Annual Report 2013

Market expectations.

Germany.

Overall, we expect the downward trend in the telecommunications market in Germany to continue in 2014 and 2015. In addition to the intense competitive environment, this is also due to the change in customers’ usage patterns. They are shifting their communication activities to social networks such as Facebook or Google+, or to IP messaging applications such as Joyn or WhatsApp.

Traditional voice revenues in the fixed and mobile networks continue to fall due to the bundling of voice telephony with other telecommunications products and the price reduction that this entails, for example in the form of flat rates.

We also expect mobile service revenues to decrease further, mainly as a consequence of the substitution of text messaging by integrated rate plans and the use of IP messaging services, which are mostly free of charge. Expected regulatory price cuts serve to increase the negative trend in revenue – for example the price cuts for roaming within the European Union from July 2014 and for national termination from December 2014.

The popularity of mobile data services continues to rise, which has a positive impact on data revenues and compensates the decrease of mobile service revenues. The increasing spread of smartphones and tablets will have a positive impact on mobile data and Internet usage in the coming years – and therefore also on the sale of data flat rates.

In the fixed-network broadband market, we expect cable network operators to continue to grow. We expect growth predominantly in neighboring market segments such as television, intelligent networks, De-Mail, cloud services, machine-to-machine (M2M) services, mobile payment, and cyber security (protection against online crime). Demand for integrated telecommunications products continues to rise among small and medium-sized companies, particularly for secure data transmission in the form of cloud applications. We also expect to see takeovers and mergers on the German telecommunications market.

United States.

The U.S. mobile market continues to be characterized by intense competition among the major mobile carriers -- wireless pricing plans have been dynamic in 2013, and customer investments have risen. Data continues to be a growth driver, and despite the high level of competition, the U.S. mobile market is expected to grow from mobile broadband data services in 2014 and 2015, which is expected to offset declining revenues from voice and text services. “No-contract” product offerings are also expected to grow in popularity.

Europe.

Our European markets (excluding Germany) are dominated by tough competition between market players from the traditional telecommunications industry, alternative broadband providers such as cable and optical fiber network operators, and providers of Internet-based over-the-top services such as text messaging (e.g., WhatsApp) and Internet TV (e.g., Watchever).

We expect decisions by national regulatory authorities and the European Union to continue to put the markets under pressure and have a negative impact on mobile revenues in future. Our growth areas will only partially be able to compensate for decreased revenue from traditional telephony. These include mobile data services, television, broadband fixed network, ICT services, and adjacent business areas such as energy, Internet services, and handset insurance. On top of that, the strong growth in the popularity of smartphones and tablets will lead to heavy demand for higher bandwidths.

The macroeconomic conditions in some of our Southern and Eastern European footprint markets remain tough. There is a possibility that the governments in some of the countries within the Europe operating segment may look to improve their financial situation by imposing fiscal measures on the telecommunications market.

Systems Solutions.

Due to the anticipated recovery in the global economy, we expect the growth trend in the ICT market to increase again in 2014 and 2015. We anticipate that the ICT market will continue to be dominated by ongoing cost pressure and strong competition. Overall demand is constantly changing. The following aspects in particular change the market: cloud services, big data (storage, preparation, processing, and analysis of large volumes of data), intelligent networks (Industry 4.0, Internet of Things, M2M), and mobilizing business processes (use of mobile devices in a company’s business processes).

We expect the markets in our market segments to develop in different ways:

Telecommunications: Various factors are generating new challenges in the hotly contested telecommunications market: innovative change, the increasing intensity of competition, the continued price erosion and intervention by state regulatory authorities. Business with mobile data services will continue to grow in the coming years, whereas business with fixed-network voice telephony will decrease. The macroeconomic trend has only a slight impact on the telecommunications market.