Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on February 28, 2008

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

 

Form 20-F

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number 001-14540

 

 

Deutsche Telekom AG

(Exact Name of Registrant as Specified in its Charter)

Federal Republic of Germany

(Jurisdiction of Incorporation or Organization)

Friedrich-Ebert-Allee 140, 53113 Bonn, Germany

(Address of Registrant’s Principal Executive Offices)

Guido Kerkhoff

Chief Accounting Officer

Deutsche Telekom AG

Friedrich-Ebert-Allee 140, 53113 Bonn, Germany

+49-228-181-0

G.Kerkhoff@telekom.de

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing

one Ordinary Share

  New York Stock Exchange

Ordinary Shares, no par value

  New York Stock Exchange*

Securities registered or to be registered pursuant to

Section 12(g) of the Act:

NONE

(Title of Class)

Securities for which there is a reporting obligation pursuant to

Section 15(d) of the Act:

NONE

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares, no par value: 4,361,297,603 (as of December 31, 2007)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes    x    No    ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes    ¨    No    x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    x    No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x

  Accelerated filer    ¨   Non-accelerated filer    ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

¨    U.S. GAAP

   x    International Financial Reporting Standards as issued by the International Accounting Standards Board    ¨    Other

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

Item 17    ¨     Item 18    ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    ¨    No    x

*Not for trading, but only in connection with the registration of American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page
PART I   

Item 1.

   Identity of Directors, Senior Management and Advisors    4

Item 2.

   Offer Statistics and Expected Timetable    4

Item 3.

   Key Information    4
  

Selected Financial Data

   4
  

Risk Factors

   7

Item 4.

   Information on the Company    17
  

Introduction

   17
  

Historical Background

   17
  

Organizational Structure

   19
  

Segment Revenue Breakdown

   20
  

Description of Business

   21
  

Mobile Communications

   21
  

Broadband/Fixed Network

   33
  

Business Customers

   47
  

Group Headquarters and Shared Services

   56
  

Innovation Management (Research and Development)

   59
  

Acquisitions and Divestitures

   61
  

Regulation

   62
  

Description of Property, Plant and Equipment

   81

Item 4A.

   Unresolved Staff Comments    82

Item 5.

   Operating and Financial Review and Prospects    83
  

Management Overview

   83
  

Critical Accounting Estimates

   91
  

Consolidated Results of Operations

   94
  

Segment Analysis

   102
  

Mobile Communications Europe/USA

   102
  

Broadband/Fixed Network

   120
  

Business Customers

   130
  

Group Headquarters and Shared Services

   134
  

Liquidity and Capital Resources

   136
  

Recently Issued IASB Pronouncements

   146

Item 6.

   Directors, Senior Management and Employees    150
  

General

   150
  

Supervisory Board

   151
  

Management Board

   156
  

Compensation

   159
  

Share Ownership

   168
  

Employees and Labor Relations

   170

Item 7.

   Major Shareholders and Related Party Transactions    177
  

Major Shareholders

   177
  

Related Party Transactions

   178

Item 8.

  

Financial Information

   181
  

Consolidated Financial Statements

   181
  

Export Sales

   181
  

Legal Proceedings

   181
  

Dividend Policy

   193
  

Significant Changes

   194

 

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          Page

Item 9.

  

The Offer and Listing

   195
  

Trading Markets

   195

Item 10.

  

Additional Information

   198
  

Articles of Incorporation

   198
  

Significant Differences in Corporate Governance Practices

   204
  

Exchange Controls

   207
  

Taxation

   208
  

German Taxation

   208
  

U.S. Taxation and U.S.-German Double Taxation Agreement of August 29, 1989

   211
  

Documents on Display

   214

Item 11.

  

Quantitative and Qualitative Disclosures about Market Risk

   214
  

Risk Identification and Analysis

   214
  

Foreign Exchange Rate Risk

   215
  

Interest Rate Risk

   216
  

Changes in Market Risk Exposure in 2007 Compared to 2006

   216

Item 12.

  

Description of Securities Other than Equity Securities

   217
PART II   

Item 13.

  

Defaults, Dividend Arrearages and Delinquencies

   218

Item 14.

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

   218

Item 15.

  

Controls and Procedures

   218

Item 16A.

  

Audit Committee Financial Expert

   220

Item 16B.

  

Code of Ethics

   220

Item 16C.

  

Principal Accountant Fees and Services

   221

Item 16D.

  

Exemptions from the Listing Standards for Audit Committees

   222

Item 16E.

  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   222
PART III   

Item 17.

  

Financial Statements

   223

Item 18.

  

Financial Statements

   223
  

Report of Independent Registered Public Accounting Firms as of December 31, 2007 and 2006 and for the three years ended December 31, 2007

   F-2
  

Consolidated Income Statement for the three years ended December 31, 2007

   F-3
  

Consolidated Balance Sheet as of December 31, 2007 and 2006

   F-4
  

Consolidated Cash Flow Statement for the three years ended December 31, 2007

   F-5
  

Consolidated Statement of Recognized Income and Expense for the three years ended December 31, 2007

   F-6
  

Notes to the Consolidated Financial Statements

   F-7

Item 19.

  

Exhibits

   223

 

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DEFINED TERMS

Deutsche Telekom AG is a private stock corporation organized under the laws of the Federal Republic of Germany (the “Federal Republic”). As used in this annual report on Form 20-F (“Annual Report”), unless the context otherwise requires, the term “Deutsche Telekom” refers to Deutsche Telekom AG, and the terms “we,” “us,” “our,” “Company” and “Group” refer to Deutsche Telekom and, as applicable, Deutsche Telekom and its direct and indirect subsidiaries as a group.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Unless otherwise indicated, the financial information contained in this Annual Report has been prepared in accordance with the requirements of the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements also comply with the regulations under commercial law as set forth in §315a(1) HGB (Handelsgesetzbuch—German Commercial Code). All IFRSs issued by the IASB, effective at the time of preparing the consolidated financial statements and applied by us, have been adopted for use in the European Union by the European Commission. Therefore our consolidated financial statements also comply with IFRS as adopted by the European Union.

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. Forward-looking statements are statements that are not historical facts. Examples of forward-looking statements include statements concerning:

 

   

plans, objectives and expectations relating to future operations, products and services;

 

   

our prospective share of new and existing markets;

 

   

plans, objectives and expectations for our cost savings and workforce reduction programs and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations, and our network upgrade and expansion initiatives;

 

   

the potential impact of regulatory actions on our financial condition and operations;

 

   

the possible outcomes and effects of litigation, investigations, contested regulatory proceedings and other disputes;

 

   

future general telecommunications sector and macroeconomic growth rates; and

 

   

our future revenues, expenditures and performance.

Forward-looking statements generally are identified by the words “expect,” “anticipate,” “believe,” “intend,” “estimate,” “aim,” “plan,” “will,” “will continue,” “seek,” “outlook,” “guidance” and similar expressions. The “Risk Factors” discussion in Item 3, the “Management Overview” discussion in Item 5 and the “Quantitative and Qualitative Disclosures About Market Risk” discussion in Item 11, in particular, contain numerous forward-looking statements, although such statements also appear elsewhere in this Annual Report.

Forward-looking statements are based on current plans, estimates and projections. You should consider them with caution. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and reports on Form 6-K) and under other applicable laws. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among others:

 

   

the level of demand for telecommunications services in the markets we serve, particularly for wireless telecommunications services, broadband access lines, voice and data traffic, new higher-value products and services, and new rate offerings;

 

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competitive forces, including pricing pressures, technological developments and alternative routing developments, all of which affect our ability to gain or retain market share and revenues in the face of competition from existing and new market entrants;

 

   

the effects of our price reduction measures and our customer acquisition and retention initiatives, particularly in the fixed-line voice telephony business, the mobile telecommunications business and our interconnection business;

 

   

the effects of industry consolidation on the markets in which we operate, particularly with respect to our mobile and leased lines businesses;

 

   

the success of new business, operating and financial initiatives, many of which involve substantial start-up costs and are untested, and of new systems and applications, particularly with regard to the integration of service offerings;

 

   

our ability to achieve cost savings and realize productivity improvements, particularly with respect to our workforce-reduction initiatives, while at the same time enhancing customer service quality;

 

   

our ability to attract and retain qualified personnel, particularly in view of our cost reduction efforts;

 

   

regulatory developments and changes, including with respect to the levels of tariffs, terms of interconnection, customer access and international settlement arrangements;

 

   

our ability to secure and retain the licenses needed to offer new and existing services and the cost of these licenses and related network infrastructure build-outs, particularly with respect to advanced services;

 

   

the outcome of litigation, disputes and investigations in which we are involved or may become involved;

 

   

risks and uncertainties relating to the benefits anticipated from our international expansion, including in the United States;

 

   

risks and costs associated with integrating our acquired businesses and with selling or combining businesses or other assets;

 

   

the progress of our domestic and international investments, joint ventures, partnerships and alliances;

 

   

concerns over health risks associated with the use of wireless mobile devices and other health and safety risks related to radio frequency emissions;

 

   

the availability, terms and deployment of capital, particularly in view of our financing alternatives, actions of the rating agencies and the impact of regulatory and competitive developments on our capital outlays;

 

   

the level of demand in the market for our debt obligations, and for the debt obligations of our subsidiaries and associated companies, and our shares, as well as for assets that we may decide to sell, which may affect our financing and acquisition strategies;

 

   

risks of infrastructure failures or damage due to external factors, including natural disasters, intentional wrongdoing, sabotage, acts of terrorism or similar events;

 

   

the effects of foreign exchange rate fluctuations, particularly in connection with subsidiaries operating outside the euro zone; and

 

   

changes in general economic conditions, government and regulatory policies, new legislation and business conditions in the markets in which we and our subsidiaries and associated companies operate.

Certain of these factors are discussed in more detail elsewhere in this Annual Report, including, without limitation, in Item 3, Item 4 and Item 5. We caution investors that the foregoing list of important factors is not exhaustive. When reviewing forward-looking statements contained in this document, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events and their potential impact on our operations and businesses.

 

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Certain information in this Annual Report has been provided by external sources. Due to the rapid changes in our industry, it is possible that some of this information is no longer accurate. Assessments of market share in particular involve the use of information released or estimated by regulatory authorities, our competitors, third parties or us.

World Wide Web addresses contained in this Annual Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, and are not incorporated by reference into, this Annual Report.

 

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PART I

ITEM 1. Identity of Directors, Senior Management and Advisors

Not applicable.

ITEM 2. Offer Statistics and Expected Timetable

Not applicable.

ITEM 3. Key Information

SELECTED FINANCIAL DATA

The following table presents selected consolidated financial and operating information. This selected consolidated financial and operating information should be read together with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the notes thereto that are included elsewhere in this Annual Report.

The selected consolidated financial information as of and for each of the five years ended December 31, 2003 through 2007 are extracted or derived from our consolidated financial statements and the notes thereto, which have been audited by Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft (“E&Y”) and PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (“PwC”).

 

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Selected Consolidated Financial Data of the Deutsche Telekom Group

 

     % Change
2007/2006(1)(2)
    2007     2006     2005     2004     2003  
                

(billions of €, except as

otherwise indicated)

       

Income Statement Data

            

Net revenues

   1.9     62.5     61.3     59.6     57.3     55.6  

Domestic

   (5.4 )   30.7     32.4     34.2     34.7     34.4  

International

   10.2     31.8     28.9     25.4     22.6     21.2  

Profit from operations

   0.0     5.3     5.3     7.6     6.3     8.3  

Net profit

   (82.0 )   0.6     3.2     5.6     1.6     2.1  

Balance Sheet Data

            

Total assets(3)

   (7.3 )   120.7     130.2     128.5     125.5     136.2  

Total financial liabilities (in accordance with the consolidated balance sheet)

   (7.7 )   42.9     46.5     46.7     51.1     64.1  

Shareholders’ equity(3)

   (8.9 )   45.2     49.7     48.6     45.5     43.5  

Cash Flow Data(4)

            

Net cash from operating activities(5)

   (3.6 )   13.7     14.2     15.1     16.7     15.0  

Net cash used in investing activities(5)

   43.7     (8.1 )   (14.3 )   (10.1 )   (4.5 )   (2.2 )

Net cash used in financing activities

   n.m.     (6.1 )   (2.1 )   (8.0 )   (12.9 )   (5.8 )

Ratios and Selected Data

            

Additions to intangible assets (including goodwill) and property, plant and equipment

   (32.3 )   9.1     13.4     11.1     6.6     7.6  

Capital expenditures(4)

   (32.1 )   8.0     11.8     9.3     6.4     6.4  

Equity ratio (%)(3)(6)

   (1.1 )   34.7     35.8     35.5     34.2     31.9  

Number of employees averaged over the year (full-time employees excluding trainees) (thousands)

   (1.9 )   244     248     244     248     251  

Revenues per employee (thousands of euro)(7)

   3.9     256.5     246.9     244.3     231.7     221.3  

Earnings per share/ADS—basic and diluted (euro)(8)

   (82.4 )   0.13     0.74     1.31     0.39     0.50  

Weighted average number of ordinary shares outstanding (basic) (millions)

   (0.3 )%   4,339     4,353     4,335     4,323     4,302  

Total number of ordinary shares at the reporting date (millions)

   0.0 %   4,361     4,361     4,198     4,198     4,198  

Dividend per share/ADS (euro)(8)(9)

   8.3     0.78     0.72     0.72     0.62      

Dividend per share/ADS (U.S. dollar)(8)(9)(10)

   16.3     1.14     0.98     0.91     0.80      

 

n.m.—not meaningful

(1) Percentage change based on figures expressed in millions.
(2) In this Annual Report, increases in the size of negative numbers are expressed in percentage terms with negative percentage amounts, and decreases in the size of negative numbers are expressed with positive percentage amounts.
(3) As of December 31, 2006, we voluntarily changed our accounting policies relating to provisions for pensions as permitted under IAS 19.93A, which allows for actuarial gains and losses to be recognized directly under retained earnings in shareholders’ equity. We believe that fully recognizing actuarial gains and losses when they occur results in a better presentation of the financial position in the balance sheet. The corresponding prior-year comparatives have been adjusted as follows: reduction in consolidated shareholders’ equity—2005: EUR 983 million, 2004: EUR 291 million, 2003: EUR 224 million; increase in provisions for pensions—2005: EUR 1,571 million, 2004: EUR 479 million, 2003: EUR 368 million; increase in deferred tax assets—2005: EUR 588 million, 2004: EUR 188 million, 2003: EUR 144 million.
(4) In accordance with the statement of cash flows.
(5) Current finance lease receivables were previously reported in net cash from operating activities. From January 1, 2007, they are reported in net cash from/used in investing activities. The prior-year comparatives have been adjusted accordingly.
(6) The ratio equals total stockholders’ equity divided by total assets. Amounts proposed as dividends are treated as short-term debt rather than as equity for purposes of the calculation of this ratio.
(7) Calculated on the basis of the average number of employees for the year, excluding trainees, apprentices and student interns.
(8) “ADS” refers to the Deutsche Telekom American Depositary Shares traded on the New York Stock Exchange (“NYSE”). One ADS corresponds to one ordinary share of Deutsche Telekom AG.
(9) Dividends per share are presented on the basis of the year in respect of which they are declared, not the year in which they are paid. The proposed 2007 dividend per share amounts are subject to approval by the shareholders at the annual shareholders’ meeting.
(10) Dividend amounts have been translated into U.S. dollars (using Moneyline Telerate) for the relevant dividend payment date, which occurred during the second quarter of the following year, except for the 2007 amount, which has been translated using the applicable rate on December 31, 2007. As a result, the actual U.S. dollar amount at the time of payment may vary from the amount shown here.

 

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Exchange Rates

Unless otherwise indicated, all amounts in this Annual Report are expressed in euros.

As used in this document, “euro,” “EUR” or “€” means the single unified currency that was introduced in the Federal Republic and ten other participating Member States of the European Union on January 1, 1999. “U.S. dollar,” “USD” or “$” means the lawful currency of the United States. “British pound sterling” or “GBP” means the lawful currency of the United Kingdom. As used in this document, the term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes, as required by Section 522 of the U.S. Tariff Act of 1930, as amended. Unless otherwise stated or as converted in accordance with our currency translation policy as set forth in “Summary of accounting policies—Currency translation” in the notes to the consolidated financial statements, conversions of euros into U.S. dollars have been made at the rate of EUR 1.00 to USD 1.4603, which was the noon buying rate on December 31, 2007.

So that you may more easily ascertain how the trends in our financial results might have appeared had they been expressed in U.S. dollars, the following table shows, for the periods indicated, the average, high, low and period-end, noon buying rates for euros, expressed in U.S. dollars per EUR 1.00:

 

Year or Month

   Average(1)    High    Low    Period-End
     (in $ per €)

2003

   1.1411    1.2597    1.0361    1.2597

2004

   1.2478    1.3625    1.1801    1.3538

2005

   1.2400    1.3476    1.1667    1.1842

2006

   1.2661    1.3327    1.1860    1.3197

2007

   1.3797    1.4862    1.2904    1.4603

2007

           

August

      1.3808    1.3402    1.3641

September

      1.4219    1.3606    1.4219

October

      1.4468    1.4092    1.4468

November

      1.4862    1.4435    1.4688

December

      1.4759    1.4344    1.4603

2008

           

January

      1.4877    1.4574    1.4841

February (through February 27)

      1.5132    1.4495    1.5132

 

(1) The average of the noon buying rates on the last business day of each month during the relevant period.

On February 27, 2008, the noon buying rate was USD 1.5132 per EUR 1.00.

Our shares trade on German stock exchanges, including the Frankfurt Stock Exchange, in euros. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of the shares on the German stock exchanges and, as a result, are likely to affect the market price of our ADSs on the New York Stock Exchange. When we declare cash dividends, they are declared in euros, and exchange rate fluctuations affect the U.S. dollar amounts you would receive if you are a holder of American Depositary Receipts (ADRs) evidencing ADSs upon conversion of cash dividends on the shares represented by your ADSs.

 

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RISK FACTORS

In addition to the other information contained in this Annual Report, investors in our securities should carefully consider the risks described below. Our financial condition or results of operations, or the trading prices of our securities, could be materially adversely affected by any of these risks.

The following discussion contains a number of forward-looking statements. Please refer to the “Forward-Looking Statements” discussion at the front of this Annual Report for cautionary information.

An economic downturn, a substantial slowdown in economic growth or deterioration in consumer spending could adversely affect our customers’ purchases of our products and services in each of our operating segments, which could have a negative impact on our operating results and financial condition.

Our business is influenced by general economic conditions in Germany, Europe and the United States. If economic growth in the countries in which we conduct business deteriorates in 2008, this could have an adverse effect on the level of demand by our individual customers for our products and services and the willingness of our business customers to invest in information and communications technology (ICT). This could, in turn, jeopardize the attainment of our growth targets, such as those relating to multimedia services in mobile telecommunications, or those relating to broadband products and services based on digital subscriber line (DSL) technology.

Because we operate in heavily regulated business environments, decisions that regulatory authorities impose on us restrict flexibility in managing our business and may force us to offer services to competitors, or reduce the prices we charge for our products and services, either of which could have a material negative impact on our revenues, profits and market shares.

Unlike many of our competitors, we are subject to strict regulation in many market segments in Germany and Central and Eastern Europe, particularly with respect to the fixed-line network business of our Broadband/Fixed Network operating segment. Government agencies regularly intervene in the offerings and in the pricing of our fixed-line products and services. Regulation can impede our ability to grow and to react to the initiatives of competitors and technological change.

At the European Union level, the framework for telecommunications regulation is currently under review. The European Commission has proposed changes that would not lead to a significant reduction of regulation. On the contrary, as a result of this review by the European Commission, the scope of regulation may be expanded by the European Union or national regulatory authorities, either of which could have negative effects on our business and pricing flexibility and, as a result, could affect our ability to generate revenue and profit. For example, the European Commission has proposed, under certain conditions, to regulate separately network operations and services provided through a network. The European Parliament and the Council of Ministers are expected to discuss these proposals in 2008.

Access and price regulation applies primarily to telecommunications services that are considered to involve an operator with “significant market power.” We have been designated an operator with significant market power in most fixed-line markets in which we operate, including in Germany, Hungary, Slovakia and Croatia. The German telecommunications regulatory framework implemented by the Federal Network Agency (Bundesnetzagentur) has an especially significant impact on our business. So far, we have been exempted from regulation on the basis of a loss of significant market power in markets of relatively minor importance only, such as the market for foreign long-distance calls in fixed-line networks.

Additionally, since we are offering mobile and fixed-line triple-play services (high-speed Internet access, communications services and entertainment offerings), media regulation may become increasingly important to our business. This regulation might restrict our ability to provide media services, including the delivery of content, and could also result in additional costs for technical implementation measures needed to comply with increased regulation.

 

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Mobile Communications

Our mobile telecommunications operations, which are conducted through our operating segments Mobile Communications Europe and Mobile Communications USA, are supervised by regulatory authorities in the countries in which we operate. We expect a tightening of regulatory control in the area of mobile telecommunications, with a probable negative effect on pricing and revenues, including as a result of further reductions in international roaming charges for the wholesale and retail voice market, data and SMS roaming charges, call termination charges and also possible access regulation in some markets. In Europe, national regulatory authorities and various E.U. bodies have the power to regulate based on market investigations or reviews.

With respect to international roaming charges for the wholesale and retail voice market, a European Union-wide regulation, valid until June 2010, is presently in place. However, in late 2008, the European Commission is expected to report on its evaluation of the present regulation and will make recommendations for modifications it deems appropriate.

Mobile call termination charges are also subject to regulatory measures in T-Mobile’s markets that can have a negative effect on revenues. Various reviews of call termination rates and court proceedings relating to regulatory measures are pending in several of T-Mobile’s markets.

Recently, the European Commission launched an inquiry into the data and SMS roaming market. Should the European Commission determine that prices for data and SMS roaming are too high, a regulation with subsequent price reductions may be imposed.

Our telecommunications systems and operations in the United States are regulated primarily by the U.S. Federal Communications Commission (FCC) and by various other federal, state and local governmental bodies. These governmental agencies may also exercise jurisdiction over mobile telecommunications operators. Some U.S. states have taken actions to regulate various aspects of wireless operations including customer billing, termination of service arrangements and advertising. Any of those agencies could adopt regulations or take other actions that could adversely affect our business. If we fail to comply with applicable regulations, we may be subject to sanctions, which may have an adverse effect on our mobile telecommunications business in the United States.

For further information regarding the matters discussed above and other aspects of the regulatory environments to which our businesses are subject, see “Item 4. Information on the Company—Regulation” and “Item 8. Financial Information—Legal Proceedings.”

Broadband/Fixed Network

We believe that, for the foreseeable future, the Federal Network Agency is likely to consider us as a provider with significant market power in various German markets for public voice telephony services in the fixed-line network and in other markets, including most of those in which we held monopoly rights in the past. As a result, we expect that the strict regulatory provisions of the Telecommunications Act relating to providers with significant market power will continue to be applied to our activities in those markets. Considering that in many markets our competitors are unlikely to gain significant market power in the near future, we expect that we will have to compete in important markets with providers not subject to these regulatory obligations. Therefore, these competitors may be expected to have more flexibility than we have in terms of the types of services offered and customers served, pricing and the granting of network access.

The Federal Network Agency has not shown any sign that it will refrain from regulating previously unregulated or emerging markets. On the contrary, the Federal Network Agency appears prepared to extend regulation into previously unregulated markets. For example, we are required to offer an Internet Protocol (IP) Bitstream Access product in the wholesale-market, which is regulated in terms of price, possibly below the current prices for Resale DSL. Additionally, we are required to offer unbundled broadband access to competitors by April 2008 or sooner if Broadband/Fixed Network introduces its own all IP-product. Unbundled broadband access for our competitors would expand competition in the access business, currently focused on metropolitan areas, to all regions in Germany. These regulatory measures could have a material adverse effect on our market shares, revenues and profits.

 

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Regulatory authorities may choose to classify our entry into new markets as extensions of our existing services and subject such new businesses to regulation instead of considering it an unregulated new product offering. For example, our triple-play offerings using DSL technology over our new 50 Mbit/s high-speed fiber-optic network (VDSL) may be viewed by the Federal Network Agency as an extension of our prior double-play and triple-play service offerings, which were based on ADSL2+ technology, and not as a new market. This could subject our VDSL technology-based product offerings to extensive regulation.

According to a regulatory order dated June 29, 2007, we must grant access to competitors to ducts or, alternatively, to dark fiber cable. The replication of VDSL products in particular by competitors using their own infrastructures is hence being made easier at our expense. Some network operators have expressed the intention to establish VDSL access through our ducts. This would increase the competitive pressure on our “Entertain” products and other services, which could have a negative impact on our market shares, revenues and profits.

Our fixed-line subsidiaries in Central and Eastern Europe are subject to regulatory provisions and risks that are similar to those affecting our fixed-line operations in Germany. The business impact of increased regulation on our subsidiaries in Central and Eastern Europe will depend on the way in which national regulatory authorities use their powers, and the extent to which our competitors take advantage of regulatory decisions designed to foster increased competition.

Further market analysis procedures under the E.U. regulatory framework continue to be carried out in Hungary and Slovakia throughout 2008, which could eventually lead to reductions in the prices we may charge to customers for wholesale and retail services. These developments could also contribute to a loss of our market shares in these countries. Our Central and Eastern European subsidiaries might also be required to adjust their product offerings on the wholesale and retail levels in furtherance of competition in the fixed-line network. This could have a material adverse effect on their market shares, revenues and profits.

For further information regarding the matters discussed above and other aspects of the regulatory environments to which our businesses are subject, see “Item 4. Information on the Company—Regulation” and “Item 8. Financial Information—Legal Proceedings.”

We face intense competition in all areas of our business, which could lead to reduced prices for our products and services and a decrease in market share in certain service areas, thereby having an adverse effect on our revenues and net profit.

Mobile Communications

Each of T-Mobile USA’s three main national competitors in the United States—AT&T, Verizon Wireless and Sprint/Nextel—is significantly larger than T-Mobile USA. Their scale could afford them significant structural and competitive advantages in this market. This situation presents a long-term challenge to T-Mobile USA to effectively compete in terms of pricing, products, coverage and the introduction of new technologies and services. Intense competition from various regional and other small national operators also exists in T-Mobile USA’s markets. Since T-Mobile USA is a significant contributor to our overall revenues and customer growth, a slowdown or decline in the business of T-Mobile USA could have a material adverse effect on the attainment of the growth targets and profitability of our Group as a whole.

Competition in the European mobile telecommunications markets has increased and can be expected to increase further in the future. Growing competition results, in part, from the market entry of low cost carriers, such as mobile virtual network operators (MVNOs), which use the networks of other operators at volume discounts, and from market consolidation. If prices for mobile telecommunications services decline more than anticipated and this decline is not compensated for by higher usage, T-Mobile may not achieve its objectives. In addition, mobile network operators’ expansion of product offerings into the fixed-line sector may result in a competitive disadvantage for T-Mobile in countries in which T-Mobile offers only mobile communications services. Moreover, technologies such as W-LAN, DSL, WiMax and Voice over Internet Protocol (VoIP), which can be used with existing hardware and platforms, could result in the diversion of voice and data traffic from T-Mobile’s network, which could lead to significant price and revenue reductions.

 

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As European markets have become increasingly saturated, the focus of competition has been shifting from customer acquisition to customer retention, and increasing the quality and value of existing customers. Accordingly, if we are unable to offer increased quality and better value to our customers, our market share and revenues may not grow as we have anticipated in our growth plans.

For more information, see “Item 4. Information on the Company—Description of Business—Mobile Communications.”

Broadband/Fixed Network

In Germany, and to a lesser extent in Central and Eastern Europe, fixed-line network voice telephony service revenues and prices have continued to decline, primarily due to intense competition and adverse decisions imposed by the national regulation authorities, and also due to customers’ ongoing substitution of mobile telecommunications and VoIP services for fixed-line usage.

Due to intense competition from mobile operators, fixed-line carriers and cable operators, we continued to lose market share in 2007. We expect a further increase in competition due to a change in mobile operators’ focus from pure mobile services towards fixed-line offerings and cable operators’ product bundles for telephone and broadband access lines, which are increasingly offered in more regions throughout Germany as well as in Central and Eastern Europe. Furthermore, regulatory actions by the Federal Network Agency and the increasing quality and acceptance of VoIP services will increase pressure on our market shares, revenues and margins.

Additional local and regional network operators are expanding their presence to include other major cities and regions. In the future, we could face even fiercer competition and lose further market share if our competitors were to combine their businesses.

Existing mobile substitution effects are intensified as a result of the proliferation of MVNOs. Reduced prices for mobile telecommunications services (e.g., on the basis of lower flat rates without call-based charges and regulatory decisions regarding mobile telephony termination rates) could increase pricing pressure on our fixed-line services. Furthermore, mobile operators are increasingly engaging in reselling DSL product bundles provided by other fixed-line operators, and this continues to have an adverse effect on our fixed-line network revenues.

The German and European markets for Internet access and portal services, especially within the broadband market, have been, and will continue to be, highly competitive. Prices for broadband flat rates have been steadily declining. Broadband/Fixed Network’s future competitive position will be affected by pricing, network speed and reliability, services offered, customer support and its ability to be technologically adept and innovative. The regulatory environment can also exert a significant influence on the level of competition. Wholesale DSL competitors are already offering broadband/VoIP bundles without a Deutsche Telekom fixed-line connection. Thus, we expect that our competitors will continue to pursue new broadband customers aggressively. In the market for portal services and content, competition is also intense due to low barriers to entry.

Part of the challenge for our Broadband/Fixed Network operating segment will be to improve its reputation for customer service while implementing cost-saving measures. If we do not continue to improve our customer service sustainably, there is a risk that we might not stop our continuing loss of customers.

Each of these developments is expected to continue to erode our market shares and to decrease our revenues and profit margins. For more information, see “Item 4. Information on the Company—Description of Business—Broadband/Fixed Network” and “Item 4. Information on the Company—Regulation.”

Business Customers

Our Business Customers operating segment, operated through T-Systems Business Services GmbH and T-Systems Enterprise Services GmbH (collectively, “T-Systems”), is a provider of solutions covering the entire ICT value chain. It is subject to risks associated with the general and regional economies of its customers and the

 

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willingness and ability of its customers to invest in information and communications technology services and products. The ICT market is shaped by long sales cycles, severe competition and declining prices. The result is downward pressure on revenues and margins.

The international growth potential of T-Systems may be constrained by its limited brand recognition in some national markets, at least compared to that of competitors who may be more established there, particularly as this relates to maintaining and increasing business with multinational companies outside of Germany. In addition, T-Systems has employed some restructuring and enhancement initiatives to improve the efficiency and integration of its ITC services. Therefore, we are in negotiations with some international IT providers for international partnerships with T-Systems or parts of T-Systems. We can provide no assurance that these negotiations will result in any transactions. If the various initiatives introduced by T-Systems are not successful, T-Systems may lose market share to its competitors or incur loss.

For more information, see “Item 4. Information on the Company—Description of Business—Business Customers.”

We may realize neither the expected level of demand for our products and services, nor the expected level or timing of revenues generated by those products and services, as a result of lack of market acceptance, technological change or delays from suppliers, which could adversely affect our cash flows.

There is a risk that we will not succeed in making customers sufficiently aware of existing and future value-added services or in creating customer acceptance of these services at the prices we would want to charge. There is also a risk that we will not identify trends correctly, or that we will not be able to bring new services to market as quickly or price-competitively as our competitors. These risks exist, in particular, with respect to our anticipated future growth drivers in the mobile telecommunications area (e.g., mobile data services provided via Universal Mobile Telecommunications System (UMTS or “3G”) or other advanced technologies) and in the fixed-line telecommunications area (e.g., triple-play services). Some of our investments to develop future products and services may involve substantial cash outlays with no certainty of market acceptance or regulatory non-interference. Accordingly, there is a risk that the return on our investments, in particular in UMTS licenses and network infrastructure may be negatively affected, which could result in significant write-downs of the value of our UMTS or other licenses or other network-related investments.

In September 2007, we re-launched our triple-play offering under the product name “Entertain” for our customers in Germany with an enlarged content offering and new features. “Triple-play” refers to the interaction between high-speed Internet access, communications services and entertainment offerings. The market acceptance for these new products and services could be negatively affected by a reduced willingness to pay for additional channels. Since the product is very complex with regard to content and technology, it may prove hard to convey its benefits to our customers via our traditional sales channels. Furthermore, potential software and IT problems could have a negative impact on its market success. In addition, the bulk of German apartment buildings have been equipped with low-priced cable TV facilities for a long time, which could lessen the propensity to switch to a new technology. Each of these factors could also have an adverse effect on our pricing models, revenues and profit margins.

Further, as a result of rapid technological progress, and the trend towards technological convergence, there is a danger that new and established information and telecommunications technologies or products may not only fail to complement one another, but in some cases may even substitute for one another. An example of this is VoIP, a technology that is already established in the business customer market. VoIP has now reached the consumer market as well and, as a technology that competes directly with traditional fixed-line telephony services, has the potential to reduce further our market share and revenues in our fixed-line business. The introduction of mobile handsets with VoIP functionality may also adversely affect our pricing structures and market share in our mobile voice telephony business. If we do not appropriately anticipate the demand for new technologies, and adapt our strategies and cost structures accordingly, we may be unable to compete effectively, with the result that our business activities, financial condition and results may suffer.

 

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For more information, see “Item 4. Information on the Company—Description of Business.”

Failure to achieve our planned reduction and restructuring of personnel could negatively affect our financial objectives and profitability.

We announced an extensive staff restructuring program for our operations in Germany in November 2005, under which a total of approximately 32,000 employees are scheduled to leave the Group by the end of 2008. Some of these employees have already left us as part of the sale of Vivento business lines and others through voluntary early retirement and other voluntary measures. By the end of 2007, the Group had already realized about 26,500 of these planned staff reductions.

However, the successful realization of our ongoing staff reduction program depends on a range of factors that are beyond our control, such as the continued successful sale of our Vivento operating businesses, general developments in the labor market and the demand for our retrained labor force and the level of acceptance of the various severance offers and other voluntary reduction measures (e.g., early retirement programs). If the planned staff reduction targets are not achieved, this would have a negative effect on our operating expenses and profitability.

In 2007, approximately 1,200 employees of Vivento Customer Services GmbH were transferred to walter services ComCare GmbH & Co. KG/walter services Holding GmbH and several regional units of arvato AG in connection with the transfer of certain Vivento call center operations. Further sales of Vivento’s business lines are planned for 2008 and are dependent on, among other things, finding suitable buyers and achieving certain financial objectives.

For more information, see “Item 4. Information on the Company—Description of Business—Group Headquarters and Shared Services” and “Item 6. Directors, Senior Management and Employees—Employees and Labor Relations—Other Employees.”

Failure to reach the goals set forth for our recently established call center, technical customer service and technical infrastructure units in Germany (Telekom Service) may jeopardize our aspirations of improved customer service quality and further cost-cutting.

On June 25, 2007, certain call center units, technical customer service units and the operational units of our technical infrastructure were transferred into three newly established companies within our Group. This transfer involved about 50,000 employees and was designed to focus on quality of service under conditions that are in line with market expectations and to secure our competitiveness in the German market. The success of our “Telekom Service” initiative largely depends on the rapid transformation of business processes, effective reporting lines and, despite the agreed upon salary reductions, enhanced employee productivity. Failure to successfully adapt to the new organizational requirements could make us fall short of our customer service and cost efficiency goals, which could impair our ability to stem loss of market share and improve employee productivity.

As a result of dispositions of certain non-core businesses in Germany, there is an increased risk of return of civil servants transferred out of the Group, which could have a negative impact on our staff and cost reduction objectives.

Our employees who have civil servant status can, based on German civil service law, only be completely transferred to the buyer of a business from us in exceptional cases. Therefore, as a general matter, such transferred civil servants are placed on leave of absence while employed with the transferred business unit. Accordingly, in the event of termination of employment with the transferred business unit, there is a risk that such civil servants will return to the Deutsche Telekom Group. This risk of return can be reduced by an agreement on compensation payments, but it cannot be completely eliminated. As of December 31, 2007, the total number of civil servants that can avail themselves of this right of return to the Deutsche Telekom Group was approximately 1,400.

 

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For further information regarding civil servants and general human resources related matters, see “Item 6. Directors, Senior Management and Employees—Employees and Labor Relations.”

Alleged health risks of wireless communications devices have led to litigation affecting T-Mobile, and could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations and, thus, adversely affect the financial condition and results of operations of our wireless services business.

Media reports have suggested that radio frequency emissions from wireless mobile devices and cell sites may raise various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Research and studies are ongoing. The World Health Organization has declared that, on the basis of current scientific knowledge, there are no known adverse effects on health below the international threshold standards, nor is it expecting any serious dangers to arise in the future, although it does recommend continued research due to the ongoing scientific uncertainty. We cannot provide assurance that research in the future will not establish links between radio frequency emissions and health risks.

Whether or not such research or studies conclude there is a link between radio frequency emissions and health, popular concerns about radio frequency emissions may discourage the use of wireless devices and may result in significant restrictions on the location and operation of T-Mobile’s cell sites and the usage of T-Home’s wireless devices, telephones or products using W-LAN technology. Such restrictions on use could have material adverse effects on our results of operations.

T-Mobile USA is subject to current and potential litigation relating to these health concerns. Several amended class action lawsuits have been filed in the United States against T-Mobile USA and several other wireless service operators and wireless telephone manufacturers, asserting products liability, breach of warranty and other claims relating to radio frequency transmissions to and from wireless mobile devices. The complaints seek substantial monetary damages as well as injunctive relief. The defense of these lawsuits may divert management’s attention, and T-Mobile USA may be required to pay significant awards or settlements and incur significant expenses in defending these lawsuits.

We do not know whether legislators, regulators or private litigants will refrain from taking other actions adverse to us, based on the purported health-related risks associated with radio frequency emissions. Any such litigation, legislation or adverse actions may result in additional costs and loss of revenues in our mobile communications businesses.

For more information, see “Item 8. Financial Information—Legal Proceedings.”

We continuously engage in large-scale programs to reshape our IT infrastructure to adapt to changing customer needs and organizational requirements. Failure to effectively plan and monitor these activities could lead to misallocations of resources and impaired processes with negative consequences for our operations.

In May 2007, we launched the “IT 2010” initiative as a comprehensive Group plan for all IT activities. This program has been established to implement our Group IT strategy and is supervised by the Chief Information Officer (CIO) board. The initiative comprises several cross-company workstreams and additional intra-company initiatives. The overall focus of the program is oriented towards “Customer Value,” “Operational Excellence” and “Cost Reduction.” By 2010, cost savings of up to EUR 1 billion, which are expected to be realized through reduced IT budgets, unified workplace systems and minimized manual interfaces, are anticipated. In accordance with the needs of our customers, the program is geared towards boosting the development of IP-based telecommunications products and services.

Due to the enormous complexity of the implementation of this IT strategy, malfunctions, connectivity issues, implementation delays, and other unforeseen problems, could result in costly process impairments and remediation, and possible extended down-times of IT processes, and therefore frustrate the attainment of our cost-savings goals.

 

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One of our most important IT programs deals with the long-term development and implementation of a comprehensive IP platform that will support both fixed-line and mobile telephony services. This means that the traditional PSTN platform will be completely replaced by an IP-based system. Upon implementing this joint IP platform, we will be subject to risks inherent in all IT systems connected to the Internet, such as hacker attacks, “spam calls” and other disruptions. These risks could lead to a temporary interruption of our IT resources and, as a result, impair the performance of our technical infrastructure.

System failures due to natural or man-made disruptions could result in reduced user traffic and reduced revenues and could harm our reputation and results.

Our technical infrastructure (including our network infrastructure for fixed-line network services and mobile telecommunications services) may be damaged or disrupted by fire, lightning, flooding and other calamities, technology failures, human error, terrorist attacks, hacker attacks and malicious actions, and other similar events. We attempt to mitigate these risks by employing a large number of measures, including backup systems and protective systems such as firewalls, virus scanners, and building security. We cannot, however, be certain that these measures will be effective under all circumstances and that disruptions or damages will not occur. Damage or disruption to our infrastructure may result in reduced user traffic and revenues, increased costs, and damage to our reputation.

