2. ECONOMIC REPORT
2.1 General economic and sector conditions
General economic development
As a result of the coronavirus pandemic, the International Monetary Fund (IMF) already downgraded its growth forecasts for the global economy in 2020 after the first quarter of 2020. In its updated outlook (World Economic Outlook, Update April 2020), the IMF drastically reduced its forecast by -6.3 percentage points (compared to its January outlook) to -3.0%. The IMF was thus already anticipating the worst recession since the Great Depression of the 1930s.
In its latest update on January 26, 2021, the IMF reported – based on preliminary calculations – a decline for the global economy of -3.5% in 2020. Growth was thus well below the prior-year figure (+2.8%) and also 6.8 percentage points below the IMF’s outlook in January 2020 (+3.3%).
The Fund also downgraded its forecasts for the United Internet Group’s target markets in North America during the past year. Its most recent forecast is a decline of -3.4% for the USA (prior year: +2.2%), and thus 5.4 percentage points lower than in its January outlook. The forecast of -5.5% for Canada (prior year: +1.9%) is 7.3 percentage points less than originally expected. And for Mexico, the IMF forecasts a decline in economic output of -8.5% (prior year: -0.1%), and thus 9.5 percentage points lower than at the beginning of the year.
The picture is similar in United Internet’s important eurozone region. The IMF has also drastically downgraded its forecast for the region and now expects economic output to fall by -7.2% (prior year: +1.3%) – 8.5 percentage points less than in January. The forecast for France was downgraded to -9.0% (prior year: +1.5%), for Italy to -9.2% (prior year: +0.3%), and for Spain to -11.1% (prior year: +2.0%). This corresponds to a decrease of 10.3 percentage points for France, 9.7 percentage points for Italy, and 12.7 percentage points for Spain compared to the January outlook.
For the UK, the IMF now expects a recession of -10.0% (prior year: +1.4%), and thus 11.4 percentage points lower than at the beginning of the year.
The IMF also downgraded its economic forecast for Germany – United Internet’s most important market by far (sales share 2020: over 91%) – by 6.5 percentage points during the past year and expects economic output to fall by -5.4% (prior year: +0.6%).
The IMF’s calculations for Germany are below the preliminary figures of the country’s Federal Statistics Office (Destatis), which calculated a (price adjusted) decline in gross domestic product (GDP) of -5.0% (prior year: +0.6%). Following ten years of growth, the German economy thus entered into a severe recession in the corona crisis year 2020, similar to that of the global financial and economic crisis of 2008/2009. However, the economic decline was less severe than the recession of -5.7% in 2009. After price and calendar adjustments, German GDP fell by -5.3% in 2020, as the past year had more working days than 2019.
Changes in growth forecasts made during 2020 for United Internet’s key target countries and regions
Source: International Monetary Fund, World Economic Outlook (Update), January 2021
Multi-period overview: GDP trend in United Internet’s key target countries and regions
Source: International Monetary Fund, World Economic Outlook (Update), January 2021
Multi-period overview: development of price-adjusted GDP in Germany
Source: Destatis, January 2021
Development of sector / core markets
At its annual press conference (January 13, 2021), the industry association Bitkom forecast a decline of -0.6% (prior year: +1.9%) to € 169.8 billion for the German ICT market in 2020. At the beginning of 2020, and thus prior to the coronavirus pandemic, the association had still anticipated revenue growth of +1.5%. Despite the decline, the German ICT sector has thus come through the coronavirus crisis comparatively well so far.
The decline in the overall ICT market resulted in particular from falling information technology sales. According to Bitkom’s 2020 forecast, sales in this largest submarket fell by -0.7% (prior year: +4.0%) to € 94.6 billion – after growth of +2.7% had been expected at the beginning of the year. The individual segments developed very differently: +3.2% for IT hardware (prior year: +3.2%), -1.0% for software (prior year: +7.3%), and -3.2% for IT services (prior year: +2.4%). The consistently positive development of IT hardware – despite the pandemic – also resulted from United Internet’s strongly growing core business, cloud computing, as IT infrastructure is increasingly rented instead of purchased. The Infrastructure-as-a-Service subsegment (i.e., business with rented servers, network and storage capacities) grew by 39.5% to € 2.1 billion in 2020.
