2. ECONOMIC REPORT

2.1 General economic and sector conditions

General economic development

As a result of the war in Ukraine and high inflation, the International Monetary Fund (IMF) downgraded its forecast for 2022 on several occasions during the year. In its latest economic outlook (World Economic Outlook, Update January 2023), the IMF reported growth of 3.4% for the global economy in 2022, based on preliminary calculations. Growth was thus significantly below the prior-year level (6.2%) and also 1.0 percentage points lower than the IMF’s original outlook in January 2022 (4.4%).

In the United Internet Group’s target markets in North America, growth also fell well short of the IMF’s original expectations (exception: Mexico). The IMF anticipates growth of 2.0% for the USA (prior year: 5.9%), and thus 2.0 percentage points less than in its January outlook. The forecast of 3.5% for Canada (prior year: 5.0%) is 0.6 percentage points less than originally expected. And for Mexico, the IMF forecasts an increase in economic output of 3.1% (prior year: 4.7%), and thus 0.3 percentage points more than at the beginning of the year.

The picture is also similar in United Internet’s important eurozone region. The IMF now expects growth of 3.5% (prior year: 5.3%) and thus 0.4 percentage points less than it forecast in January. Growth of 2.6% was calculated for France (prior year: 6.8%), 3.9% for Italy (prior year: 6.7%), and 5.2% for Spain (prior year: 5.5%). This corresponds to a decrease of 0.9 percentage points for France and 0.6 percentage points for Spain, but an increase of 0.1 percentage points for Italy compared to the January outlook.

For the UK, the IMF now expects growth of 4.1% (prior year: 7.6%), and thus 0.6 percentage points less than at the beginning of the year.

The economic development in Germany – United Internet’s most important market by far (sales share 2022: around 89%) – was much slower than in the previous year and also well below the IMF’s original expectations. The IMF has calculated that economic output increased by 1.9% (prior year: 2.6%) and thus 1.9 percentage points less than expected at the beginning of the year.

The IMF’s calculations for Germany are in line with the preliminary figures of the country’s Federal Statistics Office (Destatis), which – at its “GDP 2022” press conference on January 13, 2023 – announced a 1.9% increase in (price-adjusted) gross domestic product (GDP) for 2022. This is 0.7 percentage points less than in 2021 (2.6%). According to estimates of the Federal Statistics Office, the macroeconomic situation in Germany in 2022 was dominated by the consequences of the war in Ukraine and, in particular, by extreme energy price increases. In addition, there were intensified material and supply bottlenecks, huge price increases, for example for food, as well as a shortage of skilled workers and the ongoing coronavirus pandemic – although this eased over the course of the year. Against this difficult backdrop, the Federal Statistics Office believes the German economy fared reasonably well on the whole in 2022.

Changes in growth forecasts made during 2022 for United Internet’s key target countries and regions

Source: International Monetary Fund, World Economic Outlook (Update), January 2019, 2020, 2021, 2022 und 2023

Multi-period overview: GDP trend in United Internet’s key target countries and regions

Source: International Monetary Fund, World Economic Outlook (Update), January 2019, 2020, 2021, 2022 und 2023

Multi-period overview: development of price-adjusted GDP in Germany

Source: Destatis, January 2023

Development of sector / core markets

At its annual press conference on January 10, 2023, the industry association Bitkom assumed growth of 4.0% (prior year: 5.9%) to € 196.1 billion for the German ICT market in 2022. At the beginning of 2022, the association had anticipated revenue growth of 3.6% for 2022. The digital sector thus proved highly robust in a macroeconomic environment dominated by war, disrupted supply chains, and inflation.

The increase in the overall ICT market resulted in particular from strong growth in sales of information technology. According to Bitkom’s 2022 forecast, sales in this largest submarket rose by 6.6% (prior year: 9.1%) to € 118.9 billion – after growth of 5.9% had been expected at the beginning of 2022. All segments of this sub-market made good progress, especially the software and IT hardware segments – of particular importance for United Internet’s cloud business (Infrastructure-as-a-Service/IaaS and Software-as-a-Service/SaaS). Software grew by 9.4% (prior year: 11.3%), IT hardware by 5.4% (prior year: 11.8%), and IT services by 5.5% (prior year: 5.3%).