Shortcomings in our supply and procurement process could negatively affect our product portfolio, revenues and profits.

As a fully integrated ICT service provider, we cooperate with a wide range of different suppliers for technical components and assemblies, as well as for software and other goods and information important to the conduct of our business. Although we do not believe that we are materially dependent on any single supplier, our contractors may want to extend delivery times, raise prices and limit supply due to their own shortages or changing business and product strategies.

If our commercial partners fail to deliver products and services in a timely and qualitative manner, the ensuing disruptions in our chain of supply could negatively affect our product portfolio, cost structure, revenues and profits. We take a variety of measures to shelter ourselves from these risks, but we cannot be sure that these measures will be effective under all circumstances.

We are continuously involved in disputes and litigation with regulators, competitors and other parties. The ultimate outcome of such legal proceedings is generally uncertain. When finally concluded, they may have a material adverse effect on our results of operations and financial condition.

We are subject to numerous risks relating to legal and regulatory proceedings, in which we are currently a party or which could develop in the future. Litigation and regulatory proceedings are inherently unpredictable. Legal or regulatory proceedings in which we are or come to be involved (or settlements thereof) may have a material adverse effect on our results of operations or financial condition. For information concerning some of the litigation in which we are involved, including with respect to Polska Telefonia Cyfrowa Sp. z o.o. (“PTC”) and Toll Collect, see “Item 8. Financial Information—Legal Proceedings.” For information concerning our regulatory environment, see “Item 4. Information on the Company—Regulation.”

Future sales of our shares by the Federal Republic or KfW Bankengruppe (“KfW”) may adversely affect the trading prices of our shares and ADSs.

The Federal Republic (which owns, together with KfW, approximately 31.7% of our outstanding shares) has announced its intention to continue its privatization policy. Accordingly, we cannot predict if and when the Federal Republic will further reduce its holdings of its equity interest in Deutsche Telekom AG. The reduction in the Federal Republic’s direct or indirect holdings may involve KfW. For shareholders, there is a danger that the market offering of a significant volume of our shares by either the Federal Republic or KfW, or speculation to this effect on the markets, could have a negative impact on the price of our shares and ADSs.

 

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In April 2006, the Blackstone Group purchased 191.7 million of our shares from KfW. KfW agreed with Blackstone to a one year lock-up with respect to further sales of KfW’s Deutsche Telekom shares. In return, Blackstone agreed with KfW to a two-year lock-up of its Deutsche Telekom shares. As the Blackstone lock-up period ends in April 2008, market speculation regarding a significant sale of shares currently held by Blackstone could have a negative impact on the price of our shares. We are not a party to these agreements and have no right to enforce or waive the lock-up restrictions.

Certain of KfW’s debt instruments are exchangeable into shares of Deutsche Telekom AG, which, upon exchange, could also have a negative impact on the price of our shares. KfW issued a class of exchangeable bonds in 2003 that matures on August 8, 2008. Exchangeable bonds are debt securities that the holder may exchange for shares in another company during a predefined period and at a predefined price. When the exchange price is exceeded and when the holder exercises the exchange right, KfW will be obligated to exchange the bonds offered for Deutsche Telekom AG shares. When the exchangeable bonds mature on August 8, 2008, KfW has the right to settle them in Deutsche Telekom AG shares. These exchangeable bonds in the aggregate amount of EUR 5 billion have a share exchange price of EUR 17.526 per ordinary share. Accordingly, approximately 285.3 million shares may be delivered by KfW in exchange for the outstanding bonds maturing in August 2008. The delivery to debtholders by KfW of a significant amount of our shares could have a negative impact on the market price of our shares.

Unexpected difficulties related to the integration of SunCom Wireless Holdings and Orange Nederland or other acquired entities could adversely affect our business and profits.

On September 16, 2007, T-Mobile USA and SunCom Wireless Holdings, Inc. (“SunCom”) announced that they had entered into a definitive merger agreement for the acquisition by T-Mobile USA of all of the outstanding shares of common stock of SunCom, for an aggregate of approximately USD 1.6 billion (EUR 1.1 billion). With the acquisition of SunCom, completed on February 22, 2008, we hope to realize significant cost synergies, reduce roaming expenses and improve our market presence.

On October 1, 2007, T-Mobile Netherlands had concluded a transaction with France Télécom regarding the acquisition of the Dutch mobile operator, Orange Nederland, for a purchase price of EUR 1.3 billion. By combining these businesses, we expect to realize significant synergies with regard to marketing expenses and network infrastructure.

Any major problem in integrating networks, operations, product offerings, personnel, standards and procedures of these or other acquired companies may have material adverse effects on our results of operations and our ability to improve our market position as anticipated.

Exchange-rate, interest-rate and rating risks have had, and may continue to have, an adverse effect on our revenue and cost development.

We are exposed to currency risks related to our international business activities. Generally, our Central Treasury seeks to hedge currency risks that may have a negative impact on our cash flows, although there can be no guarantee that our hedging strategies will succeed. Currency risks may have a negative impact on our results of operations when amounts in local currencies are translated into euros, particularly in connection with U.S. dollar-denominated and British pound sterling-denominated results.

For more information with respect to the impact of exchange rates and currency translations, see “Item 5. Operating and Financial Review and Prospects—Consolidated Results of Operations.”

We are also exposed to interest-rate risks, primarily in relation to the euro, U.S. dollar and British pound sterling currencies. Interest-rate risks arise as a result of fluctuations in interest rates affecting the level of interest payments due on indebtedness at variable rates in each of these currencies. Once per year, our Management Board specifies ratios of fixed and variable debt in these three currencies. Our Central Treasury then takes measures, using derivative instruments and other measures, to implement the interest-risk management decisions of the Management Board.

 

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For more information about our hedging activities and interest-rate and market risks, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

In 2007, all three rating agencies maintained our long-term rating at either A- or A3. However, in May 2007, Fitch Ratings changed its outlook from “stable” to “negative.” A decrease in our credit ratings below certain thresholds by various rating agencies would result in an increase in interest rates due to step-up provisions in certain bonds and medium-term notes. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Resources—Step-up Provisions.”

Developments in the telecommunications sector have resulted, and may in the future result, in substantial write-downs of the carrying value of certain of our assets.

We review on a regular basis the value of each of our subsidiaries and their assets. In addition to our regular annual impairment reviews, whenever indications exist that goodwill, intangible assets or fixed assets may be impaired due to changes in the economic, regulatory, business or political environment, we consider the necessity of performing certain valuation tests, which may result in impairment charges. The recognition of impairments of intangible assets, property, plant and equipment and financial assets could cause us to take large, non-cash charges against net profit, which could lead to a reduction in the trading price of our shares and ADSs. For more information, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Estimates.”

 

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ITEM 4. Information on the Company

INTRODUCTION

The legal and commercial name of our company is Deutsche Telekom AG. We are a private stock corporation organized under German law. Our registered office is located at Friedrich-Ebert-Allee 140, 53113 Bonn, Germany, and our telephone number is +49 (228) 181-0. Our agent for service of process in the United States is Deutsche Telekom, Inc., 600 Lexington Avenue, New York, NY 10022.

HISTORICAL BACKGROUND

We are an integrated telecommunications provider offering our customers around the world a comprehensive portfolio of state-of-the-art services in the areas of telecommunications and IT.

The provision of public telecommunications services in Germany was long a state monopoly, as formerly provided in the constitution of the Federal Republic. In 1989, the Federal Republic began to transform the postal, telephone and telegraph services administered by the former monopoly provider of such services into market-oriented businesses, and divided the former monopoly into three distinct entities along their lines of business, one of which was our predecessor, Deutsche Bundespost Telekom. At the same time, the Federal Republic also began the liberalization of the German telecommunications market. We were transformed into a private stock corporation effective January 1, 1995.

The operation of networks (including cable networks) for all telecommunications services, other than public fixed-line voice telephony, was opened to competition in Germany on August 1, 1996, when the new legal framework for the regulation of the telecommunications sector in Germany, the Telecommunications Act, became effective. As required by the Telecommunications Act, and mandated by the directives of the E.U. Commission, the telecommunications sector in Germany was further liberalized on January 1, 1998, through the opening of the public fixed-line voice telephony services to competition.

Since then, we have faced intense competition and have been required, among other things, to offer competitors access to our fixed-line network at regulated interconnection rates. For more information on the regulatory effects on competition in our fixed-line business, see “—Regulation.”

Other important events in the development of our business have included:

 

   

the formation of strategic business areas, Mobile Communications Broadband/Fixed Network and Business Customers as of January 1, 2005, as an evolution from our previous structure, to better serve evolving customer needs;

 

   

the 2005 acquisition of Global System for Mobile Communications (GSM) networks in California and Nevada in the United States from Cingular for USD 2.5 billion, and the related dissolution of our network-sharing joint venture with Cingular;

 

   

the full divestment of shareholdings in the Russian mobile telecommunications operator, Mobile TeleSystems OJSC (“MTS”), in 2005 following reductions of our shareholdings in 2003 and 2004;

 

   

the acquisition of a 76.5% majority interest in Crnogorski Telekom a.d. (“Crnogorski Telekom”) in Montenegro through our Hungarian subsidiary, Magyar Telekom, in 2005;

 

   

the acquisition in 2006 of the Austrian mobile telecommunications operator, tele.ring, for a purchase price of EUR 1.3 billion;

 

   

the acquisition in 2006 of gedas AG (“gedas”) (a subsidiary of Volkswagen AG), an IT service provider primarily focused on the automotive and manufacturing industries, for a purchase price of EUR 0.3 billion;

 

   

the completion of the merger of T-Online International AG with and into Deutsche Telekom AG in June 2006;

 

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the acquisition of additional shares in PTC and the full consolidation as of November 1, 2006;

 

   

the acquisition in November 2006 by T-Mobile USA of 120 additional spectrum licenses in the United States for data and voice services for a total purchase price of USD 4.2 billion (EUR 3.3 billion);

 

   

the acquisition in 2007 of Orange Nederland, a Dutch telecommunications operator, for a purchase price of EUR 1.3 billion;

 

   

the sale of Media & Broadcast to Telédiffusion de France in January 2008 for EUR 0.85 billion; and

 

   

the completion of the acquisition of SunCom in February 2008 for a purchase price of EUR 1.1 billion.

Additional information regarding the foregoing events and developments is contained throughout this Item 4.

 

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ORGANIZATIONAL STRUCTURE

As described below, our Group is organized and reports along five operating segments, Mobile Communications Europe, Mobile Communications USA, Broadband/Fixed Network, Business Customers, and Group Headquarters and Shared Services.

 

   

Each of Mobile Communications Europe and Mobile Communications USA offers digital mobile voice and data services to consumers and business customers and also sells hardware and other terminal devices in connection with the services offered. In addition, services are sold to resellers and other companies that buy network services and market them independently to third parties.

 

   

Broadband/Fixed Network offers consumers and small business customers state-of-the-art infrastructure for traditional fixed-network services, broadband Internet access, and multimedia services. Broadband/Fixed Network also does business with national and international network operators and with resellers, and provides wholesale telecommunications services for our other operating segments.

 

   

Business Customers offers its customers a full range of ICT services and is divided into two business units. T-Systems Enterprise Services supports multinational corporations and large public authorities, and T-Systems Business Services serves around 160,000 large and medium-sized enterprises.

 

   

Group Headquarters and Shared Services is responsible for strategic and cross-divisional management functions.

The following table shows the significant subsidiaries that we owned, directly or indirectly, as of December 31, 2007. The revenues of these companies, together with Deutsche Telekom AG, account for more than 90% of the Group’s revenues.

 

Name and registered office

   %
Held

T-Mobile USA, Inc. (“T-Mobile USA”), Bellevue, Washington, United States(1)

   100.00

T-Mobile Deutschland GmbH (“T-Mobile Deutschland”), Bonn, Germany(2)

   100.00

T-Systems Enterprise Services GmbH (“Enterprise Services”), Frankfurt am Main, Germany

   100.00

T-Systems Business Services GmbH (“Business Services”), Bonn, Germany

   100.00

T-Mobile Holdings Ltd. (“T-Mobile UK”), Hatfield, United Kingdom(1)

   100.00

Magyar Telekom Nyrt. (“Magyar Telekom”), Budapest, Hungary(3)

   59.30

PTC, Polska Telefonia Cyfrowa Sp. z o.o. (“PTC”), Warsaw, Poland(2)

   97.00

T-Mobile Netherlands Holding B.V. (“T-Mobile Netherlands”), The Hague, The Netherlands(1)

   100.00

HT-Hrvatske telekomunikacije d.d. (“T-Hrvatski Telekom”), Zagreb, Croatia

   51.00

T-Mobile Austria Holding GmbH (“T-Mobile Austria”), Vienna, Austria(4)

   100.00

T-Mobile Czech Republic a.s. (“T-Mobile Czech Republic”), Prague, Czech Republic(5)

   60.77

Slovak Telekom a.s. (“Slovak Telekom”), Bratislava, Slovakia

   51.00

T-Systems GEI GmbH, Aachen, Germany(6)

   100.00

 

(1) Indirect shareholding via T-Mobile Global Holding GmbH, Bonn
(2) Indirect shareholding via T-Mobile International AG, Bonn
(3) Indirect shareholding via MagyarCom Holding GmbH, Bonn
(4) Indirect shareholding via T-Mobile Global Holding Nr. 2 GmbH, Bonn
(5) Indirect shareholding via CMobil B.V., Amsterdam
(6) Indirect shareholding via T-Systems Enterprise Services GmbH, Frankfurt am Main

A list of our subsidiaries as of December 31, 2007, is filed as Exhibit 8.1 to this Annual Report.

 

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SEGMENT REVENUE BREAKDOWN

The following table presents total revenues (the sum of external (net) revenues and intersegment revenues), net revenues and intersegment revenues of our segments for the years indicated.

In November 2006, the IASB issued IFRS 8 “Operating Segments.” IFRS 8 replaces IAS 14 “Segment Reporting” and must be applied to reporting periods beginning on or after January 1, 2009. We have opted for early adoption of IFRS 8, beginning with the financial year ending on December 31, 2007. According to IFRS 8, reportable operating segments are identified based on a “management approach,” which requires review of the Group’s internal organizational and management structure and on internal financial reporting to the chief operating decision maker. As a consequence of our early adoption of this Standard and changes in our internal reporting and management channels, we have separated Mobile Communications into two operating segments—Mobile Communications Europe and Mobile Communications USA. The figures for previous periods have been adjusted accordingly. For more information please see note 39 to notes to the consolidated financial statements.

Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the Business Customers and Group Headquarters and Shared Services operating segments. In previous periods, these results were reported under the Broadband/Fixed Network operating segment. Prior-year figures have been adjusted accordingly.

For more information regarding our revenues on a segment basis, see “Item 5. Operating and Financial Review and Prospects—Segment Analysis.”

 

    For the years ended December 31,  
    2007     2006     2005  
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
 
    (millions of € except percentages)  

Mobile Comunications Europe

  20,000   32.0   713     20,713     17,700   28.8   755     18,455     16,673   28.0   945     17,618  

Mobile Comunications USA

  14,050   22.5   25     14,075     13,608   22.2   20     13,628     11,858   19.9   29     11,887  

Broadband/Fixed Network

  19,072   30.5   3,618     22,690     20,366   33.2   4,149     24,515     21,447   36.0   4,395     25,842  

Business Customers

  8,971   14.3   3,016     11,987     9,301   15.2   3,568     12,869     9,328   15.6   3,817     13,145  

Group Headquarters and Shared Services

  423   0.7   3,445     3,868     372   0.6   3,386     3,758     298   0.5   3,279     3,577  

Reconciliation

      (10,817 )   (10,817 )       (11,878 )   (11,878 )       (12,465 )   (12,465 )
                                                           

Total

  62,516   100.0       62,516     61,347   100.0       61,347     59,604   100.0       59,604  
                                                           

 

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DESCRIPTION OF BUSINESS

Mobile Communications

Principal Activities

Our mobile communications business is comprised of two separate reporting segments, Mobile Communications Europe and Mobile Communications USA, collectively referred to as T-Mobile. Mobile Communications Europe includes our mobile operations in Germany, the United Kingdom, Poland, Hungary, The Netherlands, the Czech Republic, Austria, Croatia, Slovakia, Macedonia and Montenegro. Mobile Communications USA includes our mobile operations in the United States through T-Mobile USA.

The principal services offered by our mobile communications business to residential and business customers are digital mobile telephony voice services and data services, such as SMS (Short Message Service), MMS (Multimedia Messaging Services), Mobile Internet and other data services. These voice and data services are provided based on mobile communication technologies such as GSM (Global System for Mobile communications), including GPRS (General Packet Radio Service), and EDGE (Enhanced Data rates for Global Evolution), and UMTS (Universal Mobile Telecommunications System), including HSDPA (High-Speed Downlink Packet Access) and HSUPA (High-Speed Uplink Packet Access). T-Mobile also operates numerous W-LAN HotSpots. T-Mobile offers national and international roaming services to its customers through a number of roaming agreements with third-party operators, which allow customers to access mobile services while outside their home network service area. T-Mobile also sells mobile devices to customers in conjunction with its service offerings. Mobile voice and data services are offered on both a prepay basis and a contract basis.

T-Mobile customers generally purchase contract services on the basis of fixed monthly fees, and pay time-based airtime and per-message fees. Some contract service offerings include a specified amount of airtime, data volume or messages in the monthly fee. Prepay services are purchased on the basis of monetary increments that are recorded on the customers’ SIM (subscriber identity module) cards and then deducted, based on airtime or messaging usage fees, as the cards are used. W-LAN services are sold on both a monthly subscription basis and through various usage-based plans. Usage fees can vary according to the rate plan selected by the customer, the day and time when a call is made, the destination of the call, the location where the call originates and, in some cases, other terms applicable to the rate plan, such as whether the called party is also a customer of the same network.

Global Branding and Alliances

In 2007, T-Mobile, through the Open Handset Alliance, joined with leading technology and wireless companies and announced the development of Android, which is anticipated to be an open and comprehensive platform for mobile devices. The Open Handset Alliance currently consists of thirty-four multinational companies, including, among others, T-Mobile, Google Inc., High Tech Computer Corp., Qualcomm Inc., and Motorola, Inc. This alliance shares common goals to foster innovation relating to mobile devices and to provide consumers with a better user experience. By providing developers with a new level of openness that enables them to work more collaboratively, Android aims to accelerate the pace at which new and compelling mobile applications are made available to consumers. The first phones based on Android are expected to be available in the second half of 2008.

In 2006, we re-branded Mobimak in Macedonia as T-Mobile Macedonia and Monet in Montenegro as T-Mobile Crna Gora.

T-Mobile was a founding member of the “FreeMove” alliance, together with Telefónica in Spain, TIM Italia S.p.A. in Italy and Orange S.A. in France. The alliance aims to make mobile services more widely available and seamless in all countries in which alliance members operate, by cooperating in several key areas, including the development of joint services related to roaming, voice and data, and the development and purchasing of mobile devices. The European Commission required Telefónica to leave the alliance in 2006 following Telefónica’s acquisition of O2 plc.

 

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New Services

T-Mobile’s strategy is to offer an integrated portfolio of voice and data services to its customers, using the most appropriate technologies available depending on local market conditions.

The coverage in all of our markets is based on GSM network technology. GPRS technologies have been deployed to add data capabilities to the GSM network, which are being further enhanced in terms of performance and capacity by EDGE technology. EDGE is currently commercially available in the United States, Germany, the Czech Republic, Austria, Poland, Hungary, Croatia, Macedonia, Slovakia and Montenegro. In urban and suburban areas in Europe with a higher demand for data capacity, this technology is supplemented by UMTS-FDD (Frequency Division Duplex) or UMTS-TDD (Time Division Duplex) technology. The network is fully integrated and allows a seamless user experience for voice and data services.

In 2006, all of our markets in Europe with UMTS-FDD coverage areas were upgraded to support HSDPA (High-Speed Downlink Packet Access) and HSUPA (High-Speed Uplink Packet Access) technology. HSDPA allows data rates of up to 7.2 Mbit/s in the downlink and HSUPA allows data rates of up to 1.4 Mbit/s in the uplink.

Based on the spectrum acquired in 2006, T-Mobile USA also started to build out its UMTS-FDD network in 2007 and expects to launch services employing this technology to specific markets in 2008.

In 2007, T-Mobile USA launched FlexPay, a new product which combines characteristics of contract and prepay offerings. FlexPay allows services to be purchased with or without a contract on the basis of a fixed monthly fee paid in advance. This product includes similar specified amounts of airtime, data volume or messages for a monthly fee as traditionally offered to contract customers who pay for their services in arrears. Usage over the paid-in-advance bundle is charged based on the purchase of prepay services at specific FlexPay rates. FlexPay customers who subscribe to a contract are reported as contract customers; otherwise they are considered prepay customers.

Also in 2007, T-Mobile USA launched its HotSpot@Home product, which combines W-LAN and T-Mobile USA’s nationwide voice and data network. Customers with the HotSpot@Home service can get improved mobile coverage, and, with the purchase of an add-on plan, unlimited domestic calling over their personal W-LAN connection when at home. When mobile, customers can get the same benefits at all of the 9,700 T-Mobile HotSpot locations across the United States (including roaming). During 2008, T-Mobile USA’s Wi-Fi agreement with Starbucks will end and Wi-Fi operations in Starbucks locations will transition from T-Mobile USA to AT&T. After the transition is complete, T-Mobile USA HotSpot and HotSpot@Home customers will be able to continue to obtain Wi-Fi access at Starbucks locations for the next five years under a roaming agreement between T-Mobile USA and AT&T.

In addition, T-Mobile offers mobile broadband data services through its W-LAN HotSpots in Europe and in the United States. The integration of W-LAN HotSpots and the mobile network enables our customers to use data services regardless of the access technology used.

To date, T-Mobile has met or exceeded all regulatory obligations with respect to its UMTS and other license requirements in the United Kingdom, Germany, Austria, The Netherlands, the Czech Republic, Hungary, Croatia, Poland, the United States and Slovakia. For more information regarding regulatory obligations, see “—Regulation.”

Principal Markets

Our principal mobile telecommunications markets are in the United States, Germany, the United Kingdom, Poland, Hungary, The Netherlands, the Czech Republic, Austria, Croatia, Slovakia, Macedonia and Montenegro.

T-Mobile counts its customers by the number of SIM cards activated and not churned. Since the beginning of 2006, T-Mobile has included in its customer totals the SIM cards with which machines can communicate automatically with one another (“M2M cards”). T-Mobile’s mobile telecommunications subsidiaries count contract customers as customers for the length of their contracts, and count prepay customers as customers as long as they continue to use our services, and then for a prescribed period thereafter, which differs according to

 

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the particular market. Generally, at the end of this period, or in the case of payment default or voluntary disconnection, the customers are cancelled or “churned.” The churn rate for any given period represents the number of customers whose service was discontinued during that period, expressed as a percentage of the average number of customers during the period, based on beginning and period-end figures. Our competitors may calculate their churn rates using methods different from ours. In addition, because we use different calculation methodologies in different jurisdictions, our own churn figures are not comparable across all of our national operations. Our churn methodologies are described in greater detail under each national discussion below.

Mobile Communications Europe

Germany

Through T-Mobile Deutschland, T-Mobile offers mobile telecommunications services to individual and business customers in Germany. At December 31, 2007, T-Mobile Deutschland had approximately 36.0 million customers, including approximately 0.7 million M2M cards in use in machine-to-machine applications that were counted as customers for the first time in 2006. There were approximately 31.4 million customers at December 31, 2006, including approximately 0.5 million M2M cards in use. Of the total customers at December 31, 2007, approximately 16.1 million were contract customers, compared to approximately 15.1 million at December 31, 2006. T-Mobile Deutschland had approximately 19.9 million prepay customers at December 31, 2007, compared to approximately 16.3 million at December 31, 2006.

T-Mobile Deutschland’s total average churn rate for 2007 was 1.1% per month, compared to an average churn rate of 1.6% per month in 2006, due primarily to a decrease in the prepay churn rate. The average contract customer churn rate was 1.2% per month in 2007, which remained unchanged compared to 2006. The average prepay churn rate during 2007 was 1.0% per month, compared to the average prepay churn rate of 2.0% per month during 2006, which was primarily driven by the change of churn policy in 2007. In general, a contract customer of T-Mobile Deutschland is churned either after the voluntary termination upon the lapse of the customer’s contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations.

As a result of court proceedings against competitors, T-Mobile Deutschland changed its deactivation policy at the beginning of 2007 in favor of its prepay customers. These customers can now use their prepaid credit longer than before. Since the beginning of 2007, T-Mobile Deutschland’s prepay churn policy states that the contractual relationship between T-Mobile and the prepay customer starts with the activation of the prepay SIM card and continues for an indefinite time. Without a notice period, the contractual relationship can be terminated by the customer in writing or by calling a T-Mobile service center. The termination of the contractual relationship by the customer is directly followed by disconnection from the network (churn). The contractual relationship can be terminated by T-Mobile in writing or by SMS with one month prior notice. After the one month notice period, the customer is churned, unless the account is topped up or the customer generates outgoing voice or data traffic during the one-month notice period.

Until December 31, 2006, T-Mobile Deutschland’s prepay churn policy stated that in the 12 months following activation, a customer could originate calls/data traffic and receive data or voice communication (“phone-time”). In the following 92 days, the customer could only receive data and voice communication (“message-time”) and originate only SMS traffic. After these approximately 15 months, the prepay customer was churned, unless the prepay account was topped-up during the approximately 15-month period. In that case, if a EUR 15 top-up credit was added to the account, the customer got 215 days of phone-time plus 92 days of message-time. With EUR 30 and EUR 50 top-up credits, the phone-time period was again 12 months plus 92 days message-time. For two prepaid tariffs, the churn policy was different than described above. For these special tariffs, phone-time for standard top-ups of EUR 15, EUR 30 and EUR 50 was 92 days followed by 92 days messaging-time.

United Kingdom

T-Mobile UK offers mobile telecommunications services to individual and business customers in the United Kingdom. At December 31, 2007, T-Mobile UK had approximately 17.3 million customers, compared to approximately 16.9 million at December 31, 2006. Of the total customers at December 31, 2007, approximately

 

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3.9 million were contract customers, compared to approximately 3.7 million at December 31, 2006, and approximately 13.4 million were prepay customers at December 31, 2007, compared to approximately 13.2 million at December 31, 2006. Beginning January 1, 2006, T-Mobile UK has counted its wholesale customers as either contract or prepay customers. Until December 31, 2005, T-Mobile UK counted all of its wholesale customers as contract customers. In the T-Mobile UK customer base, M2M cards account for less than one percent of the overall prepay customer base.

Of the total number of T-Mobile UK customers at December 31, 2007 and 2006, approximately 5.2 million and 5.3 million, respectively, were customers of Virgin Mobile Telecoms Limited (“Virgin Mobile”), which is an MVNO. T-Mobile UK is reporting Virgin Mobile customers as prepay customers. All Virgin Mobile customers currently use T-Mobile UK prepaid technology. Virgin Mobile is continuing to increase their contract tariff offerings. However, due to the technology used it is currently impossible for T-Mobile UK to differentiate Virgin Mobile customers as either contract customers or prepay customers. Virgin Mobile reports to T-Mobile UK the number of customers using a churn policy whereby a customer is churned after a period of 180 days of inactivity. As a mobile virtual network operator, Virgin Mobile purchases airtime minutes and basic mobile services from T-Mobile UK and resells these minutes and services under the “Virgin Mobile” brand name. Until January 2004, Virgin Mobile had been a joint venture between T-Mobile UK and the Virgin Group. At that time, T-Mobile UK sold its 50% equity stake in Virgin Mobile to the Virgin Group and received a payment of GBP 50 million (approximately EUR 75 million) in exchange for waiving its right to participate in any initial public offering of Virgin Mobile. Additionally, T-Mobile UK and Virgin Mobile concluded a telecommunications supply agreement granting Virgin Mobile use of T-Mobile UK’s mobile telecommunications network for a further ten years. In 2006, NTL Incorporated acquired Virgin Mobile Holdings (UK) plc, the parent company of Virgin Mobile. This acquisition has not had a significant impact on the telecommunications supply agreement between T-Mobile UK and Virgin Mobile.

In December 2007, “3” (a brand name of Hutchison 3G UK Limited) and T-Mobile UK entered into a network sharing agreement to consolidate the 3G Radio Access Networks to provide customers with enhanced network coverage and faster access to high-speed mobile services at a lower cost.

During 2007, T-Mobile UK’s average monthly churn rate (not including Virgin Mobile customers) was 3.2%, compared to 3.3% in 2006. The decrease in churn was predominantly caused by a decrease in T-Mobile UK’s contract churn rate of 2.0% per month in 2007, compared to 2.1% per month in 2006. This decrease was primarily the result of longer contract duration and improved credit review procedures. The prepay churn rate was 3.8% per month in 2007, which is approximately the same as in 2006.

Generally, a contract customer of T-Mobile UK is churned either after the voluntary termination upon the lapse of a contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. A prepay customer in the United Kingdom is churned after a period of 180 days of inactivity, i.e., the customer has neither originated nor received a voice or data communication in that period.

Poland

T-Mobile holds a 97% interest in PTC. Since November 1, 2006, PTC has been fully consolidated in Mobile Communications Europe.

At December 31, 2007, PTC had approximately 13.0 million customers, compared to approximately 12.2 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 5.4 million were contract customers, compared to approximately 4.5 million at December 31, 2006. PTC had approximately 7.6 million prepay customers at December 31, 2007, compared to approximately 7.7 million at December 31, 2006.

PTC’s average churn rate during 2007 was 3.1% per month. The average contract churn rate during 2007 was 0.7% and the average prepay churn rate was 4.6% in 2007. A comparison with 2006 is not meaningful due to the first-time consolidation as of November 1, 2006.

In general, a contract customer of PTC is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. PTC’s

 

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prepay churn policy generally states that a customer can originate calls or data traffic and receive data or voice communications during his respective validity period. The length of the validity period can be up to 12 months depending on the recharge amount (account validity). The validity period can be extended by additional top-up credits. If a customer exceeds the account validity date, he will receive a grace period depending on his tariff, during which the customer can only receive voice and data communications. The grace period is either 3 months or 12 months depending on the tariff plan. If the prepay account has not been topped-up during this grace period, the customer is churned.

For information regarding a dispute concerning our investment in PTC, including challenges to our ownership of PTC shares, see “Item 8. Financial Information—Legal Proceedings.”

Hungary

T-Mobile Hungary, the mobile operations of Magyar Telekom, offers mobile telecommunications services to individual and business customers in Hungary. We hold a 59% interest in Magyar Telekom.

At December 31, 2007, T-Mobile Hungary had approximately 4.9 million customers, compared to approximately 4.4 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 1.8 million were contract customers, compared to approximately 1.5 million at December 31, 2006. T-Mobile Hungary had approximately 3.1 million prepay customers at December 31, 2007, compared to approximately 2.9 million at December 31, 2006.

T-Mobile Hungary’s average churn rate during 2007 was 1.4% per month, compared to approximately 1.5% per month in 2006. The average contract churn rate in 2007 was approximately 0.8% per month, which was about the same as in 2006. The corresponding prepay customer churn rate was 1.8% in both 2007 and 2006. Generally, a contract customer of T-Mobile Hungary is churned either after the voluntary termination upon the lapse of his contracted loyalty period or after forced contract termination due to the customer’s failure to fulfill payment obligations. In the absence of re-charging, a prepay customer is churned after a period of 12 to 16 months depending on the amount charged on the prepay card.

The Netherlands

Through T-Mobile Netherlands, T-Mobile offers mobile telecommunications services to individual and business customers in The Netherlands.

On October 1, 2007, T-Mobile Netherlands acquired the Dutch telecommunications provider, Orange Nederland, from France Télécom for approximately EUR 1.3 billion. Through the acquisition of Orange Nederland, T-Mobile Netherlands is the second largest mobile operator in the Dutch market in terms of customer market share.

At December 31, 2007, T-Mobile Netherlands had approximately 4.9 million customers (of which 2.2 million were attributable to Orange Nederland) compared to approximately 2.6 million customers (which did not include Orange Nederland) at December 31, 2006. At the end of 2007, approximately 2.1 million customers were contract customers (of which 0.7 million were attributable to Orange Nederland) and approximately 2.8 million were prepay customers (of which 1.5 million were attributable to Orange Nederland), compared to approximately 1.3 million contract customers and approximately 1.2 million prepay customer at the end of 2006.

T-Mobile Netherlands’ average churn rate for 2007 (including Orange Nederland) was 2.8% per month, compared to an average churn rate of 2.8% per month in 2006. Excluding Orange Nederland, T-Mobile Netherlands’ average churn rate for 2007 was 3.0% per month, which represents an increase of 0.2 percentage points compared to 2006. This increase was due to an increase in the prepay churn rate, which was partially offset by a decrease in the contract churn rate. The average contract churn rate excluding Orange Nederland decreased from 1.5% per month in 2006 to 1.4% per month in 2007 due to attractive retention offers to contract customers. The average prepay churn rate excluding Orange Nederland increased from 4.2% per month in 2006 to 4.6% per month in 2007 due to increased competition in the Dutch market.

 

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In general, a contract customer of T-Mobile Netherlands is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. If a prepay customer has neither originated nor received a voice or data activity (or received only SMS/MMS messages) for a period of 180 days, the customer is churned and removed from the customer base, provided the customer’s account has not been re-charged during that period.

If an Orange Nederland’s prepay customer has neither originated nor received a voice or data activity (or received only SMS/MMS messages) and has not recharged for a period of 3 months, the customer is churned and removed from the reported customer base.

Czech Republic

Through T-Mobile Czech Republic, T-Mobile offers mobile telecommunications services to individual and business customers in the Czech Republic. T-Mobile’s equity interest in T-Mobile Czech Republic is held through its wholly-owned subsidiary, CMobil, which owns approximately 61% of T-Mobile Czech Republic.

At December 31, 2007, T-Mobile Czech Republic had approximately 5.3 million customers, compared to approximately 5.0 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 2.2 million were contract customers, compared to approximately 1.8 million at December 31, 2006. T-Mobile Czech Republic had approximately 3.0 million prepay customers at December 31, 2007, compared to approximately 3.2 million prepay customers at December 31, 2006.

T-Mobile Czech Republic’s average churn rate during 2007 was 1.4% per month, which is approximately the same as in 2006. The average contract churn rate during 2007 was 0.6% per month, compared to the average contract churn rate of 0.7% per month during 2006. The average prepay churn rate during 2007 was 1.9% per month, compared to the average prepay churn rate of 1.7% per month during 2006, which was caused by a higher number of customers who were acquired with special time limited offers. Generally, a contract customer is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. In the absence of re-charging, a prepay customer is churned 30 days after completing a period of 12 months without charged voice or data communications activity.

Austria

Through T-Mobile Austria, T-Mobile offers mobile telecommunications services to individual and business customers in Austria. On April 28, 2006, T-Mobile Austria acquired tele.ring. At December 31, 2007, T-Mobile Austria had approximately 3.3 million mobile customers (including approximately 1.0 million tele.ring customers). Of the total customers at December 31, 2007, approximately 2.1 million were contract customers (including approximately 0.8 million tele.ring customers) and approximately 1.1 million were prepay customers (including approximately 0.2 million tele.ring customers). In the T-Mobile Austria customer base, M2M cards account for less than one percent of the overall prepay customer base.

T-Mobile Austria’s acquisition of tele.ring was subject to certain conditions imposed by the European Commission and the Austrian Telekom-Control-Kommission. The main conditions were the sale of certain sites and UMTS frequencies to smaller competitors in order to strengthen their market and competitive positions. T-Mobile Austria sold redundant sites not being used after the merger of the two networks. On September 23, 2006, T-Mobile Austria and tele.ring legally merged.

T-Mobile Austria’s average churn rate during 2007 slightly increased to 2.0% per month (tele.ring’s average churn rate was 2.3% per month during 2007), as compared to the average churn rate of 1.9% per month during 2006. The average churn rate for contract customers during 2007 decreased to 1.2% per month compared to 1.3% per month in 2006 (tele.ring’s average contract churn rate was 1.5% per month during 2007). In general, a contract customer is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations.

Since the beginning of September 2007, T-Mobile Austria has generally churned prepay customers if they had 13 months and two weeks without any charged data or voice communication.

 

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From the beginning of December 2004 until the end of August 2007, T-Mobile Austria had generally churned prepay customers if they had 12 months and six weeks without any account movements (e.g., account top-up or outgoing traffic) and six months without incoming voice calls longer than one minute.

tele.ring generally churns prepay customers after three months without any charged data or voice communications.

Croatia

Through T-Mobile Hrvatska d.o.o. (“T-Mobile Croatia”), T-Mobile offers mobile telecommunications services to individual and business customers in Croatia. Deutsche Telekom’s equity interest in T-Mobile Croatia is held through its 51% equity interest in T-Hrvatski Telekom, which owns 100% of T-Mobile Croatia’s share capital.

At December 31, 2007, T-Mobile Croatia had approximately 2.4 million customers, compared to approximately 2.2 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 0.7 million were contract customers, compared to approximately 0.6 million at December 31, 2006. T-Mobile Croatia had approximately 1.7 million prepay customers at December 31, 2007, compared to approximately 1.6 million at December 31, 2006.

T-Mobile Croatia’s average monthly churn rate during 2007 was 1.3%, compared to 1.1% in 2006. The average contract churn rate was 0.7% per month in 2007, which decreased compared to 1.1% in 2006. The average prepay churn rate during 2007 was 1.5% per month, compared to 1.1% per month in 2006. In general, a contract customer is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. In general, a prepay customer is churned after a period of 270 days without re-charging.

Slovakia

Through T-Mobile Slovensko, T-Mobile offers mobile telecommunications services to individual and business customers in Slovakia. T-Mobile Slovensko has been fully consolidated since the beginning of 2005. Prior to 2005, we did not fully consolidate T-Mobile Slovensko as we were not in a control position, due to certain minority holder rights. Deutsche Telekom’s equity interest in T-Mobile Slovensko is held through its 51% equity interest in Slovak Telekom, a.s., which owns 100% of T-Mobile Slovensko’s share capital.

At December 31, 2007, T-Mobile Slovensko had approximately 2.4 million customers, compared to approximately 2.2 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 1.2 million were contract customers, compared to approximately 1.0 million at December 31, 2006. T-Mobile Slovensko had approximately 1.2 million prepay customers at December 31, 2007, which is about the same number of prepay customers it had at December 31, 2006.

T-Mobile Slovensko’s average churn rate during 2007 was 1.5% per month, which represents a decrease from 1.6% in 2006. The average contract churn rate decreased, from 1.0% per month in 2006 to 0.8% per month in 2007, primarily due to intensive retention campaigns. The average prepay churn increased from 2.0% per month in 2006 to 2.1% per month in 2007.

Generally, a contract customer is churned either after the voluntary termination upon the lapse of his contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. A prepay customer is churned after a period of 12 months without re-charging calculated from the last use.

Macedonia

In Macedonia, T-Mobile offers mobile telecommunications services through T-Mobile Macedonia. T-Mobile Macedonia is a wholly-owned subsidiary of Makedonski Telekomunikacii A.D. (“MakTel”), which is majority owned by Magyar Telekom.

At December 31, 2007, T-Mobile Macedonia had approximately 1.2 million customers, compared to approximately 0.9 million at December 31, 2006.

 

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Montenegro

In Montenegro, T-Mobile offers mobile telecommunications services through T-Mobile Crna Gora (Montenegro). All of the share capital of T-Mobile Crna Gora (Montenegro) is held by Crnogorski Telekom, which is majority owned by Magyar Telekom.

At December 31, 2007, T-Mobile Crna Gora (Montenegro) had approximately 0.4 million customers, compared to 0.3 million customers at December 31, 2006.

Mobile Communications USA

Through T-Mobile USA, T-Mobile offers mobile telecommunications services to individual and business customers in the United States. At December 31, 2007, T-Mobile USA had approximately 28.7 million customers, compared to approximately 25.0 million at December 31, 2006. Of the total customers at December 31, 2007, approximately 23.9 million, or 83%, were contract customers, compared to approximately 21.2 million, or 85%, at December 31, 2006, and approximately 4.8 million were prepay customers at December 31, 2007, compared to approximately 3.8 million at December 31, 2006.

