2. ECONOMIC REPORT

2.1 General economic and sector conditions

General economic development

The International Monetary Fund (IMF) upgraded its forecast for 2023 slightly during the course of the year. In its latest economic outlook (World Economic Outlook, Update January 2024), the IMF reported growth of 3.1% for the global economy in 2023, based on preliminary calculations. Growth was thus below the prior-year level (3.5%) but at the same time 0.2 percentage points above the IMF’s original outlook of January 2023 (2.9%).

In the United Internet Group’s target markets in North America, growth rates varied somewhat. The IMF anticipates growth of 2.5% for the USA (prior year: 1.9%), and thus 1.1 percentage points more than in its January outlook for 2023 (1.4%). However, the calculated growth of 1.1% for Canada (prior year: 3.8%) is 0.4 percentage points less than originally expected (1.5%). And for Mexico , the IMF forecasts an increase in economic output of 3.4% (prior year: 3.9%), and thus 1.7 percentage points more than anticipated at the beginning of the year (1.7%).

The picture is much gloomier in the eurozone region, where all countries of importance for United Internet displayed much weaker growth than in 2022. The IMF now expects overall growth of 0.5% (prior year: 3.4%) for the eurozone and thus a further 0.2 percentage points less than it forecast in January (0.7%). Growth of 0.8% was calculated for France (prior year: 2.5%), 0.7% for Italy (prior year: 3.7%), and 2.4% for Spain (prior year: 5.8%). This corresponds to an improvement of 0.1 percentage points each for France and Italy, and 1.3 percentage points for Spain, compared to the January outlook (France: 0.7%; Italy: 0.6%; Spain: 1.1%). And for Poland, the IMF expects growth of 0.6% (prior year: 5.3%).

For the UK, a non-EU country, the IMF expects growth of 0.5% (prior year: 4.3%), and thus 1.1 percentage point more than at the beginning of the year (-0.6%).

The economic development in Germany – United Internet’s most important market by far (sales share 2023: around 89%) – was much slower than in the previous year and also below the IMF’s original expectations. The IMF has calculated that economic output in Germany decreased by -0.3% (prior year: 1.8%) and was thus a further -0.4 percentage points below expectations at the beginning of the year (0.1%).

The IMF’s calculations for Germany are therefore in line with the preliminary figures of the country’s Federal Statistical Office (Destatis), which – at its “GDP 2023” press conference on January 15, 2024 – also announced a decline in (price-adjusted) gross domestic product (GDP) of -0.3% for 2023. This is 2.1 percentage points less than in 2022 (1.8%). According to the Federal Statistical Office, this was due to further inflation-related high prices throughout the economy, unfavorable borrowing conditions caused by rising interest rates and an overall decline in both domestic and foreign demand.

Changes in growth forecasts made during 2023 for United Internet’s key target countries and regions

Source: International Monetary Fund, World Economic Outlook (Update), January   2023, April   2023, July   2023, October   2023 and January   2024

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

Source: International Monetary Fund, World Economic Outlook (Update), January   2020, 2021, 2022, 2023 and 2024

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

Source: Destatis, January   2024

Development of sector / core markets

At its annual press conference on January 10, 2024, the industry association Bitkom assumed growth of 2.0% (prior year: 6.8%) to € 215.0   billion for the German ICT market in 2023. At the beginning of 2023, the association was still anticipating revenue growth of 3.8% for 2023. Nevertheless, the digital sector is proving highly robust once again – despite the adverse macroeconomic environment dominated by geopolitical crises, disrupted supply chains, and skilled labor shortages.

The increase in the overall ICT market resulted in particular from growth in sales of information technology. According to Bitkom’s 2023 forecast, sales in this largest submarket – and of particular importance for United Internet – rose by 2.2 % (prior year: 8.7%) to € 142.9   billion, compared to a growth forecast of 6.3% at the beginning of 2023. The various segments of this sub-market made varied progress: software grew by 9.6% (prior year: 15.0%) and IT services by 5.1% (prior year: 8.5%), while IT hardware fell by -5.4% (prior year: 4.8%) following the disproportionately high level of investment during the pandemic.

There was also good progress in the telecommunications submarket. For this second core market of United Internet, the industry association expects growth in 2023 of 1.7 % (prior year: 3.4%) to € 72.1   billion – compared to its forecast at the beginning of 2022 of 0.9%. Growth in the individual segments of the telecommunications market was also quite varied: whereas the infrastructure business (driven by the 5G network rollout) grew by 4.4% (prior year: 14.2%) and telecommunication services by 1.9% (prior year: 2.1%), sales of user devices fell by -0.7% (prior year: 2.4%).

The smallest sub-market, consumer electronics (of no significance for United Internet), continued its decline and decreased by -2.1% (prior year: -7.2%) to € 8.1   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-based broadband connections in Germany has slowed in recent years. With expected growth of 0.2 million, or 0.5%, to 37.0 million in 2023, the number of new connections was again at a moderate level. 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 “25th TC Market Analysis for Germany 2023” (November 2023). 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 0.4 million to 24.3 million, fiber-optic connections grew by 0.8 million to 4.2 million. The number of cable connections also fell by 0.2 million to 8.5 million.