There was also good progress in the telecommunications submarket. For this second core market of United Internet, the industry association expects growth in 2022 of 1.3% (prior year: 2.5%) to € 68.9 billion – compared to its forecast at the beginning of 2022 of 0.9%. The individual segments of the telecommunications market developed quite differently: infrastructure business (driven by the 5G network rollout) increased strongly by 7.3% (prior year: 2.0%), while growth was more modest for user devices at 1.8% (prior year: 9.2%), and telecommunication services at 0.3% (prior year: 1.1%).

The smallest sub-market, consumer electronics (of no significance for United Internet), continued its decline and decreased by -8.2% (prior year: -4.3%) to € 8.2 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, 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 0.7 million, or 1.9%, to 37.7 million in 2022, 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 “24 ^th TC Market Analysis for Germany 2022” (October 2022). Despite the above mentioned growth, the connections currently of relevance for United Internet in the two technology fields of DSL and FTTB/FTTH (fiber-optic) performed very differently. Whereas DSL connections in Germany fell by 0.3 million to 25.1 million, fiber-optic connections grew by 0.8 million to 3.4 million. The number of cable connections (a technology which United Internet expects to offer for the first time in April 2023 via a cooperation with Tele Columbus) rose by 0.2 million to 9.2 million. A further <0.05 million connections in Germany are still operated via satellite/powerline.

At € 33.6 billion, revenues generated in the landline business in 2022 were up 1.2% on the previous year (€ 33.2 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 18.7% to 274.4 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 2.3 percentage points, from 55.7% in the previous year to 58.0% in 2022. Fixed-line connections with speeds of at least 1 Gbit/s increased their share by 1.7 percentage points to 5.8% (of all broadband connections).

Key market figures: fixed-line in Germany

Source: Dialog Consult / VATM, TC Market Analysis for Germany 2022, October 2022

Mobile internet market in Germany

According to estimates of Dialog Consult/VATM, the number of active SIM cards in the German mobile communications market increased by 8.0 million, or 5.0%, to 169.3 million in 2022. 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 10.9 million to 56.5 million. By contrast, the number of personal SIMs declined by 2.9 million to 112.8 million.

Total revenues in the German mobile communications market increased by 1.5% from € 26.3 billion to € 26.7 billion in 2022 (including interconnection, wholesale, and user device revenues). Service revenues increased by 3.4% to € 21.1 billion, while other revenues (which include interconnection, wholesale, and user device revenues) decreased by 5.1% to € 5.6 billion.

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 38.8% to 5.65 GB.

In line with this growing usage, the number of (personal) SIM cards used for the faster 4G/5G networks also rose by 9.9 million to 89.8 million, while SIM cards with indefinite use (2G/3G) fell by 12.8 million to 23.0 million.

Key market figures: mobile communications in Germany

Source: Dialog Consult / VATM, TC Market Analysis for Germany 2022, October 2022

Global cloud computing market

There was further dynamic growth in the cloud computing market in 2022. In its “Public Cloud Services, Worldwide, 2020-2026, 3Q22 Update” (October 2022), Gartner Inc. forecasts global growth for public cloud services of 18.8% in 2022, from USD 412.63 billion to USD 490.33 billion.

Over the past years, cloud technology has evolved from a useful and competitive business tool to a key enterprise enabler.

In addition to macroeconomic conditions and high inflationary pressure, the coronavirus pandemic in particular has accelerated the digitalization process across numerous sectors since 2020. Most companies now regard new technologies as essential tools for coping with the crises. Within just a short period of time, for example, thousands of employees working from home were connected, new digital channels for sales and support were opened, and a large number of systems and data were moved to the cloud.

As a result, the migration of data, applications, and infrastructure to the cloud has become an integral part of most digital transformation strategies, with the aim of creating more agile and adaptable operations.

Growth is particularly strong at present in the field of IaaS, as companies accelerate their IT modernization initiatives in order to minimize risks and optimize costs. Moving operations to the cloud reduces current capital expenditures by spreading them over the life of a cloud subscription – a key advantage in an environment where liquidity can be critical to maintaining operations.

Key market figures: cloud computing worldwide

Source: Gartner, Public Cloud Services, Worldwide, 2020-2026, 3Q22 Update, October 2022

German online advertising market

In its study “German Entertainment and Media Outlook 2022 – 2026” (August 2022), the auditing and consultancy company PricewaterhouseCoopers (PwC) forecasts an increase in total revenues (paid search, display, video, affiliate / classifieds) of the German online advertising market (mobile advertising and desktop advertising) of 12.0% from € 11.99 billion to € 13.43 billion for 2022 – following very strong growth of 27.0% in 2021.