T-Mobile USA’s average churn rate for 2007 was 2.8% per month, down from 2.9% in 2006. The contract customer churn rate decreased to 1.9% in 2007, from 2.2% in 2006, largely due to the introduction of two-year customer contracts in the second quarter of 2006, consistent with plans offered by the other large U.S. national carriers. Competitive differences, differences in features and services due to the use of multiple wireless technologies, and general differences in consumer behavior between the United States and Europe factor into the higher industry churn rates in the United States compared to Europe. However, the churn rate of our U.S. operations is higher than the U.S. industry average, due in part to the higher proportion of prepay customers in T-Mobile USA’s customer base relative to most of its U.S. competitors. Prepay customers in the United States typically churn at substantially higher rates than contract customers.

Generally, a contract customer of T-Mobile USA is churned either after the voluntary termination upon the lapse of a contract or after forced contract termination due to the customer’s failure to fulfill contractual obligations. A prepay customer in the United States is churned after a period of 90 days of inactivity (i.e., the customer has neither originated nor received a voice or data communication in that period).

On September 16, 2007, T-Mobile USA entered into an agreement to purchase the regional mobile communications carrier, SunCom Wireless Holdings, Inc. After obtaining all necessary regulatory and other approvals, on February 22, 2008, T-Mobile USA acquired all of the shares in SunCom for USD 27.00 per share, or USD 1.6 billion (approximately EUR 1.1 billion). The total value of this transaction including net debt of approximately USD 0.8 billion (approximately EUR 0.5 billion) is EUR 1.6 billion. Through this acquisition, T-Mobile USA will be expanding its network in the southeastern United States, Puerto Rico and the U.S. Virgin Islands, thereby expanding its footprint in the United States market.

On November 29, 2006, T-Mobile USA was awarded 120 licenses in the FCC Auction No. 66 (“Auction 66”), which offered a total of 90 MHz of Advanced Wireless Services (AWS) spectrum in the 1700 MHz and 2100 MHz frequency bands across the United States. The total purchase price for these licenses was USD 4.2 billion (EUR 3.3 billion). The cost for T-Mobile USA per MHz of spectrum acquired in this auction per person of covered population was USD 0.63. With this additional spectrum, T-Mobile USA more than doubled its average spectrum position in the top 100 U.S. markets from 25.9 MHz to 52.2 MHz. During 2007, T-Mobile USA has been investing in network infrastructure in certain markets to utilize the AWS spectrum and expects to launch AWS services in 2008 in these markets.

On January 5, 2005, T-Mobile USA and AT&T (formerly Cingular Wireless) terminated their network-sharing joint venture (GSM Facilities LLC, “GSM Facilities”), and T-Mobile USA acquired 100% ownership of the shared-network assets in California, Nevada and New York City, plus additional wireless spectrum in California and Nevada as previously disclosed in our Annual Reports in 2006 and 2005. In connection

 

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with this transaction, on January 7, 2007, T-Mobile USA gave up 10 MHz of spectrum in the New York City Basic Trading Area (BTA) to AT&T, and T-Mobile USA received 5 MHz of spectrum from AT&T in each of the nine BTAs in the California/Nevada market. In addition, T-Mobile USA acquired an option to purchase from AT&T an additional 10 MHz of spectrum in each of the Los Angeles and San Diego BTAs, under certain circumstances, effective two years after the initial closing of the transaction. In February 2007, T-Mobile USA elected to exercise the option with respect to the San Diego BTA only.

Seasonality

T-Mobile’s business in each of its principal markets is affected by seasonal factors, with a general increase in sales of products and services occurring during the fourth calendar quarter, due to holiday purchases. As a result, T-Mobile’s performance during the fourth quarter can have a significant influence on its performance for the full year.

Suppliers

T-Mobile purchases IT and network components, as well as mobile devices for purposes of resale, from a number of different suppliers.

T-Mobile believes that it has reduced its technological risks and the risk of delays in the supply of equipment and other technologies, both by contracting with multiple suppliers having significant market share in the network infrastructure, IT services and mobile device businesses, and by negotiating contractual penalties to be enforced in the event a supplier does not meet its obligations with respect to timeliness and quality. However, these penalty provisions may not fully mitigate the harm to our business caused by any such contractual breaches.

Marketing and Sales

Each of T-Mobile’s principal subsidiaries uses its own mix of direct and indirect distribution channels to market its products and services to its customers. In each of T-Mobile’s principal markets, T-Mobile sells its products and services to retail customers through its own network of direct retail stores, which are continuously being expanded. In Germany, these direct retail stores (Telekom shops (formerly T-Punkt shops)) are operated by a subsidiary of the Deutsche Telekom Group. Further direct sales channels include a direct sales force dedicated to business customers, sales through customer service and the T-Mobile websites, which are used for customer-relationship management as well as for sales transactions. In addition, third-party distributors, who typically market the products and services of multiple mobile network operators, play a significant role in distribution. Our mobile telecommunications subsidiaries use a variety of incentives to encourage third-party vendors to sell T-Mobile products and services, such as payment of associated marketing expenses and commissions.

Mobile telecommunications resellers and MVNOs are also an important distribution channel for T-Mobile products and services, especially in Germany and the United Kingdom. In the United States, MVNOs are currently a minor but growing distribution channel for T-Mobile USA products and services. In general, mobile telecommunications resellers purchase minutes and data at wholesale rates and mobile devices at a discount from network operators, resell packaged services and mobile devices under their own brands through their own distribution channels, charge their customers at rates that they set independently, and provide customer service and technical support.

T-Mobile provides its customers with access to T-Mobile specific and third-party content services as well as to the open Internet. Content provided to customers is either at no additional charge, in which case the customer only has to pay the normal connection charges to view the content, or it is premium content, where a customer pays a specific charge through the customer’s mobile telephone bill to access the content.

Through its “HotSpot” product, T-Mobile USA operates one of the largest carrier-owned W-LAN networks in the United States, available in more than 9,700 convenient public access locations nationwide (including roaming locations).

 

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Since 2005, T-Mobile, through its “web’n walk” product, offers to its customers mobile open access to the Internet on mobile phones. T-Mobile believes that this strategy is superior to the offers of its competitors, who determine the content access for their customers.

Dependence on Patents, Licenses and Industrial, Commercial or Financial Contracts

T-Mobile and its subsidiaries own a large number of registered patents and generally have a number of patent applications outstanding at any given time for technical innovations in the area of mobile telecommunications applications as a consequence of our continuous development activities. Patent protection activity is focused on countries with T-Mobile operations. We do not believe that T-Mobile or any of its subsidiaries is dependent on any one patent or group of patents.

To enable us to offer mobile telecommunications services in the different jurisdictions in which we operate, we require, and therefore are dependent on, telecommunications licenses from the relevant authorities in each of these jurisdictions. For further information, see “—Regulation.”

We do not believe that T-Mobile is dependent on any third-party industrial, commercial or financial contracts.

Competition

General

Competition in the mobile telecommunications market is generally intense and conducted on the basis of price, subscription options and range of services offered, offers of subsidized mobile devices, coverage, innovation and quality of service.

In the past, competition in the European mobile telecommunications market was conducted at the national level. Increasingly, however, competition in this market is being conducted on a more international basis, as Europe-wide services are being introduced.

In Western Europe, the rate of mobile telephone penetration is quite high. As a result, T-Mobile expects that the growth in the number of T-Mobile customers in these markets will be significantly lower than in past years, and that the focus of competition will continue to shift from customer acquisition to customer retention, and to stimulate demand for voice usage and new data products and services. T-Mobile believes that, as competition intensifies in its European markets, customer terminal equipment subsidies will be reduced and competition will focus more on the service revenue market rather than on numbers of customers.

The global mobile telecommunications industry has been undergoing consolidation in recent years, which may increase competitive pressure, and we expect that this trend will continue in the coming years.

In addition, new technologies, whether introduced by us or by others, can be expected to draw customers from existing technologies, including our customers. The competitive dynamics of the mobile telecommunications industry, therefore, could change in ways that we cannot predict which could adversely affect our results of operations and, thus, our financial position.

Mobile Communications Europe

Germany

In Germany, T-Mobile Deutschland faces intense competition from mobile network operators Vodafone, E-Plus and O2. We believe that T-Mobile Deutschland maintained its market leadership position, in terms of number of customers, at September 30, 2007.

T-Mobile believes that T-Mobile Deutschland had a customer market share of approximately 37% at September 30, 2007, while Vodafone had a customer market share of approximately 35%, E-Plus had a customer market share of approximately 15% and O2 had a customer market share of approximately 13%. T-Mobile believes that the overall penetration rate in the German mobile telecommunications market was approximately 113% at September 30, 2007.

 

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In the retail market, in addition to competition from other network operators, T-Mobile Deutschland faces significant competition from resellers. T-Mobile expects that, in the short-term, the market entry of existing and potentially new resellers will significantly further affect mobile telephony prices and attract customers from the other existing mobile operators.

United Kingdom

In the United Kingdom, T-Mobile UK faces intense competition, principally from Vodafone, O2 and Orange. In addition, T-Mobile UK faces competition from “3”. T-Mobile believes that T-Mobile UK’s customer market share, which includes customers of Virgin Mobile, remained stable at 24% as of September 30, 2007, compared to September 30, 2006. T-Mobile believes that the penetration rate in the United Kingdom mobile telecommunications market was approximately 119% at September 30, 2007.

In the retail market, in addition to competition from other mobile network operators, T-Mobile UK faces significant competition from resellers, as well as from other MVNOs.

Poland

In Poland, PTC faces competition from Polkomtel, Centertel and P4. T-Mobile believes that PTC’s customer market share was approximately 32% at September 30, 2007, compared to 34% at September 30, 2006. T-Mobile believes that the penetration rate in the Polish mobile telecommunications market was approximately 104% at September 30, 2007.

Hungary

In Hungary, T-Mobile Hungary faces competition from Pannon and Vodafone Hungary. T-Mobile believes that T-Mobile Hungary’s customer market share was approximately 44% at September 30, 2007, compared to approximately 45% at September 30, 2006. Pannon had a market share of approximately 35% at September 30, 2007, compared to 34% at September 30, 2006, and Vodafone Hungary had a market share of approximately 21% at September 30, 2007, approximately the same share as in 2006. T-Mobile believes that the penetration rate in the Hungarian mobile telecommunications market was approximately 104% at September 30, 2007.

The Netherlands

In The Netherlands, T-Mobile Netherlands faces intense competition from KPN Mobile (including Telfort), Vodafone and, until September 30, 2007, from Orange Nederland. T-Mobile believes that T-Mobile Netherlands’ customer market share (excluding Orange Nederland’s customers) was approximately 15% at September 30, 2007, compared to approximately 15% at September 30, 2006, while KPN Mobile (including Telfort), Vodafone and Orange Nederland had a market share of approximately 51%, 22% and 12%, respectively, at September 30, 2007, compared to approximately 50%, 23% and 12%, respectively, at September 30, 2006. T-Mobile believes that the penetration rate in the Dutch mobile telecommunications market was approximately 109% at September 30, 2007.

In the Dutch retail market, in addition to competition from the mobile network operators mentioned above, T-Mobile Netherlands competes with an increasing number of MVNOs.

Czech Republic

In the Czech Republic, T-Mobile Czech Republic faces competition from Telefónica O2 Czech Republic (formerly Eurotel Praha) and Vodafone Czech Republic (formerly Oskar Mobil). T-Mobile believes that T-Mobile Czech Republic’s customer market share was approximately 41% at September 30, 2007, compared to approximately 41% at September 30, 2006, Telefónica O2 Czech Republic had a market share of approximately 39% at September 30, 2007, compared to approximately 40% at September 30, 2006, and Vodafone Czech Republic had a market share of approximately 20% at September 30, 2007, compared to approximately 19% at September 30, 2006. T-Mobile believes that the penetration rate in the Czech mobile telecommunications market was approximately 124% at September 30, 2007.

 

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Austria

In Austria, T-Mobile Austria primarily faces competition from mobilkom austria, ONE and “3”. T-Mobile believes that T-Mobile Austria’s customer market share after the consolidation of tele.ring was approximately 34% at September 30, 2007, and the customer market shares of mobilkom austria, ONE and “3” were approximately 40%, 21% and 5%, respectively, at September 30, 2007. T-Mobile believes that the penetration rate in the Austrian mobile telecommunications market was approximately 115% at September 30, 2007.

Croatia

In Croatia, T-Mobile Croatia faces competition from VIPnet and Tele2. T-Mobile believes that T-Mobile Croatia’s customer market share was approximately 47% at September 30, 2007, compared to approximately 50% at September 30, 2006. T-Mobile believes that the penetration rate in the Croatian mobile telecommunications market was approximately 108% at September 30, 2007.

Slovakia

In Slovakia, T-Mobile Slovensko faces competition from Orange and Telefónica O2. T-Mobile believes that T-Mobile Slovensko’s customer market share was approximately 41% at September 30, 2007, compared to approximately 45% at September 30, 2006. T-Mobile believes that the penetration rate in the Slovak mobile telecommunications market was approximately 103% at September 30, 2007.

Macedonia

In Macedonia, T-Mobile Macedonia faces competition from Cosmofon AD, and since September 2007 also from VIP, which is 100% owned by Mobilkom Austria. Based on the published customer numbers of T-Mobile Macedonia and Cosmofon, T-Mobile believes that T-Mobile Macedonia’s customer market share was approximately 66% at September 30, 2007, compared to approximately 67% at September 30, 2006. T-Mobile believes that the penetration rate in the Macedonian mobile telecommunications market was approximately 77% at September 30, 2007.

Montenegro

In Montenegro, T-Mobile Crna Gora (Montenegro) faces competition from ProMonte and Mtel. T-Mobile believes that T-Mobile Crna Gora’s customer market share was approximately 38% at September 30, 2007, which represents an increase from approximately 36% at September 30, 2006.

Mobile Communications USA

T-Mobile USA faces intense competition in the United States mobile telecommunications market from the three other large national mobile providers, Verizon, AT&T and Sprint/Nextel, and from various regional operators and MVNOs. The four largest national carriers are estimated to represent approximately 85% of the total U.S. mobile telephony customer base as of September 30, 2007. T-Mobile USA’s customer market share, measured against the other large nation-wide operators, was approximately 13% at September 30, 2007, about the same as of September 30, 2006. Most of these competitors or their predecessors had been operating in the United States mobile telecommunications market for a considerable time prior to the entry of T-Mobile USA’s predecessors into the United States market.

Verizon, AT&T and Sprint/Nextel together represent approximately 74% of the total United States mobile telephony market in terms of customers as of September 30, 2007. These companies have potential advantages of size and scale that could allow them to deliver services in a more cost-efficient manner and thereby negatively affect T-Mobile USA’s competitive position.

The United States mobile telecommunications market is quite different in a number of respects from the European mobile telecommunications markets. For example, there is no single communications standard. In addition, licenses to provide wireless services cover numerous localities, rather than the entire nation. It can

 

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therefore be difficult for network operators to obtain the spectrum needed in some localities to expand customer bases, upgrade the quality of service and add new services, particularly in densely populated urban areas. Low population density in other areas can cause problems with network efficiency and result in large geographic areas with no or limited coverage. For these and other reasons, including the extremely high penetration level of reliable, low cost, fixed-line telephony services, penetration levels for mobile telephony services in the United States are generally lower than penetration levels in western European countries. Mobile telecommunications operators in the United States market generally continue to invest heavily in their networks in order to generate customer growth. However, as of September 30, 2007, penetration in the United States has reached approximately 82% and slowing wireless industry customer growth expectations and decreasing churn rates indicate that the market is maturing.

Usage and pricing practices in the United States mobile market also differ significantly from those typically seen in European markets. Average voice usage per customer per month is generally much higher in the United States than in Europe. Contract pricing in the United States is typically in the form of a fixed monthly charge at various price points for specified bundles of features and services, which permit usage up to prescribed limits with no incremental charges. Usage in excess of the limits results in incremental charges. The majority of prepay usage is priced solely on a usage basis. Typically, both inbound and outbound usage counts against the contract usage limits, and both are subject to incremental charges for excess contract usage and prepaid usage. Monthly average revenue per user (ARPU) is typically higher in the United States than in Europe. However, average revenue per minute of use is substantially lower in the United States than in Europe.

The differences between the United States and European mobile telephony markets result in different competitive pressures in these markets. In the United States, coverage is a key competitive factor, as is the perceived value of bundles of minutes, features and services at the most popular price points. To the extent that the competitive environment requires us to decrease prices, or increase our service and product offerings, our revenues could decline, our costs could increase and our customer retention could be adversely affected.

Broadband/Fixed Network

The Broadband/Fixed Network operating segment offers consumers and small business customers state-of-the-art infrastructure for traditional fixed-network services, broadband Internet access, and customer-oriented multimedia services. Broadband/Fixed Network also provides services to national and international network operators and resellers, and provides products and services for Deutsche Telekom’s other operating segments.

During 2007, the “T-Com” business unit and brand name were renamed “T-Home.” The T-Home business unit’s activities include Broadband/Fixed Network’s domestic (Germany) operations. T-Home’s operations include all consumer products and services for the home, as well as for very small business customers. These products and services include triple-play packages, comprising voice communication, Internet access, and IPTV, that are marketed under the “Entertain” brand name in Germany. The merger of T-Online International AG into Deutsche Telekom AG, completed in June 2006, has enabled Broadband/Fixed Network to achieve improved structural as well as product and service efficiencies. The merger established Broadband/Fixed Network as an integrated telecommunications wireline service provider offering customers fully integrated products and services from a single source.

In July 2007, we launched the “congstar” brand, to offer wireless telephone and broadband services aimed at younger, price sensitive customers. congstar’s business model is centered on the less assistance-intensive sale of products via the Internet and call centers.

T-Home continues to adapt its simplified and integrated portfolio of rates and services, which was initially introduced in September 2006 in anticipation of market developments in Germany. This portfolio of integrated products, called “ Complete Packages” (Komplettpakete), includes an access line and a variety of flat rates and services for telephony, surfing the Internet and Internet television in an assortment of combinations. These product offerings are marketed as basic telephony services (“single-play”), telephony and high-speed Internet access (“double-play”), and voice communications services, high-speed Internet access and entertainment offerings (“triple-play”). Triple-play was launched in October 2006.

 

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T-Online France and T-Online Spain, our IP/Internet services in France and Spain were divested on June 29, 2007 and July 31, 2007, respectively.

In 2007, we created three new service companies, Deutsche Telekom Kundenservice GmbH, Deutsche Telekom Technischer Service GmbH and Deutsche Telekom Netzproduktion GmbH. These companies were part of our objectives to improve our competitiveness and to offer first-class service to our customers at competitive rates and in a cost-effective manner (Telekom Service). For more information, see “Item 6—Directors, Senior Management and Employees—Employees and Labor Relations.”

Principal Activities

Broadband/Fixed Network operates one of the largest fixed-line networks in Europe in terms of the number of lines provided. Broadband/Fixed Network reports its domestic and international operations separately. The Scout24 group and T-Online Austria are included within domestic operations. The principal activities of the Broadband/Fixed Network operating segment include:

 

   

Network communications services, consisting of network access products (excluding broadband) and calling services;

 

   

Wholesale services, for domestic and international customers, including voice services, IP services, network and access services (Resale DSL and the unbundled local loop) and solutions;

 

   

IP/Internet products and services, including broadband access, VoIP, ISP access-related services, video-on-demand, triple-play services, digital distribution platforms for games (marketed as Gamesload), software (marketed as Softwareload) and music (marketed as Musicload);

 

   

Other services, including data communications services and solutions provided through the Business Customers operating segment to small- and medium-sized enterprises, value-added services (special purpose telephony services including toll-free services and public payphones), terminal equipment for telecommunications, as well as, publishing services, customer retention programs, installation and maintenance services; and

 

   

Fixed-line network services, wholesale services, IP/Internet services and multimedia services in Central and Eastern Europe, through Magyar Telekom (Hungary), Slovak Telekom (Slovakia) and T-Hrvatski Telekom (Croatia).

Most of Broadband/Fixed Network’s revenues in 2007 were derived from fixed-line network communications services provided within Germany, primarily in the form of access and calling services revenues. For more information, see “Item 5. Operating and Financial Review and Prospects—Segment Analysis—Broadband/Fixed Network.”

 

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The following table reflects the number of broadband and fixed network access lines in operation supported by our Broadband/Fixed Network operating segment:

 

     As of
December 31,
2007
   As of
December 31,
2006
   %
Change
December 31,
2007/
December 31,
2006
    As of
December 31,
2005
   %
Change
December 31,
2006/
December 31,
2005
 

Broadband

             

Lines (total)(1)(2)(3)

   13.9    11.3    23.6     8.5    32.8  

of which: retail

   10.2    7.9    29.0     6.8    16.4  

Domestic(4)

   12.5    10.3    22.0     7.9    29.8  

of which: retail

   9.0    7.1    27.6     6.3    11.7  

International(2)(3)(5)

   1.4    1.0    39.6     0.6    74.7  

of which: Magyar Telekom(5)

   0.8    0.6    31.1     0.4    64.0  

of which: Slovak Telekom

   0.3    0.2    43.3     0.1    75.0  

of which: T-Hrvatski Telekom

   0.3    0.2    59.6     0.1    n.m.  

Broadband ISP rates (total)(3)(6)

   9.9    7.1    38.5     4.9    45.6  

of which: domestic

   8.7    6.3    38.2     4.5    41.2  

Fixed-network lines

             

Lines (total)(1)(7)

   36.6    39.0    (6.2 )   41.2    (5.5 )

Domestic

   31.1    33.2    (6.4 )   35.2    (5.8 )

Standard analog lines

   22.4    24.2    (7.2 )   25.5    (5.2 )

ISDN lines

   8.6    9.0    (4.5 )   9.8    (7.5 )

International (Central and Eastern Europe only)(5)

   5.5    5.8    (4.7 )   6.0    (3.9 )

Narrowband ISP rates (total)(3)(6)

   2.3    3.1    (25.1 )   4.3    (26.9 )

Wholesale/resale

             

DSL resale(8)

   3.7    3.4    10.8     1.7    98.5  

of which: domestic

   3.5    3.2    9.7     1.6    n.m.  

Unbundled local loop lines(9)

   6.4    4.7    36.8     3.3    43.2  

 

n.m.—not meaningful

The tables include broadband lines in Germany and Central and Eastern Europe. The prior-year figures were adjusted to reflect the deconsolidation of T-Online France and T-Online Spain. The total was calculated on the basis of actual figures and rounded to millions. Percentages are calculated on the basis of actual figures.

 

(1) Lines in operation.
(2) Total of retail and resale.
(3) No longer includes T-Online France and T-Online Spain, which were divested on June 29, 2007 and July 31, 2007, respectively. Prior year periods have been adjusted accordingly.
(4) Broadband lines excluding lines for internal use.
(5) Subscriber-line figures for December 31, 2007 and December 31, 2006, encompass customer relationships for Magyar Telekom’s subsidiary MakTel and Crnogorski Telekom (formerly Telekom Montenegro). Prior-year comparatives have not been adjusted.
(6) Total calculated on the basis of customers (broadband and fixed network rates) in Germany and Central and Eastern Europe with a billing relationship and pay as you go customers (those customers who do not have a rate plan with a monthly basic charge).
(7) Telephone lines excluding internal use and public telecommunications, including wholesale services.
(8) Definition of resale: Sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group. Resale is included in the total number of broadband lines.
(9) Unbundled local loop lines (TAL—Teilnehmeranschlussleitung) in Germany only: Deutsche Telekom wholesale service that can be leased by other telecommunications operators without upstream technical equipment in order to offer their own customers a telephone or DSL line.

 

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Operations in Germany

During 2007, the number of T-Home’s fixed network access lines and call minutes in Germany continued to decrease. This is primarily due to increased competition from alternative fixed network providers with fully integrated bundled packages, cable network operators, resellers and fixed-to-mobile substitution.

In Germany, the number of T-Home fixed network access lines decreased by 2.1 million, or 6.4%, to 31.1 million in 2007. The number of call minutes decreased by only 2.7% in 2007 as compared to 2006, primarily due to the increased acceptance of call plans with a flat-rate component. T-Home’s estimated market share for fixed network access lines declined from 91.3% in 2005 to 87.1% in 2006 to an estimated 81.4% in 2007 based on information from the Federal Network Agency’s draft 2007 Annual Report. Although not as significant as the factors mentioned above, substitution by cable network operators also contributed to this decline.

The Complete Packages integrated product and rate portfolio, which was introduced in September 2006, were accepted by 10.1 million customers as of December 31, 2007 as compared to 3.6 million customers as of December 31, 2006.

Broadband/Fixed Network intends to pursue new business opportunities, and expects to continue its growth in the broadband area. In 2006 and 2007, Broadband/Fixed Network introduced more competitive rate plans, including flat-rate plans, and new products and services, which increased the number of broadband lines in operation through the offering of attractive bundled rate plans with a flat-rate component. Broadband/Fixed Network also intends to continue to introduce non-access related broadband services. In addition, the Broadband/Fixed Network operating segment is focusing on defending its market share in its core businesses by slowing the decline of fixed network access lines.

Broadband services allow customers to access the Internet and Internet-related services at significantly higher speeds than traditional dial-up services. Broadband is used to refer to ADSL (asymmetric digital subscriber line), ADSL2 and ADSL2+ (more advanced ADSL technology) and VDSL (very high-speed digital subscriber line) technologies, for which the downstream data rate is greater than 128 Kbit/s. For more information, see “—IP/Internet Services—Broadband Access” below.

The broadband market continued to grow during 2007. Falling prices for services provided by Internet service providers (ISPs) and cable network operators, and competitively priced bundled broadband access, voice and ISP product offerings by fixed network operators, were factors in the continued growth of the broadband market.

The total number of broadband lines in operation in Germany provided by T-Home increased by 2.3 million, or 22.0%, from 10.3 million at December 31, 2006 to 12.5 million at December 31, 2007. This increase was primarily due to the strong growth in the number of retail DSL customers in the highly competitive German market, especially in connection with T-Home’s continued introduction of new bundled offerings providing broadband access, voice and ISP products in anticipation of market demand. This is reflected by the successful introduction of the Complete Packages in 2006 and has been complemented by continued adaptation in 2007 of these packages when necessary to more closely follow customer demand. This combination of proactive introduction of innovative products and subsequent reaction to specific customer demands by fine tuning our product offerings resulted in considerable growth in the number of retail DSL lines in operation in 2007. This increase was also due to an increase in the number of unbundled local loop lines from 4.7 million at December 31, 2006 to 6.4 million at December 31, 2007, and to a lesser extent to an increase in the number of Resale DSL lines sold to alternative providers from 3.2 million at December 31, 2006 to 3.5 million at December 31, 2007. However, the absolute number of Resale DSL lines sold to alternative providers decreased for the first time in the fourth quarter of 2007 as these alternative providers increased their demand for stand-alone bitstream access (unbundled local loop lines), which offers were introduced in the fourth quarter. This trend is expected to continue. For more information regarding Resale DSL and stand-alone bitstream access regulation, see “—Regulation—German Telecommunications Regulation—Broadband Access—Bitstream.”

Broadband/Fixed Network is one of the largest integrated fixed network operators in Europe, based on both revenues and number of customers with approximately 9.9 million broadband ISP rate customers as of

 

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December 31, 2007. The total number of customers with broadband ISP rates increased by 2.7 million, or 38.5%, from 7.1 million as of December 31, 2006 to 9.9 million at the end of 2007. Customers with narrowband ISP rates decreased by 0.8 million, or 25.1%, from 3.1 million as of December 31, 2006 to 2.3 million at the end of 2007, primarily due to customer migration from narrowband ISP rates to broadband ISP rates. In Germany, the number of customers with broadband ISP rates increased 38.2%, from 6.3 million as of December 31, 2006 to 8.7 million as of December 31, 2007. Operations in Central and Eastern Europe realized a 40.3% increase in the number of customers with broadband ISP rates as of December 31, 2007, compared to December 31, 2006. The growth internationally is primarily due to attractive products and rate offerings in Central and Eastern Europe. The comparatively low market penetration rates in Central and Eastern Europe provide for continuing growth opportunities.

Broadband/Fixed Network expects that market share in fixed network access lines and the prices for fixed-network products will continue to decrease due to continued high competition from other fixed-line operators, cable network operators, fixed-to-mobile substitution and an increase in sales of broadband products as part of bundled offers in connection with increased use of IP-based networks. Broadband/Fixed Network also expects that the adoption of IP-based networks by fixed-line operators will lead to the obsolescence of PSTN networks in the medium-term. This should contribute to a loss in fixed network access lines, which we believe will be accompanied by a smaller increase in the number of broadband lines in operation and related demand for products by ISP customers.

The Complete Packages integrated product and rate portfolio has contributed to an increase in broadband customers and increased use of broadband lines and ISP products. The integrated broadband access, ISP and VoIP features available from T-Home in combination with the new service initiatives are expected to continue to increase customer satisfaction and loyalty.

T-Home’s present network infrastructure is comprised of access and transmission networks and service platforms.

T-Home has been investing in modern network infrastructure technologies since 2005, which will form the basis of its next generation network (NGN). The development of T-Home’s NGN is a long-term objective and necessitates the implementation and integration of network enhancement technologies, as well as other technologies. NGN technologies are currently being integrated into the existing network infrastructure and will replace elements of the existing network, such as asynchronous transfer mode (ATM) and Synchronous Digital Hierarchy (SDH), as well as platforms such as the public switched telephone network (PSTN). The network infrastructure will integrate existing constituent IP platforms into a single IP architecture and will benefit from the performance advantages offered by high-speed network structures. The overall design concept of T-Home’s migration to a NGN based network is based on several key principles. For instance, introduction of leading-edge NGN technologies on all network layers denotes a move towards a layered architecture, a shift from circuit (i.e., voice based) to packet technologies (i.e., IP-based), and utilization of ethernet and passive optical network technologies. An NGN approach results in a reduction in an assortment of technologies and platforms through its utilization of a leaner infrastructure, as well as in a reduction in resources needed to operate the network. Therefore, implementation of NGN technologies increases the efficiency of the existing network and our ability to expand our portfolio of products and services. Implementation of the NGN will result in the replacement of certain service platforms in the mid- to long-term, including our PSTN network.

Access Network

T-Home offers ICT access for individual customers, very small business customers and other carriers. Typically a customer has access to T-Home’s network by means of a copper cable that runs from T-Home’s transmission network to the customer’s home or office. The portion of the access network that connects the transmission network to the customer is commonly referred to as the “last mile” or “local loop.” T-Home began to significantly upgrade its access network in 2005 through implementation of VDSL high-speed access technology. The implementation of VDSL began in 2006 and continued in 2007. T-Home also intends to continue to upgrade its broadband access network by expanding the use of ADSL2+ technology. ADSL2+ will enable customers to realize access speeds of up to 20 Mbit/s.

 

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For more information regarding network access regulation, see “—Regulation—German Telecommunications Regulation—Interconnection.”

Transmission Network

T-Home’s transmission network consists of fiber-optic cables enhanced with Wavelength Division Multiplexing (WDM) and SDH technologies, as well as other network components. WDM uses wavelengths of light to increase the capacity of fiber-optic cables, thereby allowing multiple communication channels. This allows T-Home to increase the capacity of its transmission network without having to use additional fiber-optic cable. SDH is an international high-speed transmission standard, which improves network management and increases the reliability of fiber-optic networks. T-Home continued to reduce its investment in SDH in 2007. T-Home plans to extend further its use of WDM and other network enhancement technologies based on the demands of its customers and in conjunction with our ongoing broadband strategy.

Service Platforms

T-Home uses its service platforms to enable the provision of voice, data and other value-added services to its customers. T-Home’s service platforms include IP-based and ATM technologies, which permit the high-quality transmission of large amounts of data (e.g., VoIP, text, audio and video). These platforms allow T-Home to deliver a wide range of products and services to individual and business customers. The products and services delivered on these service platforms include browser access to the World Wide Web and virtual private networks (VPNs). Server connections to the World Wide Web are also employed in T-Home’s service platforms.

Network Communication Services

Network Access Products

T-Home offers network access to its individual and business customers through a variety of access-line packages, which generally include a fixed monthly payment and a variable component based on traffic volume. These access-line packages may contain standard analog-line access or digital-line access, the latter of which is also known as Integrated Services Digital Network (ISDN) access lines. In addition, both types of access lines are a prerequisite for broadband access and can be enhanced by increasing their bandwidth capacity through the use of DSL technology as described below under “—IP/Internet Services.”

Fixed Network Access (formerly Narrowband)

Analog Access

T-Home’s standard access voice products permit the customer to use a single telecommunications channel for voice, data or facsimile transmission. The following table shows the number of analog access lines in operation, excluding public payphones, as of December 31 for each of the periods presented:

 

Year

   Analog Access
Lines

2005

   25.5 million

2006

   24.2 million

2007

   22.4 million

The number of analog access lines in operation has continued to decrease from 2005 to 2007. T-Home expects this trend to continue in the future. Competition, due to regulatorily mandated unbundling of the PSTN and DSL access lines in 2008, customer acceptance of bundled voice and Internet products, and conversion of the network to the NGN, are expected to be significant factors in this continued decrease.

ISDN Access

T-Home’s ISDN access products permit a single customer access line to be used simultaneously to provide multiple products and services, including voice, data and facsimile transmission.

 

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T-Home offers two types of ISDN access lines to customers—basic and primary. Basic ISDN access lines provide two telecommunications channels per access line and are offered to individual as well as business customers. Primary ISDN access lines provide 30 telecommunications channels per access line and are offered mainly to business customers. The following table shows the number of ISDN access lines and channels in operation as of December 31 for each of the periods presented:

 

     ISDN Access Lines(1)     

Year

   Basic    Primary    Total ISDN
Channels(2)

2005

   9.8 million    93,000    22.5 million

2006

   9.1 million    89,000    20.9 million

2007

   8.7 million    88,000    20.0 million

 

(1) ISDN lines including internal use and public payphones, including wholesale services.
(2) Calculations of total ISDN channels based on actual figures.

The number of basic ISDN access lines decreased in 2007 compared to 2006, primarily as a result of increased competition, especially from bundled voice and Internet products, and saturation of the ISDN market. T-Home expects this trend to continue.

T-Home expects the number of fixed network access lines in operation to continue to decrease in the future due to increased competition, fixed-to-mobile substitution and increased acceptance of VoIP. In addition, T-Home no longer actively markets ISDN access lines to customers.

Calling Services

Analog and ISDN access permit comprehensive local, regional and international calling services, and dial-up Internet access, and offers customers many of the same services, such as three-way calling, call-waiting and caller ID. ISDN access also offers several features not available to analog access customers, including a second connection channel, which allows the customer to have three separate telephone numbers to use the telephone, send or receive faxes and use the Internet simultaneously.

In 2007, T-Home’s competitors continued to make considerable inroads into the calling services market, primarily as a result of regulatory decisions favoring increased competition in the fixed-line area. Competitors have introduced their own infrastructure and continue to make investments in interconnection points to benefit from favorable pricing conditions. The decrease in the number of T-Home’s call minutes in Germany continued in 2007, due to loss of access lines to these competitors, fixed-to-mobile substitution and increased acceptance of VoIP. T-Home’s call plans with a flat-rate component, which were initially introduced in 2005 and expanded and improved in 2006 and 2007, have led to an increase in call minutes by customers through those plans.

To counter some of these competitive challenges, T-Home introduced several different rate plans, designed to provide customers with reduced per-call rates for an additional monthly fee. These new rate plans were designed to better meet the demands of specific customer segments, compared to T-Home’s existing rate plans. T-Home believes that there is a trend towards including and increasing flat-rate components in rate plans. The continued increase in customer acceptance of the Complete Packages has lead to a decrease in demand for individual products that are components of these bundles, such as fixed network access.

In addition, in October 2006, T-Home completed the introduction of its new Complete Packages product portfolio, which offers customers a choice of three different levels of single-play, double-play and triple-play. T-Home expects calling minutes with respect to the newly introduced flat-rate plans to increase. However, overall, T-Home expects calling minutes and revenues in the future to decrease due to increased acceptance of Complete Packages, continued loss of fixed network access lines, continued fixed-to-mobile substitution and the increased acceptance of VoIP.

 

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Wholesale Services

Through its wholesale services business, T-Home provides products and services to other domestic carriers and service providers, as well as to other members of the Deutsche Telekom Group, in accordance with regulatory guidelines stipulated by the Federal Network Agency. Within Wholesale Services, International Carrier Sales & Solutions (ICSS), is responsible for the international wholesale business. ICSS’ services and solutions are sold globally under the Deutsche Telekom brand. Wholesale products and services provided to third-party and Deutsche Telekom Group customers include the following:

Domestic Services

Interconnection services

T-Home’s interconnection services primarily consist of call origination and the transit and termination of switched voice traffic. The terms under which T-Home interconnects its telephone network with the networks of other domestic carriers and service providers are either bilaterally negotiated or imposed by the Federal Network Agency. At December 31, 2007, T-Home had 100 bilateral interconnection agreements and 47 interconnection orders (issued by the Federal Network Agency). The Federal Network Agency mandated price reductions on interconnection prices from June 1, 2006 until November 30, 2008.

IP services

T-Home provides Internet transport services for broadband and fixed network service providers (“virtual ISP services”) as well as transport services for carrier interconnection. In addition, T-Home offers nationwide access through its IP backbone and regional IP access to broadband IP providers. T-Home also provides scalable fixed network and broadband Internet transport services to ISPs (“OnlineConnect”), which allow ISPs to expand their Internet platforms in line with customer demand.

Access services

Demand for services enabling other telecommunications operators to offer their own end-customer telephone and Internet services continued to increase in 2007. The trend of telecommunications operators leasing access to the local loop to enable themselves to supply their customers with telephone and Internet services, using T-Home’s network infrastructure continued to increase significantly to 6.4 million lines in 2007 from 4.7 million in 2006 and 3.3 million lines in 2005. Unbundled local loop access is available to competitors in high bitrate (typically DSL capable) and low bitrate (typically not DSL capable) variants. Due to competitors increasing investment in their own network infrastructure, including co-location facilities and exchanges, in Germany, and, in part due to regulatory decisions, T-Home expects that the demand for access in the unbundled local loop will increase in the future. T-Home expects that regulatory decisions will continue to have a significant effect.

Furthermore, since July 2004, T-Home has offered a Resale DSL product, i.e., the sale of broadband access lines to competitors. This enables third-party operators to offer an integrated service combining access and IP services to their retail customers under their own brands. The current maximum transmission speed offered to Resale DSL customers is 16 Mbit/s. Resale DSL continued to increase in 2007 to 3.5 million, from 3.2 million in 2006 and from 1.6 million in 2005. T-Home expects that unbundled local loop access, as mentioned above, will continue to increase, particularly at the expense of Resale DSL.

Network Services

T-Home offers leased lines with transmission speeds ranging from 64 Kbit/s to 2.5 Gbit/s, which are tailored to fit the specific needs of carriers and mobile network operators. These leased lines can be used both for the transmission of data and for voice traffic. T-Home also offers Carrier Services Networks, which combine leased lines with network management services.

 

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International Services

International Carrier Sales & Solutions (ICSS) provides broadband operators, mobile operators and MVNOs, content, application and media providers, corporate service providers and virtual network operators (VNOs), fixed voice carriers, and carriers’ carriers and their customers, with worldwide direct access to Deutsche Telekom’s international telecommunications network. ICSS’ main focus is the transfer of outgoing international voice and data traffic from Germany to carriers in other countries for termination in their networks, and the provision of carrier termination and transit services for calls that originate outside of Germany and are routed through our network for termination in Germany or a third country. During 2007, ICSS managed total worldwide voice traffic of approximately17.5 billion minutes providing connections to more than 190 countries worldwide. With continuously changing markets, ICSS has redesigned its portfolio from traditional voice and transport services to advanced innovative wholesale services and customized IP solutions.

IP/Internet Services

T-Home’s integrated broadband strategy includes new offerings for voice, Internet and entertainment services. T-Home believes that broadband growth in Germany, particularly in the retail market, is largely dependent on the successful introduction and acceptance of double-play and triple-play products and services.