The telecommunications submarket had a stabilizing effect on the overall ICT market. For this second core market of United Internet, the industry association expects only a moderate decline of -0.1% (prior year: +0.1%) to € 66.7 billion – after growth of +1.0% was expected at the beginning of the year. The individual segments of the telecommunications market also developed quite differently: +0.3% for user devices (prior year: +0.1%), +0.1% for telecommunication services (prior year: -0.1%), and -2.4% for infrastructure (prior year: +1.5%).
The smallest sub-market, consumer electronics (of no significance for United Internet) continued its decline with a further strong decrease in sales of -3.0% (prior year: -5.6%) to € 8.5 billion. According to Bitkom, even the pandemic-related boom in individual product segments (e.g., game consoles, wearables and headsets) was unable to halt this downward slide.
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, as well as the global cloud computing market, and the German online advertising market 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 2.8%, to 36.2 million in 2020, 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 “22nd TC Market Analysis for Germany 2020” (October 2020). 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 25.6 million and by 0.4 million to 1.9 million. The number of cable connections rose by 0.3 million to 8.7 million. A further
At € 33.0 billion, revenues generated in the landline business in 2020 were slightly up (+0.6%) on the previous year (€ 32.8 billion). 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 25.0% to 168.1 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 6.4 percentage points, from 40.3% in the previous year to 46.7% in 2020.
Key market figures: fixed-line in Germany
Fixed-line revenues (in € billion)
Source: Dialog Consult / VATM, TC Market Analysis for Germany 2020, October 2020
Mobile internet market in Germany
According to estimates of Dialog Consult/VATM in their joint report “22nd TC Market Analysis for Germany 2020”, the number of active SIM cards in the German mobile communications market increased by 8.6 million, or 6.1%, to 148.7 million in 2020. This growth is attributable to so-called M2M SIM cards (machine-to-machine SIM cards), which are used, for example, for the automated exchange of information between machines, vending machines, vehicles, etc. and/or with a central control station, which increased by 9.5 million to 39.1 million. By contrast, the number of personal SIMs decreased by 0.9 million to 109.6 million.
At the same time, mobile revenues rose by +1.6% to € 25.9 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 45.4% to 3.0 GB. At the same time, the number of SIM cards suitable for use in the faster 4G/5G networks rose by 12.9 million to 75.4 million, while 2G/3G SIM cards fell by 13.8 million to 34.2 million.
Key market figures: mobile communications in Germany
Mobile revenues (in € billion)
Source: Dialog Consult / VATM, TC Market Analysis for Germany 2020, October 2020
Global cloud computing market
There was also further dynamic growth in the cloud computing market in 2020. In an update of its study “Forecast Analysis: Public Cloud Services, Worldwide, 2018-2024, 3Q20 Update” (September 2020), Gartner Inc. forecast global growth for public cloud services of +6.1% in 2020, from USD 242.69 billion to USD 257.54 billion.
The market benefited from a “digitization drive” among companies and public authorities as a result of the coronavirus pandemic and the associated lockdowns. On the other hand, cost-cutting measures introduced by companies and public authorities (delays in tenders and order placement) in some areas as a result of the global pandemic-related recession had the effect of restricting growth. As a result, the aforementioned market growth of +6.1% was significantly lower than in the previous year (+22.0%).
It should be noted that 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
Global sales of public cloud services
thereof Application Infrastructure Services (PaaS)
thereof Application Services (SaaS)
thereof System Infrastructure Services (IaaS)
thereof Management and Security Services
thereof Business Process Services (BPaaS)
thereof Cloud Desktop as a Service (DaaS)
Source: Gartner, September 2020
German online advertising market
In its study “German Entertainment and Media Outlook 2020 – 2024” (November 2020), the auditing and consultancy company PricewaterhouseCoopers forecasts a decline in revenues of the German online advertising market of -4.7% to a total of € 8.09 billion in 2020.