Key market figures: total online advertising market in Germany (mobile advertising & desktop advertising) – acc. to PWC

Source: PricewaterhouseCoopers, German Entertainment and Media Outlook 2022 – 2026, August 2022

The Online Marketing Group (OVK) of the German Association for the Digital Economy (BVDW) is much more cautious than PwC in its assessment of the situation in the German online advertising market. The OVK only takes net revenues into account in its market figures and focuses on the most important sub-market for United Internet, the display advertising market (mobile and desktop). The definition of the display advertising market comprises in-page advertising, including out-stream advertising and in-stream video advertising. Keyword-based paid search, affiliate or newsletter marketing, advertising for apps in the app store, and in-game advertising, by contrast, are not included in the OVK model.

Based on its updated forecast of September 2022, the OVK anticipates – in its OVK Report 2022/02 (November 2022) – an increase in net revenues of the display advertising market from € 5.120 billion in the previous year to € 5.468 billion. This represents an increase of 6.8%, following growth of 24.7% in the previous year.

Key market figures: display advertising market in Germany (mobile advertising & desktop advertising) – acc. to OVK

Source: Online-Vermarkterkreis (OVK), OVK-Report 2022/02, November 2022

The OVK believes that the coronavirus pandemic has led to a strengthening of display advertising. Advertising budgets followed consumers and were increasingly invested in digital advertising. In 2021, the display advertising market thus achieved exceptionally strong growth of 24.7%, reaching a new, significantly higher market level.

According to OVK estimates, the display advertising market also got off to a strong start in the first quarter of 2022. The 2nd quarter was then dominated by the war in Ukraine and its consequences. In some sectors, budgets were reduced or postponed as advertising planning returned to a more flexible approach. However, thanks to flexible booking options, digital display advertising was less affected by the decline in advertising spend and the second quarter closed with a slight year-on-year increase.

For the second half of 2022, the OVK expected demand to rise again due to catch-up effects, growing revenues in the retail and e-commerce sectors, and a further shift of budgets to digital media.

Legal conditions / significant events

Legal conditions

Amendment of the German Telecommunications Act

The modernized German Telecommunications Act (“Telekommunikationsgesetz” -TKG) came into force on December 1, 2021. The TKG amendment transposes Directive (EU) 2018/1972 of December 11, 2018 on the European Electronic Communications Code into national law. The modernized legislation focuses on the faster rollout of FTTH and mobile networks as well as consumer protection. For example, the legislature has enshrined in law for the first time the right of citizens to high-speed internet connections and is encouraging faster network rollout with new framework conditions and simplified approval procedures. In the interests of consumer protection, the terms of contracts in particular have been regulated, meaning that contracts can be terminated with one month’s notice at any time after expiry of the minimum contract term, unless a contract extension is actively requested.

In 2022, these legal changes (shortening of subsequent contract terms in the extension period) led to a year-on-year decline in contract growth for United Internet’s Consumer Access segment from shift effects (resulting from the shifting of contract terminations to an earlier date). This had the effect of slowing 1&1’s contract growth by 250,000 contracts in 2022. No further shift effects are expected in the fiscal year 2023.

The other legal parameters for United Internet’s business activities remained largely unchanged from the previous year in 2022 and had no significant influence on the development of the United Internet Group.

Significant events

War in Ukraine

The full-scale attack on the entire territory of Ukraine launched by Russia (with the support of Belarus) on February 24, 2022, marked the beginning of the Ukrainian War of 2022.

The EU, the USA, the UK, and other states reacted to the attack by imposing stringent sanctions against Russia, Belarus, and the separatist regions of eastern Ukraine. With an overwhelming majority, the United Nations and its 193 member countries (UN General Assembly) also condemned Russia for the attack on Ukraine and called for an immediate withdrawal and an end to the aggression.

The United Internet Group does not pursue any business activities in the countries involved in the war. Ukraine, Russia, and Belarus are not target countries for United Internet companies and there are no locations in the aforementioned countries. Against this backdrop, the war has had no direct impact on the business performance and position of the Company or the Group.