In 2007, T-Home continued to develop its portfolio to include new innovative broadband services. The new high-speed VDSL network, which T-Home began to roll out in 2005, provides bandwidths of up to 50 Mbit/s. In conjunction with this roll out, T-Home continued to develop new markets in which it will be possible to offer innovative services. In March 2005, T-Home launched its VoIP broadband telephony service. VoIP technology offers Internet users an affordable option of telephoning via the Internet. Since the beginning of November 2005, T-Home has been offering a VoIP flat-rate. In 2006, the portfolio of access services was broadened with rate offerings that include Internet access and DSL telephony that can be selected for all available access line speeds. In May 2006, T-Home launched the T-DSL 16000 product line primarily for data-intensive applications.

In October 2006, T-Home launched its first triple-play product consisting of high-speed Internet access, telephony and Internet Protocol TV (IPTV). As part of the launch of IPTV via the new high-speed network, T-Home has concluded agreements with numerous broadcasters in Germany. Since August 2006, T-Home has been offering transmissions of soccer matches of the first and second Bundesliga divisions in cooperation with the pay-TV channel Premiere.

In the entertainment area, the existing videoload (formerly marketed as “video-on-demand”) portfolio is being continually expanded, with a film library of over 2,000 titles from all genres. T-Home offers “Musicload,” one of the leading German online-music download portals based on the number of downloads. With the introduction of “Gamesload” in August 2005 and “Softwareload” in November 2006, T-Home established two other digital distribution platforms for entertainment and downloading of software on the Internet. Scout24 is a group of leading European online marketplaces and an established online classified service. Scout24 provides a broad range of sector specific marketplaces: AutoScout24, FinanceScout24, FriendScout24, ImmobilienScout24 (real estate), JobScout24 and TravelScout24.

Broadband Access

T-Home typically offers broadband access based on ADSL technology, which combines a high-speed data download transmission speed with a lower upload transmission speed, primarily to its individual customers. T-Home also offers synchronous DSL (SDSL) technology to its business customers, which permits high-speed data transmission speeds in both directions. Since 2003, SDSL has been available throughout Germany under the “T-DSL Business” brand name. T-Home provides analog and ISDN access lines, enhanced by means of DSL technology, to its individual and business customers at a fixed monthly fee. In the future, it is anticipated that T-Home will offer DSL on a stand-alone basis, enabling customers to substitute broadband access for fixed- network access. In addition, T-Home expects the number of broadband lines in operation to increase in the near future.

 

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The number of broadband access lines provided by T-Home continued to increase in 2007, and T-Home expects that demand for high-bandwidth services will result in continued growth in the number of broadband access lines in operation in the future.

To access the Internet, however, in addition to obtaining a broadband access line, individual customers also require a contract with an Internet Service Provider (ISP), such as T-Home’s ISP service. Since the merger of T-Online into Deutsche Telekom, T-Home has offered integrated services, such as Complete Packages, which include ISP services, Internet access and telephony services.

Other Services

Other services includes data communications, value-added services and terminal equipment which were previously reported separately, as well as various other services such as publishing, support services and the sale of products and services through T-Home’s Telekom Shop (formerly T-Punkt) outlets.

Data Communications

T-Home’s full portfolio of data communications solutions, which is also offered by the Business Customers operating segment, includes the following products and services:

 

   

Telekom Design Networks (TDN), which combine data and voice communications products to meet the specific needs of business customers and other carriers. A wide range of additional services (e.g., consulting, project management, design and re-design of customer networks) are integrated into TDN contracts. These components form the basis for a customized system solution, which can then be adjusted, based on changing client requirements and new technologies;

 

   

Internet solutions and IP-related services, primarily provided through the CompanyConnect and “IP-Transit” products;

 

   

IP-Transit offers bandwidths from 2 Mbit/s to 2.5 Gbit/s and provides worldwide Internet connectivity using multiple connections to different providers simultaneously. Based on this technology, customers can achieve very high system stability and independence from a single ISP. IP-Transit is mainly marketed by T-Home, in cooperation with T-Systems, to wholesale services customers and large-sized companies; and

 

   

Dedicated customer lines: T-Home’s dedicated customer line product offers business customers connections between two customer networks (located up to 50 kilometers apart) with transmission speeds of up to one Gbit/s.

Value-Added Services

T-Home offers a range of value-added telephone services for individual and business customers. These services include toll-free numbers and shared-cost numbers for customer-relationship management, directory-assistance numbers, the provision and administration of directory databases and public payphones.

T-Home’s premium-rate services (which use the 0190 and 0900 exchanges) enable information and entertainment packages to be sold and billed automatically by telephone or via the Internet. T-Home provides contact-routing solutions to our customers. Through its product, “T-VoteCall,” T-Home provides media broadcasting companies (largely television and radio stations) with the ability to catalogue and switch customer calls to pre-defined locations.

Terminal Equipment

Through its terminal equipment business, T-Home distributes, for purchase or lease, an extensive range of third-party and T-Home’s own-brand telecommunications equipment. Products range from individual telephone sets and facsimile machines, targeted at individual customers, to more complex telephones, private branch exchanges (PBXs) and complex network systems (including broadband access devices), targeted at business customers.

 

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Most of T-Home’s terminal equipment sales occur through its Telekom Shop outlets, which offer an extensive product portfolio, including ISDN and DSL business products, and products and services from T-Mobile and third-party vendors. T-Home receives commissions on its sales of products and services provided by other Deutsche Telekom operating segments. At December 31, 2007, T-Home had 804 Telekom Shop outlets in Germany.

Additional Services

Other services also includes publishing services, which include the sale of marketing and advertising services to small- and medium-sized companies via T-Home’s telephone directories. The telephone directories (e.g., DasTelefonbuch, GelbeSeiten, DasÖrtliche) are edited and published in a variety of formats (including print, CD-ROM, online and a version for mobile devices) in cooperation with local publishers. T-Home receives most of its publishing revenues from advertisements contained in these directories. In recent years, this business has been subject to increasing pressure from competition especially from online services. For information regarding legal proceedings relating to directory services, see “Item 8. Financial Information—Legal Proceedings.”

In addition, other services includes support services, such as installation, maintenance, hotline, customer consulting, training and software installation services, which are provided on a standardized basis and, for business customers, on a customized basis.

Broadband/Fixed Network operates primarily in the fixed-line and ISP business areas in Central and Eastern Europe. The majority of the business activities of our Central and Eastern European subsidiaries, except for mobile telecommunication, are included in the Broadband/Fixed Network’s results of operations. Since January 2007, the shared services and headquarters functions in Hungary of Magyar Telekom have been reported under the Group Headquarters and Shared Services operating segment, and the business customers results of operations have been reported under the Business Customers operating segment.

Broadband/Fixed Network sold T-Online France on June 29, 2007 and T-Online Spain on July 31, 2007. The results of these companies are included in results of operations through their respective dates of divestiture.

Central and Eastern Europe

Broadband/Fixed Network provides fixed-line network services, wholesale services, IP/Internet services and multimedia services (radio and television) in certain countries in Central and Eastern Europe, through its subsidiaries Magyar Telekom (Hungary), Slovak Telekom (Slovakia) and T-Hrvatski Telekom (Croatia). As an integrated telecommunications provider, Broadband/Fixed Network also markets triple-play services and intends to market quadruple-play services (which includes mobile communications in addition to triple-play services) through these subsidiaries.

Magyar Telekom

Broadband/Fixed Network holds a 59.35% equity interest in Magyar Telekom, the leading full-service telecommunications service provider in terms of customers and revenues in the Republic of Hungary. Magyar Telekom offers telecommunications services, such as fixed-line telephone services, data communications services, wholesale services, IP/Internet services, multimedia broadcast services and other services such as IT outsourcing services for customers throughout most of Hungary. Magyar Telekom holds a 56.7% stake in MakTel, the incumbent fixed-line carrier in the Republic of Macedonia. In addition, Magyar Telekom has a stake of 76.5% in Crnogorski Telekom, which provides fixed-line and Internet services in the Republic of Montenegro.

In response to the competitive pressure from cable television network operators offering cable TV, cable broadband Internet and voice over cable services, call-by-call and preselection competitors, and mobile substitution, Magyar Telekom continued to promote several flat-rate tariff packages and DSL offers and launched the first IPTV offering in Hungary in November 2006.

 

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Magyar Telekom maintained its leading position among ISPs in the Hungarian market based on the number of customers. The number of broadband access lines provided by Magyar Telekom continued to increase in 2007. The number of customers with broadband ISP rates at Magyar Telekom (including MakTel & Crnogorski Telekom) increased from 437,000 at December 31, 2006 to 580,000 at December 31, 2007. On March 30, 2007, Magyar Telekom introduced an unbundled ADSL service.

Magyar Telekom’s multimedia and broadcasting services business primarily consists of its cable television business. The number of Magyar Telekom’s cable television customers increased from 414,000 in 2006 to 419,000 in 2007.

Magyar Telekom’s international strategy is to provide international network and carrier services in southeastern Europe by expanding its presence in the region. Accordingly, Magyar Telekom entered the Romanian market in July 2004, the Bulgarian market in September 2004, and the Ukrainian market in August 2005, and currently offers wholesale services in each of these markets. Capitalizing on its experience in these markets, Magyar Telekom has expanded its activities as an alternative carrier and Internet service provider in southeastern Europe.

Magyar Telekom controls MakTel, currently the leading fixed-line operator in Macedonia in terms of revenues. MakTel’s exclusive right to offer fixed-line telecommunications services in Macedonia expired at the end of 2004. Since then, competition has intensified in the international telecommunications and Internet services segments.

T-Hrvatski Telekom

Broadband/Fixed Network owns a 51% equity interest in T-Hrvatski Telekom, the leading full-service telecommunications provider in the Republic of Croatia in terms of revenues. T-Hrvatski Telekom offers access and local, long-distance and international fixed-line telephone services, data communications services, IP/Internet services and wholesale services.

T-Hrvatski Telekom introduced entertainment services with the launch of IPTV in September 2006. T-Hrvatski Telekom also operates a digitalized fixed-line telecommunications network. Since mid-2005, particularly in the fixed-line voice telephony business, T-Hrvatski Telekom has been confronted by increasing competition. In addition to preselection, mobile substitution is the main competitive challenge in Croatia.

In 2007, the number of T-Hrvatski Telekom’s fixed network access lines in operation decreased slightly compared to 2006 and 2005. However, the number of its broadband access lines in operation increased by 59.9% to 345,000 at December 31, 2007, from 216,000 at December 31, 2006 and 101,000 at December 31, 2005.

T-Hrvatski Telekom’s IP/Internet business is the largest Croatian ISP in terms of revenues, and its market share at the end of 2007, based on revenues, was approximately 77%. The number of T-Hrvatski Telekom’s online customers increased by 15.9% to approximately 1,128,000 in 2007 compared to 2006. Broadband/Fixed Network expects that T-Hrvatski Telekom’s online business will be positively affected by customers’ substitution of broadband access services for standard dial-up access, which is expected to continue to increase in the future.

Slovak Telekom

In 2000, Broadband/Fixed Network acquired a 51% equity interest in the then state-owned Slovenské telekomunikácie a.s., which was rebranded “Slovak Telekom” In March 2006. As part of this rebranding strategy, the “T” brands were introduced in Slovakia. Slovak Telekom is a leading full-service telecommunications provider in the Slovak Republic. On October 5, 2007, Slovak Telekom sold TBDS (Tower Broadcasting & Data Services a.s.), its subsidiary operating in the broadcasting business area (formerly Rádiokomunikácie o.z. and RK Tower s.r.o.) to TRI R a.s.

Slovak Telekom offers access and local, long-distance and international fixed-line telephone services, data communications services, wholesale services, IP/Internet services. Until the disposition of TBDS Slovak Telekom provided distribution and broadcast of radio and television signals.

 

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In December 2006, Slovak Telekom introduced new competitive entertainment services with the launch of IPTV and triple-play. Slovak Telekom believes that triple-play is expected to be one of the main drivers for the success of Slovak Telekom’s broadband business. Through its online portal, “T-Station,” Slovak Telekom also offers games-on-demand, music-on-demand and video-on-demand.

Slovak Telekom’s total number of fixed network access lines decreased in 2007 by 3.5% compared to 2006, due to mobile substitution and to increasing customer migration to unbundled DSL, which was introduced in May 2006. In 2006, Slovak Telekom’s total number of fixed network access lines decreased by 2.3% compared to 2005.

The number of broadband access lines in operation in Slovak Telekom’s network continued to increase in 2007. The number of broadband access lines in operation at December 31, 2007 was 261,000 compared to 182,000 at December 31, 2006, and 104,000 at December 31, 2005.

As of December 31, 2007, Slovak Telekom’s online customer base increased to approximately 265,000 customers, a 19.7% increase, compared to 2006. The number of Internet customers using broadband services increased to 216,000 at December 31, 2007. Slovak Telekom believes that the development of high-bandwidth Internet services in Slovakia will encourage customer migration from fixed network to broadband access.

Sales Channels

Broadband/Fixed Network offers its products and services through a broad range of third-party distributors, as well as direct and indirect sales channels. Broadband/Fixed Network’s direct distribution channels include its Telekom Shop retail outlets, direct sales force dedicated to either business or retail customers, and online ordering via the Internet. In addition, Broadband/Fixed Network provides toll-free numbers that allow customers to obtain information about, and place orders for, its various products and services. Broadband/Fixed Network maintains separate sales units for direct sales to individuals and businesses, domestic carrier services and services offered to network operators and service providers.

Seasonality

Broadband/Fixed Network’s businesses are not materially affected by seasonal variations.

Suppliers

The principal types of equipment purchased by Broadband/Fixed Network are network components, such as switching systems; transmission systems; access network components; and customer premises equipment, such as telephones, fax machines, broadband modems and similar items. Although we do not believe Broadband/Fixed Network is dependent on any single supplier due to its multiple-supplier strategy, there may be occasions when a particular product from a particular supplier is delayed or back-ordered. Broadband/Fixed Network’s major suppliers are Siemens AG, Deutsche Post AG, Alcatel-Lucent Deutschland AG, Grey Global Group (MediaCom), AVM Computersysteme, Cisco Systems Inc., Corning Cable Systems GmbH & Co. KG, and IBM.

Dependence on Patents, Licenses, Customers or Industrial, Commercial or Financial Contracts

We do not believe that Broadband/Fixed Network is dependent on any patent or other intellectual property rights. For a description of patent infringement litigation relating to certain DSL-related technology that is relevant to Broadband/Fixed Network’s business, see “Item 8. Financial Information—Legal Proceedings—Other Proceedings.” We also do not believe that Broadband/Fixed Network is dependent on any individual third-party customer or on any industrial, commercial or financial contract.

Competition

Broadband/Fixed Network faces intense competition, based primarily on price in the market for fixed-line network voice telephony, from other fixed-line carriers and mobile operators. In recent years, this competition has intensified, especially in the fixed network and broadband access markets as well as in the market for ISP products and services. In particular, competition through bundled offers from other fixed-line carriers has

 

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intensified. The introduction of attractively priced triple-play packages to customers by Broadband/Fixed Network and other fixed-line carriers as well as cable operators is evidence of this increase in competition. We expect that competition from cable operators and VoIP will also continue to increase. Depending on the degree to which alternative technologies, such as VoIP, cable broadband and the Internet, gain market acceptance, the usage of Broadband/Fixed Network’s PSTN network will be adversely affected.

A number of competitors in Germany have indicated that they are either considering investing or intend to invest in their own high-speed networks, for instance by developing VDSL access networks, in order to pursue their own triple-play strategies. To date, only one competitor has confirmed this intention. Given the significant competitive advantage that such high-speed networks offer in the broadband access market, Broadband/Fixed Network expects that other competitors will eventually follow suit and invest in their own networks in order to compete with Broadband/Fixed Network.

National network operators, such as Arcor AG & Co. KG and local network operators, such as HanseNet Telekommunikation GmbH (“HanseNet”), Versatel AG and NetCologne Gesellschaft für Telekommunikation mbH, have also made substantial investments in local network infrastructure and compete with Broadband/Fixed Network in major urban centers throughout Germany.

Competition from local network operators, on the basis of leased lines (unbundled local loop) or the competitor’s own infrastructure, is increasing, particularly from entities owned by large European telecommunications companies, such as HanseNet (a subsidiary of Telecom Italia).

The impact of mobile substitution on Broadband/Fixed Network is also increasing, in part because of the increased market entry of MVNOs (i.e., companies with aggressive pricing policies that buy mobile network services and market them independently to third parties). Furthermore, as prices for mobile telephony decline, local and other calling services, as well as access services, face increasing competition from mobile telephone operators, due to mobile substitution.

It is also possible that cable operators may increase their market share by offering attractive triple-play services.

Accordingly, we believe that we continue to be exposed to the risk of further market share losses and falling margins.

Competition in the fixed-line network business in Central and Eastern Europe also increased. The growing number of competitors offering call-by-call and, more recently, carrier pre-selection services to consumers has led to increased competition, especially in Hungary, in which mobile substitution was also a significant factor. Increased mobile substitution also affected the Slovakian market. In addition, competition in Hungary and Slovakia is also expected to increase as cable network operators in those countries upgrade their networks to offer double-play and triple-play services. Competition in Croatia is expected to increase following the award of additional fixed-line network licenses.

In 2005, T-Home offered VoIP services in Germany for the first time to retail customers. VoIP services can compete with traditional voice telephony, both in the network access services business and in the various calling services markets. VoIP network access services offerings and customer acceptance have continued to increase in 2007. In addition, VoIP services also has substantial competitive potential in the calling services markets.

Prices for DSL access, ISP services and voice communications in the fixed-line network continued to decrease significantly in Germany in 2007, primarily due to increased competition and technological progress, and to a lesser extent to mobile substitution. The increased use of bundled packages (including calling plans) with a flat-rate component and a decrease in the overall prices for these packages by our competitors have intensified the downward pricing pressure on our own products, services and pricing packages. These factors, combined with the continued implementation of government policies intended to foster greater competition, are expected to yield similar trends in the future.

 

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Effect of Regulatory Decisions

In the markets for international, long-distance and local calling services in Germany, the level of competition we face is influenced by the fact that we are required to permit other telecommunications companies to interconnect with our fixed-line network and for access to the unbundled local loop at rates determined by the Federal Network Agency. As a result, decisions of the Federal Network Agency regarding the rates that we are permitted to charge for interconnection and for access to the unbundled local loop have had, and will continue to have, a significant impact on the strength of Broadband/Fixed Network’s competition in the market for fixed-line network voice telephony as well as on Broadband/Fixed Network’s revenues and profit. For a more detailed discussion of regulatory decisions and other competitive factors affecting Broadband/Fixed Network’s business, see “—Regulation” and “Item 8. Financial Information—Legal Proceedings.”

Other Fields of Business Activity

Although Broadband/Fixed Network does not manufacture its own equipment, it does re-sell telecommunications equipment provided by other companies under its own brand. The terminal equipment sector is characterized by falling prices, low margins, rapid technological innovation and intense competition. The basis for competition in this field is primarily price. Broadband/Fixed Network’s most significant competitors in this area are Siemens AG, Alcatel, Koninklijke Philips Electronics N.V. and Tenovis GmbH & Co. KG. Most of these competitors are also suppliers to Broadband/Fixed Network.

Apart from broadband-related developments, Broadband/Fixed Network believes that future innovations will be increasingly focused on the convergence between fixed-line and mobile telecommunications networks. In addition to its launch of the T-Box (single answering service for calls to the fixed-line number and the mobile number) in October 2005, Broadband/Fixed Network has introduced other convergence products. Broadband/Fixed Network believes that these and other such products could play an important role in the process of converging multimedia, telecommunications and related products and services.

Business Customers

The Business Customers operating segment provides, through T-Systems, ICT services worldwide, primarily to German and international companies, non-profit organizations and governmental agencies. T-Systems is also responsible for servicing all of the Deutsche Telekom Group’s business customers.

Principal Activities

T-Systems uses advanced information technology and its telecommunications expertise to provide ICT infrastructure and tailored ICT solutions to its customers and, in some instances, takes over complete business processes as part of these solutions. T-Systems supports its customers through its global telecommunications network and through its IT infrastructure network, which connects more than twenty countries worldwide.

In 2007, German-based operations contributed approximately 79.1% of T-Systems’ total revenues, which include intersegment revenues from other Deutsche Telekom Group companies and affiliates. For more information, see “Item 5. Operating and Financial Review and Prospects—Segment Analysis—Business Customers.” T-Systems’ other primary markets are in Western Europe, but T-Systems serves its multinational customers globally through its delivery organizations. Although the majority of T-Systems’ customers are headquartered in Germany, as of December 31, 2007, approximately 30.9% of T-Systems’ 56,516 employees provided services from locations outside Germany.

 

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Business Model

T-Systems’ activities in 2007 have been organized through two main business units: Enterprise Services and Business Services, each of which is described in more detail below. The following graphic illustrates this business model:

LOGO

 

* Services provided for service units of both Enterprise Services and Business Services.

Business Services

Business Services is responsible for approximately 160,000 large-, medium- and small-sized business customers in Germany. The Sales & Service Management service unit primarily services customers on a personalized basis. The Marketing & Product Management unit designs services for customers on a standardized basis, which are ultimately customized for large-sized business customers by the Sales & Service Management service unit. Business Services is also responsible for the delivery of telecommunications services to all business customers of both Business Services and Enterprise Services through its Telecommunications Operations (TC Operations) service unit.

Business Services’ Sales & Service Management service unit addresses its customers’ needs via five sales channels: large enterprises, medium enterprises, small enterprises, public and healthcare organizations and is responsible for managing customer relationships.

Business Services’ Marketing & Product Management service unit is responsible for product management, pricing and distribution of telecommunications offerings for all business customers of T-Systems. Marketing & Product Management is responsible for the lifecycle management of products and solutions and for the costs of all purchased inputs relating to customer offerings. Marketing & Product Management is also responsible for innovation management, marketing control, management of purchased inputs and the regulatory compliance of products and services.

 

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TC Operations is responsible for planning, building and operating T-Systems’ global telecommunications service-generating platforms and its customers’ LAN and WAN networks. Additionally, TC Operations carries out the delivery functions of Business Services (as described in more detail below). TC Operations is also responsible for quality and process management, as well as external procurement of telecommunications services for T-Systems.

Enterprise Services

Enterprise Services serves T-Systems’ largest customers, multinational corporations and large public institutions through its dedicated Sales & Service Management service unit. In 2007, Enterprise Services became responsible for servicing certain large customers of Business Services. Enterprise Services is also responsible for the non-German T-Systems subsidiaries. In addition, Enterprise Services also delivers information technology services, through its Systems Integration and IT Operations service units, for business customers of both Business Services and Enterprise Services.

Enterprise Services’ Sales & Service Management service unit provides services through six vertical market segments, called “Industry Lines,” which reflect T-Systems’ key customer accounts. Sales & Service Management is responsible for managing the customer relationships of the Enterprise Services business unit.

Enterprise Services’ Sales & Service Management is organized along six defined Industry Lines, as follows:

 

   

“Telecommunications, Media & Utilities”—Includes other network operators and companies offering fixed-line, mobile and Internet telecommunications services, as well as media, ISP and utilities companies. T-Systems provides outsourcing services and other IT systems, such as customer relationship management, customer care, call center and billing systems.

 

   

“Automotive”—Includes original equipment manufacturers (OEMs), automotive industry suppliers (including manufacturers of rubber products), motor vehicle component retailers, as well as automotive dealers and repair shops.

 

   

“Manufacturing”—Includes manufacturers of components for the aircraft, electronics, aerospace, defense, high-tech, mechanical engineering, chemical, pharmaceutical and consumer goods industries. T-Systems provides supply chain management, product life-cycle management and IT and telecommunications outsourcing services.

 

   

“Services”—Includes the services industry, such as telematics, insurance, travel, transport, logistics, professional, wholesale distribution and retail. T-Systems develops a variety of solutions, including sales support systems, billing solutions, portals for direct sales via the Internet, Internet-based reservation and booking systems, and tracking and data management systems.

 

   

“Finance”—Includes banks and insurance companies. T-Systems develops a variety of solutions, including industry specific sales support systems and electronic banking solutions.

 

   

“Public”—Includes government agencies, state pension funds, the armed forces of the Federal Republic, research and teaching institutions and international organizations. T-Systems enables public entities (such as federal ministries and state agencies) to establish innovative business processes, such as services to individuals through the Internet and the management of data and voice networks.

IT Operations carries out the delivery functions of Enterprise Services (as described in more detail below). IT Operations provides ICT solutions to support business processes or takes over full responsibility for the operation of entire business processes of a customer. Accordingly, this service unit supplies customers with workstations, service and maintenance functions, operates data centers, and provides systems and applications necessary to support or completely take over a customer’s operations.

Systems Integration develops, integrates and manages customized ICT solutions for customers, including industry specific, as well as industry independent, solutions. Customer solutions include ICT solution consulting, software and platform development, migration services, systems integration and application management.

 

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Media & Broadcast

Media & Broadcast primarily provides terrestrial television and radio network broadcast services, which include the planning, installation, maintenance, troubleshooting and operation of terrestrial television and radio transmission equipment. Media & Broadcast was sold to Télédiffusion de France for EUR 850 million on January 15, 2008.

Detecon

Detecon offers its customers integrated management and technology consulting. Detecon operates worldwide and focuses on consulting for the telecommunications market. Detecon markets its services separately from the Business Services and Enterprise Services business units.

Service Offerings Portfolio

A significant recent trend in the IT and telecommunications markets is the emergence of a combined ICT market, which is driven primarily by customer requirements and technological advances. The primary advantages of this combined market are more effective and efficient solutions and incident management in complex IT and telecommunications infrastructures, including one single service agreement for all ICT services.

It is the goal of T-Systems to become a European-based ICT leader for multinational companies, and an ICT leader for mid-market companies in Germany. T-Systems is continuing the process of aligning its operations to provide combined IT and telecommunications services more effectively, through improved service management, and solutions development. In this regard, T-Systems is reshaping its service offerings, particularly within three value enhancing service levels:

 

   

“ICT Infrastructure”—Includes the provisioning of capacity or connectivity, in combination with communication technology related applications and value added services and the selling of hardware with related basic support services.

 

   

“Horizontal processes and applications”—Includes standard business applications on platforms run by T-Systems, provided and operated for various customers (application provisioning and operations), application development and system integration and Business Process Outsourcing (i.e., complete end-to-end management of business processes including human or asset resources outsourced to T-Systems).

 

   

“Vertical processes and solutions”— In addition to its horizontal processes and applications which apply to all industries, T-Systems offers industry specific solutions or vertical solutions for different industries. The automotive, public and telecommunications industries are served completely, whereas banking, aerospace, and travel, transport and logistics industries are served with selected industry-specific solutions.

In addition, T-Systems provides consulting and digital security services, which are included in each of the above service levels.

Development of Business Model

T-Systems is planning to focus its activities and to position itself more strongly in the network-centric ICT market. In 2008, T-Systems began implementation of its “Next Generation T-Systems” program, which has been developed to react to customer needs through the creation of two simplified and specific go-to-market models: The Corporate Customers unit, which will address multinational and large customers, and the Business Customers unit, which will focus on smaller enterprises.

Corporate Customers will combine a dedicated account management for major customers and a direct sales approach with regional focus for large customers, allowing us to interact more closely with our customers. Corporate Customers will also support Deutsche Telekom in optimizing its IT needs and achieving its cost

 

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targets. Corpoarte Customers will also be responsible for all of our multinational customers. Due to its specific requirements, the public sector will be serviced by a separate dedicated team.

In the Business Customers unit, we will serve our customers with a multi-channel sales approach comprised of a decentralized sales force, e-channels (e.g., Internet Shops), telesales and partner sales.

T-Systems also intends to standardize and modularize its portfolio. The offerings of Next Generation T-Systems will include application management (i.e., end-to-end operational responsibility for an application) and ICT infrastructure (e.g., provisioning of capacity in combination with communication technology related applications).

There will be a clear functional separation of production delivery and sales. The delivery basis for the network centric model will be one integrated factory for Computing Services, Desktop Services, and Telecommunications Services. We intend to focus on centralized ICT services production with global delivery capabilities.

The integrated IT and TC factory will enable the delivery of high quality services with a comprehensive scope. We believe that an integrated customer management focus will ensure consistent handling of contracts and service delivery across all services.

As announced in 2007, T-Systems is in the process of analyzing strategic options regarding its Systems Integration business. T-Systems is currently negotiating with potential partners. We hope to finalize negotiations in the near term. However, we cannot provide assurance that a favorable outcome will be realized.

Business Services

Business Services offers a comprehensive portfolio of telecommunications services to its customers and those of Enterprise Services. Given the convergence of the telecommunications and IT markets, Business Services has enlarged its portfolio by offering IT Services and has positioned itself as a network-centric ICT provider for the German middle market. The Business Services product and services portfolio includes:

 

   

Voice Services—consisting of telephone lines and calling services, including VPN as well as mobile voice access;

 

   

Voice Equipment—telecommunications equipment available for sale or lease;

 

   

Data communication services—consisting of traditional data connections (e.g., leased link services, VPN transport services based on Frame Relay and ATM technologies) and IP solutions based on modern IP technologies, including VoIP;

 

   

Local Area Network (LAN) solutions—LAN and W-LAN hardware for sale or lease, as well as the implementation and operation of related solutions (e.g., W-LAN corporate / AutoID solutions, hotspot solutions);

 

   

Mobile solutions—access solutions and integration services, including customer-requested solutions relating to digital transmission of content, such as universal secure access and mobile office solutions;

 

   

IT infrastructure services—solutions for improving IT-infrastructure (e.g., desktop management, datacenter outsourcing & services, storage solutions);

 

   

IT business solutions—design, implementation and management of applications to support internal processes of corporate customers;

 

   

Business Process Outsourcing—assumption of responsibility for complete business processes (e.g., billing solutions, human resources); and

 

   

Digital Security Services—including antivirus, firewall and encryption services.

Sales & Service Management

Sales & Service Management is the “single face to the customer” for Business Services and is responsible for all customer-relevant tasks, including product positioning in the German market, sales proposals, customer acquisition and retention, order management, implementation and service management.

 

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To support quality customer service throughout Germany, the sales force is organized regionally. Due to the vast range of customers and their different needs and requirements, Sales & Service Management is separated into five sales channels:

 

   

large enterprises and multi-national corporations that require customized solutions;

 

   

medium enterprises that require the integration of multiple products;

 

   

small enterprises that require standardized products;

 

   

public, which addresses solutions specific to public authorities; and

 

   

health care, which addresses solutions specific to the health care industry.

Contracts relating to the Sales & Services Management distribution channels have an average duration of approximately three years. Voice services provided are billed on a per-minute basis, while data services are billed in terms of the volume of bandwidth provided each month. Customers taking advantage of leased-line services pay an initial connection fee, based on the type of line leased, and thereafter pay monthly subscription charges based on the line’s capacity (narrowband or broadband), the length of the line (point-to-point connection) and the duration of the lease.

Sales & Service Management’s assets consist of telecommunications and network equipment as well as transmission equipment (84%), assets under construction (9%), intangible assets (4%) and furniture and office equipment (3%).

Marketing & Product Management

Business Services’ Marketing & Product Management service unit is responsible for developing telecommunications and IT offerings for large, medium- and small-sized companies as well as developing telecommunications offerings for multinational corporations and large public institutions. Marketing & Product Management is also responsible for Business Services’ lifecycle and portfolio management of products and solutions, as well as innovation management, marketing, communications, product profitability and the regulatory compliance of products and services.

Telecommunications Operations

Telecommunications Operations, as part of T-Systems Business Services business unit, manages the development, construction and operation of T-Systems’ German and international service platforms, based on transport capacity leased primarily from T-Home and, to a lesser extent, from other providers.

T-Systems’ service platforms include:

 

   

IP MPLS—delivers advanced IP services and features, including VPNs for business customers;

 

   

ATM/Frame Relay—used as transport technologies through which specific services in customer networks are offered;

 

   

VoIP—T-Systems operates an international IP-based voice platform for advanced Voice over IP products for business customers. This platform also provides the gateway function to legacy PSTN/ISDN Services;

 

   

Managed Leased Line Systems—provides transport capacity with less than 2 Mbit/s in Germany; and

 

   

Ethernet Platform—based on T-Home’s or other providers’ aggregation and access network for end-to-end ethernet VPN services and LAN-to-LAN connections.

TC Operations also provides value added services through IP-based platforms, including:

 

   

Remote dial-in and Client Encryption—designed to give mobile and non-permanent users an easy and secure access to their companies’ Intranet through private dial and secure Internet access technologies;

 

   

Security Services—modular security solutions, as well as customized solutions and firewall services;

 

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Shared Internet Access Services—primarily proxy services based on different access rates and technologies; and

 

   

Managed Hosting Services—for server based solutions, applications and web services.

Approximately 74% of TC Operations’ assets are comprised of technical facilities mainly consisting of active network equipment and approximately 17% are comprised of intangible assets mainly consisting of software licenses with the remaining 9% comprised of assets under construction, furniture and office equipment as well as leasehold improvements.

Media & Broadcast

Media & Broadcast is the largest broadcast network operator and broadcast service operator in Germany in terms of revenues and has an outstanding expertise in systems-equipment technology and digital broadcasting transmitters. Its customers comprise national public and commercial broadcasters, television production companies and international broadcasters. In Europe, Media & Broadcast is one of the leading providers of broadcast services in terms of revenues. As of December 31, 2007, Media & Broadcast’s broadcast network in Germany comprised more than 3,000 analog television and radio transmitters/inverters, and more than 500 digital television and radio transmitters.

As part of our divestiture strategy, Media & Broadcast was sold to Télédiffusion de France for a purchase price of EUR 850 million on January 15, 2008.

Many of these services are delivered via Media & Broadcast’s own infrastructure. Media & Broadcast’s main service, and its primary source of revenues, is television and radio network services, which include the planning, installation, monitoring, maintenance, troubleshooting and operation of terrestrial television and radio transmission equipment.

Media & Broadcast’s satellite services include the marketing and delivery of satellite capacity, and the provision and operation of uplinks and downlinks.

In addition, Media & Broadcast services include temporary transmission lines as well as permanent transmission links. T-Systems expects its business relationship with Media & Broadcast to continue.

Enterprise Services

Systems Integration

Systems Integration (SI) provides advice and assistance for a company’s entire “plan-build-run” lifecycle. Through its ICT solutions, SI increases the flexibility of its customers’ business processes. Its primary focus is on solution design and architecture, IT projects (e.g., solution implementation, along with development projects, including software and platform development, re-engineering and migration), and solution and application development, including testing and application lifecycle services. The focal points of SI’s business model are:

 

   

“Industrialization”—relates to the introduction of uniform processes, general standards, methods and tools and enhancing the re-usability of modular solutions. It is also defined by the maintenance of low-cost structures at production sites. For this reason, T-Systems’ SI business unit has established sourcing platforms in countries such as India, Russia, Hungary and Brazil in order to provide local and offshore capabilities.

 

   

“Verticalization”—SI’s business is an integrated part of the T-Systems ICT portfolio strategy and mainly focused on five industries: Telecommunications, Automotive, Manufacturing, Public and Services. Cross industry services are provided by separate application development-, service and testing factory units within SI. This concentration on specific competencies enhances the quality of activities to achieve best in class process consulting, project and application services delivery.

 

   

“Internationalization”—through SI, an international delivery network has been established to provide sales and services to international customers by offering them tailored, efficient solutions and service components.

 

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IT Operations

IT Operations is responsible for providing services relating to customer IT infrastructure, including computing services, desktop services, application services and telecommunications services. IT Operations’ services are offered to new and existing customers through Enterprise Services’ Sales & Service Management service unit.

IT Operations provides the personnel, servers and infrastructure necessary to operate the IT functions of T-Systems’ customers. IT Operations is represented in a large number of locations throughout Germany and the world. As of December 31, 2007, IT Operations had a total of more than 17,000 employees, of whom approximately two-thirds were based in Germany.

IT Operations comprises three main service lines: Desktop Services & Solutions, Computing Services & Solutions and Business Process Outsourcing. Desktop Services & Solutions delivers, operates and maintains desktop systems for customers, while Computing Services & Solutions operates data centers for customers and manages the systems and applications, which run in these data centers. Business Process Outsourcing operates solutions that support customers’ business processes, taking “end-to-end” responsibility for those processes.

Desktop Services & Solutions

The Desktop Services & Solutions service line is responsible for the development and implementation of complete office systems solutions with wide-ranging responsibility for IT infrastructure. Other core services include stand-alone office systems solutions, including desktop operations, call-center and help-desk services, as well as the operation of computing services infrastructure, consulting and IT design. These services may include sales or leasing contracts relating to desktop computer hardware supplied by third parties. Through Desktop Services & Solutions, T-Systems provides cost-effective desktop services primarily to large customers. Such services cover the entire lifecycle of the workstations provided to the customer, and also include the remote configuration, troubleshooting and debugging of software running on workstations serviced through Desktop Services & Solutions.

Through Desktop Services & Solutions, IT Operations also ensures the proper operation of the workstations and services hardware and software products provided. As of December 31, 2007, more than 1,400,000 workstations were serviced through Desktop Services & Solutions. Help-desk services are primarily provided through the Services Office platform and the Call Center Platform Management (CCPM) services. The Services Office platform supports one of the largest and most sophisticated Microsoft Exchange applications worldwide, with more than 300,000 mailboxes as well as file, fax and SMS services. CCPM includes services that are required for the smooth operation of a call-center platform.

In general, desktop services contracts have an average duration of two years. Customers pay for managed desktop services based on contractually agreed service levels. These agreements describe quantities of goods (i.e., the number of computers leased and maintained) as well as customer-specific availability and quality requirements for the services provided.

Computing Services & Solutions

Computing Services & Solutions provides customers with the ability to outsource their entire IT operations. The services offered include the operation of data centers, application management, user support and network management. Other services offered include the installation, operation and administration of central computer systems (mainframes), open computer systems (e.g., UNIX, Windows NT), data center infrastructure services and business applications, on behalf of its customers.

Generally, contracts involving computing services have an average duration of four years or more. Customers pay for computing services based on contractually agreed service levels. These agreements describe the quantity, quality and extent of services to be provided.

 

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Business Process Outsourcing

Business Process Outsourcing targets the following markets:

 

   

Human Resources Solutions, including payroll accounting and travel expense management services, human resources support and time management;

 

   

Billing Services for telecommunication companies, media companies and utilities, which involves settlement and collection services, from the collection and processing of data to the generation of invoices and billing;

 

   

Finance & Accounting Services, which includes the processing of accounting-related business transactions according to national and international accounting standards;

 

   

Managed Document Services, which include archiving, printing and mailing, as well as electronic data exchange; and

 

   

Accounts Receivable Management/Debt Management for business customers, which includes credit rating checks, address investigation and other services.

Seasonality

The revenues of the Business Customers operating segment are not materially affected by seasonal variations. However, its revenues may be subject to quarterly fluctuations depending on sales cycles (currently ranging between six and 18 months) and the purchasing patterns and resources of its customers, which are subject to general economic conditions and, therefore, difficult to predict. Accordingly, revenues received in a particular quarter may not be indicative of future revenues to be received in any subsequent quarter.

Suppliers

The principal goods and services purchased by T-Systems are computer hardware for client servers and mainframes, operating systems and applications software, network capacity, network services, telecommunications network components and IT consulting services. Business Customers manages the risks in the supplier relationships, as well as the risks associated with quality and cost considerations, on behalf of its customers. We do not believe that Business Customers is dependent on any single supplier.

Dependence on Intellectual Property

We do not believe that the Business Customers operating segment is dependent on any individual patents, licenses or industrial, commercial or financial contracts. However, Business Customers is subject to third-party software licenses in connection with the services it provides to its customers. Any breach, violation or misuse of third-party software licenses could result in additional costs with respect to the particular projects that are the subject of such licenses.

Dependence on Material Contracts

Business Customers intends to become less dependent on internal customers (i.e., other Deutsche Telekom Group companies) and to improve its market position with respect to external customers. In 2007, the other Deutsche Telekom Group companies accounted for approximately 25.2% of Business Customers’ total revenues, compared to 27.7% in 2006 and 29.0% in 2005. No other customer accounted for a significant portion of Business Customers’ total revenues in 2007.

Competition

T-Systems operates in markets that are subject to intense competitive pressures, and the overall market has been characterized by consolidation and increased concentration during the past year. T-Systems faces a

 

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significant number of competitors, ranging in size from large IT and telecommunications providers to an increasing number of relatively small, rapidly growing and highly specialized organizations. T-Systems believes that its combination of ICT service and solutions, performance, quality, reliability and price are important factors in maintaining a strong competitive position.