According to estimates of Dialog Consult/VATM, revenues generated in the landline business in 2023 were unchanged from the previous year at € 32.6 billion. In addition to retail sales, these revenue figures also include wholesale, interconnection, and terminal device revenues.

At the same time, however, calculations of Dialog Consult/VATM indicate that 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 16.1% to 320.9 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 (downstream) speeds of at least 50 Mbit/s increased by 3.2 percentage points, from 58.7% in the previous year to 61.9% (of all broadband connections) in 2023. There was even stronger growth in fixed-line connections with speeds of at least 250 Mbit/s, which raised their share by 5.1 percentage points to 23.0% (of all broadband connections).

Key market figures: fixed-line in Germany

Source: Dialog Consult / VATM, TC Market Analysis for Germany 2023, November   2023

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 12.9   million, or 7.6%, to 181.9   million in 2023. 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 12.0 million to 70.3 million. The number of active personal SIMs (active = used in the last three months) rose only slightly by 0.5 million to 104.9 million – thus indicating a largely saturated market, as the figures for the past few years have shown.

Dialog Consult / VATM calculates that total revenues in the German mobile communications market increased by 0.4% from € 27.5 billion to € 27.6   billion in 2023 (including interconnection, wholesale, and user device revenues). Service revenues rose by 1.0% to € 21.1 billion, while other revenues (which include interconnection, wholesale, and user device revenues) decreased by 3.0% to € 6.4 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 active personal SIM cards and mobile revenues by 22.1% to 6.57 GB.

Key market figures: mobile communications in Germany

Source: Dialog Consult / VATM, TC Market Analysis for Germany 2023, November   2023

Global cloud computing market

There was further dynamic growth in the cloud computing market in 2023. In its “Public Cloud Services, Worldwide, 2021-2027, 3Q23 Update” (November 2023), Gartner Inc. forecasts global growth for public cloud services of 17.8% in 2023, from USD 478.32   billion to USD 563.59   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, 2021-2027, 3Q23 Update, November   2023

German online advertising market

In its study “German Entertainment and Media Outlook 2023 - 2027” (September 2023), 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 7.0% from € 12.58 billion to € 13.47   billion for 2023 – following growth of 6.0% in 2022.

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

Source: PricewaterhouseCoopers, German Entertainment and Media Outlook 2023 – 2027, September   2023

The Online Marketing Group (OVK) of the German Association for the Digital Economy (BVDW) is somewhat 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 in September 2023, the OVK anticipates – in its OVK Report 2023/02 – an increase in net revenues of the display advertising market from € 5.18 billion in the previous year to € 5.47 billion. This represents an increase of 5.6%, compared to growth of 1.1% in the previous year. In spring 2023, the Online Marketing Group (OVK) had forecast an increase in net revenues of 4.6%.

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

Source: Online-Vermarkterkreis (OVK), OVK-Report 2023/02, September   2023

Legal conditions / significant events

The legal parameters for United Internet’s business activities remained largely unchanged from the previous year in 2023 and had no significant influence on the development of the United Internet Group.

Legal conditions

One of the factors determining the future success of United Internet subsidiary 1&1 as a mobile network operator is the future allocation of mobile communication frequencies (spectrum). As part of the German Federal Network Agency’s spectrum auction in 2019, 1&1 acquired 5G spectrum in the 2 GHz and 3.6 GHz bands. The frequency blocks in the 3.6 GHz band are already available and are being used for mobile network operations, while the frequencies in the 2 GHz band will be available from 2026. In order to bridge this period, 1&1 has leased further spectrum in the 2.6 GHz band from Telefónica.

In order to be able to operate its mobile network competitively and efficiently, 1&1 – as well as all other mobile network operators – not only requires high-frequency spectrum but also so-called low-band frequencies, which are essential for indoor coverage. Around 80% of data traffic is handled in this band.

In September 2023, the Federal Network Agency once again addressed the topic of awarding low-band frequencies in the 800 MHz spectrum, which are due to expire in 2025. In a so-called consultation paper, it advocated a prolongation of the frequencies to the three incumbent network operators. In the past, spectrum was awarded exclusively via non-discriminatory auctions in Germany, and such a prolongation would be a novelty. In the event of such an award, 1&1 would not receive access to the low-band frequencies.

The German Federal Cartel Office also commented on the spectrum award situation in November 2023. In a position paper, the Federal Cartel Office stated that an extension of the frequencies without taking 1&1 into account would expose 1&1, as a market newcomer, to serious competitive disadvantages compared to the established mobile network operators. In its position paper, the Federal Cartel Office also points out, with reference to other European countries, that the available spectrum is sufficient for four mobile network operators.

Various studies published by 1&1 on the spectrum situation in Germany came to the same conclusion. They argue that the low-band frequencies are not always being used efficiently by the three other mobile network operators and that there is no discernible correlation between a high level of spectrum held by individual mobile network operators and the performance of their mobile networks, meaning that low-band frequencies could be allocated to all four mobile network operators without any loss of quality.