However, the macroeconomic conditions caused by the war deteriorated significantly during the course of 2022. The high inflation rate in particular, with hitherto unprecedented price hikes also for electricity and gas, has placed a major burden on citizens and companies – both nationally and internationally.

Compared with the previous year, United Internet’s earnings were negatively impacted in particular by a € 22.4 million increase in electricity costs in its fiscal year 2022.

FTTH product contract with Deutsche Telekom

Following a commercial agreement in the fiscal year 2021, 1&1 and Deutsche Telekom concluded the respective FTTH product contract in February 2022. This deal enables 1&1 to integrate all of Deutsche Telekom's fiber-optic home connections into its products. 1&1 receives these upstream services together with network transport services and value-added services such as VoIP and IP-TV from a single source from its sister company 1&1 Versatel, whose nationwide transport network is already largely connected to Deutsche Telekom's regional broadband networks.

Contract signed with GfTD for the construction of antenna locations

On April 4, 2022, 1&1 signed an agreement with GfTD GmbH regarding the construction of antenna locations for the rollout of 1&1’s mobile communications network. The order is for 500 new locations. GfTD is one of Germany’s leading service providers for radio tower infrastructure and will act as general contractor for the nationwide acquisition and construction of new antenna locations for 1&1’s mobile network. The two companies have already been successfully cooperating since early 2020 on the German government’s “not-spots program” aimed at closing coverage gaps in rural areas.

Contract signed with ATC for renting of existing antenna locations

On April 21, 2022, 1&1 signed a framework contract with ATC Germany Holdings GmbH, a German subsidiary of American Tower Corporation (ATC), regarding the joint use of existing antenna locations for the rollout of 1&1’s mobile communications network. As an independent owner of communications sites, ATC is one of the world’s leading providers of radio tower infrastructure and owns around 15,000 antenna locations in Germany alone. As part of the agreement, ATC will provide 1&1 with antenna masts for the installation of 1&1’s high-performance antennas. Both companies will work closely together to assess the availability of co-location sites which can be gradually put into operation in the near future. The individual location agreements have terms of 20 years and can be extended several times by 1&1.

Wholesale cooperation with Tele Columbus

On November 21, 2022, 1&1 and Tele Columbus AG announced a long-term wholesale framework agreement. Under the terms of the partnership, the nationwide transport network of 1&1 Versatel GmbH will be connected to the regional city networks of Tele Columbus AG. From the second quarter of 2023, 1&1 will then also be able to offer high-speed internet connections to all households equipped with an internet-capable Tele Columbus fiber-optic connection. Tenants of apartments with Tele Columbus internet connections will thus also be able to use 1&1's high-performance broadband offering. For 1&1, this opens up additional marketing potential for fixed-line products offering peak bandwidths of up to 1,000 Mbit/s in households connected by Tele Columbus. At the same time, Tele Columbus will benefit from even higher network utilization. The technical and organizational preparations to guarantee seamless booking and service processes are already well advanced. 1&1’s internet signal is fed into multiple central Tele Columbus network points and routed directly to households.

Contract with Orange for international roaming around the world

On November 25, 2022, 1&1 and Orange signed a long-term agreement for the provision of international roaming services for the 1&1 mobile network. With the launch of 1&1‘s mobile network, 1&1 will thus be able to provide its customers with reliable mobile services also during their trips abroad. As one of the world‘s largest telecommunications service providers, Orange is a leader in the field of international roaming and sponsored telecommunications platforms. As part of the partnership, 1&1 customers will have access to all international roaming services based on Orange’s global roaming footprint. These services use state-of-the-art roaming technologies – including 5G and VoLTE. 1&1 will therefore receive all international roaming services from a single source and customized to its needs, providing comprehensive global network coverage – including numerous value-added services and top-level anti-fraud solutions.

Contract with Eubanet for acquisition of new antenna locations

On December 21, 2022, 1&1 signed an agreement with Eubanet GmbH concerning the acquisition of up to 7,500 new 5G antenna locations. Based in Germany, Eubanet GmbH is a well-established consulting and service company in the telecommunications sector focusing in particular on the analysis and acquisition of suitable locations for new mobile telecommunications facilities. Eubanet has technical and contract-specific expertise in setting up virtually all networks, including 5G. This direct collaboration with a highly experienced acquisition partner represents a further step in reaching the expansion targets for 1&1’s mobile communications network.

There were no other significant events in fiscal 2022 which had a material effect on the development of business.