PricewaterhouseCoopers believes that this sharp decline is due to lower prices – as a result of the coronavirus pandemic – and the short-term suspension and cancelation of advertising campaigns due to fears of liquidity bottlenecks. PricewaterhouseCoopers thus also sees confirmation of the general trend that, in times of recession, reducing advertising budgets is often the first cost-cutting measure to be taken. Sectors such as tourism and clothing, which have been particularly hard hit by the pandemic, reduced their budgets more sharply than others. In addition, online advertising campaigns can be canceled, suspended, or postponed more flexibly than traditional advertising.
The decline was primarily attributable to desktop advertising, which fell by -8.3% to € 4.22 billion. Mobile advertising, on the other hand, declined by “just” -0.5% to € 3.87 billion.
In terms of advertising formats, display advertising (-10.0%) and affiliates/classifieds (-8.8%) in particular suffered the sharpest declines of the overall market.
Key market figures: online advertising in Germany (mobile advertising & desktop advertising)
in € billion
Online advertising revenues
thereof search marketing
thereof display advertising
thereof affiliate / classifieds
thereof video advertising
Source: PricewaterhouseCoopers, German Entertainment and Media Outlook 2010 – 2024, November 2020
Legal conditions / significant events
The legal parameters for United Internet’s business activities remained largely unchanged from the previous year in 2020 and thus had no significant influence on the development of the United Internet Group.
As a result of the coronavirus pandemic, the International Monetary Fund (IMF) already drastically downgraded its growth forecasts for the global economy in 2020 by -6.3 percentage points to -3.0% after the first quarter of 2020. The IMF was thus already anticipating the worst recession since the Great Depression of the 1930s. Ultimately, the IMF forecast a decline of -3.5% for the global economy, -7.2% for the eurozone economy, and -5.4% for the German economy.
Despite its stable and largely non-cyclical business model, United Internet’s business activities in the fiscal year 2020 were also affected by the economic impact of the coronavirus pandemic – albeit to a much lesser extent than other sectors and companies. United Internet’s Consumer Access and Consumer Applications segments were negatively impacted by the pandemic, while the Business Access segment recorded slightly positive effects. For the Group as a whole, this resulted in negative sales effects of € -25.1 million and negative earnings effects of € -27.2 million. United Internet did not experience any increase in payment defaults as a result of the pandemic.
- Consumer Access Whereas the temporary change in customer behavior caused by the coronavirus pandemic (especially in the field of telephony (voice), due in part to work-from-home regulations and shelter-in-place restrictions) had a positive impact on sales of the Consumer Access segment in the first quarter of 2020, this was outweighed by burdens on sales (especially from reduced international roaming revenue) due to strict temporary travel restrictions for customers in this segment in the following quarters. All in all, there was a resulting negative sales effect of € -24.1 million. At the same time, the aforementioned temporary change in customer usage patterns (particularly in the field of telephony and international roaming) had a negative impact on segment earnings of € -25.2 million (compared to 2020 planning). There were no negative effects in the form of increased payment defaults.
- Business Access By contrast, positive effects from increased telephony (voice) business as a result of the coronavirus pandemic, led to an additional € +3.8 million in sales and € +1.6 million in EBITDA in the Business Access segment.
- Consumer Applications In the Consumer Applications segment, online advertising business in the second quarter in particular, and to some degree also in the third quarter, of 2020 was affected by a decline in the online advertising market due to the marked restraint of many advertisers during the coronavirus pandemic. The loss of marketing business caused by the pandemic impacted sales by a total of € -4.8 million and earnings by € -3.6 million.
Negotiations for a national roaming agreement
In addition to operating activities, the fiscal year 2020 was dominated by preparations for the construction of the Company’s own mobile communications network and the ongoing negotiations for a national roaming agreement needed for the transition period during which 1&1 Drillisch gradually establishes the network. In an ad-hoc announcement on February 15, 2021, 1&1 Drillisch reported that it had accepted Telefónica Germany’s offer – improved following a review by the EU Commission – for national roaming and the related MBA MVNO advance services. The conclusion of an agreement, which Telefónica’s offer expects by approx. mid-May 2021, would constitute an essential prerequisite for the planned rollout of a high-performance 5G mobile communications network.