T-Systems holds different market positions (based on total revenues) in different regions of the world. In Germany, T-Systems believes it is still the market leader in 2007 in the IT and telecommunications areas. In Western Europe, T-Systems was one of the five largest vendors in 2007, together with IBM Global Services, Accenture, CapGemini, and HP Services with respect to IT services including intersegment revenues of T-Systems, and one of the four largest companies, together with BT Global Services, France Télécom and Telefónica, in the telecommunications industry. Globally, T-Systems ranked among the top 20 IT and telecommunications companies. T-Systems’ global IT competitors include IBM Global Services, EDS, Fujitsu Services, HP Services, Accenture, CSC, Atos Origin and Capgemini. In the telecommunications area, T-Systems competes globally with AT&T (Business), Verizon (Business), NTT, France Télécom (Enterprise) and BT Global Services.

Competition in the telecommunications markets in which T-Systems competes is very intense, both in Germany and globally. The market is characterized by substitution of legacy services (voice and data) by IP and mobile services and by strong pricing pressures. The competitive landscape over the past several years has been characterized by market participants attempting to reduce their indebtedness and increase their profitability through strategic refocusing and concentration on IP services, fixed-mobile convergence and network-centric ICT solutions. Additionally, consolidation (primarily in the U.S. market) in the ICT market has increased the competitive landscape. T-Systems expects this strategic refocusing to continue in 2008 and therefore expects similarly fierce competition.

Competition is also intense in the information technology area. The current market is characterized by strong pricing pressures, reduced customer IT budgets, prolonged customer sales cycles and aggressive competition from offshore providers. As a result of these competitive pressures, many companies, including T-Systems, are attempting to maintain or expand market share through improved productivity, cost-cutting and efficiency measures. This situation has also led to a consolidation in the IT sector, which T-Systems expects to continue for the foreseeable future. In addition, T-Systems expects that the global IT services markets recovery will continue in 2008, but competition will likely remain intense.

Group Headquarters and Shared Services

General

Group Headquarters and Shared Services performs strategic and cross-divisional management functions for the Deutsche Telekom Group. Group Headquarters functions include those performed by many of our central departments, such as treasury, legal, accounting and human resources. Operating functions not directly related to the core businesses of our operating segments are considered shared services functions. These functions also include, among others, the management and servicing of our real estate portfolio (primarily within Germany), fleet management and Vivento. Since the beginning of 2007, Group Headquarters and Shared Services has also included the shared services and headquarters functions of Magyar Telekom. Although many of the Group Headquarters and Shared Services functions are legally part of Deutsche Telekom AG, we manage Group Headquarters and Shared Services as though it were a separate legal entity.

Principal Activities

The real estate unit is, based on total and net revenues, the largest shared service within Group Headquarters and Shared Services. The real estate unit is responsible for managing our real estate portfolio, renting commercial real estate and providing facility management services for our Group, primarily in Germany. Our real estate operations are conducted through various subsidiaries and affiliates and include:

 

   

the internal and external Group leasing and rental business;

 

   

the power supply and air conditioning solutions business related to our telecommunications facilities;

 

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facility management services;

 

   

real estate management for Magyar Telekom and Slovak Telekom, as well as third parties in Hungary and Slovakia; and

 

   

the operation, management and servicing of our radio transmission sites, such as our radio towers and transmitter masts in Germany (primarily used in mobile, radio and satellite communications, as well as for television broadcasting).

In the second quarter of 2007, we sold our remaining minority stake in Sireo Real Estate Asset Management GmbH of 25.1% to a former co-shareholder, Corpus Immobiliengruppe GmbH & Co. KG. For more information about our real estate portfolio and management activities, see “—Description of Property, Plant and Equipment—Network Infrastructure—Real Estate.”

Vivento was established in 2002 with the goal of efficiently implementing our staff restructuring measures in a socially responsible manner. Through Vivento, displaced workers are retrained and equipped with new employment qualifications for permanent redeployment within the Deutsche Telekom Group or with external employers, or for project and temporary assignments. In addition to individual placements, Vivento staffs major projects and workforce-intensive operations and services. To create further employment opportunities, Vivento operates its own business lines. At the beginning of 2004, Vivento commenced providing call center services primarily to some of our Group companies and, to a lesser extent, to third parties. These call center operations consist of a portion of the former call center operations of Broadband/Fixed Network, as well as those of Vivento Customer Services GmbH, which was established in the first quarter of 2004.

Vivento Customer Services provides customer-relationship services, including call center and back-office services, within the Group as well as to third parties. As of December 31, 2007, Vivento Customer Services employed approximately 2,600 people. In addition, approximately 900 people from Vivento were employed by Vivento Customer Services on a temporary basis as of that date. In the first quarter of 2007, we sold seven call center locations of Vivento Customer Services, including a total of approximately 1,200 jobs, to external companies. As of April 1, 2007, two call center locations were transferred to walter services ComCare. Five call center locations were transferred to the arvato group as of May 1, 2007. At the beginning of 2008, we sold five additional call center locations of Vivento Customer Services to the arvato group. The transfer of these call centers and the approximately 600 employees associated with them will be effective as of March 1, 2008.

In July 2004, Vivento set up a further business line by establishing Vivento Technical Services GmbH, which offers installation and after-sales services in the field of technical infrastructure within and outside the Group. As of December 31, 2007, Vivento Technical Services had approximately 1,900 employees, and a further 300 were temporary staff from Vivento. In October 2007, Deutsche Telekom and Nokia Siemens Networks signed a strategic partnership agreement, an essential part of which is the transfer of operations of Vivento Technical Services to Nokia Siemens Networks as of January 1, 2008. In connection with the transfer of operations, approximately 1,600 employees were transferred to Nokia Siemens Networks.

During 2007, approximately 1,700 of our employees were transferred to Vivento. As of December 31, 2007, a total of approximately 38,600 employees have been transferred to Vivento since its creation. Approximately 70% of these employees were transferred from Broadband/Fixed Network, both as part of Broadband/Fixed Network’s program to increase its efficiency, and through the transfer of some Broadband/Fixed Network operations to the Vivento business lines. The remaining transferred employees were either apprentices who had finished their professional training within the Group, but had not obtained full-time employment, or came from the other Deutsche Telekom operating segments.

At December 31, 2007, a total of approximately 28,300 employees had left Vivento since its formation, of which approximately 5,000 left during 2007. About 77% of these employees were external placements. As of December 31, 2007, approximately 10,200 employees were in Vivento, of which approximately 600 were permanent staff, approximately 5,200 were employees of the Vivento business lines and approximately 2,900 were engaged on a temporary or contract basis within or outside of the Group.

 

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In 2008, Vivento will focus on our capacity management program in order to support further staff restructuring measures within the Deutsche Telekom Group. This program intends to create further external employment opportunities, especially for civil servants in the public sector.

The following table provides information regarding Vivento’s employee structure and movements for the periods presented:

 

     2007(1)    2006(1)    2005(1)

Number of employees transferred to Vivento

   1,700    2,700    2,400

Number of employees that have left Vivento

   5,000    4,400    6,100

Total number of employees in Vivento as of year-end

   10,200    13,500    15,300

of which: Operational staff of Vivento

   600    700    700

of which: Number of employees in business lines

   5,200    7,200    7,200

 

(1) Figures have been rounded to nearest 100.

Our fleet management company, DeTeFleetServices GmbH, provides fleet management and mobility services, with approximately 42,000 vehicles provided to our Group companies and affiliates within Germany. DeTeFleetServices also generates net revenues from third parties through its sale of used fleet vehicles and, to a limited extent, through fleet management services to third parties. The majority of third party customers are former affiliates of Deutsche Telekom that were sold.

The Central Treasury department is primarily responsible for cash management, investments in securities, leasing arrangements and the refinancing of indebtedness through a variety of financial arrangements, including, among other things, bank loans and other credit arrangements. Furthermore, this unit is responsible for the issuance of debt in the international capital markets, the handling of payments and clearing transactions, and foreign exchange and hedging activities. For more information, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

T-Venture Holding GmbH is also included in Group Headquarters and Shared Services. T-Venture’s mission is to scout new products, technologies and services and to acquire access to them on our behalf. Accordingly, a central corporate fund has been established for this purpose, in addition to the individual investments that can be made by our operating segments.

The Telekom Training unit is responsible for providing professional training and qualification services for our employees within Germany. This unit also provided training for approximately 10,400 apprentices during 2007.

Group Headquarters and Shared Services also includes the establishment and maintenance of international intellectual property rights for the Deutsche Telekom Group, including all Telekom brands.

 

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INNOVATION MANAGEMENT (RESEARCH AND DEVELOPMENT)

Innovation Strategy

In 2007, we continued to focus our research and development strategy on the introduction of innovative products for our customers, based on their current and future requirements. The idea of connectivity, whether at home, on the move or at work, provides the central basis for the future design of our product categories, including our three core product categories—voice/messaging, high-speed Internet and IPTV.

In 2007, we continued to concentrate our research activities based on the “5i” strategy, which comprises the following five focus fields, reflecting our strategic innovation portfolio and development priorities:

 

   

Inherent Security—offers our customers network-related security solutions.

 

   

Intuitive Usability—seeks to make complicated services and functions more user friendly.

 

   

Intelligent Access—aims to offer customers the best service available without requiring the user to manually select the network services and access.

 

   

Integrated Service Components—promotes the appropriate connection and interaction of many multimedia and service devices to one another.

 

   

Infrastructure Development—creates the technological basis needed to meet bandwidth, mobility and security requirements in a cost-effective manner for our Group and customers.

Systematic analysis and tracking of future customer needs helps us focus our research and development (R&D) efforts on the topics and technologies that are most relevant to our customers. Key innovation and performance indicators and processes enable us to evaluate and provide quality assurance throughout the Group. Execution strategies and the timing of the introduction of products to the market are subject to Group-wide contribution and effort.

Research & Development

Our innovation activities are currently managed by our Product & Innovation Department, which is responsible for innovation strategy, innovation management across the Group, innovation marketing, Group-wide research and development and corporate venture capital. This department focuses primarily on issues that are relevant to all operating segments. The operating segments are primarily responsible for product innovations that are close to market launch, i.e., within a development lead time of up to 24 months.

In addition to the Product & Innovation Department, Deutsche Telekom Laboratories and T-Venture support the implementation of our innovation strategy. Deutsche Telekom Laboratories acts as a central research and development unit. T-Venture, a venture capital company, finances and supports innovative new companies in the telecommunications and IT sectors.

Deutsche Telekom Laboratories

Launched in 2005, Deutsche Telekom Laboratories established itself as a central research and development institute and an international science institution. Deutsche Telekom Laboratories is divided into the Innovation Development Laboratory and the Strategic Research Laboratory. Both areas are organized to support the transfer of knowledge and findings from academic research into product design with our operating segments.

The Innovation Development Laboratory has assumed the role of general contractor for applied research and development. On the basis of the five innovation areas described above, it manages our R&D portfolio. It develops and assesses innovative ideas, implements test environments, assists with demonstrations and prototypes, and develops business models. It then transfers results to the operating segments for further review and development.

 

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The Strategic Research Laboratory carries out long-term, applied fundamental and technology research and provides important basic insights for the development of innovative products and solutions. To achieve this, we have worked closely with the Berlin Technical University.

Research and Development Expenditures

In 2007, our expenditures on experimental, explorative, and pre-production research and development were EUR 0.2 billion (2006: EUR 0.2 billion; 2005: EUR 0.2 billion). Typical research and development activities included the development of new data-transmission processes and innovative telecommunications products. In 2007, investment in internally generated intangible assets to be capitalized amounted to EUR 0.3 billion (2006: EUR 0.3 billion; 2005: EUR 0.2 billion). These investments related primarily to internally developed software. As in previous years, the vast majority of this amount was attributable to the Broadband/Fixed Network, Mobile Communications Europe and Mobile Communications USA operating segments. In 2007, over 2,200 employees were involved in projects and activities to create new products and market them efficiently to customers.

Intellectual Property

In the market for mobile and fixed network telephony, intellectual property rights play an extremely important role, both nationally and internationally. For this reason, we focus intensively on in-house development and third-party acquisition of such rights.

In 2007, we filed 542 patent applications worldwide, a slight decrease compared to 2006. We held 5,800 intellectual property rights (inventions, patent applications, patents, utility models, and design models) as of the end of 2007 (2006: 5,663; 2005: 6,686). The portfolio of rights is reviewed on a regular basis, and those rights that are no longer relevant are eliminated. Management of these intellectual property rights is governed by strict cost-benefit considerations.

 

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ACQUISITIONS AND DIVESTITURES

The following table presents each of the principal acquisitions and divestitures made by us during our last three fiscal years:

 

Year

  

Segment(1)

  

Event

   Amount  
               (billions of €)  
2007    Mobile Communications Europe   

Acquisition of Orange Nederland(1)

   (1.3 )
2007    Broadband/Fixed Network   

Purchase of shares in Immobilien Scout GmbH

   (0.4 )
2007    Broadband/Fixed Network   

Sale of T-Online France S.A.S.

   0.5  
2007    Broadband/Fixed Network   

Sale of T-Online Spain S.A.

   0.3  
2007    Broadband/Fixed Network   

Sale of TBDS, (Tower Broadcasting & Data Services), Slovakia

   0.1  
2007    GHS   

Sale of real estate(2)

   0.1  
2006    Mobile Communications Europe   

Purchase of shares in PTC(3)

   (0.6 )
2006    Business Customers   

Purchase of shares in gedas

   (0.3 )
2006    Mobile Communications Europe   

Purchase of shares in tele.ring

   (1.3 )
2006    Broadband/Fixed Network   

Exchange of shares of Deutsche Telekom AG for shares of T-Online International AG(4)

   (0.8 )
2006    GHS   

Sale of real estate

   0.4  
2005    Broadband/Fixed Network   

Purchase of shares in Crnogorski Telekom

   (0.1 )
2005    GHS   

Sales of shares in DeASat S.A.

   0.1  
2005    Mobile Communications Europe   

Purchase of shares in CMobil

   (0.1 )
2005    GHS   

Sale of real estate

   0.2  
2005    GHS   

Sales of shares in Intelsat, Ltd.

   0.1  
2005    Mobile Communications Europe   

Sale of remaining shares in MTS

   1.2  
2005    Broadband/Fixed Network   

Purchase of additional shares of T-Online International AG

   (1.8 )
2005    Broadband/Fixed Network   

Sale of shares in comdirect bank AG (“comdirect bank”)

   0.2  

 

(1) As part of our acquisition of Orange Nederland, we also acquired Orange Nederland Breedband B.V., a provider of broadband Internet lines and other Internet-based services in The Netherlands. We expect to sell our interest in Orange Breedband in the near future.
(2) In 2007, we entered into agreements for the sale of properties in the aggregate amount of EUR 113.2 million. Of the EUR 433.5 million in proceeds we received in 2007, EUR 93.9 million related to properties transferred in 2007 and EUR 339.6 million related to transactions in 2006 and prior years.
(3) Further payments relating to the acquisition of PTC shares from Elektrim will be required to be made as determined by pending legal proceedings. For more information on PTC, see “Item 8. Financial Information—Legal Proceedings” and “Notes to the Consolidated Financial Statements—Summary of accounting policies—Business combinations.”
(4) In June 2006, we issued 62.7 million of our shares in exchange for the remaining shares of T-Online in connection with the completion of the merger of T-Online International AG into Deutsche Telekom AG, which shares had a fair value of EUR 0.8 billion. In August 2006, we repurchased 62.7 million of our shares in the market, which shares were retired to avoid dilution as a result of the issuance of shares in connection with the merger.

 

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REGULATION

Overview

Our operations worldwide, as well as those of our subsidiaries and affiliates, are subject to sector-specific telecommunications regulations and general competition law, as well as a variety of other regulations. The extent to which telecommunications regulations apply to us depends largely on the nature of our activities in a particular country, with the conduct of traditional fixed-line telephony services usually being subject to the most extensive regulation. Regulations can have a very direct and material effect on our overall business, particularly in jurisdictions that favor regulatory intervention.

General Licensing Requirements

To provide services and to operate our networks, either general authorizations or licenses are required from regulatory authorities in countries in which we operate. In member states of the European Union (“E.U. Member States”), the operation of fixed networks and the provision of public voice telephony services in the fixed network require notification to, or registration with, regulatory authorities. Further, the public voice telephony services of our Croatian subsidiary, T-Hrvatski Telekom, require a license.

Licensing procedures also apply to our mobile network operations with respect to radio frequencies. The duration of any particular license or spectrum usage right depends on the legal framework in the relevant country. Most countries limit the duration of licenses or usage rights, which are generally renewable, to between three and thirty years.

The E.U. Regulatory Framework

General

Between 1989 and 2001, the European Union introduced a number of liberalization and harmonization directives as well as recommendations regarding open and efficient access to, and the use of, public telecommunications networks and services. These were intended to open monopolistic markets and to harmonize technical interfaces, usage conditions, and mandatory minimum service standards for all fixed-line users and to provide a general framework for tariffs throughout the European Union. At the end of 1999, the European Commission initiated a review of the E.U. telecommunications regulatory framework, focusing on the development of competition in the telecommunications sector and the increasing convergence of media, telecommunications and information technology. In 2002, the European Union adopted several legislative measures, which included a general framework directive and four specific directives regarding the following topics (collectively constituting the “E.U. Framework”):

 

   

access to, and interconnection of, electronic communications networks;

 

   

mandatory minimum service standards for all users (universal service obligations) and users’ rights;

 

   

authorization and licensing regimes;

 

   

telecommunications data protection; and

 

   

a regulatory framework for radio spectrum policy in the European Union.

The directives are, among other things, intended to:

 

   

establish the rights, responsibilities, decision-making powers and procedures of the national regulatory authority (“NRA”) in each E.U. Member State and the European Commission;

 

   

identify specific policy objectives that NRAs must achieve in carrying out their responsibilities; and

 

   

provide that operators with significant market power in defined electronic communications markets can be subject to certain obligations.

Since the most significant part of our business is undertaken in the European Union, our operations are to a large extent subject to the E.U. Framework on telecommunications regulation. E.U. Member States are required

 

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to enact E.U. legislation in their domestic law and to take E.U. legislation into account when applying domestic law. In each E.U. Member State, a NRA is responsible for enforcing the national telecommunications laws that are based on the E.U. Framework. NRAs generally have significant powers under their relevant telecommunications acts, including the authority to impose network access and interconnection obligations, and to approve or review the charges and general business terms and conditions of providers with “significant market power.” In general, a company can be considered to have significant market power if its share of a particular market exceeds 40%. NRAs also have the authority to assign wireless spectrum and supervise frequencies and to impose universal service obligations.

The European Commission supervises the NRAs and formally and informally influences their decisions in order to ensure the harmonized application of the E.U. Framework throughout the European Union. Companies can challenge decisions of the relevant NRA before national courts. Such legal proceedings can lead to a decision by the European Court of Justice, which is the ultimate authority on the correct application of E.U. legislation.

The E.U. Framework is also important in some countries that are not yet part of the European Union, but which are expected to be in the future, such as Croatia. Those countries are already adapting their telecommunications legislation to the E.U. Framework.

Special Requirements Applicable to Providers with Significant Market Power

The most significant impact on our business stems from the E.U. Framework’s special requirements applicable to providers with significant market power. Obligations in relation to network access, price setting, separate accounting for interconnection services, publication, and non-discrimination, can be imposed on those operators that are designated by the relevant NRA as having significant market power in an electronic communications market. Such determinations are based on E.U. guidelines and E.U. competition case law. We have been designated as having significant market power primarily in most fixed-line markets in which we operate, as well as in mobile voice call termination markets.

In particular, the NRA may subject providers with significant market power, and their affiliates, to the following rules and obligations:

 

   

The prior approval or retroactive review of charges, insofar as such charges and conditions relate to a market in which the provider holds significant market power.

 

   

The obligation to offer other companies unbundled special network access (including interconnection) as well as access to certain services and facilities on a non-discriminatory basis.

In addition, providers with significant market power can be obliged to maintain segregated accounting systems with regard to access services. This obligation is intended to allow for transparency with respect to various telecommunications services in order to prevent, among other things, the cross-subsidization of services. In this regard, the NRA may specify the structure of a provider’s internal accounting for particular telecommunications services, which can increase costs of compliance.

Under the E.U. Framework, the European Commission periodically issues a market “recommendation,” which is a list of telecommunications markets that it considers susceptible to sector-specific regulation. NRAs must take this list of markets into account when defining the markets that are to be analyzed for the existence of competitive restraints. If a NRA finds that a market is not competitive, it establishes which providers have significant market power in this market and may impose certain measures prescribed by statute.

In February 2003, the European Commission issued its first recommendation, which related to the retail markets for fixed-line public telephone service and leased lines, as well as the wholesale markets for the unbundled local loop, fixed network interconnection, leased lines, broadband access, mobile voice call termination, mobile access and call origination, international roaming, and broadcasting transmission services. We have been designated as an operator with significant market power in almost all of these markets in Germany. Future market analyses by NRAs have to consider a new recommendation of the European Commission issued in November 2007 as described in “—Legislative Developments” below.

 

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NRAs may analyze additional markets not included in the E.U. recommendation if justified by special national circumstances. NRAs are required to conduct market analyses on all communications markets included in the European Commission’s recommendation, as well as those that the NRAs have decided to include within the scope of sector-specific regulation in agreement with the European Commission. All NRA market analyses are subject to the supervision of the European Commission and can be challenged if the European Commission does not agree with the NRA’s findings.

In addition to the European Commission’s recommendation, there is a separate E.U. regulation on unbundled access to the local loop, which became effective in January 2001. It contains the obligations to provide full unbundled access to copper-paired wire lines, as well as unbundled access to the high-frequency spectrum of those lines (line-sharing). Since each member state has specifically addressed local loop unbundling by individual regulatory measures under the framework, the new E.U. proposals to amend the regulatory framework as described below provide for the termination of the separate E.U. regulation on local loop unbundling. Unbundling has led to a considerable loss of our market share. For detailed effects of unbundling obligations, see “—German Telecommunications Regulation—Interconnection” below.

Additional E.U. legislation that may materially affect our business is discussed in the subsequent sections on broadband and fixed network regulation and mobile communications regulation.

Legislative Developments

Under the E.U. Framework, the European Commission must regularly review its market recommendation. In November 2007, the European Commission issued the second version of its market recommendation, which now has to be considered by NRAs when analyzing telecommunications markets. The new version of the market recommendation reduced the number of markets to be reviewed from 18 to 7. In particular, most retail markets have been removed from the list of markets that are susceptible to telecommunications regulation. However, the most important retail market relating to retail access to the fixed telephone network remains subject to such regulation. Further, some wholesale markets are now described in a broader manner. For example, the market for local loop unbundling is no longer restricted to metallic loops. Whether these broader definitions lead to an expansion or a reduction of regulation is difficult to predict at this time. The new market recommendation primarily relates to the retail market for access to the public telephone network at a fixed location, wholesale markets for call origination of fixed telephone networks, call termination of individual fixed networks, network infrastructure access (including shared or fully unbundled access ) at a fixed location, broadband access, terminating segments of leased lines, and voice call termination on individual mobile networks.

In addition, the entire E.U. Framework is subject to a review currently in progress. The European Commission has issued proposals to amend the current framework, which must be accepted by the European Parliament and the Council of Ministers before becoming legislation. These proposals do not include any deregulation efforts. Instead, the European Commission has proposed establishing a regulatory agency at the E.U. level, and to extend veto rights of the European Commission with respect to an NRA decision. Furthermore, the European Commission proposes to provide NRAs the power to separate the network operations of providers with significant market power from the service business of such providers in certain circumstances. In 2008, the European Parliament will debate these proposals. Any changes to the framework would become effective following their transposition into national law. Whether the regulatory framework will increase or decrease the regulatory burden on us will depend on the changes being adopted by the European Union, the manner in which revised directives are subsequently implemented in the E.U. Member States, and how the revised regulatory framework will be applied by the respective NRA.

Infringement Proceeding Against Germany

In September 2007, the European Commission launched an infringement proceeding against Germany relating to legislation that in principle excludes new markets from telecommunications regulation. This legislation was adopted in January 2007 with the intent to foster innovation and investments in new infrastructures. In the event of access and price regulation in these new markets, both the incumbent network operator and new entrants will have a reduced incentive to invest in new infrastructures. The European

 

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Commission, however, regards the new market rule as restricting the discretionary powers of the Federal Network Agency in contravention of E.U. Directives. Since this new rule has not yet been applied, we do not expect the infringement proceeding to affect our business. However, the general notion of the new market rule to foster investments by non-regulation was an important basis for our decision to invest in new fiber optical broadband access networks in Germany (see “—German Telecommunications Regulation—Interconnection” below). This infringement proceeding may take several years to resolve.

Media Regulation

Although regulation of broadcast media and media content has not materially affected our business, as traditional telecommunications services and media services increasingly converge through products such as triple-play, media regulation may become increasingly important to our business. For example, in Germany we currently offer IPTV to our high-speed broadband customers, as well as mobile TV services to customers of T-Mobile Deutschland. There are already several regulations related to media services and platforms. A further notification obligation for broadcasting platforms will become effective on September 1, 2008 in Germany. This new legislation will result in regulations relating to the selection of broadcasting programs transmitted over such platforms (e.g., “must carry” obligations), and may also affect the contractual conditions for such transmissions. Moreover, the new legislation can be interpreted to suggest that in Germany we are restricted in producing our own TV and radio programs as long as a significant part of our shares is controlled by the German government.

Other E.U. regulation requires TV set top boxes to have either no encryption technology or a common scrambling algorithm. The set top boxes we use for our German IPTV services rely on a special digital rights management technology that might not be entirely compatible with the common scrambling algorithm. However, the Federal Network Agency has initially granted us a preliminary exemption from this regulation until July 2007, and the recently amended Telecommunications Act now explicitly allows for further exemptions. Until now, the Federal Network Agency has not decided this issue. If the current legislation is ultimately determined to apply to our set top boxes, this could result in our set top boxes not being in compliance with the legal requirements. Modification of the current digital rights management technology could prove costly and some features of our IPTV service may be discontinued.

Competition Law

The European Union’s competition rules have the force of law in all E.U. Member States. The main principles of the E.U. competition rules are set forth in Articles 81 and 82 of the European Community Treaty (“E.C. Treaty”) and in the E.U. Merger Regulation (the “Merger Regulation”). In general, the E.C. Treaty prohibits “concerted practices” and all agreements that may affect trade between Member States and which restrict, or are intended to restrict, competition within the European Union, and prohibits any abuse of a dominant position within the common market of the European Union, or any substantial part of it, that may affect trade between Member States. The European Commission enforces these rules in cooperation with the national competition authorities, which may also directly enforce the competition rules of the E.C. Treaty. In addition, the national courts have jurisdiction over alleged violations of E.U. competition law.

The Merger Regulation requires that all mergers, acquisitions and joint ventures involving participants meeting certain turnover thresholds are to be submitted to the European Commission for review, rather than to the national competition authorities. Under the amended Merger Regulation, concentrations will be prohibited if they significantly impede effective competition in the common European market, or a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.

In addition, all E.U. Member States (and other jurisdictions in which we operate, such as the United States) have legislation in place, which is substantially similar to the E.U. competition rules. Thus, in markets where we are dominant, our ability to practice business freely and to establish our own prices can be restricted. Moreover, our opportunities to cooperate with other companies, or to enhance our business by fully or partially acquiring other businesses, can also be limited. In Germany, the authority responsible for the application of competition law is the Federal Cartel Office (Bundeskartellamt). For information regarding specific competition cases in which we are involved, see “Item 8. Financial Information—Legal Proceedings.”

 

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German Telecommunications Regulation

Since the most substantial part of our business is located in Germany, German telecommunications regulation has an especially significant impact on our business. As in all E.U. Member States, German telecommunications regulation is based on the E.U. Framework. German telecommunications regulation is mainly derived from the Telekommunikationsgesetz (the “Telecommunications Act”).

We believe that, for the foreseeable future, the Federal Network Agency is likely to view us as a provider with significant market power in various German markets for public voice telephony services in the fixed network and in other markets, including most of those in which we held monopoly rights in the past. Additionally, we have been determined to be a provider with significant market power in the German market for mobile voice call termination. We expect that the strict regulatory provisions of the Telecommunications Act relating to providers with significant market power will be applied to our activities in those markets also in the future. Considering that in many markets our competitors are unlikely to gain significant market power in the near future, we expect that we will have to compete in important markets with providers not subject to those regulatory obligations. Therefore, these competitors may have more flexibility than we have in terms of the selection of services offered and customers served, pricing and the granting of network access.

Pricing

Under the Telecommunications Act, tariffs for telecommunications access services offered by providers with significant market power and their affiliates can be subject to price regulation, insofar as the tariffs relate to a market in which significant market power has been determined to exist. Other tariffs are essentially unregulated. The tariffs of all providers in Germany are, however, subject to generally applicable E.U. and German laws, including competition law and consumer protection rules. In addition, tariffs for universal services must be set at an “affordable price.” For more information, see “—General Network Access—Universal Services.”

The Telecommunications Act distinguishes between tariffs that require prior regulatory approval and those that are subject to retroactive review. Generally, wholesale pricing requires prior approval, whereas retail pricing is subject to retroactive review. Nevertheless, at present, we are required to disclose most retail pricing measures concerning our fixed telephony network to the Federal Network Agency two months before they become effective, which enables the Federal Network Agency to undertake a preliminary evaluation with respect to whether our prices comply with rules prohibiting abuse of significant market power. This requirement restricts our flexibility to react quickly to competition in the retail markets for fixed telephony.

General Network Access

Every operator of a public telecommunications network, irrespective of its market position, is obligated, upon request, to make an interconnection offer to other network operators for interconnection with its network. If the parties cannot agree on the terms and conditions of such interconnection, upon application by one of the parties, the Federal Network Agency can compel an operator that controls access to end users to allow interconnection to its network and can impose other access obligations.

Universal Services

The Telecommunications Act includes provisions to ensure the availability of certain basic telecommunications services (“universal services”) throughout Germany. Universal services comprise public fixed-line network voice telephony with certain ISDN features, directory services, telephone books, public pay phones and certain categories of transmission lines. These services must be universally available to all customers at a price determined by the Federal Network Agency to be an “affordable price.” We currently provide the universal services specified by the Telecommunications Act voluntarily and without compensation.

Data Retention

On January 1, 2008, new rules on data retention for law enforcement purposes entered generally into force. This legislation implements an E.U. directive which came into force in 2006. The new requirements result in additional investment and recurring annual costs for us. The new rules oblige us to store certain data for six

 

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months which is the minimum period the E.U. directive requires. At present, it is unclear to what extent our costs for telecommunication’s surveillance will be compensated in the future. Currently, there are discussion in the German parliament, to increase the compensations for surveillance obligations.

Interconnection

Fixed-Fixed Interconnection

On April 13, 2006, the Federal Network Agency decided on new fixed-fixed interconnection charges valid from June 1, 2006 until November 30, 2008. The charges were again reduced by approximately 10%. The Federal Network Agency justified this price reduction by not considering the costs of certain switches in the PSTN-network that it believes are not efficient based on the number of users. On September 5, 2006, we initiated legal proceedings to obtain injunctive relief. This action was dismissed by the court on December 20, 2006. Some competitors also initiated legal proceedings in order to lower the tariffs further. The proceedings are still pending. In the meantime, the reduced charges have taken effect.

Local Loop Access

After concluding the market analysis procedures required by the Telecommunications Act, the Federal Network Agency published a Regulatory Order for access to the local loop in April 2005, which confirmed that we were considered to have significant market power in this market. Accordingly, although we have offered unbundled local loop access since 1998, this decision confirmed that we are still obligated to offer such access to other carriers. By allowing competitors to connect to customer access lines within our local networks, unbundling of the local loop allows our competitors to gain direct access to customers without having to build local networks of their own. In this way, competitors are able to use our customer access lines to offer a wide range of local services directly to customers.

We are involved in a number of pending legal proceedings regarding recent decisions of the Federal Network Agency that concern access charges relating to the local loop, and which have resulted in severe reductions in our charges for such access. We believe that the Federal Network Agency did not take into account a number of our costs that were justifiable costs for these services, and that if it had done so, our permitted local loop access charges would have been higher. For more information, see “Item 8. Financial Information—Legal Proceedings—Proceedings Against Decisions of the Federal Network Agency.”

On March 30, 2007, the Federal Network Agency reduced the monthly line rental charges we are allowed to charge our competitors, from EUR 10.65 to EUR 10.50. These charges are valid for the period from April 1, 2007 to March 31, 2009. On July 29, 2007, the Federal Network Agency also decided to reduce the one-time activation (takeover of an existing line) charge for subscriber line rental we are allowed to charge our competitors by approximately 16%, to EUR 36.19 for the most common type of subscriber line (copper wire pair with high bit-rate use). The corresponding cancellation charges have been reduced as well. In cases in which a customer switches to another carrier, or returns to us, the charges were reduced to EUR 5.21. These amended activation and cancellation charges are valid until June 30, 2008. Due to the importance of customer line rental to our wholesale business, these reductions will have negative effects on revenues.

Since January 2001, we have been offering line sharing (i.e., using a single access line for multiple purposes, including sharing access with competitors) in accordance with E.U. requirements. On July 29, 2007, the Federal Network Agency reduced the monthly line sharing charges from EUR 2.31 to EUR 1.91. This decision was based on a finding of a decrease in overhead costs and a rejection of certain cost-allocation factors. Further, the Federal Network Agency decided on the one-time activation charges for the provision of line sharing, which will be reduced to EUR 44.73. Another reduction concerns the one-time cancellation charges for line sharing, which were lowered to EUR 7.67 and EUR 48.65, respectively (with/without switching the end customer’s access to another carrier using line sharing). The amended tariffs are valid until June 30, 2008.

On December 20, 2007, the Federal Network Agency decided on our reference offer for access to unbundled local loop. We now have to pay penalties in the event of delayed provision or delayed fault repair.

 

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Following requests from competitors, the Federal Network Agency is currently investigating whether we are abusing our dominant market position by delaying the handling of competitors’ requests for local-loop unbundling. The outcome of this investigation is uncertain, but it can result in obligations to significantly expand capacities to handle such requests.

In June 2007, the Federal Network Agency updated its regulatory order relating to local loop access. In addition to existing obligations (access to the local loop, co-location, ex-ante rates approval), we must also provide access to cable ducts and, under certain conditions, dark fiber and co-location within the street cabinets. We have initiated legal proceedings against this obligation and filed for a preliminary order to suspend the execution of the obligation until the Administrative Court has ruled on the issue. In its preliminary order of January 18, 2008, the Administrative Court upheld the obligations of the Federal Network Agency. A decision in the main proceeding is expected during the first half of 2008.

Broadband Access—Bitstream

In the market analysis for wholesale broadband access services, we were determined as having significant market power and, therefore these markets are subject to regulation described below. The Federal Network Agency divided the broadband wholesale services market into separate IP Bitstream Access and ATM Bitstream Access markets.

IP Bitstream

For the IP Bitstream Access market, the Federal Network Agency issued a regulatory order in September 2006. According to the order, we are obliged to offer IP broadband access to our competitors and the rates are subject to prior approval by the Federal Network Agency. In accordance with this order, we had published our reference offer for broadband access on December 13, 2006. This offer is based to a large extent on a combination of existing wholesale products (Wholesale DSL and T-ZISP). However, on August 28, 2007, the Federal Network Agency issued an initial decision obligating us to alter our reference offer to include symmetric DSL access (SDSL) and unbundled DSL access (i.e., without PSTN phone access). Furthermore, we have to provide certain transmission quality levels sufficient for the provision of IP-based voice services.

In accordance with this initial decision, we published a revised reference offer on September 28, 2007, which is currently being reviewed by the Federal Network Agency and our competitors. A final decision by the Federal Network Agency is expected in the spring of 2008. The introduction of IP Bitstream Access as a wholesale product is not expected before April 2008.

IP Bitstream Access will enable our competitors to offer all IP-access throughout Germany.

Competitors’ requests for VDSL access were dismissed. This decision was not based on the finding of VDSL constituting a new market (and thus not being regulated, in accordance with the German Telecommunications Act), but was based on the reasoning that our VDSL products did not fall within the scope of the underlying regulatory order of September 2006, which concerned DSL access up to the standard of ADSL2+ (maximum 16 Mbit/s).

ATM Bitstream

Since March 7, 2007, we are obligated to provide ATM bitstream access, the prices for which will be subject to retroactive approval of the Federal Network Agency. A reference offer for ATM bitstream access had been published on June 8, 2007. However, since negotiations with our competitors are ongoing, the Federal Network Agency has temporarily suspended its proceedings.

In January 2008, we presented a new reference offer for ATM bitstream access that reflects the results of the negotiations with our competitors. On the basis of this offer, the Federal Network Agency will now resume the examination proceedings. A final decision on the reference offer and proceedings for the retroactive price control can be expected during the first half of 2008. The introduction of ATM bitstream access as a wholesale product is not expected before June 2008.

 

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We are currently preparing price applications for IP bitstream access, stand-alone bitstream access, and the wholesale broadband product T-ZISP, to be submitted to the Federal Network Agency for approval. The outcome of the examination by the Federal Network Agency is uncertain. There can be no assurance that the prices the Federal Network Agency approves for these products will not be below the current level for DSL wholesale products and therefore result in pressure on retail prices.

Broadband Access—DSL Resale

Besides unbundled local loop access and line sharing, we offer our Resale DSL product to our competitors on a voluntary basis.

Since August 2006, we have offered our Wholesale DSL product on the basis of fixed prices for bandwidths of 1, 2, 6 and 16 Mbit/s. This has resulted in considerable price reductions compared to the Resale DSL product (which is offered to competitors at a 20% discount to the retail price). Most ISPs have therefore already switched from Resale DSL to Wholesale DSL. Other competitors offering DSL access on the basis of carrier line sharing or unbundled local loop provided by T-Home, however, have submitted complaints to the Federal Network Agency alleging that they cannot match the low DSL retail prices offered by competitors on the basis of our Wholesale DSL product. They allege that we are engaging in price dumping or predatory pricing because the prices we are charging for Wholesale DSL are lower than the costs for a competitor offering a product based on carrier line sharing. In addition, they allege that there is no “consistency” between the prices charged for carrier line sharing, unbundled local loop and Wholesale DSL. So far, the Federal Network Agency has decided not to open a proceeding at this time. However, the Federal Network Agency made clear that Wholesale DSL is under close observation and that proceedings might be initiated in the future.

Retail Regulation

On June 23, 2006, the Federal Network Agency had imposed on us the obligation to disclose to it any retail pricing measures within the markets for access to the public telephone network, as well as the markets for publicly available local and national telephone services provided at a fixed location for residential and non-residential customers, including VoIP services, two months before they become effective. However, this obligation generally does not apply to bundled products containing regulated and non-regulated services if the obligation has been met regarding the regulated components of the bundle, the regulated components are still offered unaltered on a stand-alone basis, and the difference between the price of the bundle and the sum of the prices of the regulated components is at least equal to the costs of the non-regulated components.

However, on September 5, 2007, the administrative court in Cologne rescinded this obligation with regard to national fixed-to-fixed-calls for VoIP services. This increases our ability to react quickly to market changes.

The Federal Network Agency has determined that we are a provider with significant market power for the markets for national fixed-to-mobile calls. In December 2007, the Federal Network Agency imposed on us the obligation to disclose to it any retail pricing measures within the market for national fixed-to-mobile calls (excluding VoIP services) two months before they become effective. National fixed-to-mobile calls for VoIP services are still subject to ex-post regulation measures. Therefore, in general, these obligations to provide pricing measures two months prior to effectiveness will delay our ability to react quickly to market changes.

The Federal Network Agency still does not classify VoIP as a “publicly available telephone service,” which would imply an emergency services obligation. However, with the further development of VoIP, and the increasing use of this nomadic service, the Federal Network Agency has requested all market participants to submit proposals for a technical solution to the emergency services problem.

