2. Economic Report
2.1 General economic and sector conditions
General economic development
The International Monetary Fund (IMF) downgraded its forecasts for the global economy several times in the course of 2019. In the latest update to its “World Economic Outlook” on January 20, 2020, the Fund reported preliminary growth for the global economy of 2.9% in 2019. Growth was thus well below the prior-year figure (3.6%) and also 0.6 percentage points below the IMF’s outlook in January 2019 (3.5%).
Among other things, the Fund attributed this weaker-than-expected global economic trend to increasing trade barriers and growing uncertainty due to geopolitical risks.
From the point of view of United Internet, the economies of its current target markets all performed worse than originally expected. At the same time, the pace of economic growth in United Internet’s target markets was also slower than in the previous year.
With growth of 2.3% in 2019, the US economy fell considerably short of its prior-year figure (2.9%) and of the IMF’s expectations at the beginning of the year (outlook January 2019: 2.5%). Economic growth of 1.5% in Canada was also well below the prior-year figure (1.9%) and likewise failed to reach the IMF’s original expectations (1.9%). The Mexican economy stagnated with growth of 0.0%, falling well short of the prior-year figure (2.1%) and the IMF forecast (2.1%).
At 1.2%, economic growth in the eurozone was much lower than in the previous year (1.9%) and also below the IMF’s original expectations (1.6%).
In France, the 1.3% increase in economic output was both below the prior-year level (1.5%) and original expectations (1.7%). With economic growth of 2.0%, Spain failed to match its prior-year figure (2.4%) and the IMF’s original forecast (2.2%). The same applies to Italy, where growth of just 0.2% was well below both the prior-year level (0.8%) and the original forecast of the IMF (0.6%).
With growth of 1.3%, the economic trend in the non-euro country UK was unchanged from the previous year but also below the IMF’s original expectations (1.5%).
The IMF calculated economic growth of just 0.5% for Germany, United Internet’s most important market (sales share 2019: almost 92%), for 2019. This is 1.0 percentage point less than in the previous year (1.5%) and 0.8 percentage points below the original expectations (1.3%). The IMF’s calculations for Germany are also largely in line with the preliminary figures of the country’s Federal Statistics Office (Destatis), which calculated growth (after price and calendar adjustments) in gross domestic product (GDP) of 0.6% (prior year: 1.5%).
Changes in growth forecasts made during 2019 for United Internet’s key target countries and regions
| January | April | July | October | Actual 2019 | Change on |
World | 3.5% | 3.3% | 3.2% | 3.0% | 2.9% | -0.6%-points |
USA | 2.5% | 2.3% | 2.6% | 2.4% | 2.3% | -0.2%-points |
Canada | 1.9% | 1.5% | 1.5% | 1.5% | 1.5% | -0.4%-points |
Mexico | 2.1% | 1.6% | 0.9% | 0.4% | 0.0% | -2.1%-points |
Eurozone | 1.6% | 1.3% | 1.3% | 1.2% | 1.2% | -0.4%-points |
France | 1.5% | 1.3% | 1.3% | 1.2% | 1.3% | -0.2%-points |
Spain | 2.2% | 2.1% | 2.3% | 2.2% | 2.0% | -0.2%-points |
Italy | 0.6% | 0.1% | 0.1% | 0.0% | 0.2% | -0.4%-points |
UK | 1.5% | 1.2% | 1.3% | 1.2% | 1.3% | -0.2%-points |
Germany | 1.3% | 0.8% | 0.7% | 0.5% | 0.5% | -0.8%-points |
Source: International Monetary Fund, World Economic Outlook (Update), January 2020
Multi-period overview: GDP trend in United Internet’s key target countries and regions
| 2015 | 2016 | 2017 | 2018 | 2019 | YoY change |
World | 3.2% | 3.2% | 3.7% | 3.6% | 2.9% | -0.7%-points |
USA | 2.6% | 1.5% | 2.3% | 2.9% | 2.3% | -0.6%-points |
Canada | 0.9% | 1.4% | 3.0% | 1.9% | 1.5% | -0.4%-points |
Mexico | 2.6% | 2.9% | 2.0% | 2.1% | 0.0% | -2.1%-points |
Eurozone | 2.0% | 1.8% | 2.4% | 1.9% | 1.2% | -0.7%-points |
France | 1.3% | 1.2% | 1.8% | 1.7% | 1.3% | -0.4%-points |
Spain | 3.2% | 3.3% | 3.1% | 2.4% | 2.0% | -0.4%-points |
Italy | 0.7% | 0.9% | 1.6% | 0.8% | 0.2% | -0.6%-points |
UK | 2.2% | 1.9% | 1.7% | 1.3% | 1.3% | 0.0%-points |
Germany | 1.5% | 1.9% | 2.5% | 1.5% | 0.5% | -1.0%-points |
Source: International Monetary Fund, World Economic Outlook (Update), January 2020
Multi-period overview: development of price- and calendar-adjusted GDP in Germany
| 2015 | 2016 | 2017 | 2018 | 2019 | YoY change |
GDP | 1.5% | 2.1% | 2.8% | 1.5% | 0.6% | -0.9%-points |
Source: German Federal Statistical Office, January 2020
Development of sector / core markets
At its annual press conference on January 14, 2020, the industry association Bitkom forecast that the ICT market in Germany had grown significantly by 2.0% (prior year: + 2.2%) to € 169.6 billion in 2019. At the beginning of 2019, the association had anticipated that growth would be 0.5 percentage points lower at 1.5%.