In an expert opinion commissioned by 1&1, the former Federal Constitutional Court judge and renowned legal expert, Prof. Udo Di Fabio, also clearly stated that the auctioning of the first 5G spectrum to a market newcomer in 2019 resulted in additional regulatory responsibility. Prolonging the spectrum usage rights of established network operators without taking 1&1 into account as a newcomer would violate the protection of legitimate expectations principle and the equality principle and would even be unconstitutional from several points of view.

The Federal Network Agency is expected to provide further information on the exact award modalities in 2024.

Significant events

IPO of IONOS

On January 17, 2023, IONOS Group SE announced concrete plans for the IPO of IONOS as part of an “intention to float” (ITF) and completed its IPO on February 8, 2023. The shares of IONOS Group SE have since been listed on the regulated market of the Frankfurt Stock Exchange (Prime Standard) under ISIN: DE000A3E00M1, WKN: A3E00M, ticker symbol: IOS. United Internet received gross proceeds of around € 292 million from the sale of shares, while the entire placement volume amounted to around € 389 million. Following the IPO of IONOS Group SE, United Internet holds 63.8% and Warburg Pincus 21.2% of IONOS shares. 15.0% of shares are in free float.

Acquisition of fiber-optic city networks from BT

In early July 2023, 1&1 Versatel acquired four fiber-optic city networks from BT. The acquisition of the BT city networks in Munich, Frankfurt, Düsseldorf, and Stuttgart with a total length of 1,590 km is in line with 1&1 Versatel’s strategy of steadily expanding its own fiber-optic network. The purchase price amounted to around € 42 million.

Conclusion of binding heads of terms for a long-term exclusive national roaming partnership with Vodafone

In August 2023, 1&1 concluded binding heads of terms with Vodafone for a long-term exclusive national roaming partnership.

The national roaming cooperation includes the non- discriminatory provision of national roaming services in areas not yet covered by the new 1&1 mobile network and comprises in particular access to Vodafone’s 5G network including the mobile standards 2G and 4G, as well as future mobile standards and technologies.

The starting date for the Vodafone national roaming services will be one year after concluding the final national roaming cooperation, however no later than October 1, 2024. The basic term of the national roaming cooperation will be 5 years from that point on. 1&1 Mobilfunk will have the right to prolong the term of the national roaming cooperation up to twice by five further years each time – i.e., by up to an additional 10 years. The end of the contract term will be followed by a transition period of three years.

The calculation basis is a so-called capacity model, under which 1&1 will pay a fixed price per percentage point for the percentage share of the Vodafone network used by its customers. This fixed price changes from time to time in line with the percentage cost development of the Vodafone network. The conditions are thus geared to future market developments and enable 1&1 to make competitive offers over the long term.

Addition of 5G to national roaming agreement with Telefónica

In November 2023, 1&1 expanded the national roaming agreement it concluded with Telefónica Germany in May 2021 with the addition of 5G.

Wherever the 5G network currently under construction does not yet have its own coverage, 1&1 customers will automatically have access to Telefónica Germany’s 2G/4G/5G network as part of the national roaming agreement expanded to include 5G. From October 2024 at the latest, 1&1 will use national roaming from Vodafone as planned and gradually reduce its advance services from Telefónica Germany.

1&1 O-RAN: launch of mobile services in Europe’s most modern 5G network

Following the launch of “1&1 5G at home” in December 2022, 1&1 activated its mobile services on December 8, 2023. Germany’s fourth mobile network is thus now fully functional and can also be used with smartphones on the move.

A condition for the activation of mobile services was the previously completed provision of 5G national roaming by Telefónica Germany. This means that 1&1 customers can now access Telefónica's 5G network wherever the 1&1 network, which is currently being set up, does not yet have its own coverage – automatically and without interruption. Vodafone is scheduled to provide 5G national roaming from summer 2024.

1&1 is the first network operator in Europe to rely entirely on the new Open RAN technology. At the heart of the 1&1 network (“1&1 O-RAN”) is a private cloud operated in hundreds of cities through decentralized edge data centers. All network functions are controlled by software running on conventional servers. 1&1 plans to use Gigabit antennas at all antenna locations, which are connected via fiber-optic cable to the 1&1 edge data centers. This network architecture enables minimal latency, which is essential for future real-time applications.

Unlike traditional networks based on proprietary technology from specialized network suppliers, such as Huawei, the 1&1 O-RAN has a large number of standardized interfaces. This means that software and hardware components from the most innovative and secure providers can be flexibly combined. At the same time, it also eliminates 1&1’s dependence on individual suppliers.

Partial repayment of the shareholder loan by IONOS Group SE

In December 2023, IONOS Group SE concluded a loan of € 800 million with a banking syndicate to partially refinance its existing shareholder loan with United Internet AG. The refinancing is at a fixed annual interest rate of 4.67%. The syndicated loan has a term until December 15, 2026 and is due at maturity. Following the partial repayment, the shareholder loan with United Internet amounts to € 350 million and is subordinated. The shareholder loan continues to have a fixed annual interest rate of 6.75%, a term until December 15, 2026, and is to be gradually repaid before this date.

There were no other significant events in fiscal 2023 which had a material effect on the development of business.