The broadband access tariffs, as well as the broadband and narrowband service tariffs, that we offer to retail customers are not subject to regulation under the Telecommunications Act. However, these tariffs are indirectly affected by the regulation of wholesale tariffs for these services and will be taken into account by the Federal Network Agency in a review undertaken as part of a retroactive procedure if they form part of a product bundle

 

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that contains regulated components. Moreover, sector-specific regulation may be extended in the future to the broadband services market, which will depend on the results of the Federal Network Agency’s current market analysis procedures.

Upon the request of a competitor, on February 6, 2008, the Federal Network Agency initiated proceedings concerning the 24 months’ minimum contract duration of our current double-play offerings (“Call&Surf”), investigating whether the minimum contract duration constitutes an abuse of a dominant market position. In case the Federal Network Agency obliges us to significantly shorten the minimum contract duration, this might have a significant impact on our ability to design competitive tariff plans, and on customer acquisition and retention costs.

Central and Eastern European Telecommunications Regulation

Our subsidiaries in Hungary and Slovakia are subject to the same E.U. Framework as our fixed-line products and services in Germany. We also operate fixed-line and mobile networks in Croatia, Macedonia and Montenegro. These countries are also orientating their regulatory frameworks towards the E.U. Framework. Therefore, all of our subsidiaries in Central and Eastern Europe are generally exposed to a set of regulatory risks similar to those in Germany described above. Additional significant regulatory matters affecting specific subsidiaries are discussed below.

Hungary

Although some significant competition within the fixed-line network has existed in Hungary for several years, Magyar Telekom still possesses substantial market share in many telecommunications markets within Hungary. As expected, the Hungarian NRA has found Magyar Telekom to be an operator with significant market power in a large number of the markets currently subject to regulation, including subscriber lines and calling services.

Currently, Magyar Telekom has to comply with wholesale obligations regarding call origination and termination, unbundling, local and national bitstream access and price regulation for the termination of wholesale leased lines. As in previous years, Magyar Telekom also remains under the obligation to submit its reference offers for interconnection and unbundling to the Hungarian NRA for prior approval.

The Hungarian Competition Authority completed its investigation of the bundling of PSTN and DSL lines of the Hungarian incumbent operators, and concluded that Magyar Telecom’s DSL offering constitutes unjustified product bundling. Accordingly, Magyar Telekom was required to introduce an unbundled DSL product (the wholesale product was introduced in February, 2007 and the retail product in April, 2007).

In addition, the Hungarian NRA has launched a public discussion about the necessity of a wholesale line rental product to provide additional opportunity for some competitors to broaden their customer base at the expense of Magyar Telekom’s market share. However, this obligation was not required with respect to the market relating to access to the public telephone network at a fixed location for residential and business customers.

As competition between Magyar Telekom and cable television providers for telephony, Internet access and television services becomes more intense, Magyar Telekom expects to be increasingly affected by the disparity of regulatory burdens between services provided over the fixed-line telephony network and those provided over cable networks. Unlike Magyar Telekom, cable network providers are currently not subject to any wholesale obligations.

Moreover, Magyar Telekom is required to pay other incumbent PSTN operators in Hungary call termination rates that are 40-50% higher than the regulated rates Magyar Telekom is allowed to charge competitors. The NRA plans to further balance this inequality gradually to the level justified by economies of scale.

A new SMP resolution dealing with the broadband market was published in January of 2008. It introduced a new obligation according to which SMP operators must offer wholesale unbundled ADSL at regulated prices.

 

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Slovakia

The Slovak NRA determined that Slovak Telekom is designated as an operator with significant market power in most of the designated fixed-line markets in which it operates. As a result, Slovak Telekom is required to publish reference offers for unbundling of the local loop, interconnection, and terminating parts of leased lines, keep separate accounts, and comply with obligations regarding transparency and non-discrimination in the markets for unbundled local loops, call termination, transit and origination, and termination of leased lines. Furthermore, Slovak Telekom is obliged to offer carrier selection and carrier pre-selection and to follow a prescribed calculation methodology for the pricing of calling services.

Additional regulatory obligations were imposed on Slovak Telekom as a consequence of the completion of the first market analysis by the Slovak NRA during 2007. Slovak Telekom was required to provide a wholesale bitstream access reference offer. The second round of market analysis has begun and is expected to continue until the end of 2008. It is likely that additional regulatory obligations will be imposed upon Slovak Telekom as a result of this market analysis.

Furthermore, in the normal course of Slovak Telekom’s business, Slovak Telekom is facing proceedings before the Antimonopoly Office. One such case with respect to claims of abuse of a dominant market position through voice calling plans and promotions involves a potential fine of approximately EUR 15 million. Slovak Telekom appealed the first-instance decision of the Antimonopoly Office. The payment of the fine is suspended until the final decision of the Antimonopoly Office which again might be appealed by Slovak Telekom in court.

Croatia

The current Croatian regulatory regime is largely based on the E.U. regulatory framework implemented across the European Union in 1998, although it also incorporates certain provisions from the E.U.’s 2002 regulatory framework. According to announcements from the Government of the Republic of Croatia, a new law on electronic communications may be expected during 2008, in order to align the Croatian regulatory framework fully with the current E.U. regulatory framework.

The Croatian NRA designated Hrvatski Telekom as an operator with significant market power in the market for fixed public voice, the market for leased lines, the market for interconnection and the market for transmission of voice, sound, data, documents, pictures and other services. Hrvatski Telekom’s subsidiary IskonInternet had been designated as holding joint significant market power with Hrvatski Telekom in the market for fixed public voice and the market for transmission of voice, sound, data, documents, pictures and other services. As a consequence, Hrvatski Telekom has to offer competitors network access (including interconnection, unbundled access to the local loop, and bitstream access), as well as access to certain services and facilities on a non-discriminatory basis. Furthermore, the pricing of public voice, leased lines and all regulated wholesale products where Hrvatski Telekom is designated as having significant market power is subject to cost-orientation and ex-ante approval by the Croatian NRA.

Macedonia

The Macedonian regulatory framework has already largely been aligned with the current E.U. regulatory framework. MakTel has been designated by the Macedonian NRA as an operator with significant market power in the fixed voice telephone networks and services markets, including the market for access to networks for data transmission and leased lines. As a result, MakTel has been obligated to publish reference offers for interconnection and unbundling of the local loop, access and usage of specific network facilities, carrier selection and pre-selection, minimal sets of leased lines, and cost-oriented tariffs for services.

Additionally, in September 2007, the Commission for Protection of Competition obligated MakTel to provide a reference offer to its competitors relating to wholesale digital leased lines.

It is expected that these and further regulatory interventions, could lead to increased competition and could have an impact on MakTel’s market position.

 

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Montenegro

Our subsidiary in Montenegro is increasingly subject to similar regulatory actions as are applicable to our other European subsidiaries. As Montenegro continues to align its telecommunications regulatory regime with the E.U. Framework, we expect that operations in Montenegro will become increasingly subject to similar levels of regulatory intervention, decreasing market entry barriers and increasing competition.

Mobile Regulation

United States

Our U.S. mobile operations, conducted through T-Mobile USA, are regulated by the FCC and by various other Federal, state and local governmental bodies. Only the FCC has authority to regulate “rates and entry” by Commercial Mobile Radio Service (“CMRS”) operators, while both the individual states of the United States and the FCC have authority to regulate “other terms and conditions” of CMRS. The FCC has refrained from regulating rates charged by CMRS operators. However, under its authority to license CMRS operators to serve the public, the FCC has imposed a number of requirements on operators, including rules for providing emergency 911 services, number portability and support for lawful electronic surveillance. In addition, there are conditions on AWS licenses, which were granted on November 29, 2006, requiring T-Mobile USA to build-out or put the spectrum to use within the initial 15-year license term. If substantial use of the spectrum has not commenced by the end of this period, the licenses could be forfeited at that time. The AWS spectrum is occupied by incumbent commercial providers on the 2.1GHz band and Federal government agencies on the 1.7 GHz band. The 2.1 GHz incumbents relocation rules are governed by FCC regulation, whereas the 1.7 GHz incumbents relocation process is governed by the Commercial Spectrum Enhancement Act (CSEA). T-Mobile USA has commenced the procedures to coordinate with and relocate incumbent commercial and government users in the AWS frequency band. Access to the spectrum is tied to the clearance of these incumbent users. While significant progress has been made, T-Mobile USA is seeking to accelerate timeframes consistent with its needs for spectrum for 3G services and to offload traffic from its GSM network.

In October 2007, T-Mobile USA filed applications with the FCC for approval to transfer SunCom’s wireless licenses and international Section 214 authorizations to T-Mobile USA. Through its licensee subsidiaries, SunCom Wireless License Company, LLC (“SunCom Wireless”) and SunCom Wireless Puerto Rico License Co., LLC (“SunCom Puerto Rico”), SunCom holds licenses and is a facilities-based CMRS operator in North Carolina, South Carolina, Tennessee, Georgia, Virginia, Puerto Rico and the U.S. Virgin Islands. Because of T-Mobile USA’s foreign ownership, other federal agencies, including the Department of Homeland Security, the Department of Justice, and the Federal Bureau of Investigation must also approve the transfer of these licenses, which they did on January 7, 2008. The FCC approved the transaction on February 8, 2008, which was the last required regulatory approval. T-Mobile USA completed the acquisition of SunCom on February 22, 2008. Accordingly, SunCom and its licensee subsidiaries are now wholly-owned subsidiaries of T-Mobile USA.

In addition, depending upon how they are resolved, certain proceedings currently pending at the federal and state levels could impose costs and other burdens on T-Mobile USA. These include:

 

   

Special Access: High capacity circuits used by CMRS operators for transporting traffic between cell sites and local exchange carrier switching facilities is supplied in large part by the local exchange carriers. The FCC initiated a proceeding to reform special access provisioning in 2005. Since then the issue has been raised in both concluded and pending local exchange carrier or interexchange carrier merger proceedings, although broad rules applicable to all local exchange carriers have yet to be established. In light of public comments and a report issued by the Government Accountability Office, the FCC imposed reporting, non-discrimination, and limited pricing relief conditions on the wireline companies involved in recent mergers. In 2007, however, the FCC granted several local exchange carriers pricing relief for certain next-generation broadband special access services, so prices for those

 

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specific services could rise. Special access costs are an increasingly large portion of T-Mobile USA’s annual operating expenditures, and the inability to secure special access circuits on cost-based and non-discriminatory terms could become a significant issue in the future.

 

   

CALEA: The Communications Assistance for Law Enforcement Act (CALEA) requires a telecommunications carrier to ensure that its equipment, facilities, or services are capable of enabling the government to intercept communications and access call-identifying information when lawfully authorized. CALEA applies to CMRS operators. In addition, T-Mobile USA is subject to an agreement with the U.S. Federal Bureau of Investigation, Department of Justice and Department of Homeland Security, which imposes on us certain operational and other requirements designed to ensure that we can effectively respond to, and implement, such legally authorized intercepts and other information requests by U.S. law enforcement agencies. In August 2005, the FCC ruled that CALEA applied to facilities-based broadband Internet access providers, as well as to interconnected VoIP services, and established a compliance deadline of May 14, 2007. Insofar as this order applies to the services T-Mobile USA provides, T-Mobile USA is in compliance with the FCC’s requirements. In May 2006, the FCC decided, as required by CALEA, that it would rely on industry standard setting bodies to define the technical requirements for meeting the new CALEA obligations. These obligations could necessitate significant network modifications in the future in order to comply with the assistance capability requirements of CALEA.

 

   

Universal Service: The FCC and many states administer universal service programs that help ensure that affordable telecommunications services are accessible throughout the United States. The federal universal service fund (“USF”) is statutorily mandated by the Telecommunications Act of 1996 and provides support to rural and non-rural high cost areas, low income subscribers, schools and libraries, and rural health care providers. Wireless carriers, including T-Mobile USA, are required to contribute to the federal USF as well as some of the state universal service programs. Currently, FCC rules provide that carriers contribute to the federal USF based upon interstate end user revenues, and carriers can then collect those contributions from their end user customers. However, the USF contribution methodology is subject to an ongoing rulemaking proceeding in which the FCC is considering basing contributions on line capacity or the number of telephone numbers. In the interim, in June 2006 the FCC issued new rules requiring VoIP service providers to contribute to the USF, increasing the safe harbor revenue percentage for wireless carriers’ contributions from 28.5% to 37.1%, and adopting other reporting and contribution requirements. Wireless carriers also are eligible to receive USF support if they are designated as an eligible telecommunications carrier (“ETC”). SunCom Puerto Rico, which became an indirect wholly-owned subsidiary of T-Mobile USA on February 22, 2008 when T-Mobile USA acquired SunCom, is designated as an ETC in Puerto Rico. In addition, SunCom Wireless has pending applications with the FCC seeking ETC designation in North Carolina, Tennessee and Virginia. The FCC is considering a recommendation of the Federal-State Joint Board on Universal Service (“Joint Board”) that the high cost USF support received by competitive ETCs be capped, as well as other changes to how high cost USF support is distributed. In addition, the Joint Board suggested that high cost monies, which currently support voice services, also support broadband services. Carriers that contribute and receive support from the federal USF are subject to audits by the FCC and the Universal Service Administrative Company, which administers the federal USF. It is not possible to predict whether and how the FCC will modify the federal USF’s contribution and distribution methodologies, or the impact of those modifications.

 

   

Customer Proprietary Network Information (CPNI)/Consumer issues: The FCC recently adopted new rules governing carrier processes for handling CPNI, which include mandatory customer-set passwords for online account access and for access to certain types of CPNI over the phone, providing notice to law enforcement and customers in the event of unauthorized disclosures, and providing notice to customers of certain changes to their accounts. Implementation of the FCC’s new rules required T-Mobile USA to make certain alterations to its systems and practices and imposed and will continue to impose additional financial and administrative costs on the company. The FCC’s new rules became effective December 8, 2007. The FCC also is examining whether to impose additional CPNI safeguards on telecommunications carriers and VoIP providers, which if adopted, would further increase T-Mobile USA’s costs.

 

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E911 Order: In September 2007, the FCC released an order that would change the method by which wireless carriers measure compliance with accuracy requirements for locating 911 callers. Under the order, the FCC established one-, three- and five-year benchmarks for compliance. The first benchmark will become effective on September 11, 2008. Ultimately, in five years, the FCC expects that accuracy would be measured against each of the more than 6,000 public safety answering points throughout the United States rather than as an average of system performance over a national network. Implementation of this measurement method over a five-year period, could result in significant costs, and T-Mobile USA could be subject to penalties if not in compliance. On February 20, 2008, T-Mobile USA and the Rural Cellular Association filed a joint appeal in the U.S. Court of Appeal challenging these requirements on the grounds that they are arbitrary and capricious, and that the FCC adopted them in violation of the procedure required by law.

 

   

Back-up Power Rule: In October 2007, the FCC adopted rules that will require wireless carriers to have eight hours of backup power at their cell sites and remote terminals. Wireless carriers may be able to exclude some facilities from the requirement if they can demonstrate in a report to be filed with the FCC within six months after the effectiveness of the reporting obligation (which effective date is currently uncertain) that the installation of the equipment necessary to comply with the eight-hour back-up rules (e.g., generators or batteries) presents a risk to safety or life or health, is precluded by private legal obligation or agreement, or is precluded by Federal, state, tribal or local law. For those facilities that do not fall within one of these exclusions, wireless carriers will be required to file with the FCC a compliance plan six months after the filing of the initial report. However, it is unclear as to whether or not the FCC intends to approve the compliance plans (or on what basis) and over what period of time the compliance plans must be implemented. T-Mobile USA and other wireless carriers have commenced litigation in a federal court of appeals seeking to nullify and stay the implementation of these rules. T-Mobile USA is in the process of reviewing the new rules and attempting to clarify how they are intended to be implemented. However, it is likely that compliance with the implementation requirements of these rules, or related clarifying rules, will result in increased capital expenditures in the near term.

 

   

Regulation on the state and local level: Some states, through their respective public utility commissions and legislatures, or through other means, have taken, or are seeking to take, actions to regulate various aspects of wireless operations, including customer billing, termination of service arrangements, advertising, the filing of “informational” tariffs and certification of operations. These developments have significantly affected, or have the potential to significantly affect, T-Mobile USA’s business practices with respect to many aspects of the carrier-customer relationship, including solicitations, marketing, activations, billing and customer care. At the local level, wireless facilities typically are also subject to zoning and land use regulation, and may be subject to fees for use of public rights-of-way. T-Mobile USA’s access to additional sites to install wireless facilities is a key component of its ability to continue to deploy wireless services in an effective manner.

European Union

Our operations within the European Union are subject to rules established by the E.U. Framework (see “—The E.U. Regulatory Framework”). The Recommendation on relevant markets, which has to be analyzed by NRAs, has been updated in November 2007, and require NRAs to analyze one mobile communication market in order to determine whether regulatory remedies must be imposed: call termination in mobile networks. Various remedies imposed by the NRAs are described by country below.

The markets for access and call origination and international roaming have been deleted from the list of recommended markets to be analyzed. However, it will be possible for NRAs to analyze and regulate further markets, if (a) high and non-transitory entry barriers are present in this market, (b) a market structure does not tend towards effective competition within the relevant time horizon taking into account the state of competition behind the barriers of entry, or (c) competition law alone is insufficient to adequately address the market failures concerned.

 

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On February 20, 2006, the European Commission announced that, in light of the inability of NRAs to impose regulatory remedies, it had begun work on an E.U. regulation on international roaming charges. On June 30, 2007, an E.U. regulation entered into force which regulates international roaming tariffs for wholesale and retail customers on the basis of a capped pricing system. As a consequence, our mobile operations in the European Union had to lower their wholesale and retail roaming tariffs, which negatively affected our revenues. On the basis of a price schedule (glidepath) mandated by this E.U. regulation, further reductions of wholesale and retail roaming prices will have to be made in mid-2008 and mid-2009. Furthermore, the E.U. regulation mandates the introduction of additional transparency measures requiring us to make additional investments.

The European Commission has announced that it will review the development of prices for data roaming, possibly resulting in proposals to regulate those prices. For that reason, the ERG has coordinated market analysis procedures to be conducted by NRAs with the purpose of monitoring the development of data roaming prices. On February 11, 2008, E.U. Commissioner Reding announced that the E.U. Commission would propose new price regulations unless SMS and data roaming prices are reduced significantly by July 2008.

Germany

On November 8, 2006, the Federal Network Agency finalized the first market analysis procedure for the mobile call termination market and decided that T-Mobile Deutschland had to reduce its termination rate charges from EUR 0.11 per minute to EUR 0.0878 per minute for the period from November 23, 2006 to November 30, 2007. T-Mobile Deutschland appealed the Federal Network Agency’s decision to regulate termination rates and the regulation establishing the actual tariff level to the Administrative Court of Cologne. In March 2007, the administrative court in Cologne considered the ex ante obligation for termination rates unlawful. However, the decision is not final yet due to an appeal from the Federal Network Agency to the highest administrative court in Germany. For more information, see “Item 8. Financial Information—Legal Proceedings.”

Under German administrative law, the decision to regulate termination rates remains valid until a final court decision is issued. However, the Federal Network Agency had to decide on the termination rate charges for the period after November 30, 2007. The Federal Network Agency issued a new decision on November 30, 2007 and decided that T-Mobile Deutschland had to reduce its termination rate charges to EUR 0.0792 per minute from December 1, 2007 until March 31, 2009. The same rate also applies to Vodafone, while E-Plus and O2 are required to lower their mobile termination rates to EUR 0.088 per minute (from EUR 0.0994 per minute) for the same time period. All operators have appealed these decisions.

The Federal Network Agency recently published in its official gazette that the renewal process for the GSM licenses of E-Plus, T-Mobile Deutschland and Vodafone has been finalized. The GSM license term of T-Mobile Deutschland has been extended until the end of 2016. The Federal Network Agency also announced the tender of additional spectrum for digital cellular mobile networks in 2008. It is expected that, in the course of this auction, spectrum capacity in different bands (1.8 GHz, 2 GHz, 2.6 GHz) will be made available to market participants. The 2.6 GHz is the coordinated UMTS extension bands (190 MHz of spectrum), while the spectrum at 2 GHz is UMTS spectrum that was already allocated in 2000, but later returned to the Federal Network Agency. It is currently unclear under what conditions the allocation will take place. We do not expect the auction to be as competitive or expensive as the auction in 2000.

Pursuant to the 2004 amendments to the Telecommunications Act, new regulatory fees will, in the future, be imposed based on the revenues of respective telecommunications companies. This provision may have a disproportionate effect on large companies, such as Deutsche Telekom, and may have a material adverse effect on our results of operations. The details on how these new regulatory fees will be calculated have not yet been determined and will be promulgated in a separate ordinance, which is expected to become effective during 2008.

Consumer protection obligations in the revised Telecommunications Act came into force in February 2007. These obligations had a considerable negative impact on T-Mobile Deutschland, in particular, by requiring prices for premium voice call services to be announced before a call is made. Additional amendments of the Telecommunications Act are currently pending finalization and approval, which could also have significant impact on T-Mobile Deutschland.

 

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On February 10, 2005, the E.U. Commission opened formal proceedings in Germany against, among others, T-Mobile Deutschland and T-Mobile International. The E.U. Commission alleged that T-Mobile Deutschland had been charging excessive wholesale roaming tariffs for calls of foreign visitors in its network during the period from 1997 to 2003. On July 18, 2007, the E.U. Commission informed us that the proceedings have been closed. Consequently, no fines have been imposed on us.

United Kingdom

T-Mobile UK does not have any obligation to provide national roaming to third parties. However, in 2003, the predecessor to the Office of Communications (Ofcom), Oftel, undertook a consultation on proposals to require T-Mobile UK and all other GSM operators to offer GSM national roaming if requested by the new UMTS mobile operator “3”. All U.K. GSM licensees objected to this proposal. Ofcom issued a consultation in 2004 on whether it has the power to impose such a condition if it is needed, and proposed guidelines to be applied if it is required to determine a national roaming agreement. The mobile operator “3” is seeking the continuation of this condition, despite having selected a new national roaming provider by auction. It is uncertain when Ofcom will reach a decision in this matter.

Ofcom is planning to release a number of spectrum bands to the market in 2008 and 2009, some of which may be used for competing mobile services. It has proposed that spectrum will be auctioned on a technology and service neutral basis. Ofcom is currently preparing for several spectrum award processes. Ofcom is not currently proposing to limit the use of such spectrum. In addition, T-Mobile UK and the other U.K. GSM operators may be able to change the use of their current GSM spectrum after 2007, e.g., to use it for UMTS services, but the terms on which they may be able to do so are currently under consultation. The initial proposal is that 1800 MHz spectrum, which is the spectrum held by T-Mobile UK will be liberalized in either 2008 or 2009 and will be able to be used by the existing licensees. The 900 MHz licensees will have to return some of their spectrum, which will be auctioned in 2008 or 2009. Existing licensees will not be able to bid and the maximum amount available for acquisition will be 2 x 5 MHz of 900 MHz spectrum.

T-Mobile is currently regulated on its average price for call termination and these regulations have recently been extended and now expire on March 31, 2011. The regulated maximum mobile voice call termination charge for T-Mobile UK for the period from April 1, 2007 to March 31, 2008 is 6.2 pence per minute. Thereafter, the maximum will be reduced by 5.8% for the second year and 5.3% for the third and fourth years, respectively. Some aspect of the price controls are under appeal by both fixed and mobile operators and the amount of the price control will be considered in 2008 by the United Kingdom Competition Commission and the Competition Appeal Tribunal. If the appeals are successful, the price controls will be remitted to Ofcom for further consideration.

The Netherlands

In its decision regarding the analysis of the market for call termination under the current regulatory framework, the Dutch NRA decided that voice call-termination tariffs should be decreased to reflect the actual cost of such termination by July 1, 2008, with this decrease being introduced incrementally, beginning on July 1, 2006. However, this decision was annulled by the Trade and Industry Appeals Tribunal. As a result, the Dutch NRA issued a new decision on July 31, 2007. In this decision, the Dutch NRA adopted a proposal of the Dutch mobile network operators to lower termination rates in three yearly reductions starting August 15, 2007 followed by decreases on July 1, 2008 and July 1, 2009. This decision has been challenged by two fixed-line operators, in reaction to which all Dutch mobile network operators have appealed as well. This procedure is now pending and a hearing will take place in March 2008. As the appeal does not suspend the decision, the mobile call termination charges are decreased as of August 15, 2007 in accordance with the NRA’s decision.

According to a decision by the Dutch competition authority on September 27, 2004, T-Mobile Netherlands was fined EUR 14.8 million for its alleged involvement in an anti-competitive scheme regarding dealer commissions, carried out together with the four other Dutch mobile telecommunications operators. After T-Mobile Netherlands and the other affected companies filed an appeal of this decision on a variety of grounds,

 

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the Court of Rotterdam granted an appeal based on various substantive grounds while at the same time denying various other grounds for appeal. Both the Dutch competition authority and a selection of the affected companies, including T-Mobile Netherlands, have subsequently appealed the Court of Rotterdam’s decision. The Appeals Board for Trade and Industry (the highest appeals court in this procedure) has taken an interim decision as of December 31, 2007. In its decision, the Appeals Board has referred three prejudicial questions to the European Court and will as a result not take a final decision before these questions have been answered.

Czech Republic

The Czech NRA designated all three mobile operators in the Czech Republic (i.e., T-Mobile Czech Republic, Telefónica O2 Czech Republic and Vodafone Czech Republic) as having significant market power in the market for mobile call termination and imposed regulatory remedies on them including price regulation of mobile termination charges. These remedies, effective since July 1, 2006, resulted in a decrease in mobile termination charges by 4% compared to the price level determined by the Czech NRA in March 2005. Mobile operators submitted additional cost data to the Czech NRA during the second half of 2007. The Czech NRA will calculate the new level for regulation of mobile termination charges, which is expected to become effective from July 2008. This may result in more significant price decreases than those mandated in the past.

Since August 2007, T-Mobile Czech Republic has been testing the provision of DSL services through infrastructure rented from the Czech fixed-line incumbent Telefónica O2 Czech Republic a.s. On November 22, 2007, T-Mobile Czech Republic was granted a license for the provision of voice and data services through fixed network, which is a necessary regulatory condition for the commercial launch of DSL services. Since January 3, 2008, DSL services have been provided commercially.

Austria

Based on its decision of October 27, 2004, the Austrian NRA published its final decision concerning the mobile termination rates of all network operators including T-Mobile Austria in December 2005. In this procedure, Mobilkom Austria was found to have the lowest network costs (2005: EUR 0.0679 per minute). Therefore, Mobilkom has been the benchmark for all other network operators and Mobilkom’s network costs in 2005 were the target value to be reached by the mobile termination rates of all mobile network operators by the end of 2008 at the latest. As a result, a price schedule (glidepath) has applied, in which the mobile termination rates of the mobile network operators have been reduced between EUR 0.01 per minute and EUR 0.0183 per minute every six months until the target value is reached.

In February and April 2007, the Austrian Highest Administrative Court annulled the decisions of the Austrian NRA of October 27, 2004 and December 2005. These decisions and proceedings have been reviewed and the mobile termination rates for the period until the end of 2006 have been confirmed. During these proceedings, the Austrian NRA calculated the network costs of all mobile network operators again to determine the actual benchmark level for a regulation of mobile termination rates beginning in 2007. Mobilkom remained the benchmark with network costs of EUR 0.0572 per minute in 2006. Therefore, the Austrian NRA decided in its decision of October 15, 2007 that, in 2007, the mobile termination rates of the mobile network operators have to be reduced between EUR 0.01214 per minute and EUR 0.0205 per minute every six months until the target value of EUR 0.0572 per minute is reached by the end of 2008. The next review of the target value and the price schedule is expected to take place mid-2009. The decisions of October 15, 2007 and subsequent decisions of October 29, 2007, were appealed to the Highest Administrative Court by the Austrian mobile network operators.

The Austrian Government has published a draft on data retention for law enforcement purposes. This legislation is intended to implement E.U. directives which came into force in 2006. The new requirements may result in additional investment and recurring annual costs for us, depending on the final wording of the national legislation. At present, it is unclear to what extent those costs will be compensated by the state.

 

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Hungary

T-Mobile Hungary is currently subject to regulatory obligations regarding the termination of calls into its network. On January 24, 2005, the Hungarian NRA designated T-Mobile Hungary, Vodafone and Pannon GSM as having significant market power in the wholesale market for call termination on mobile networks, and required each of these companies to grant access to specific network facilities, act in a transparent and non-discriminatory manner, and maintain long-run incremental cost-based mobile termination rates and accounting separation. T-Mobile Hungary and Vodafone filed suit against the decision. The court of first instance materially amended the decision in some parts including provisions related to termination rates. A judicial review procedure was initiated and the case is pending before the Supreme Court.

On July 25, 2005, the Hungarian NRA imposed specific reductions of termination rates on all three mobile network operators. Beginning retroactively from May 2005, the three mobile network operators were to apply average termination fees based on an international benchmark calculation. All three mobile network operators appealed the decisions of the Hungarian NRA at the City Court in Budapest. The court rejected the claims of the operators. The Hungarian NRA issued a resolution on September 12, 2005 maintaining the effect of its prior decisions. T-Mobile Hungary appealed this resolution and the court suspended the case until the judgment in the pending Supreme Court Case described above. The Hungarian NRA imposed a fine of approximately EUR 600,000 on T-Mobile Hungary for not complying with its July 25, 2005 decision while the proceedings took place. T-Mobile Hungary filed suit against the fine, and won the case at first instance. The case was appealed by the regulator and the court of second instance annulled the judgment of the court of first instance and obliged the court to start a new proceeding.

On October 2, 2006, the Hungarian NRA issued its new market analysis decision regarding the mobile voice termination market. According to this decision, the Hungarian NRA designated T-Mobile Hungary, Vodafone and Pannon GSM as having significant market power, amended the obligations set out in its 2005 decision and stated that it planned to further reduce mobile termination rates. All three mobile operators filed suit against the October 2006 decision and the case is currently pending.

On December 20, 2006, the Hungarian NRA delivered its decisions on the mobile termination fees applicable from February 2, 2007. The rates are identical to those forecast in the 2006 market analysis decision and will result in a decrease in termination rates in 2007, with additional decreases in 2008 and 2009. Each of the decisions of the Hungarian NRA to decrease termination rates has been challenged by all mobile operators in court. The court suspended the case until the judgment in the case detailed above.

On November 8, 2007, Magyar Telekom and T-Mobile Hungary signed the renewed concession contract on the basis of which the duration of the 900 MHz frequency usage right was extended until May 4, 2016. Magyar Telekom and T-Mobile Hungary paid approximately EUR 39 million for the 900 MHz license extension and committed to a EUR 78 million mobile broadband investment obligation in underdeveloped regions of the country.

Slovakia

On July 12, 2006, the Slovak NRA imposed obligations on T-Mobile Slovensko relating to voice call termination, transparency, non-discrimination, accounting separation and network access, which is now final. However, the NRA did not impose the obligation of cost-orientation of termination tariffs, which means that the wholesale prices for termination in the network of T-Mobile Slovensko are not currently regulated. An additional obligation of cost-oriented termination tariffs, similar to that in most other E.U. Member States, may be imposed in the future, following the second round of termination market analysis which started in March 2007 and is currently ongoing. Such a remedy could lead to further termination rate reductions, with negative net effects on T-Mobile Slovensko’s revenues.

Amendments to the Slovak Electronic Communications Act adopting the E.U. Data Retention Directive (which requires implementation for operators by April 1, 2008) because effective on December 29, 2007. Provisions necessary to enforce E.U. roaming regulations were also adopted by these amendments. Since compensation for data retention investments is provided, costs will be borne by the operators.

 

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Poland

In July 2006, three mobile operators in Poland, including PTC, were designated as having significant market power in the call termination market and, as a result, regulatory obligations relating to provision of access, non-discrimination, transparency and cost orientation were imposed on them. These three mobile operators appealed the decisions of the Polish NRA and the claims are still pending. On September 25, 2006, PTC fulfilled these regulatory obligations and published new mobile termination rates calculated on a cost basis and information regarding the provision of access and submitted this information to the Polish NRA. New mobile termination rates became effective from October 15, 2006. Although the Polish NRA accepted the reduction of mobile termination rates proposed by all mobile operators, the Polish NRA’s objective is a further reduction of mobile termination rates in order to reach a level equal to the benchmark of the average of the three lowest mobile termination rates (so-called best current practice) in the European Union by the end of 2007. In January 2007, the Polish NRA initiated a proceeding in order to assess the charges applied by the operators and requested additional cost information in January 2007. Based on a decision dated April 27, 2007, new mobile termination rates were effective immediately: EUR 0.106 per minute from May 2007 until April 2008, EUR 0.89 per minute from May 2008 until April 2009, EUR 0.73 per minute from May 2009 until April 2010 and EUR 0.57 per minute from May 2010. The decision was based on best current practice consisting of MTR from Sweden, Finland and Cyprus. PTC appealed the NRA decision, but this appeal was denied at the administrative level. As a result, PTC has brought a further legal challenge in the Polish courts.

In April 2006, the Polish NRA began a national consultation process and notified its draft decision to the European Commission that designated three mobile operators, including PTC, as having significant market power in the market for access and call origination and imposing related regulatory obligations on them. However, the draft decision was withdrawn in May 2006. After having ceased an analysis based on the old telecommunication law in September 2007, the NRA has restarted the procedure based on the new law. It is expected to be concluded in the first half of 2008.

Tele2 requested to be admitted as a MVNO to PTC’s network. As a commercial agreement could not be reached, Tele2 approached the Polish NRA, which initiated an administrative proceeding against PTC in May 2006. This proceeding is still pending. PTC claims that such a proceeding is contrary to the European legal framework and, in July 2006, submitted a complaint on infringement of E.U. Law to the European Commission. The European Commission expressed the same opinion and requested the NRA to analyze the relevant market prior to imposing any access obligation in favor of Tele2. As stated above, the NRA has not yet concluded its analysis.

In 2004, PTC was granted spectrum in the 3.6-3.8 GHz range (WiMax frequencies). In July 2006, the Polish NRA started the first proceeding aimed at revoking the WiMax spectrum rights on the basis that PTC had not started commercial use of the frequencies. In its decision of October 12, 2006, the Polish NRA decided not to withdraw the WiMax frequencies because PTC committed to a new schedule of WiMax network development. Due to continuing supply problems PTC had not enough transmitters to develop the network. In July 2007, the Polish NRA started another revoking procedure. In response, PTC submitted a new schedule of network development in October 2007. The NRA has not finally approved the new schedule yet and may still decide to withdraw the frequencies.

In February 2007, the Polish NRA demanded PTC to inform its customers about their alleged right to withdraw from contracts without compensation as soon as PTC modifies its contractual rules and regulations. Contrary to the NRA’s rigid interpretation of the Polish Telecommunication Act, PTC believes that not every modification of contractual rules and regulations empowers customers to withdraw from the contract without compensation. PTC addressed this issue to the E.U. Commission due to implications of E.U. law. In June 2007, the NRA imposed on PTC a fine of approximately EUR 550,000. PTC filed an appeal against this decision in July 2007, which is still pending.

 

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Other European operations

Croatia

T-Mobile Croatia, has been designated as having significant market power in the interconnection market and in the market for public voice services in mobile networks. The market analysis in Croatia is based on a static 25% market share determination. Accordingly, interconnection prices have to be determined in line with the principles of transparency and cost-orientation, based on the actual costs of the services provided, including a reasonable rate of return on investment. Even though the Croatian NRA has started to work on a cost accounting model, call termination rates have so far been regulated on a benchmark model.

Reference interconnection offers, which include prices and terms of interconnection, is required to be approved by the Croatian NRA. T-Mobile Croatia’s current reference interconnection offer has been approved by the regulator and is valid until December 31, 2008. National call termination rates, SMS termination rates and call origination rates for calls for value added services are included in the reference interconnection offer, and, therefore, cannot be changed without NRA approval. Following several value added service providers requests, the Croatian NRA started a proceeding aimed at amending the reference interconnection offer. This proceeding may result in amendments to the existing terms and price justification relating to voice value-added services already included in the reference interconnection offer and the inclusion of non-voice value added services in the regulation.

On September 10, 2007, T-Mobile Croatia filed a suit before the Administrative Court of the Republic of Croatia in Zagreb against the regulator’s decision relating to the change of call origination rates for value added services in the reference interconnection offer. This proceeding is still pending. Additionally, on April 24, 2006, T-Mobile Croatia filed a suit before the Administrative Court of the Republic of Croatia in Zagreb against the NRA’s prior decision regarding the reference interconnection offer. This proceeding is also pending.

The regulatory framework in Croatia is a combination of the old and new E.U. regulatory framework. In May 2007, guidelines on the drafting of the new Electronic Communications Act were published. It is expected that the new Electronic Communications Act, to be adopted in 2008, will be in conformity with the new E.U. Framework.

 

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DESCRIPTION OF PROPERTY, PLANT AND EQUIPMENT

Network Infrastructure

As a result of substantial investments in telecommunications and cable networks since the early 1990s, Broadband/Fixed Network believes that its fixed-line network in Germany is one of the most technologically advanced networks in the world, with full-digital switching and nearly 100% digital transmission capability. Advanced VDSL, ADSL2+, ATM and WDM technologies are incorporated in this network, which not only provide much faster voice and data transmission, but also improved network management and network reliability.

During 2007, Broadband/Fixed Network continued to expand its use of NGN enabling high-speed access and transmission network technologies. In particular, Broadband/Fixed Network plans to continue to increase incorporating ADSL2+ technology and VDSL technology in-line with the demands of its customers and in conjunction with its ongoing broadband strategy. Moreover, in addition to its announced efforts to increase broadband access speeds, Broadband/Fixed Network intends to continue to increase the use of innovative technologies like Outdoor DSLAM and Gigabit Ethernet to provide IPTV and high-speed access at speeds up to 25 Mbit/s. NGN technologies increase the efficiency of, and potential to, offer new services using the existing network.

As of December 31, 2007, Broadband/Fixed Network’s PSTN in Germany consisted of approximately 7,900 local networks connected by a long-distance transmission network. Broadband/Fixed Network’s IP platform, the basis for various services offered to individual customers (especially access to the Internet) and business customers (e.g., VPNs and connection of servers to the World Wide Web), consisted of numerous locations primarily linked through router technology.

The following table provides information on the length of the copper and fiber-optic cables contained in Broadband/Fixed Network’s access and transmission networks in Germany at December 31, 2007, and each of the two prior years:

 

     Length in km

Year

   Copper Cable    Fiber-Optic Cable

2005

   1.480 million    0.206 million

2006

   1.485 million    0.216 million

2007

   1.491 million    0.231 million

For more information about Broadband/Fixed Network’s network infrastructure, see “—Description of Business—Broadband/Fixed Network.”

Cable Transmission Infrastructure

Broadband/Fixed Network’s global transmission infrastructure consists of underground and submarine cables, which directly link the German national telecommunications network to numerous other telecommunications service providers worldwide. In addition, Broadband/Fixed Network holds interests in numerous fiber-optic submarine and terrestrial cable networks worldwide. Restoration contracts with other cable operators and telecommunications carriers have been created to prevent network failures from affecting network availability. Broadband/Fixed Network’s domestic telecommunications network is connected to submarine cables via various “landing points,” five of which are located in Germany.

Computing Services & Solutions (CSS)

CSS possesses the server equipment, software tools and expertise employed in the operation of the computer network infrastructure described above. As of December 31, 2007, CSS’ global mainframe systems performance had a combined total computing power of more than 132,000 millions of instructions per second (MIPS).

T-Systems’ mainframe computing equipment in Germany and Switzerland (more than 70% of T-Systems’ total worldwide computing power) is based on a leasing contract with IBM. T-Systems only purchases the

 

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computing capacity actually required, according to a flexible, demand-driven business agreement. In addition to these mainframe systems, as of December 31, 2007, a total of approximately 39,000 servers (most of which are owned by T-Systems) were operated worldwide, in particular in Europe.

Mobile Network Infrastructure

At December 31, 2007, the network infrastructure of our mobile telecommunications business consisted of approximately 87,515 base station cells in Europe and approximately 37,940 base station cells in the United States.

Real Estate

Our German real estate portfolio consists of approximately 9,810 properties, which comprise a total site area of approximately 36.9 million square meters. The total net floor space of these properties is approximately 9.3 million square meters. In addition, we have leased from third parties approximately 4.1 million square meters. Most of this area is used for telecommunications installations, research centers, service outlets, computer centers and offices. Area and sites used for our radio transmission facilities are not itemized in square meters and therefore are not included in the total real estate portfolio figures above.