With sales of € 92.9 billion and growth of 2.9% (prior year: + 3.5%), the IT sector continued to display the strongest growth and also the largest market volume. Vendors of software (+ 6.3%) and IT services (+ 2.4%) once again posted the strongest growth in 2019.
The telecommunications market recorded growth once again in 2019 with an increase of 2.0% (prior year: + 1.9%) to € 68.1 billion. There were increases in sales of user devices (+ 11.1%) and telecommunication infrastructure (+ 1.5%), while telecommunication services stagnated at the prior-year level.
The consumer electronics market continued its decline with a strong decrease in sales of - 7.7% (prior year: - 6.6%) to € 8.6 billion.
The most important ICT markets for United Internet’s business model are the German telecommunications market (broadband connections and mobile internet) in its mostly subscription-financed Access division, and the global cloud computing, and German online advertising markets for its subscription- and ad-financed Applications division.
(Stationary) broadband market in Germany
In view of the high level of household coverage already achieved and the strong trend toward mobile internet usage, demand for new landline broadband connections in Germany has slowed in recent years. With expected growth of 1.0 million, or 2.9%, to 35.2 million in 2019, the number of new connections was again well below earlier record years. These figures were calculated by the Association of Telecommunications and Value-Added Service Providers (Verband der Anbieter von Telekommunikations- und Mehrwertdiensten – VATM) and Dialog Consult in their joint “21st TC Market Analysis for Germany 2019” (October 2019). Within the above mentioned growth, the connections of relevance for United Internet in the two technology fields of DSL and FTTB/FTTH grew by 0.3 million to 25.3 million and by 0.4 million to 1.5 million. The number of cable connections rose by 0.3 million to 8.4 million. A further 0.1 million connections in Germany are still operated via satellite/powerline.
At € 32.8 billion, revenues generated in United Internet’s landline business remained unchanged from the previous year. In addition to retail sales, these revenue figures also include wholesale, interconnection, and terminal device revenues.
According to calculations of Dialog Consult/VATM, the average volume of data used is rising much more strongly than the number of newly activated connections and landline revenues – as an indicator of continued growth in usage of e.g., IPTV and cloud applications – with growth of 26.0% to 137.1 GB (per connection and month). As a result, demand for more powerful broadband connections also developed strongly. For example, the proportion of switched broadband connections with speeds of at least 50 MBit/s increased by 7.0 percentage points, from 33.3% in the previous year to 40.3% in 2019.
Key market figures: fixed-line in Germany
| 2019 | 2018 | Change |
Fixed-line revenues (in € billion) | 32.8 | 32.8 | 0.0% |
Source: Dialog Consult / VATM, TC Market Analysis for Germany 2019, October 2019
Mobile internet market in Germany
According to estimates of Dialog Consult/VATM in their joint report “21st TC Market Analysis for Germany 2019”, the number of active SIM cards in the German mobile communications market increased by 3.8 million, or 2.8%, to 140.8 million.
Mobile revenues also rose by 2.0% to € 25.6 billion. In addition to retail sales, these revenue figures also include interconnection, wholesale, and user device sales.
According to forecasts of Dialog Consult/VATM, the average volume of data used (per connection and month) – as an indicator of the growing use of mobile data services – grew much faster than the number of SIM cards and mobile revenues by 58.6% to 2.5 GB. At the same time, the number of SIM cards suitable for use in 4G/5G networks rose by 7.3 million to 57.5 million, while 2G/3G SIM cards fell by 3.5 million to 83.3 million.
Key market figures: mobile communications in Germany
| 2019 | 2018 | Change |
Mobile revenues (in € billion) | 25.6 | 25.1 | + 2.0% |
Source: Dialog Consult / VATM, TC Market Analysis for Germany 2019, October 2019
Global cloud computing market
There was also further dynamic growth in the cloud computing market in 2019. In an update of its study “Forecast Analysis: Public Cloud Services, Worldwide” (November 2019), Gartner Inc. forecast global growth for public cloud services of 15.8% in 2019, from $ 196.71 billion to $ 227.80 billion.
