem with DSL 50Mb and only very few are willing to pay and upgrade for fiber penetration.

It's businesses who should be the driver and when people talk about the business markets, there is no such thing as a business market. We did several market segmentation projects at Versatel to really directly address the certain market segments, their specific needs, which is incredibly difficult but generally speaking it's very generic. It's the multinationals, big corporations with lots of locations who definitely and urgently need connection solutions, networks, own private networks and then need to have their locations and production sites connected.

So they're in high demand and those are the companies who, even in 2011 and before, had fiber connections because in a complex corporate network, the main location with maybe 1,000 or 5,000 employees or even a production site, a factory, even 10 years ago they needed a fiber connection in order to have a stable, reliable service.

Today all the corporations above 1,000 people are basically on fiber and now it’s about the smaller companies?

Yes.

The approach is to identify business clusters in cities where there is no fiber. Can you explain for me a bit on a go-to-market approach like this, how do you identify these areas? How do you set up the project, talk to the local businesses and the communities and then also conduct a bid and what is the time horizon for such a project? How large are these projects usually and when do you start building? First you collect the data and contacts and so on?

With several stakeholders including KKR but also Mr. Dommermuth himself, we tried numerous ways to approach these segments and, until 2019, I think all big players had that trouble, including Deutsche Telekom and Vodafone. Vodafone halted their business area campaign temporarily, so they all had the same problem. The main issue is to really identify the companies which are present at a very local and micro level site; secondly, to identify the decision-makers; and thirdly, to identify what the connectivity needs are.

You can segment these companies by their company size so there are ways to enrich the data with how many employees and sales revenue clusters which is maybe rough but it’s a first indication. The second and probably better indication is the industry cluster because, if you have a construction company with 30 employees and 20 of these employees are digging the whole day, then you probably don't have connectivity needs. But maybe a small internet agency that has 15 people, they will have very high benefits; the industry cluster is a high indicator.

Then it comes to the real need for connectivity is companies which are separated in several locations that have a lot of collaboration needs. Mainly, those companies have increasingly infrastructure in the cloud so they need constant connection and high-performance connection. This is incredibly difficult to identify if you have a business area and you have Company A; where is the headquarters of this company? Is it only a subsidiary? Is it an outpost with some decision-makers? Which functions are present on site? Is it only a warehouse site where you probably don't have much connectivity needs or where you have a central warehouse which is highly connected?

This is very, very difficult. We tried to go to the local level in sending sales reps, going from house to house and knocking on every door and asking; these Ranger kind of sales campaigns. It’s very costly, very ineffective and not very successful. We tried it with partners including Ranger who are very experienced in this door-to-door marketing; they were also not successful. We tried it with online campaigns.

You have a high number of people who are interested, however those who are able to make the decisions are limited. Sometimes they just sign their name and later you find that they’re not authorized. The sales reps just try to get their signature and later it's going to be cancelled. Another point of complexity is, after doing the initial pre-sales or the sales itself, it's actually making the connection because a very high number of these companies do not own the properties; they're renting it. Even if they have high demand and they immediately would like to sign, you need to identify the owner of the property and then to get their permission to enter it.

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