We manage and service our German real estate portfolio through various subsidiaries and service providers, including Sireo.

The real estate portfolio of our consolidated Group had a book value of EUR 9,329 million at December 31, 2007, including radio transmission properties and real estate assets of our foreign subsidiaries. Approximately 64% of this amount (EUR 5,936 million) relates to properties held directly by Deutsche Telekom AG on an unconsolidated basis. The remaining 36% is mostly held through our mobile communications operating segments, Mobile Communications Europe and Mobile Communications USA, and our Central and Eastern European subsidiaries. About 80% of the real estate portfolio is located in Germany, approximately 14% is located in Europe (excluding Germany) and approximately 6% is located in the United States.

To improve operational efficiencies, and to dispose of non-core assets, we have continued to monetize certain of our real estate assets. In 2007, we entered into agreements for the sale of properties in the aggregate amount of EUR 113.2 million. Of the EUR 433.5 million in proceeds we received in 2007, EUR 93.9 million related to properties transferred in 2007 and EUR 339.6 million related to transactions in 2006 and prior years. The properties we sold in 2007 comprised approximately 2.3 million square meters of land area and approximately 0.2 million square meters of net floor space. We leased back a relatively small portion of these properties. Although we will incur rent expense related to the leased-back properties, we will achieve a reduction in interest payments and other costs related to the properties sold. In 2008, we will continue to optimize our portfolio, as well as, dispose of non-core assets.

Our radio transmission sites in Germany, including towers, masts and rooftops, are owned or leased by various subsidiaries. Our subsidiaries manage these radio transmission sites and the related technical infrastructure facilities to provide antenna space for T-Mobile, T-Home and T-Systems in Germany. These subsidiaries also offer these services to third-party radio-network operators. Our subsidiaries currently manage approximately 25,700 radio transmission sites, of which approximately 3,200 are located on Deutsche Telekom AG property. Approximately 23,100 of these transmission sites are owned by our subsidiaries, whereas the remaining 2,600 are owned by third-parties. In addition, we own and operate approximately 19 radio transmission sites for AM, short- and long-wave radio transmission.

ITEM 4A. Unresolved Staff Comments

None.

 

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ITEM 5. Operating and Financial Review and Prospects

You should read the following discussion in conjunction with our annual consolidated financial statements, including the notes to those financial statements, which appear elsewhere in this Annual Report.

The strategies and expectations referred to in the following discussions are considered forward-looking statements and may be strongly influenced or changed by shifts in market conditions, new initiatives we implement and other factors. We cannot provide assurance that the strategies and expectations referred to in these discussions will come to fruition. Forward-looking statements are based on current plans, estimates and projections, and therefore, you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Please refer to “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors” for descriptions of some of the factors relevant to these discussions and other forward-looking statements in this Annual Report.

MANAGEMENT OVERVIEW

Management of our company provides the following discussion and analysis to present an overview of our financial condition, operating performance and prospects from management’s perspective.

The 2007 financial year was a challenging year for us, but we achieved many of our goals. Following the appointment of a new Chairman of the Management Board in 2006, we restructured the Management Board team. Additionally, we had to adjust our anticipated results for 2007 mainly due to competitive pressure in our domestic markets. At the same time, we developed a new strategy, “Focus, fix and grow.” This strategy has four main aims:

 

   

Improve competitiveness in Germany and in Central and Eastern Europe

 

   

Grow abroad with mobile communications

 

   

Mobilize the Internet and the Web 2.0 trend

 

   

Roll-out network-centric ICT

Another challenge for us in 2007 was to continue with the necessary personnel-related and structural changes within our Company, which are focused on improving our cost structure and providing us with new, forward-looking perspectives.

In 2008, we will have to continue to deal with technological change and fierce competition in our sales markets by taking targeted measures. Our “Focus, fix and grow” strategy will be the basis for the successful implementation of these measures, which will also support our efforts to continue to offer our shareholders a dividend.

The following paragraphs highlight several recent important developments relating to our Group.

Net revenues and net profit

The 2007 financial year was again marked by intense competitive and price pressure in the telecommunications industry, as well as ongoing technological change. Our 2007 financial results were characterized by two basic trends, with our international market businesses recording revenue and earnings growth while our domestic market businesses witnessed a revenue and earnings decline.

 

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Net revenues increased by EUR 1.2 billion to EUR 62.5 billion in the 2007 financial year, a continuation of our positive revenue development of the past few years. This growth was mainly a result of the changes to our consolidated Group (primarily the consolidation of PTC) that contributed EUR 1.9 billion to net revenues. Customer growth in our mobile communications business also contributed to the increase in revenue. In contrast, however, exchange rate effects negatively impacted growth by EUR 1.0 billion, primarily the result of the weakening U.S. dollar.

While net revenues rose in the Mobile Communications Europe and Mobile Communications USA operating segments, it declined in the Broadband/Fixed Network and Business Customers operating segments. The proportion of international net revenues continued to increase, rising by 3.8 percentage points year-on-year to 50.9%. In addition to changes in the composition of the Group, this positive development was mainly the result of customer growth in the Mobile Communications operating segments.

In 2007, net profit declined year-on-year by EUR 2.6 billion to EUR 0.6 billion. A major cause of this decline was a tax expense of EUR 1.4 billion recorded in 2007 compared with a tax benefit of EUR 1.0 billion recorded in 2006, primarily resulting from the recognition of previously unrecognized deferred tax assets relating to tax loss carryforwards at T-Mobile USA and the reversal of income tax liabilities. In 2007, the effects of the 2008 corporate tax reform in Germany led to a one-time deferred tax expense. In addition, net profit was negatively impacted by a year-on-year increase in depreciation, amortization and impairment losses, mainly resulting from higher amortization of customer bases and brand names in the amount of EUR 0.3 billion at the companies consolidated for the first time during 2006 (primarily PTC).

Proposed Dividend

Our Management Board and Supervisory Board are proposing a dividend of EUR 0.78 for each Deutsche Telekom share carrying dividend rights. This would be an 8.3% increase over the prior year dividend. This proposal is subject to approval by our shareholders at the 2007 annual general shareholders’ meeting scheduled for May 15, 2008.

Organizational structure and business activities

In November 2006, the IASB issued IFRS 8 “Operating Segments.” IFRS 8 replaces IAS 14 “Segment Reporting” and must be applied to reporting periods beginning on or after January 1, 2009. We have opted for early adoption of IFRS 8, beginning with the financial year ending on December 31, 2007. According to IFRS 8, reportable operating segments are identified based on a “management approach,” which requires review of the Group’s internal organizational and management structure and the internal financial reporting chain to the chief operating decision-maker. As a consequence of our early adoption of this Standard and changes in our internal reporting and management channels, we have separated Mobile Communications into two reporting segments, Mobile Communications Europe and Mobile Communications USA. The figures for previous years have been adjusted accordingly. For more information see note (39) to notes to the consolidated financial statements.

Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the Business Customers and Group Headquarters and Shared Services operating segments. In previous periods these results were reported under the Broadband/Fixed Network operating segment. Prior-year figures have been adjusted accordingly.

Mobile Communications remain Group’s growth area

Mobile Communications Europe and USA operating segments expanded their combined customer base to 119.6 million. T-Mobile Deutschland added 4.6 million new customers in the Mobile Communications Europe operating segment and had 36.0 million customers at December 31, 2007. This increase was primarily the result of a modified procedure for deactivating prepaid customers in Germany, which was implemented as a result of court proceedings brought by third-parties against our competitors. In October 2007, T-Mobile Netherlands

 

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acquired the Dutch mobile communications company Orange Nederland from France Télécom. With a customer base of 2.2 million, Orange Nederland’s consolidation in October 2007 contributed to the growth of the Mobile Communication Europe operating segment. In the United Kingdom, T-Mobile UK (including Virgin Mobile) added around 0.4 million new customers in the reporting year. Customer figures developed just as encouragingly for the Central and Eastern European mobile companies. The mobile communications subsidiaries in Hungary, Slovakia, Croatia, Montenegro, and Macedonia added a total of 1.2 million new customers, moving the total mobile communications customer count for these companies to 11.3 million. In November 2006, the Mobile Communications Europe operating segment fully consolidated the Polish company PTC for the first time. PTC posted growth of 0.8 million customers year-on-year, bringing the total to 13.0 million customers at the end of 2007.

In the Mobile Communications USA operating segment, T-Mobile USA once again substantially increased its customer base. With a total of 3.7 million new customers in 2007, the number of customers at the end of the reporting year increased to 28.7 million. Its acquisition of regional mobile communications provider, SunCom Wireless Holdings, Inc., completed on February 22, 2008, will enable T-Mobile USA to expand its presence in the southeastern United States, as well as to Puerto Rico and the Virgin Islands.

Continued DSL growth in the Broadband/Fixed Network operating segment

In September 2006, the Broadband/Fixed Network operating segment in Germany rolled out Complete Packages comprising voice telephony, broadband Internet and TV entertainment (single-, double- and triple-play). As a result, Broadband/Fixed Network was able to add new DSL lines in 2007, thus continuing to improve its competitiveness.

In the broadband market, the operating segment achieved significant new customer net adds for 2007, helped by the consistent marketing of Complete Packages as well as new services. Attractive prices for the Complete Packages in conjunction with significantly enhanced services also contributed to this success. Voice and Internet communications products proved very popular. Just under 70% of customers signing up for one of the Complete Packages in 2007 opted for a Call & Surf (double-play) package. DSL growth was also boosted by the “Telekom-Vorteil” program launched in conjunction with T-Mobile which gives customers a discount if they purchase selected products from both T-Mobile and T-Home.

However, the number of fixed network lines in Germany decreased by 2.1 million in 2007 to 31.1 million, largely due to customer churn in favor of fixed network competitors. A smaller proportion of line losses was attributable to the migration of customers to cable network operators and mobile phone companies.

The development of call minutes saw contrasting trends in 2007. The continuing loss of subscriber lines and the growing substitution by mobile communications and VoIP caused the absolute number of call minutes in our network to decline by 2.7% compared to 2006. However, the continued marketing of flat-rate calling plans slowed this decline.

By introducing the Entertain packages during the IFA consumer electronics show, Broadband/Fixed Network began the marketing of an IPTV offering for the mass market in August 2007. The Entertain packages offer innovative functions such as time-shift television access to a broad spectrum of up to 145 TV channels, a comprehensive online video store, and the ability to record programs using the integrated video recorder. Approximately 17 million households have access to these innovative broadband services. In addition to continuing to extend our broadband network in 2007, we pushed ahead with the preparations for migrating the traditional telephone network to an IP-based infrastructure. In order to motivate customers to better leverage the possibilities of Internet communication, we are developing and operating custom platforms for communities (user groups).

Following the marketing of the download platforms Musicload, Softwareload, and Gamesload, in October 2007, Videoload became the fourth such brand to join our portfolio. Customers can download a large selection of music, games, software, and films and a broad service and information offering over the Internet.

 

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We launched the new “T-Home” brand on May 18, 2007, replacing the previous “T-Com” brand. With the new umbrella brand, we now offer all consumer services for the home under a single brand name in Germany. T-Home is also responsible for marketing standard consumer products for small business customers.

Growth in the broadband market has remained steady outside Germany. The Broadband/Fixed Network operating segment is active in the Central and Eastern European markets through our foreign subsidiaries. Despite continued competition, the Central and Eastern European companies managed to grow, primarily as a result of their broadband packages. Thousands of customers in Croatia, Hungary, and Slovakia opted for the IPTV packages in 2007.

As part of our “Focus, fix and grow” strategy, we sold T-Online France and T-Online Spain during 2007.

Business Customers operating segment with successes abroad and new pioneering projects in Germany

The market for information and communications technology (ICT) was again characterized by tough competition and intense price pressure in 2007. This was reflected in the results of both business units, T-Systems Enterprise Services and T-Systems Business Services.

Despite the negative results in Germany, the Business Customers operating segment continued to be one of the leading service providers in information and communications technology in Europe through new strategically significant business contracts. T-Systems also boosted its international business with customers outside Germany. In the U.K. market, outsourcing contracts with energy utility Centrica and insurer Royal & SunAlliance helped achieve an improvement in market position. T-Systems won further contracts in 2007 in Italy, Switzerland, and France. This included contracts with Airbus to set up and operate a high-performance network in Asia, as well as with Bosch for a new network infrastructure connecting more than 200 locations in the Asia-Pacific region and data centers in North America and Europe. Overall, these developments continue the implementation of the international strategy, which T-Systems launched in the previous year, of focusing on the core markets in Western Europe and worldwide service for its customers with global operations.

In 2007, gematik (Gesellschaft für Telematikanwendungen der Gesundheitskarte) awarded T-Systems a contract to set up and operate the network for electronic health cards. T-Systems is also contributing to modernizing administration functions, an important public sector reform project, throughout Europe. In 2007, the German state of Saxony awarded T-Systems a contract for setting up and operating a state-wide network on the basis of the Internet protocol, which will link all the authorities and institutions of the state.

Group Strategy

The Group’s “Focus, fix and grow” strategy is being implemented successfully throughout our Group companies.

We face disparate market and competitive scenarios. While the markets for traditional fixed network and mobile communications are becoming increasingly saturated throughout Europe, we still believe there is potential growth in other areas, including the broadband market, mobile Internet use and the mobile communications market in the United States. However, this potential for growth could be adversely affected by a deteriorating economic situation. We have responded to these challenges with our “Focus, fix and grow” strategy that focuses on four areas:

 

   

Improve competitiveness in Germany and Central and Eastern Europe

 

   

Grow abroad with mobile communications

 

   

Mobilize the Internet and the Web 2.0 trend

 

   

Roll out network-centric ICT

 

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Improve competitiveness

We continue to promote the development of the broadband market. Efforts are focused on the Mobile Communications operating segments with the expansion of UMTS and HSDPA, and the Broadband/Fixed Network operating segment with the continued roll-out of DSL and VDSL coverage. This high-speed network provides a telecommunications infrastructure that offers not only voice telephony and broadband Internet, but also high-definition television (HDTV) with interactive potential. The success of this broadband initiative depends on our ability to offer attractively priced products and exceptional customer service.

We have significantly improved our customer orientation by simplifying the consumer brand structure. T-Home represents products and services for the home and T-Mobile covers products and services used on the move. Additionally, we have launched product offerings aimed at price-sensitive customers, particularly through the introduction of our congstar brand in Germany and a highly flexible product portfolio.

Sales and customer service have also been improved. During 2007, we expanded our sales network through our newly branded Telekom Shops. Additionally, the reorganization of our call center, technical customer service and technical infrastructure activities into three independent service companies in June 2007 enabled us to improve service and sales and also improve cost structures.

Given the expected continuing competition in several of our markets, it is imperative that we continue to adjust our cost structures. The “Save for Service” savings program slightly exceeded the target of EUR 2 billion in savings in 2007. Our completely IP-based network infrastructure, which will be expanded in the coming years, is expected to contribute significantly to this savings program. Full interoperability between fixed and mobile networks is a key advantage of such an infrastructure.

Grow abroad with mobile communications

Our international revenue accounted for more than 50% of total revenue in 2007. T-Mobile USA remained the main growth driver for our international mobile communications business. The acquisition of SunCom, a mobile communications company active in the southeastern United States and in the Caribbean, is expected to result in an expansion of the customer base and a significant increase in mobile communications coverage. By acquiring Orange Nederland in October 2007, we have become the number two mobile communications company in the Dutch mobile market in terms of customer market share.

We intend to continue to leverage international economies of scale and synergies, and thus grow further in our international markets. This may entail consolidation in existing markets, where this is feasible and worthwhile, and also may involve markets where we do not currently operate.

Mobilize the Internet and the Web 2.0 trend

The key trends in the industry are mobile Internet access, Web 2.0, where users play an active role in influencing and shaping Internet content, and personal, social, and business networking between users. We believe that these trends represent a growth opportunity for us, including our web’n’walk service, which provides mobile access to the Internet. The Apple iPhone, which T-Mobile launched in Germany in November 2007 as the exclusive distributor, also reinforces this trend toward mobile Internet usage since all iPhone calling plans include a data flat rate.

In order to advance the trends towards the individualization of personal communication and the use of social networks, we are turning inward and outward for development and partnering. T-Mobile added new functionalities to the web’n’walk service in 2007, providing even faster mobile access to e-mails and to users’ favorite websites and Internet services such as eBay, Windows Live, Google, and Yahoo!. The innovative MyFaves service addresses the growing customer need for easy-to-use contacts in their personalized networks. T-Mobile USA had already rolled out this service in the market. T-Mobile Deutschland introduced MyFaves in October 2007. Our website products now offer Web 2.0 functionalities, such as the ability to integrate up-to-date information from other websites as RSS feeds and podcasts.

 

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In May 2007, the T-Online Venture Fund invested in Jajah, a web telephony start-up, opening up the prospect of future synergies and market opportunities. Such opportunities are expected to develop in both the mobile and fixed network businesses, as well as in the online segment, particularly with social networking. We also integrated numerous popular Internet services into our Internet portal, such as Wikipedia, Lycos IQ, Webnews, Mister Wong and moviepilot.de.

Roll out network-centric ICT

While margins in the telecommunications sector for business customers are shrinking, the information technology (IT) market is growing. The continuing convergence of IT and telecommunications is the driving force behind the growth of network-centric ICT. This area primarily includes IP-based network services and all network-based IT services. We are focusing on business with large corporate accounts and mid-sized business customers. The next steps to continue implementation of the ICT strategy have also been defined. IT and telecommunications production is to be combined in a single organizational unit within T-Systems. The new structure provides superior conditions for modularizing production in terms of building solutions that can be used again, thus helping improve T-Systems’ competitiveness. T-Systems is also looking for a partner for certain divisions such as Systems Integration. The appointment of Mr. Reinhard Clemens to the Group Board of Management in December 2007 enabled us to further consolidate our position by drawing on the services of a renowned expert in international IT markets who will advance the further development of T-Systems.

Our strategies may, of course, be adapted and changed to respond to opportunities and changing conditions. As reported in past years, we may embark on capital expenditure programs and pursue acquisitions, joint ventures or full or partial dispositions or combinations of businesses where we perceive opportunity for profitable growth, cost savings or other benefits for our Group. Transactions may be conducted using newly issued shares of Deutsche Telekom or shares of affiliates, cash or a combination of cash and shares, and may individually or in the aggregate be material to our financial and business condition or results. As a result, they may affect the market trading prices of our securities. As in the past, discussions with third parties in this regard may be commenced, on-going or discontinued at any time or from time to time.

Outlook(1)

The overall encouraging development in our international sales markets continues, especially in the key market of the United States. Extremely fierce competition and the continued decline in prices throughout the entire telecommunications market will again dominate developments in our business, particularly in Germany.

 

 

(1) This Outlook discussion contains forward-looking statements that reflect management’s current views with respect to future events. Words such as “expect,” “anticipate,” “believe,” “intend,” “may,” “could,” “estimate,” “aim,” “goal,” “plan,” “project,” “should,” “will,” “seek,” “outlook” or similar expressions generally identify forward-looking statements. These forward-looking statements include statements with regard to the expected development of revenue, earnings, operating profitability and personnel related measures and reductions. You should consider forward-looking statements with caution. They are subject to risks and uncertainties, most of which are difficult to predict and are often beyond our control. The risks and uncertainties include those described in the sections “Forward-Looking Statements” and “Risk Factors” of this Annual Report. Please read those sections when considering this Outlook discussion. Among the other relevant factors that might influence our ability to achieve our objectives are: the progress of our workforce reduction initiative and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations, and cost-saving initiatives. In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on costs and revenue development. Further, an economic downturn in Europe or North America, and changes in exchange and interest rates, may also have an impact on our business development and availability of capital under favorable conditions. If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by such statements. We can offer no assurance that our estimates or expectations will be achieved. We do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and reports on Form 6-K) and under other applicable laws.

 

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We respond to continuous technological change and fierce competition in our sales markets by taking targeted measures. The most important of these are:

 

   

Improvements to the service culture and processes, investments in future product areas and simplification of the product range and pricing models tailored to target groups, with the aim of safeguarding existing customer relationships in the long-term and attracting new customers.

 

   

Expansion of the sales network in Germany by further developing direct sales channels (Telekom Shops) and sales partnerships.

 

   

Cost-cutting measures and further rationalization investments in more cost-effective IP networks.

 

   

Continuation of measures to adjust the workforce structure. The necessary workforce reduction will be implemented using socially responsible and voluntary instruments such as partial retirement, severance and voluntary redundancy payments and early retirement.

 

   

Targeted consolidation in markets where we currently have a presence, but also activities outside these markets to leverage international economies of scale and synergies.

 

   

Participation in market trends by promoting innovative in-house development or, if necessary, through partnerships.

All of these measures are based on the “Focus, fix and grow” strategy, and are expected to contribute to the positive development of revenue and cost efficiencies, as well as, to safeguard cash flow.

Mobile Communications Europe and Mobile Communications USA

We expect that our mobile communications business will be positively affected by the customer growth rates in the Mobile Communications USA operating segment. We also expect customer numbers to continue growing in the Mobile Communications Europe operating segment, albeit at a lesser rate than in the United States. Our range of innovative data services, especially an enhanced, attractively priced web’n’walk offering with new mobile devices, is expected to be a key growth driver in Europe and the United States.

Based on these plans and expectations for the mobile communications business, we expect that our positive revenue trend will continue in both Europe and the United States. This development is expected to be supported by further cost savings, for instance in the United Kingdom, where T-Mobile UK and its competitor “3” will share their UMTS networks to save costs and provide a larger proportion of the population with 3G mobile services. However, regulatory decisions and exchange rate risks, especially for the U.S. dollar and British pound sterling, may negatively affect revenues and profits when these currencies are translated into euros.

Our capital expenditure activities in the 2008 financial year will continue to focus on our mobile communications business. In Europe, key areas will include improvements in the quality of the GSM networks and the further expansion of the UMTS networks. In the United States, we plan to enhance network quality and network coverage, as well as accelerate the development of 3G mobile communications networks and services.

Broadband/Fixed Network

We expect that the traditional fixed network business will continue to lose customer market share because of continued fierce competition from alternative telecommunications carriers and cable operators, as well as mobile substitution. The introduction of an all-IP network and IP access will also shape developments in 2008 and beyond. In addition, prices are expected to fall further due to regulatory requirements and competition-induced price cuts. We intend to defend our market leadership in the broadband business, and serve the mass market in Germany with our Entertain products. The Broadband/Fixed Network operating segment plans to launch a quality and service campaign in 2008 that will focus on safeguarding and defending its core voice and access business, and on its broadband market leadership. In addition, we are consistently addressing growth areas with the introduction of new products, such as an innovative IP connection that will offer customers many additional functions including video telephony.

 

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Based on these plans and expectations, we expect the negative revenue trends in the Broadband/Fixed Network operating segment to continue, but at a somewhat reduced rate.

We plan to continue the roll-out of our high-speed network infrastructure in 2008. However, any expansion will be contingent on such an investment making sense when taking regulatory and economic aspects into account. In addition to expanding the high-speed network, further investments in network coverage and performance of the existing IP network infrastructure are planned for 2008.

Business Customers

In 2008, T-Systems is planning to focus its activities and to position itself more strongly in the network-centric ICT market. In 2008, T-Systems began implementation of its “Next Generation T-Systems” program, which was developed to react to customer needs through the creation of two simplified and specific go-to-market models: the Corporate Customers unit, which will address multinational and large customers, and the Business Customers unit, which will focus on smaller enterprises. In January 2008, T-Systems’ Media & Broadcast division was sold to the French provider TDF (Télédiffusion de France) and Active Billing, which handles our receivables management business, was transferred to the Broadband/Fixed Networks operating segment.

At the same time, the Business Customers operating segment intends to expand its position as a European provider in the international ICT market by winning further major contracts.

The Systems Integration unit is seeking to enter into a strategic partnership arrangement in 2008. Unlike network-centric businesses, Systems Integration requires over 60% of work to be performed on the customer’s premises. At the same time, providers in this market have to buy standardized programming services from local and offshore countries such as Hungary, Brazil, and India in order to be competitive. A strategic partnership is therefore desired to increase the number of internationally available specialists for on-site customer business and to augment offshore resources. Although we are currently negotiating with potential partners, we cannot provide assurance that any favorable arrangements will be realized.

Based on these plans and expectations, revenue at Business Customers is expected to stabilize in view of the measures described.

Group Headquarters and Shared Services

The results of Group Headquarters and Shared Services are to a significant extent influenced by the development of Vivento. The changed market environment means that the Group’s personnel structure will have to be adjusted further. Vivento’s expertise will be used to establish a capacity management system in 2008, with the goal of generating further external employment opportunities for Deutsche Telekom staff. The system will focus in particular on employment prospects in the public sector, which will be offered primarily to the Group’s civil servants. Vivento’s reporting of the personnel costs for the employees concerned will negatively affect the results of Group Headquarters and Shared Services in 2008. In addition, measures taken to centralize functions at Group Headquarters and Shared Services will initially have a negative effect. However, continuation of the Save for Service program is expected to lead to efficiency gains in the coming years.

Business development in the Group

In view of the anticipated market situation in the individual operating segments described above, we expect to again achieve overall positive results for the Group.

 

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CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements prepared in accordance with IFRS as issued by the IASB, are dependent upon and sensitive to accounting methods, assumptions and estimates that we use as bases for the preparation of our consolidated financial statements. We have identified the following critical accounting estimates and related assumptions and uncertainties inherent in our accounting policies that we believe are essential to an understanding of the underlying financial reporting risks, and the effect that these accounting estimates, assumptions and uncertainties have on our consolidated financial statements under IFRS.

Measurement of property, plant and equipment, and intangible assets involves the use of estimates for determining the fair value at the acquisition date, provided they were acquired in a business combination. Furthermore, the expected useful lives of these assets must be estimated. The determination of the fair values of assets and liabilities, as well as of the useful lives of the assets is based on management’s judgment.

The determination of impairments of property, plant and equipment, and intangible assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, increased cost of capital, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs, prices paid in comparable transactions and other changes in circumstances that indicate an impairment exists. The recoverable amount and the fair values are typically determined using a discounted cash flow method which incorporates reasonable market participant assumptions. The identification of impairment indicators, as well as the estimation of future cash flows and the determination of fair values for assets (or groups of assets) require management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows, applicable discount rates, useful lives and residual values. Specifically, the estimation of cash flows underlying the fair values of the mobile businesses considers the continued investment in network infrastructure required to generate future revenue growth through the offering of new data products and services, for which only limited historical information on customer demand is available. If the demand for these products and services does not materialize as expected, this would result in less revenue, less cash flow and potential impairment to write-down these investments to their fair values, which could adversely affect future operating results.

The determination of the recoverable amount of a cash-generating unit involves the use of estimates by management. Methods used to determine the fair value less costs to sell include discounted cash flow-based methods and methods that use quoted stock market prices as a basis. Key assumptions on which management has based its determination of fair value less costs to sell include ARPU, subscriber acquisition and retention costs, churn rates, capital expenditure and market share. These estimates, including the methodologies used, can have a material impact on the fair value and ultimately the amount of any goodwill impairment.

Financial assets include equity investments in foreign telecommunications service providers that are principally engaged in the mobile, fixed network, Internet and data communications businesses, some of which are publicly traded and have highly volatile share prices. Generally, an investment impairment loss is recorded when an investment’s carrying amount exceeds the present value of its estimated future cash flows. The calculation of the present value of estimated future cash flows and the determination of whether an impairment is permanent involve judgment and rely heavily on an assessment by management regarding the future development prospects of the investee. In measuring impairments, quoted market prices are used, if available, or other valuation parameters, based on information available from the investee. To determine whether an impairment is permanent, the Company considers the ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the carrying amount, including an assessment of factors such as the length of time and magnitude of the excess of carrying value over market value, the forecasted results of the investee, the regional geographic economic environment and state of the industry. Future adverse changes in market conditions, particularly a downturn in the telecommunications industry or poor operating results of investees, could result in losses or an inability to recover the carrying amount of the investments that may not be reflected in an investment’s current carrying amount. This could result in impairment losses, which could adversely affect future operating results.

 

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Management maintains an allowance for doubtful accounts to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the aging of accounts receivable balances and historical write-off experience, customer credit worthiness and changes in customer payment terms. If the financial condition of customers were to deteriorate, actual write-offs might be higher than expected.

Income taxes must be estimated for each of the jurisdictions in which we operate, and involve a specific calculation of the expected actual income tax exposure for each tax object and an assessment of temporary differences resulting from the different treatment of certain items for IFRS consolidated financial and tax reporting purposes. Any temporary differences will generally result in the recognition of deferred tax assets and liabilities in the consolidated financial statements. Management’s judgment is required for the calculation of actual and deferred taxes. Deferred tax assets are recognized to the extent that their utilization is probable. The utilization of deferred tax assets will depend on whether it is possible to generate sufficient taxable income in the respective tax type and jurisdiction, taking into account any legal restrictions on the length of the loss-carryforward period. Various factors are used to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, loss-carryforward periods, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets changes, the recognized deferred tax assets must be reduced and this reduction will be recognized in profit or loss.

Pension obligations for benefits to non-civil servants are generally satisfied by plans which are classified and accounted for as defined benefit plans. Pension benefit costs for non-civil servants are determined in accordance with actuarial valuation, which rely on assumptions including discount rates, life expectancies and, to a limited extent, expected return on plan assets. Estimations of the expected return on plan assets have a limited impact on pension costs. Other key assumptions for pension costs are based in part on actuarial valuations, which rely on assumptions, including discount rates used to calculate the amount of the pension obligation. In order to determine the discount rate, we determine an appropriate yield curve based on the spot rates of the rate of return of more than 500 high quality European corporate bonds with a rating of “AA” as reported by Bloomberg L.P. Since our defined pension obligations are denominated predominantly in euro, this yield curve provides the basis for the discount rate. We determine the discount rate on the weighted average timing (duration) of our defined benefit payments. The duration of our defined benefit payments is approximately 15 years. The assumptions concerning the expected return on plan assets are determined on a uniform basis, considering long-term historical returns, asset allocation and future estimates of long-term investment returns. In the event that further changes in assumptions are required with respect to discount rates and expected returns on invested assets, the future amounts of the pension benefit costs may be materially affected.

We are obligated, under the German Federal Posts and Telecommunications Agency Reorganization Act (Gesetz zur Reorganisation der Bundesanstalt für Post und Telekommunikation Deutsche Bundespost), to pay for our share of any operating cost shortfalls between the income of the Civil Service Health Insurance Fund (Postbeamtenkrankenkasse) and actual benefits paid. The Civil Service Health Insurance Fund provides services mainly in cases of illness, birth, or death for its members (and their dependents), who are civil servants employed by or retired from Deutsche Telekom AG, Deutsche Post AG and Deutsche Postbank AG. When Postreform II came into effect, participation in the Civil Service Health Insurance Fund was closed to new members. The insurance premiums collected by the Civil Service Health Insurance Fund may not exceed the insurance premiums imposed by alternative private health insurance enterprises for comparable insurance benefits, and, therefore, do not reflect the changing composition of ages of the participants in the fund. We recognize provisions in the amount of the actuarially determined present value of our share in the fund’s future deficit, using a discount rate and making assumptions about life expectancies and projections for contributions and future increases in general health care costs in Germany. Since the calculation of these provisions involves long-term projections over periods of more than 50 years, the present value of the liability may be highly sensitive even to small variations in the underlying assumptions.

 

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We exercise considerable judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the final settlement. Provisions are recorded for liabilities when losses are expected from executory contracts, a loss is considered probable and can be reasonably estimated. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. In addition, significant estimates are involved in the determination of provisions related to taxes, environmental liabilities and litigation risks. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, if available, or with the support of outside consultants, such as actuaries or legal counsel. Revisions to the estimates of these losses from executory contracts may significantly affect future operating results.

Revenue recognition for customer activation fees

The operating segments Mobile Communications Europe, Mobile Communications USA and Broadband/Fixed Network, receive installation and activation fees from new customers. These fees (and related directly attributable costs) are deferred and amortized over the expected duration of the customer relationship. The estimation of the expected average duration of the relationship is based on historical customer turnover. If management’s estimates are revised, material differences may result in the amount and timing of revenue recognized for any given period.

Revenue recognition for service contracts

T-Systems conducts a portion of its business under long-term contracts with customers. Under these contracts, revenue is recognized according to the status of performance. Depending on the methodology used to determine contract progress, these estimates may include total contract costs, remaining costs to completion, total contract revenues, contract risks and other judgments. All estimates involved in such long-term contracts are subject to regular reviews and adjusted as necessary.

Revenue recognition for multiple-element arrangements

The framework of the Emerging Issues Task Force Issue No. 00-21 was adopted to account for multiple-element arrangements in accordance with IAS 8.12. EITF 00-21 requires that arrangements involving the delivery of bundled products or services be separated into individual units of accounting, each with its own separate earnings process. Total arrangement consideration relating to the bundled contract is allocated among the different units based on their relative fair values (i.e., the relative fair value of each of the accounting units to the aggregated fair value of the bundled deliverables). The determination of fair values is complex, because some of the elements are price sensitive and, thus, volatile in a competitive marketplace. Revisions to the estimates of these relative fair values may significantly affect the allocation of total arrangement consideration among the different accounting units, affecting future operating results.

 

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CONSOLIDATED RESULTS OF OPERATIONS

The following table presents information concerning our consolidated income statements for the periods indicated:

 

           For the years ended December 31,        
             2007                     2006                     2005          
     (millions of €)  

Net revenues

   62,516     61,347     59,604  

Cost of sales

   (35,337 )   (34,755 )   (31,862 )

Gross profit

   27,179     26,592     27,742  

Selling expenses

   (16,644 )   (16,410 )   (14,683 )

General and administrative expenses

   (5,133 )   (5,264 )   (4,210 )

Other operating income

   1,645     1,257     2,408  

Other operating expenses

   (1,761 )   (888 )   (3,635 )

Profit from operations

   5,286     5,287     7,622  

Finance costs

   (2,514 )   (2,540 )   (2,401 )

Share of profit (loss) of associates and joint ventures accounted for using the equity method

   54     24     214  

Other financial income (expense)

   (374 )   (167 )   784  

Loss from financial activities

   (2,834 )   (2,683 )   (1,403 )
                  

Profit before income taxes

   2,452     2,604     6,219  

Income taxes

   (1,374 )   970     (198 )

Profit after income taxes

   1,078     3,574     6,021  

Profit attributable to minority interests

   509     409     432  
                  

Net profit (profit attributable to equity holders of the parent)

   569     3,165     5,589  
                  

Net Revenues (Revenues from customers outside of the Deutsche Telekom Group)

In 2007, our net revenues increased by EUR 1,169 million, or 1.9%, to EUR 62,516 million, compared with 2006. This increase was primarily due to changes in the composition of the Group, mainly due to the full-year consolidation of PTC, the full-year consolidation of gedas, and the consolidation of Orange Nederland as of October 1, 2007. In addition, customer growth at T-Mobile USA and T-Mobile UK also contributed to the increase. The increase was partly offset by negative exchange rate effects (EUR 1,049 million) primarily from the translation of U.S. dollars into euros, and from a decrease in revenues from the Broadband/Fixed Network operating segment (EUR 1,294 million, or 6.4%) and the Business Customers operating segment (EUR 330 million, or 3.5%).

In 2006, our net revenues increased by EUR 1,743 million, or 2.9%, to EUR 61,347 million, compared with 2005. This increase was primarily due to the positive development of net revenues in the Mobile Communications Europe operating segment (EUR 1,027 million, or 6.2%) and the Mobile Communications USA operating segment (EUR 1,750 million, or 14.8%), as compared with 2005. In contrast, net revenues in the Broadband/Fixed Network operating segment decreased by EUR 1,081 million, or 5.0%, compared with 2005. In the Business Customers operating segment, net revenues remained at the same level as in the previous year.

The increase in net revenues in 2006 also included effects relating to acquisitions by the Group in the amount of EUR 1.2 billion (primarily the acquisition of gedas (EUR 495 million), PTC (EUR 299 million), and tele.ring (EUR 296 million)) and by the accelerated recognition of deferred revenue in the amount of EUR 201 million relating to a change in customer retention periods at Broadband/Fixed Network. The increase was offset, in part, by exchange rate effects totaling EUR 200 million, primarily from the translation of U.S. dollars to euros.

For more information on our net revenue development and trends, see “—Segment Analysis.”

 

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Cost of Sales

Our cost of sales comprises the aggregate cost of products and services delivered. In addition to directly attributable costs, such as direct material and labor costs, it also includes indirect costs, such as depreciation and amortization.

Cost of sales increased by EUR 582 million, or 1.7%, in 2007 to EUR 35,337 million, compared with EUR 34,755 million in 2006. In addition to customer growth at T-Mobile UK and T-Mobile USA, changes in the composition of the Group contributed to this increase, mainly due to the full-year consolidation of PTC. Higher expenses for interconnection as a result of increased traffic to third party networks, mainly due to the new Flext rate plan at T-Mobile UK, also contributed to the increased cost of sales. This increase was partly offset by negative exchange rate effects resulting primarily from the translation of U.S. dollars into euros. Cost of sales decreased at Broadband/Fixed Network and Business Customers in relation to the decrease in revenues.

Cost of sales increased by EUR 2,893 million, or 9.1%, in 2006 to EUR 34,755 million, compared with EUR 31,862 million in 2005. In addition to higher expenditures in connection with the personnel reduction initiative, the increase in the cost of sales was due primarily to customer growth in the Mobile Communications Europe and Mobile Communications USA operating segments. However, cost of sales in the Broadband/Fixed Network operating segment was down slightly compared to 2005.

Selling Expenses

Our selling expenses include all expenses for activities that do not directly increase the value of our products or services, but help to secure sales. Selling costs generally include all expenses relating to the sales (e.g., commissions), advertising and marketing departments and other sales promotion activities.

Selling expenses increased by EUR 234 million, or 1.4%, in 2007, compared to 2006. This increase was primarily due to changes in the composition of the Group, mainly due to the full-year consolidation of PTC and higher marketing expenses primarily relating to new calling plans at T-Mobile USA. The increase in selling expenses was offset, in part, by decreases in selling expenses for staff reduction related measures at Broadband/Fixed Network, Business Customers and Group Headquarters and Shared Services.

Selling expenses increased by EUR 1,727 million, or 11.8%, in 2006, compared to 2005. In addition to higher expenditures relating to the personnel reduction initiative, this increase is predominantly attributable to higher commission and marketing expenses in the Mobile Communications Europe, Mobile Communications USA and Broadband/Fixed Network operating segments, which increased mainly as a result of customer growth at T-Mobile USA, and intensified advertising for new calling plans and major sponsored events.

General and Administrative Expenses

Our general and administrative expenses generally include all costs attributable to the core administrative functions that are not directly attributable to production or selling activities.

General and administrative expenses decreased by EUR 131 million, or 2.5%, in 2007, compared to 2006. The decrease in general and administrative expenses was primarily due to a decrease in expenses in connection with staff-related measures at Group Headquarters and Shared Services and in the Business Customers and Broadband/Fixed Network operating segments. Offsetting effects mainly resulted from changes in the composition of the Group.

General and administrative expenses increased by EUR 1,054 million, or 25.0%, in 2006, compared to 2005, with the largest increases attributable to the Group Headquarters and Shared Services, Mobile Communications Europe and Mobile Communications USA operating segments. Overall, this increase is primarily due to higher expenses relating to the personnel reduction initiative.

 

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Other Operating Income

Other operating income consists of reversals of provisions (if not allocated to functional costs), income from transfer of costs and gains from disposals. Miscellaneous other operating income encompasses a variety of income items for which the individually recognized amounts are not material.

In 2007, other operating income increased EUR 388 million to EUR 1,645 million compared to 2006, primarily as a result of the gains on the disposal of T-Online France (EUR 210 million) and T-Online Spain (EUR 120 million). No income of a comparable level was recorded in the prior year.

In 2006, other operating income decreased by EUR 1,151 million to EUR 1,257 million compared to 2005, primarily as a result of the non-recurrence of a reversal of provisions in 2005 relating to the new arrangements for the financing of the Civil Service Health Insurance Fund, which accounted for EUR 783 million of the increase in other operating income in 2005.