The prices offered in the national roaming agreement are to apply retroactively from July 2020, also for the existing MBA MVNO agreement. Telefónica had invoiced consistently high advance service prices for the MBA MVNO agreement since July 2020, whereas advance service prices before July 2020 had previously always fallen. This had a negative impact on earnings of the fiscal year 2020.
Telefónica’s national roaming offer is now based again on the pricing mechanisms of the first five years of the MBA MVNO agreement. In particular, the offer again includes annually decreasing data prices, which are lower than the prices currently charged under the MBA MVNO agreement. Based on the period July 1 to December 31, 2020, the conclusion of the agreement would have a positive earnings effect for 1&1 Drillisch of approx. € 34.4 million, which would be recognized as income relating to other periods in the fiscal year 2021.
Status of price adjustment process
In its financial reporting, 1&1 Drillisch announced that certain advance service prices are the subject of several arbitration proceedings initiated by 1&1 Drillisch, in the course of which 1&1 Drillisch expects binding decisions on the type and amount of permanent price adjustments in the form of retroactively lower advance service prices. In the arbitration proceedings to review a one-time price increase of around € 64 million implemented by Telefónica in December 2018 with reference to the 2015 spectrum auction, the arbitrator submitted the final expert opinion on December 17, 2020. The arbitrator concludes that this price increase is unjustified in full for the period under review (2016 to 2020). Accordingly, it does not lead to any payment obligation on the part of 1&1 Drillisch. Otherwise, there are no more pending arbitration proceedings initiated by Telefónica.
Conversely, in its price adjustment proceedings 2, 5, and 6, 1&1 Drillisch demands significant reductions in the advance service prices of the MBA MVNO contract from Telefónica with retroactive effect.
New combined VDSL/FTTH agreement with Deutsche Telekom
On February 15, 2021, United Internet announced that its subsidiary 1&1 Drillisch AG planned to expand its fiber-optic offering and would in future receive VDSL and FTTH advance services (fiber to the home/FTTH) from its affiliate 1&1 Versatel. For this purpose, 1&1 Drillisch has entered into an agreement with 1&1 Versatel on the long-term purchase of FTTH and VDSL complete packages including Voice and IPTV effective from April 1, 2021.
At the same time, 1&1 Versatel has entered into an agreement with Deutsche Telekom on the use of Deutsche Telekom’s FTTH and VDSL connections for households. These enable 1&1 Versatel to provide FTTH/VDSL complete packages for 1&1 Drillisch, as 1&1 Versatel’s nationwide transport network is largely connected to the local broadband networks of Deutsche Telekom.
In addition to the existing access to FTTH connections of well-known city carriers, 1&1 Versatel thus gets initial access to approx. 750,000 additional FTTH connections. The number of marketable FTTH connections of Deutsche Telekom is expected to increase by an average of 2 million households per year in the coming years.
FTTH connections for private households enable bandwidths of up to 1 Gbit/s. Households not yet equipped with FTTH will be supplied with VDSL connections (up to 250 Mbit/s).
Given the advantages of the new combined VDSL/FTTH agreement, the existing purely VDSL advance service agreement between 1&1 Drillisch and Deutsche Telekom will be prematurely terminated by mutual agreement of the parties. As the premature termination of the agreement and the swift conclusion of the new agreement had already been sufficiently specified as at the reporting date, the 1&1 Drillisch subgroup wrote off deferred expenses (amounting to € 129.9 million) in the fiscal year 2020 due to a revised estimate of the remaining term of the agreement. The one-off special item has no cash effect and will be clearly exceeded by the positive effects from the expanded cooperation with Deutsche Telekom in the long-run.
The new FTTH/VDSL agreement with Deutsche Telekom is subject to approval by the Federal Network Agency (“Bundesnetzagentur”) as the competent regulatory authority.
There were no other significant events in fiscal 2020 which had a material effect on the development of business.