1&1 AG
XETRA:1U1
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1&1 AG
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[Interpreted] I'm delighted to welcome you here today. I'm not going to start with disclaimers. I immediately would like to pass the floor to Mr. Dommermuth, our CEO.
[Interpreted] Yes. Thank you very much, and good day. Ladies, and gentlemen, My colleague, Mr. Huhn, our CFO and myself, have shared or have split up the presentation. I would like to give you a short presentation on our network expansion, and then Mr. Huhn will give you the figures for 2020 and the forecast for this year. So let's start with 5G. On Page 4, you'll see an overview where we currently are in 2019, we were able to receive some frequencies. We then also didn't just auction, win some frequencies in the auctions, but also rented some, which are available from 2.6-gigahertz. While the acquisition for 3.6-gigahertz and 2.6-gigahertz. In addition, we've been able to make progress in our negotiations with Telefónica, and we're going to have a contract with Telefónica next year. In parallel, we've got lots of talks with potential network providers, and we've got some negotiations which we'd like to complete next year. In parallel, our sister company, 1&1 Versatel, is working on expanding the fiber optic network. Our objective is to connect the 1&1 Versatel fiber optic network with our antenna and to have the best possible connectivity. On the next page, you see a very, very rough overview of the architecture that we're planning. On the left-hand side, you see the traditional architecture for mobile networks. And on the right-hand side, you see the Open RAN that we're planning. The advantage of Open RAN is that we can use -- we can make use of different vendors. They are standardized interfaces which are compatible. You can see this in this graphic -- in this diagram. You see 2 different colors. These antenna aren't very entirely intelligent, so there is no -- well, there is no big switch board next to them as it were, but the antenna hooks up to so-called Edge data centers and only in this Edge data center will the -- can the signals be calculated into IP signal. This is done using standard hardware. And then we've got Far Edge data centers and Edge Data centers depending on how far they are away from the antenna. And then at the center of the network, figuratively, we've got the core system. As you can see, as I just mentioned, we're using standard computers. This is cheaper in purchasing an acquisition, also in maintenance. The applications are virtualized on the different computers and can be used in different places on a different computers. And due to this, and thanks to this interoperability, we're also hoping for an Edge innovation because then we can enter some and put some specialized knowledge into this network. On the next page, you can see an overview of the national roaming offer that we accepted today. Telefónica made an improved offer to us last week after the European Union -- the EU Commission had provided its assessment. The national roaming is going to go from the June (sic) [ July ] 1, 2020, to the July (sic) [ June ] 1 (sic) [ 30 ] , 2025. There are prolongation options, which are going to be predefined even now. There's a second extension option for up to 5 years, which will be done -- can be done at nondiscriminatory prices and that there are going to be good phase negotiations for this. The contract is going to start in the 1st of -- the contract began on the July 1, 2020, which is in the past, so the prices will be -- in fact, will become active retroactively. Currently, we have an MBA MVNO contract and relationship with Telefónica, which is why the prices are also valid for the MBA MVNO relationship that we have. The logic is similar to the one that we had in the first 5 years of the MBA MVNO contract. So we've got data prices and decrease discounts and rebates. So as MBA MVNO, we've got all the technology, including 5G. Once we've -- we are operating our own 5G network, the network will include 2G, 3G, 4G and 5G, and we've got the right for price reviews, so prices can be reviewed once a year. Our second job -- subject is VDSL and FTTH. Here, we signed 2 contracts this morning, one with our sister company, 1&1 Versatel, and 1&1 Versatel signed a contract with Deutsche Telekom. What's it about? In the future, we're going to have a full comprehensive and holistic solutions from 1&1 Versatel and 1&1 Versatel even today has a very broad coverage with VDSL and with FTTH, which is made available in starting networks. And this coverage is now being expanded by FTTH connections by Deutsche Telekom. Deutsche Telekom is making well over 750,000 household connections, to be increased by 2 million per year in the future. Next to FTTH. We've got city networks. We've got VDSL from city networks. We're going to use VDSL wherever there is no FTTH and our marketing network -- our marketing focus is going to be FTTH starting now or going forward. The networks by Versatel and Telekom is going to be connected by the transfer network by 1&1 Versatel. We've got hundreds of connection points and transfer points, so that 1&1 Versatel allows us to have complete holistic packages, including everything that is needed. On the next page, you can see some information on the corporation. It's going to run for 10 years from the 1st of April onwards. We believe that the terms and conditions are secure and attractive. We agreed with Deutsche Telekom to end an existing contingent contract that we had, and 1&1 Versatel already had such a contingent contract, which said that you could use this for 3 years. We're going to write off -- we're going to write this off for EUR 130 million. So this write-off is not cash effective, and it's going to be balanced off by positive effects from the corporation with 1&1 Versatel and Deutsche Telekom, not just evened off and not just balanced off, but exceeded. And the last piece of information, this agreement with Deutsche Telekom is subject to the approval by the Federal Network Agency, even though the Federal Network Agency was involved in the negotiations, they have reserved the right to approve this and to examine this finally. So this on national roaming, on the new corporation with 1&1 Versatel and Deutsche Telekom. And I now pass the floor to Mr. Huhn for the figures.