Cloud computing is no short-term trend, but represents a fundamental shift in the provision and use of IT services. The aforementioned figures indicate the dynamic potential of this market. IT users get better services for less money with cloud computing. Small and mid-size companies in particular can gain access to IT applications which only major corporations could afford in the past.
Key market figures: cloud computing worldwide
in $ billion | 2019 | 2018 | Change |
Global sales of public cloud services | 227.80 | 196.71 | + 15.8% |
thereof Application Infrastructure Services (PaaS) | 32.23 | 26.35 | + 22.3% |
thereof Application Services (SaaS) | 99.53 | 85.72 | + 16.1% |
thereof System Infrastructure Services (IaaS) | 40.32 | 32.44 | + 24.3% |
thereof Management and Security Services | 12.03 | 10.49 | + 14.7% |
thereof Business Process Services (BPaaS) | 43.69 | 41.71 | + 4.7% |
Source: Gartner, November 2019
German online advertising market
In its study “German Entertainment and Media Outlook 2019-2023” (October 2019), the auditing and consultancy company PricewaterhouseCoopers forecasts an increase in (net) revenues of the German online advertising market of 6.9% to a total of € 8.51 billion in 2019.
With growth of 23.1%, mobile online advertising posted the strongest increase – due in particular to the further sharp rise in the use of mobile devices. However, video advertising and search word marketing also rose strongly once again, with growth of 9.5% and 5.5%, respectively.
Key market figures: online advertising in Germany
in € billion | 2019 | 2018 | Change |
Online advertising revenues | 8.51 | 7.96 | + 6.9% |
thereof search marketing | 3.86 | 3.66 | + 5.5% |
thereof display advertising | 1.66 | 1.62 | + 2.5% |
thereof mobile online advertising | 1.28 | 1.04 | + 23.1% |
thereof affiliate / classifieds | 1.02 | 1.01 | + 1.0% |
thereof video advertising | 0.69 | 0.63 | + 9.5% |
Source: PricewaterhouseCoopers, German Entertainment and Media Outlook 2019 – 2023, October 2019
Legal conditions / significant events
Legal conditions
The legal parameters for United Internet’s business activities remained largely unchanged from the previous year in 2019 and thus had no significant influence on the development of the United Internet Group.
Significant events
- On Juli 1, 2019, the Federal Network Agency (“Bundesnetzagentur“) responsible for regulatory issues in Germany raised prices for the provision of subscriber lines (local loops). This price increase resulted in a burden on EBITDA of € 8.8 million in the fiscal year 2019.
- In its financial reporting, United Internet subsidiary 1&1 Drillisch AG communicated that certain advance service prices are the subject of a number of expert proceedings initiated by 1&1 Drillisch and that, in these proceedings, 1&1 Drillisch expects binding decisions about the kind and amount of permanent price adjustments in the form of retroactively lower advance service prices. On October 24, 2019, 1&1 Drillisch received the draft of the expert determination in the first price adjustment procedure, which was initiated with effect as of September 2017 (Price Review 1). 1&1 Drillisch's application for the advance service prices to be reduced retroactively from this point in time was rejected. It follows from the draft of the expert determination that the financials of 2017 and – at least for the time being – that the 2018 and 2019 results of 1&1 Drillisch do not improve due to price decreases. Also, a price increase due to the lapse of a contractual adjustment mechanism for certain advance service prices that was limited in time to the end of 2018 remained at least for the time being valid. With the final expert determination received on December 19, 2019, the decision announced in the draft version was confirmed. 1&1 Drillisch did not include any price decreases for advance service prices in its annual forecast 2019. However, 1&1 Drillisch expected to be able to avert the price increase effective as of January 2019 in the context of continuously decreasing market prices for mobile data usage. Against this background, United Internet downgraded its EBITDA forecast for the fiscal year 2019 by approx. € 85 million to an EBITDA of around € 1,250 million after receiving the draft of the expert determination on October 24, 2019. 1&1 Drillisch believes the expert determination is wrong for various reasons and sees methodical mistakes and discrepancies in its content. 1&1 Drillisch is also of the opinion that essential characteristics of the MBA model, which was introduced in the context of the merger clearance of the E-Plus takeover, have not been adequately considered. This includes in particular the special privileges of the MBA MVNO. In the interests of its shareholders, 1&1 Drillisch will consider its legal options. The above mentioned price increase ultimately resulted in a burden on EBITDA of € 83.1 million in the fiscal year 2019.
There were no other significant events in fiscal 2019 which had a material effect on the development of business.