Other Operating Expenses

Other operating expenses consist of impairment of goodwill, additions to provisions (if not allocated to functional costs) and losses on disposals. Miscellaneous other operating expenses encompass a variety of expense items for which the individually recognized amounts are not material.

In 2007, other operating expenses increased by EUR 873 million to EUR 1,761 million, compared to 2006. This was mainly due to the reduction of the carrying amount of goodwill (EUR 327 million) at T-Mobile Netherlands and miscellaneous other operating expenses.

The reduction of the carrying amount of goodwill of T-Mobile Netherlands was not the result of an impairment test, but of the recognition of deferred tax assets for tax loss carryforwards that were acquired in connection with the acquisition of Ben Nederland (the predecessor of T-Mobile Netherlands) but were not considered to meet the criteria for recognition at the time. Based on an assessment of all available information and relevant accounting literature, we determined that it had become probable that these previously unrecognized loss carryforwards would be realizable in the near term and deferred taxes would have to be recognized and the carrying amount of goodwill would have to be reduced accordingly.

The increase in other operating expenses was also attributable, in part, to the sale of call centers at Vivento Customer Services and the disposal of Vivento Technical Services.

In 2006, other operating expenses decreased by EUR 2,747 million compared to 2005. This was mainly due to reduced goodwill impairment losses. In 2005, goodwill impairment losses recognized as expenses totaled EUR 1,920 million relating mainly to T-Mobile UK (EUR 1,917 million) compared with EUR 10 million in 2006.

Profit from Operations

Profit from operations in 2007 was EUR 5,286 million and remained on the same level as 2006, primarily due to higher cost of sales, selling expenses and other operating expenses, offset in part, by lower general and administrative expenses and higher other operating income.

Profit from operations decreased by EUR 2,335 million 2006, compared to 2005, primarily due to higher cost of sales, selling expenses and general and administrative expenses and lower other operating income, offset in part, by lower other operating expenses.

 

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The details are described in the individual items set forth above and in personnel costs, depreciation, amortization and impairment losses set forth below.

Loss from Financial Activities

The following table presents information concerning our loss from financial activities:

 

     For the years ended December 31,  
     2007     2006     2005     2007/2006     2006/2005  
     (millions of €)     (% change)  

Finance costs

          

Interest income

   261     297     398     (12.1 )   (25.4 )

Interest expense

   (2,775 )   (2,837 )   (2,799 )   2.2     (1.4 )
   (2,514 )   (2,540 )   (2,401 )   1.0     (5.8 )

Share of profit of associates and joint ventures accounted for using the equity method

   54     24     214     n.m.     (88.8 )

Other financial income (expense)

   (374 )   (167 )   784     n.m.     n.m.  
                      

Loss from financial activities

   (2,834 )   (2,683 )   (1,403 )   (5.6 )   (91.2 )
                      

 

n.m.—not meaningful

Finance costs

Finance costs decreased by EUR 26 million in 2007, compared to 2006. This was primarily due to a slight reduction in the average net position of financial liabilities and liquid financial assets.

Finance costs increased by EUR 139 million in 2006, compared to 2005. This was primarily due to a positive effect in the second quarter of 2005 that resulted from an adjustment to the book value of financial liabilities to reflect the changes in the present value of estimated future payments. The changes in estimated future payments were triggered by a downward adjustment in interest rates relating to these financial liabilities following an upgrade of our credit rating by rating agencies.

The effective weighted average interest rate applicable to our outstanding indebtedness related to bonds and debentures was 6.1% in 2007, 6.2% in 2006 and 6.5% in 2005. The effective weighted average interest rate applicable to our outstanding indebtedness related to bank liabilities was 5.7% in 2007, 6.6% in 2006 and 6.1% in 2005. Some of our debt instruments have provisions that could cause the interest rate on such investments to increase upon the occurrence of certain downgrades in our long-term unsecured debt ratings. For more information, see “—Liquidity and Capital Resources—Capital Resources.”

Share of profit of associates and joint ventures accounted for using the equity method

The share of profit of associates and joint ventures accounted for using the equity method in 2007 increased by EUR 30 million, compared to 2006. While the share of profit of joint ventures improved, the share of profit of associates decreased primarily as a result of the full consolidation of PTC as of November 1, 2006.

The share of profit of associates and joint ventures accounted for using the equity method declined by EUR 190 million in 2006, compared to 2005, primarily due to lower profits from associates and joint ventures. In addition, the profit generated by PTC was only included through the end of October 2006.

Other financial income (expense)

Other financial expense increased in comparison with the previous year. In 2006, other financial expense included income from the sale of Celcom (EUR 196 million), whereas in 2007, gains of only EUR 18 million on the disposal of the remaining shares in Sireo, in particular, were realized in other financial expense.

 

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Other financial income (expense) decreased by EUR 951 million in 2006, compared to 2005. In 2005, other financial income (expense) included the gain on the sale of our remaining shares in MTS (EUR 976 million). In 2006, this decrease was offset, in part, by the proceeds from the sale of Celcom in 2003, which were received in the first quarter of 2006 (EUR 196 million).

Personnel costs

The following table provides a breakdown of the personnel costs included in the functional cost line items (cost of sales, selling expenses, general and administrative expenses and other operating expenses):

 

     For the years ended December 31,  
     2007     2006     2005  
     (millions of €)  

Wages and salaries

   (12,609 )   (13,436 )   (11,436 )

Social security contributions and expenses for pension plans and benefits:

      

Social security costs

   (1,588 )   (1,598 )   (1,520 )

Expenses for pension plans

   (1,056 )   (1,351 )   (1,129 )

Expenses for benefits

   (134 )   (157 )   (169 )
                  

Personnel costs

   (15,387 )   (16,542 )   (14,254 )
                  

In 2007, personnel costs declined by EUR 1,155 million to EUR 15,387 million, compared to 2006. This was mainly attributable to lower expenses for staff-related measures (EUR 1,971 million), including voluntary redundancy and severance payments (EUR 571 million) and early retirement arrangements for civil servants (EUR 1,202 million), and the continued staff restructuring program, as compared with total expenses relating to personnel reduction measures in 2006 (EUR 2,852 million). In addition, provisions amounting to EUR 237 million were made for compensation payments in connection with the collective bargaining agreement relating to the Telekom Service companies. The decline was partially offset by an increase in headcount, in particular at T-Mobile USA and, to lesser extent, the effect of changes in the composition of the Group.

In 2006, the expenses related to the personnel reduction initiative totaled EUR 2,852 million. These expenses relate primarily to voluntary redundancy and severance payments (EUR 676 million) and to the early retirement arrangements for civil servants (EUR 1,800 million). In 2005, expenses for other personnel reduction measures amounted to approximately EUR 1,210 million, mainly attributable to provisions for voluntary redundancy and severance payments for salaried employees in the context of the staff restructuring program announced in the fourth quarter of 2005. In addition, they include expenses for Altersteilzeit (partial retirement, termination benefit) and expenses for staff reduction programs at the international subsidiaries.

In addition, the increase in personnel costs in 2006 compared to 2005 is attributable to the first-time consolidation of gedas in the Business Customers operating segment, collectively agreed increases in wages and salaries, increased staff levels at T-Mobile USA and exchange rate effects between the U.S. dollar and the euro.

Number of employees (average for the year)

 

      For the years ended December 31,
     2007    2006    2005

Number of Employees

        

Civil servants

   38,265    42,969    46,525

Non-civil servants

   205,471    205,511    197,501
              

Deutsche Telekom Group

   243,736    248,480    244,026
              

Trainees and student interns

   10,708    10,346    10,019

 

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The reduction in the average number of employees was primarily caused by the sale of call centers and staff reductions in Germany and Central and Eastern Europe. The overall decrease was partially offset by an increase in headcount at T-Mobile USA, as well as, effects of changes in the composition of the Group.

Depreciation, Amortization and Impairment Losses

The following table provides a breakdown of the depreciation, amortization and impairment losses contained in the functional cost line items (cost of sales, selling expenses, general and administrative expenses and other operating expenses):

 

     For the years ended December 31,  
     2007     2006     2005  
     (millions of €)  

Amortization and impairment of intangible assets

   (3,490 )   (2,840 )   (4,427 )

of which: goodwill impairment losses

   (327 )   (10 )   (1,920 )

of which: amortization of mobile telecommunications licenses

   (1,017 )   (994 )   (951 )

Depreciation and impairment of property, plant and equipment

   (8,121 )   (8,194 )   (8,070 )
                  

Total depreciation, amortization and impairment losses

   (11,611 )   (11,034 )   (12,497 )
                  

The increase in depreciation, amortization and impairment losses in 2007 was mainly due to higher amortization of intangible assets attributable to the acquisition in 2006 of tele.ring and PTC in the Mobile Communications Europe operating segment. This relates primarily to the amortization of the customer base and brands totaling EUR 270 million. In addition, the carrying amount of the goodwill of T-Mobile Netherlands (formerly Ben Nederland) was reduced by EUR 327 million in 2007.

The decrease in amortization and impairment of intangible assets in 2006 of EUR 1,587 million, compared to 2005, was primarily attributable to the goodwill impairment losses at T-Mobile UK in 2005 in the amount of EUR 1,917 million, which were not repeated in 2006. Depreciation and amortization at tele.ring and PTC (each acquired in 2006) had the opposite effect. These essentially relate to amortization of the customer base and brands totaling EUR 274 million.

Depreciation of property, plant, and equipment decreased by EUR 73 million in 2007, mainly as a result of lower depreciation of technical equipment and machinery. The depreciation and impairment of property, plant and equipment increased in 2006 by EUR 124 million. The increase was largely the result of higher depreciation of technical equipment and machinery relating to additional operating equipment in connection with the network expansion at T-Mobile USA, which led to a higher depreciation base.

For more information relating to our intangible assets, see note (21) to notes to the consolidated financial statements.

 

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The following table provides a breakdown of impairment losses:

 

     For the years ended December 31,  
         2007             2006             2005      
     (millions of €)  

Intangible assets

   (378 )   (123 )   (1,958 )

Of which: goodwill

   (327 )   (10 )   (1,920 )

Of which: U.S. mobile telecommunications licenses

   (9 )   (33 )   (30 )

Property, plant and equipment

   (300 )   (287 )   (248 )

Of which: land and buildings

   (238 )   (228 )   (233 )

Of which: technical equipment and machinery

   (54 )   (13 )   (7 )

Of which: other equipment, operating and office equipment

   (4 )   (26 )   (5 )

Of which: advance payments and construction in progress

   (4 )   (20 )   (3 )
                  

Total impairment losses

   (678 )   (410 )   (2,206 )
                  

The impairment losses on land and buildings mainly result from the fair value measurement of land and buildings held for sale less costs to sell. The amounts are reported in other operating expenses.

Profit before Income Taxes

In 2007, profit before income taxes decreased by EUR 152 million, to EUR 2,452 million, compared with 2006, mainly due to increased loss from financial activities.

In 2006, profit before income taxes decreased by EUR 3,615 million, to EUR 2,604 million compared with 2005, mainly due to decreased profit from operations and increased loss from financial activities.

Income Taxes

 

     For the years ended December 31,
     2007    2006     2005    2007/2006    2006/2005
     (millions of €)    (% change)

Income taxes

   1,374    (970 )   198    n.m.    n.m.

 

n.m.—not meaningful

In general, the amount of income taxes we recognize is a function of our profit before income taxes and the various income tax rates applicable to profit before income taxes, and the recognition or non-recognition of deferred income taxes. However, the income tax expense recorded on our financial statements is not necessarily reflective of the actual income taxes we paid.

Income taxes changed from a benefit of EUR 970 million in 2006 to an income tax expense of EUR 1,374 million in 2007, a difference of EUR 2,344 million. The major reason for this increase was that in the prior year, deferred tax assets relating to loss carryforwards were recognized that had not previously been recognized and provisions for income taxes were reversed, creating significant favorable effects on income of EUR 1.2 billion and EUR 0.4 billion, respectively. A similar effect had led to a very low tax expense also in 2005.

Additionally, deferred tax assets and deferred tax liabilities were adjusted in the current period in response to changes in German tax rates (a decrease in the total tax burden on domestic profits from 39% to 30% as a result of the 2008 corporate tax reform legislation). The adjustment resulted in a negative effect on net income amounting to EUR 0.7 billion. This deferred tax effect, however, did not result in any additional tax payments.

Two offsetting deferred tax effects did not fully compensate the negative impact on net income: the state tax burden in the United States was adjusted to reflect more detailed information on the effects of a corporate reorganization at T-Mobile USA (EUR 0.1 billion); and the recognition of deferred tax assets on temporary

 

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differences and from tax loss carryforwards in The Netherlands (EUR 0.3 billion), which resulted almost entirely from the acquisition of T-Mobile Netherlands. At the time, neither the deferred tax assets on these temporary differences nor the loss carryforwards met recognition criteria. However, based on an assessment of all available evidence, it was determined that these previously unrecognized temporary differences and loss carryforwards at T-Mobile Netherlands were likely to be utilized in the near future, and therefore, associated deferred tax assets were required to be recognized.

Our effective income tax rate (income taxes as a percentage of profit before income taxes) was approximately 56% in 2007, (37)% in 2006 and 3% in 2005. The German statutory income tax rate applicable to us was approximately 39% in 2007, 2006 and 2005. This statutory income tax rate includes corporate income tax of 25%, a solidarity surcharge on corporate income tax (Solidaritätszuschlag) levied at 5.5% on corporate income tax, and trade tax at an average national rate.

Our profit before income taxes was EUR 2,452 million in 2007, EUR 2,604 million in 2006 and EUR 6,219 million in 2005. Profit before income taxes in each of these years included transactions that significantly affected profit before income taxes with no, or a disproportionately small, impact on income taxes recorded.

With regard to the 2006 deferred tax asset mentioned above, based on an assessment of all available evidence, we determined in the third quarter of 2006, that it had become probable that EUR 1.2 billion of the previously unrecognized deferred tax assets at T-Mobile USA relating primarily to federal income tax net operating loss carryforwards was realizable. For purposes of this assessment, we reviewed forecasts in relation to actual results and expected trends in the industry. The realization of the previously unrecognized deferred tax assets provided for a corresponding income tax benefit. These effects were partially offset by the write-off of deferred tax assets amounting to EUR 0.2 billion due to negative developments in current operating income at three of our foreign subsidiaries.

In addition, in the second quarter of 2006, we agreed with the German tax authorities on the application of a provision of trade tax law regarding certain capital losses incurred in previous years. As a result of this agreement, we were able to release a provision for income taxes totaling EUR 0.4 billion.

In 2005, we recorded previously unrecognized deferred tax assets at T-Mobile USA resulting in an income tax benefit of EUR 2.2 billion. In addition, profit before income taxes in 2005 included capital gains on our sale of MTS shares, amounting to EUR 1.0 billion, only 5% of which was taxable. Furthermore, profit before income taxes was reduced by a goodwill impairment of EUR 1.9 billion, which we recognized in 2005, primarily relating to T-Mobile UK. Because the goodwill impairments were not deductible for income tax purposes and did not affect deferred income taxes, income tax expense was not reduced by the recognition of the impairment loss.

Net profit

In 2007, our net profit decreased to EUR 569 million from EUR 3,165 million in 2006, primarily as a result of the factors set forth above.

In 2006, our net profit decreased to EUR 3,165 million from EUR 5,589 million in 2005, primarily as a result of the factors set forth above.

 

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SEGMENT ANALYSIS

The following table presents total revenues (the sum of external (net) revenues and intersegment revenues), net revenues and intersegment revenues of our segments for the years indicated.

In November 2006, the IASB issued IFRS 8 “Operating Segments.” IFRS 8 replaces IAS 14 “Segment Reporting” and must be applied to reporting periods beginning on or after January 1, 2009. We have opted for early adoption of IFRS 8, beginning with the financial year ending on December 31, 2007. According to IFRS 8, reportable operating segments are identified based on a “management approach,” which requires review of the Group’s internal organizational and management structure and on internal financial reporting to the chief operating decision maker. As a consequence of our early adoption of this Standard and changes in our internal reporting and management channels, we have separated Mobile Communications into two operating segments—Mobile Communications Europe and Mobile Communications USA. The figures for previous periods have been adjusted accordingly. For more information please see note 39 to notes to the consolidated financial statements.

Additionally, since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the Business Customers and Group Headquarters and Shared Services operating segments. In previous periods these results were reported under the Broadband/Fixed Network operating segment. Prior-year figures have been adjusted accordingly.

 

    For the years ended December 31,  
    2007     2006     2005  
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
    Net
Revenues
  %   Inter-
Segment
Revenues
    Total
Revenues
 
    (millions of € except percentages)  

Mobile Comunications Europe

  20,000   32.0   713     20,713     17,700   28.8   755     18,455     16,673   28.0   945     17,618  

Mobile Comunications USA

  14,050   22.5   25     14,075     13,608   22.2   20     13,628     11,858   19.9   29     11,887  

Broadband/Fixed Network

  19,072   30.5   3,618     22,690     20,366   33.2   4,149     24,515     21,447   36.0   4,395     25,842  

Business Customers

  8,971   14.3   3,016     11,987     9,301   15.2   3,568     12,869     9,328   15.6   3,817     13,145  

Group Headquarters and Shared Services

  423   0.7   3,445     3,868     372   0.6   3,386     3,758     298   0.5   3,279     3,577  

Reconciliation

      (10,817 )   (10,817 )       (11,878 )   (11,878 )       (12,465 )   (12,465 )
                                                           

Total

  62,516   100.0       62,516     61,347   100.0       61,347     59,604   100.0       59,604  
                                                           

Mobile Communications

The following table presents selected financial information concerning Mobile Communications Europe:

 

     For the years ended December 31,
     2007     2006     2005     2007/2006     2006/2005
     (millions of €)     (% change)

Net revenues

   20,000     17,700     16,673     13.0     6.2

Inter-segment revenues

   (713 )   (755 )   (945 )   5.6     20.1

Total revenues

   20,713     18,455     17,618     12.2     4.8

Profit before income taxes

   2,131     2,433     2,249     (12.4 )   8.2

The following table presents selected financial information concerning Mobile Communications USA:

 

     For the years ended December 31,
     2007     2006     2005     2007/2006     2006/2005
     (millions of €)     (% change)

Net revenues

   14,050     13,608     11,858     3.2     14.8

Inter-segment revenues

   (25 )   (20 )   (29 )   (25.0 )   31.0

Total revenues

   14,075     13,628     11,887     3.3     14.6

Profit before income taxes

   1,683     1,410     1,273     19.4     10.8

 

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Net Revenues

Net revenues (which consist of revenues from customers outside of the Deutsche Telekom Group) from Mobile Communications Europe increased by EUR 2,300 million, or 13.0%, to EUR 20,000 million in 2007, from EUR 17,700 million in 2006. This increase was primarily attributable, to the first-time consolidation of PTC as of November 1, 2006 and Orange Nederland as of October 1, 2007, as well as continued customer growth in all markets. In 2006, net revenues from Mobile Communications Europe increased by EUR 1,027 million, or 6.2%, to EUR 17,700 million, from EUR 16,673 million in 2005. This increase was primarily attributable to continued growth in the number of customers, and to the first-time consolidation of tele.ring as of April 28, 2006 and PTC as of November 1, 2006.

Net revenues from Mobile Communications USA increased by EUR 442 million, or 3.2%, to EUR 14,050 million in 2007, from EUR 13,608 million in 2006. This increase was primarily attributable to continued customer growth. In 2006, net revenues from Mobile Communications USA increased by EUR 1,750 million, or 14.8%, to EUR 13,608 million, from EUR 11,858 million in 2005. This increase was primarily attributable to continued growth in the number of customers.

T-Mobile counts its customers by the number of SIM cards activated and not churned. The aggregate number of T-Mobile customers increased by 12.4% from 106.4 million at December 31, 2006 to 119.6 million at December 31, 2007 (including 5.3 million customers in 2006 and 5.2 million customers in 2007 from the Virgin Mobile MVNO). This increase in customers was mainly a result of the first-time consolidation of Orange Nederland, as well as, organic growth in the United States, the United Kingdom and Central and Eastern European countries. In Germany, the customer base grew organically and due to the change in churn policy. The aggregate number of T-Mobile customers increased by 22.9%, from 86.6 million in 2005 to 106.4 million (including 6.2 million in 2005 and 5.3 million in 2006 from the Virgin Mobile MVNO). This increase in customers was mainly a result of the first-time consolidation of PTC and strong customer growth in the United States, and to a lesser extent, customer growth in Europe and the first time consolidation of tele.ring.

Total Revenues

Total revenues include both net revenues from external customers and revenues from other entities within the Deutsche Telekom Group. The most significant component of Mobile Communications Europe’s inter- segment revenues relates to revenues received from the Broadband/Fixed Network operating segment for terminating calls on our mobile network in Germany that originate from T-Home’s fixed-line network in Germany. The most significant component of Mobile Communications USA’s inter-segment revenue relates to visitor revenues received from T-Mobile Deutschland and T-Mobile UK.

Total revenues are mainly comprised of service revenues. Service revenues are comprised of revenues generated by customers for services (i.e., voice services, including incoming and outgoing calls, and data services) plus roaming revenues, monthly charges, and revenues from visitor roaming.

Revenues from mobile termination fees are primarily generated in our operations outside of the United States. Reduced mobile termination fees, as agreed with or determined by the regulatory authorities, in Germany, the United Kingdom, the Czech Republic, as well as Hungary, The Netherlands, Austria and Slovakia, negatively affected total revenues in 2007. These decreased mobile termination fees will continue to have a negative impact on total revenues in 2008 and beyond. T-Mobile believes that mobile termination fees will further decrease in its markets in the future.

 

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The following table reflects the number of our mobile communications customers by subsidiary:

 

     As of December 31,  

Subsidiary

   2007    2006    2005    2007/2006(1)    2006/2005(1)  
     (millions)    (% change)  

Mobile Communications Europe

   90.9    81.4    64.9    11.7    25.4  

T-Mobile Deutschland(2)

   36.0    31.4    29.5    14.6    6.4  

T-Mobile UK(3)

   17.3    16.9    17.2    2.4    (1.7 )

T-Mobile Hungary

   4.9    4.4    4.2    11.4    4.8  

T-Mobile Netherlands(4)

   4.9    2.6    2.3    88.5    13.0  

T-Mobile Czech Republic

   5.3    5.0    4.6    6.0    8.7  

T-Mobile Austria(5)

   3.3    3.2    2.1    3.1    52.4  

T-Mobile Hrvatska (Croatia)

   2.4    2.2    1.9    9.1    15.8  

T-Mobile Slovensko (Slovakia)

   2.4    2.2    2.0    9.1    10.0  

PTC(6)

   13.0    12.2       6.6    n.a.  

Other(7)

   1.6    1.3    1.1    23.1    18.2  

Mobile Communications USA

T-Mobile USA

   28.7    25.0    21.7    14.8    15.2  
                    

Total(1)

   119.6    106.4    86.6    12.4    22.9  
                    

 

n.a.—not applicable
(1) Calculations of percentages and total numbers of customers have been based on actual figures.
(2) As a result of court proceedings against competitors, T-Mobile Deutschland changed its deactivation policy at the beginning of 2007 in favor of its prepay customers. These customers can now use their prepaid credit longer than before. Accordingly, in 2007 far fewer customers were deactivated. Most of the reported increase in customer numbers in 2007 is due to this change.
(3) Includes Virgin Mobile customers of 5.2 million in 2007, 5.3 million in 2006 and 6.2 million in 2005.
(4) Includes Orange Nederland customers of 2.2 million in 2007 (consolidated as of October 1, 2007).
(5) Includes tele.ring customers of 1.0 million in 2006 and 2007 (consolidated as of April 28, 2006).
(6) Fully consolidated as of November 1, 2006.
(7) Other includes T-Mobile Macedonia and T-Mobile Crna Gora (Montenegro). T-Mobile Crna Gora (Montenegro) was consolidated for the first time in the second quarter of 2005.

The figures in the table above represent the total numbers of contract and prepaid customers at year-end for the periods presented based on the number of activated SIM cards. The customer counting methodologies employed differ in some respects between national markets, so that the figures in the table above may not be directly comparable with one another. For more information relating to how we calculate our customer data, see “Item 4. Information on the Company—Description of Business—Mobile Communications.”

Our European markets are relatively mature and saturated with a very high rate of mobile telephone penetration. As a result, Mobile Communications Europe expects that the growth in the number of its customers in these markets will be significantly lower than in past years, and the focus of competition will continue to shift from customer acquisition to customer retention, and to stimulate demand for voice usage and new data products and services to offset expected industry price decreases.

Mobile Communications USA expects that the growth rate of customer numbers will decrease in the United States in the future because that market is also maturing.

 

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Total Revenues by Geographic Area

The following table reflects total revenues by geographic area:

 

     For the years ended December 31,  
     2007     2006     2005     2007/2006     2006/2005  
     (millions of €)     (% change)  

Mobile Communications Europe

   20,713     18,455     17,618     12.2     4.8  

Germany(1)

   7,993     8,215     8,621     (2.7 )   (4.7 )

United Kingdom(1)

   4,812     4,494     4,153     7.1     8.2  

Hungary(1)

   1,118     1,050     1,090     6.5     (3.7 )

The Netherlands(1)(6)

   1,318     1,138     1,064     15.8     7.0  

Czech Republic(1)

   1,171     1,043     938     12.3     11.2  

Austria(1)(2)

   1,182     1,149     885     2.9     29.8  

Croatia(1)

   581     556     512     4.5     8.6  

Slovakia(1)

   510     429     378     18.9     13.5  

Poland(1)(3)

   1,965     305         n.m.     n.a.  

Other(1)(4)

   236     198     174     19.2     13.8  

Intra-segment revenues Europe(5)

   (173 )   (122 )   (197 )   (41.8 )   38.1  

Mobile Communications USA(1)

   14,075     13,628     11,887     3.3     14.6  

 

n.a.—not applicable
n.m.—not meaningful
(1) These amounts relate to each mobile subsidiary’s respective, separate financial statements (single-entity financial statements adjusted for uniform group accounting policies and reporting currency), without taking into consideration consolidation effects at the operating segment level (which effects are included under “Intra-segment revenues” in the table) or at the Group level.
(2) Includes tele.ring fully consolidated as of April 28, 2006.
(3) Fully consolidated as of November 1, 2006.
(4) Other includes T-Mobile Macedonia and T-Mobile Crna Gora (Montenegro). T-Mobile Crna Gora (Montenegro) was consolidated for the first time in the second quarter of 2005.
(5) In addition to consolidation effects at the operating segment level, “Intra-segment revenues Europe” also includes revenues as defined under footnote (1) for the following subsidiaries: T-Mobile International UK (2007: EUR 64 million, 2006: EUR 66 million and 2005: EUR 83 million), T-Systems Traffic (2005: EUR 5 million) and Pro-M (2007: EUR 29 million, 2006: EUR 75 million; Pro-M was consolidated for the first time in the second quarter of 2006).
(6) Includes Orange Nederland fully consolidated as of October 1, 2007.

Mobile Communications Europe

 

     For the years ended December 31,
     2007    2006    2005    2007/2006    2006/2005
     (millions of €)    (% change)

Total revenues

   20,713    18,455    17,618    12.2    4.8

less Terminal equipment

   985    962    1,188    2.4    19.0

less Other

   806    749    657    7.6    14.0
                    

Service revenues

   18,922    16,744    15,773    13.0    6.2
                    

Total revenues for Mobile Communications Europe increased by EUR 2,258 million in 2007, or 12.2%, compared to 2006. This increase was primarily attributable to an increase in service revenues due to the first time consolidation of PTC as of November 1, 2006 and Orange Nederland as of October 1, 2007, as well as continued customer growth.

Total revenues for Mobile Communications Europe increased by EUR 837 million in 2006, or 4.8%, compared to 2005. This increase was attributable to continued customer growth, as well as the first time consolidation of tele.ring as of April 28, 2006 and PTC as of November 1, 2006.

 

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Germany

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006     2006/2005  
     (millions of €)    (% change)  

Total revenues

   7,993    8,215    8,621    (2.7 )   (4.7 )

less Terminal equipment

   457    423    564    8.0     (25.0 )

less Other

   380    357    300    6.4     19.0  
                   

Service revenues

   7,156    7,435    7,757    (3.8 )   (4.2 )
                   

Total revenues in Germany declined by EUR 222 million in 2007, or 2.7%, compared to 2006. This decline was primarily attributable to a decrease in service revenues, which was partially offset by an increase in terminal equipment revenues and other revenues. In 2006, total revenues declined by EUR 406 million, or 4.7%, compared to 2005. This decline was primarily attributable to reductions in service revenues and revenues from sales of terminal equipment, which was partially offset by an increase in other revenues.

Service revenues decreased by EUR 279 million, or 3.8%, to EUR 7,156 million in 2007, compared to EUR 7,435 million in 2006. This decrease was primarily attributable to lower voice revenues primarily as a result of lower prices due to competitive pressures and regulation of mobile termination fees. In 2006, service revenues decreased by EUR 322 million, or 4.2%, to EUR 7,435 million, compared to EUR 7,757 million in 2005. This decrease was primarily attributable to lower voice revenues primarily having resulted from lower prices due to competitive pressures.

Revenues from sales of terminal equipment increased by EUR 34 million, to EUR 457 million in 2007, compared to EUR 423 million in 2006, due to the higher number of terminal equipment devices sold. Revenues from sales of terminal equipment decreased by EUR 141 million, to EUR 423 million in 2006, compared to EUR 564 million in 2005, due to the sale of lower value terminal equipment and reduced costs from suppliers, which were passed on to customers, and higher discounts granted as part of customer acquisition and retention efforts.

Other revenues mainly consist of MVNO revenues, activation revenues and disconnection fees. MVNO revenues reflect revenues from the national roaming agreement with O2, which are generated by O2 traffic being routed through T-Mobile Deutschland’s network. MVNO revenues accounted for 68% of total other revenues in 2007, compared to 79% in 2006 and 85% in 2005.

Other revenues increased by EUR 23 million, to EUR 380 million in 2007, compared to 2006. In 2006, other revenues increased by EUR 57 million, to EUR 357 million, compared to 2005 primarily as a result of higher MVNO revenues due to higher voice usage of O2 customers being routed through T-Mobile Deutschland’s network.

United Kingdom

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006     2006/2005  
     (millions of €)    (% change)  

Total revenues

   4,812    4,494    4,153    7.1     8.2  

less Terminal equipment

   225    289    384    (22.1 )   (24.7 )

less Other

   237    223    231    6.3     (3.5 )
                   

Service revenues

   4,350    3,982    3,538    9.2     12.5  
                   

Total revenues in the United Kingdom increased by EUR 318 million, or 7.1%, to EUR 4,812 million in 2007, from EUR 4,494 million in 2006. This increase was predominantly due to an increase in service revenues and other revenues, which was partly offset by lower terminal equipment revenues. The development of the British pound and the euro resulted in a negative currency translation effect. In 2006, total revenues increased by EUR 341 million, or 8.2%, to EUR 4,494 million, from EUR 4,153 million in 2005, due to an increase in service revenues, which was partly offset by lower terminal equipment revenues and other revenues.

 

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Service revenues increased by EUR 368 million, or 9.2%, to EUR 4,350 million in 2007, compared to EUR 3,982 million in 2006. This increase was mainly the result of an increased usage and a higher percentage of contract customers in the overall average customer base. Service revenues increased by EUR 444 million, or 12.5%, to EUR 3,982 million in 2006, compared to EUR 3,538 million in 2005. This increase was mainly a result of growth in the T-Mobile UK average customer base (excluding Virgin Mobile) due to increased customer acquisition efforts in 2006.

Revenues from sales of terminal equipment decreased in 2007, compared to 2006, mainly due to higher handset subsidies as a result of increased competitive pressures. Revenues from sales of terminal equipment decreased in 2006, compared to 2005, mainly due to higher sales discounts and reduced average prices of mobile devices.

Other revenues increased by EUR 14 million, to EUR 237 million in 2007, compared to EUR 223 million in 2006. In 2006, total other revenues decreased by EUR 8 million, to EUR 223 million, compared to EUR 231 million in 2005 due to lower activation and disconnection fees.

Poland

 

     For the years ended December 31,
         2007        2006(1)    2005
     (millions of €)

Total revenues

   1,965    305   

less Terminal equipment

   48    9   

less Other

   28    3   
              

Service revenues

   1,889    293   
              

 

n.a.—not applicable
n.m.—not meaningful
(1) Fully consolidated since November 1, 2006.

PTC was consolidated as of November 1, 2006. Total revenues contributed by PTC during 2007 amounted to EUR 1,965 million, of which service revenues amounted to EUR 1,889 million. Comparison with 2006 is not meaningful due to the first-time consolidation as of November 1, 2006.

Hungary

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006     2006/2005  
     (millions of €)    (% change)  

Total revenues

   1,118    1,050    1,090    6.5     (3.7 )

less Terminal equipment

   81    82    82    (1.2 )   0.0  

less Other

   33    23    26    43.5     (11.5 )
                   

Service revenues

   1,004    945    982    6.2     (3.8 )
                   

Total revenues in Hungary increased by EUR 68 million, or 6.5%, to EUR 1,118 million in 2007, compared to EUR 1,050 million in 2006. In local currency, total revenues also increased. The development between the Hungarian forint and the euro resulted in a positive currency translation effect. The increase in total revenues in local currency was mainly related to an increase in service revenues, primarily as a result of an increased average contract customer base. Total revenues decreased by EUR 40 million, or 3.7%, to EUR 1,050 million in 2006, compared to EUR 1,090 million in 2005. The development between the Hungarian forint and the euro resulted in a negative currency translation effect. In local currency, total revenues increased. The increase in total revenues in local currency was mainly related to an increase in service revenues.

Service revenues increased by EUR 59 million to EUR 1,004 million in 2007. In local currency, service revenues also increased. The development between the Hungarian forint and the euro had a positive currency translation effect. The increase in service revenues in local currency was mainly a result of increased usage and

 

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an increased average contract customer base, which tend to generate higher service revenues than prepay customers. Service revenues decreased by EUR 37 million, to EUR 945 million in 2006, from EUR 982 million in 2005. In local currency, service revenues increased. The development between the Hungarian forint and the euro resulted in a negative currency translation effect. The increase in service revenues in local currency was mainly related to increased usage and an increased average contract customer base, who tend to generate higher service revenues than prepay customers.

Revenues from sales of terminal equipment decreased by EUR 1 million, to EUR 81 million in 2007, compared to EUR 82 million in 2006, primarily due to handset subsidies. Revenues from sales of terminal equipment remained constant at EUR 82 million in 2006 as in 2005.

The Netherlands

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006    2006/2005  
     (millions of €)    (% change)  

Total revenues

   1,318    1,138    1,064    15.8    7.0  

less Terminal equipment

   53    47    37    12.8    27.0  

less Other

   42    15    35    n.m.    (57.1 )
                    

Service revenues

   1,223    1,076    992    13.7    8.5  
                    

 

n.m.—not meaningful

Total revenues in The Netherlands increased by EUR 180 million, or 15.8%, to EUR 1,318 million in 2007, compared to EUR 1,138 million in 2006. The first time consolidation of Orange Nederland as of October 1, 2007 contributed EUR 167 million to this increase in revenues. Excluding internal revenues between Orange Nederland and T-Mobile Netherlands, the net contribution of Orange Nederland was EUR 147 million. Total revenues in The Netherlands increased by EUR 74 million, or 7.0%, to EUR 1,138 million in 2006, compared to EUR 1,064 million in 2005. The increase in total revenues was mainly related to an increase in service revenues and terminal equipment revenues, partly offset by decreases in total other revenues.

Service revenues increased by EUR 147 million, to EUR 1,223 million in 2007, compared to EUR 1,076 million in 2006. The first time consolidation of Orange Nederland contributed EUR 151 million in 2007. Excluding Orange Nederland, T-Mobile Netherlands’ service revenues declined slightly as a result of lower contract usage and a lower share of contract customers in the overall average customer base. Service revenues increased by EUR 84 million, to EUR 1,076 million in 2006, compared to EUR 992 million in 2005, primarily due to a higher proportion of contract customers in the average customer base, who tend to generate higher service revenues than prepay customers.

Revenues from sales of terminal equipment increased by EUR 6 million, to EUR 53 million in 2007, compared to EUR 47 million in 2006.

Other revenues mainly consist of revenues from MVNOs. Other revenues increased by EUR 27 million, or 180.0%, to EUR 42 million in 2007, compared to EUR 15 million in 2006, primarily due to an increase in MVNO revenues as a result of calls from Lycamobile customers being routed through the T-Mobile Netherlands network. In 2006, total other revenues decreased by EUR 20 million, or 57.1%, to EUR 15 million in 2006, compared to EUR 35 million in 2005, primarily due to a decrease in other operating revenues.

Czech Republic

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006     2006/2005  
     (millions of €)    (% change)  

Total revenues

   1,171    1,043    938    12.3     11.2  

less Terminal equipment

   49    43    52    14.0     (17.3 )

less Other

   6    9    18    (33.3 )   (50.0 )
                   

Service revenues

   1,116    991    868    12.6     14.2  
                   

 

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Total revenues in the Czech Republic increased by EUR 128 million, or 12.3%, to EUR 1,171 million in 2007, compared to EUR 1,043 million in 2006. In local currency, total revenues also increased. The development of the Czech koruna and the euro had a positive currency translation effect. The increase in total revenues was mainly related to increased service revenues, as a result of having a larger average customer base and positive currency translation effects. Total revenues increased by EUR 105 million, or 11.2%, to EUR 1,043 million in 2006, compared to EUR 938 million in 2005. The increase in total revenues was mainly related to an increase in service revenues, as a result of having a larger average customer base and positive currency translation effects.

Service revenues increased by EUR 125 million in 2007, to EUR 1,116 million. This increase was mainly a result of a larger average customer base and a higher share of contract customers in the overall average customer base. In 2006, service revenues increased by EUR 123 million, to EUR 991 million, from EUR 868 million in 2005. This increase was mainly due to a larger average customer base, which was partly offset by lower visitor roaming revenues.

Austria

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006    2006/2005  
     (millions of €)    (% change)  

Total revenues

   1,182    1,149    885    2.9    29.8  

less Terminal equipment

   26    22    29    18.2    (24.1 )

less Other

   45    37    22    21.6    68.2  
                    

Service revenues

   1,111    1,090    834    1.9    30.7  
                    

Total revenues in Austria increased by EUR 33 million in 2007, or 2.9%, to EUR 1,182 million, from EUR 1,149 million in 2006. This increase was due to the first full-year consolidation of tele.ring, which was consolidated as of April 28, 2006. In 2006, total revenues increased by EUR 264 million, or 29.8%, to EUR 1,149 million, from EUR 885 million in 2005. This increase was primarily due to the partial-year consolidation of tele.ring as of April 28, 2006, which contributed EUR 310 million to total revenues.

Service revenues increased by EUR 21 million in 2007, to EUR 1,111 million. This increase was due to the first full-year consolidation of tele.ring. The increase was partially offset by lower prices resulting from intense competition. In 2006, service revenues increased by EUR 256 million, to EUR 1,090 million. This increase was due to the partial-year consolidation of tele.ring, which contributed EUR 277 million to service revenues. This increase was partially offset by lower prices resulting from intense competition.

Revenues from sales of terminal equipment increased by EUR 4 million in 2007, from EUR 22 million in 2006 to EUR 26 million in 2007, primarily due to the full-year consolidation of tele.ring. In 2006, revenues from sales of terminal equipment decreased by EUR 7 million, to EUR 22 million, compared to 2005, due to higher mobile device subsidies.

Other revenues, primarily consisting of revenues from non-mobile services, activation fees and other operating revenues, increased by EUR 8 million in 2007, or 21.6%, to EUR 45 million, from EUR 37 million in 2006. In 2006, other revenues increased by EUR 15 million, or 68,2%, to EUR 37 million, from EUR 22 million in 2005.

Croatia

 

     For the years ended December 31,  
     2007    2006    2005    2007/2006     2006/2005  
     (millions of €)    (% change)  

Total revenues

   581    556    512    4.5     8.6  

less Terminal equipment

   27    28    25    (3.6 )   12.0  

less Other

   13    10    12    30.0     (16.7 )
                   

Service revenues

   541    518    475    4.4