[Interpreted] All right. So hello and good day on my part as well. Let's start with Page 11 with the customer contracts. You can see that we ended 2020 with 14.83 million customer contracts, of which they were 10.52 million mobile Internet contracts and 4.31 million broadband lines that is landline. This is an increase of 500,000 customers from the last business year, as we predicted. 530,000 in mobile Internet and a loss of -- decrease from 30,000 in broadband, so for a total of 500,000. Now on the next page, you see the revenue. Total revenue last year of EUR 3,786.8 million, which is an increase of some 3%, which is comprised of service revenue of EUR 3,020 million, an increase of 2.6% over the past year. And this includes some coronavirus -- corona situation effects. If these eliminated, the growth would have been 3.4 million -- percent. The other 4.8% is this other revenue, an increase of 4.8% revenue over the past year, mostly low-margin hardware business. On the next page, you can see the preliminary EBITDA for last year of EUR 468.1 million, which is a decrease of some EUR 215 million. And you will see the reasons for this on the next page, namely on Page 14. This is EBITDA by segments. On the top left, the Access segment, which has a result of EUR 689.2 million down to EUR 482.0 million. This includes special facturation. So you have 30 -- EUR 482 million one-off of the unused VDSL contingent which Mr. Dommermuth already mentioned. EUR 34.4 million are overcharges -- overcharge Telefónica wholesale billing, which is the price adaptation retroactive. As per the July 2020, this is not going to be on the balance sheet for 2020, but this is going to be on the balance sheet for 2021 outside of the actual period in which they occurred. We also have effects from changed users' behavior due to the coronavirus pandemic and some regulators decisions which led to EUR 8.2 million increased expenditures due to increased regulation costs and EUR 5.5 million due to the regulation of SMS costs. On the bottom left, you see EBITDA for the 5G segment. Here, the expenditure was EUR 13.9 million after it had been EUR 5.7 million in the previous year. This now brings me to the outlook for 2021 and beyond. So on Page 16, you see all the positions that I would like to point out, namely service revenue. We're expecting a revenue of some EUR 3.1 billion after we've had some EUR 3.02 billion in the previous year. We are planning for an EBITDA of EUR 650 million after we had EUR 468 million, which is influenced by the EUR 200 million special facturation. This also includes EUR 55 million effects first of all, due to the cost for the 5G, that -- the initial cost for the 5G network and also a changed user behavior and we also are assuming users' behavior as similar to the previous year due to the coronavirus pandemic, which would burden us by EUR 25 million. This forecast does not include the EUR 34.4 billion -- EUR 34.4 million positive effects due to the positive effects from the MBA MVNO effect, because they are going to be booked in 2021, not in 2020, but they are -- they're not included in the EUR 650 million above. On Page 15, we've got the outlook by segment. First of all, the Access segment with a result forecast of -- EUR 689.2 million, including EUR 30 (sic) [ 25 ] million for coronavirus effects and EUR 25 (sic) [ 30 ] million that we would like to invest in branding -- in our branding budget. For 2021, the EUR 698 million is EBITDA. If you add the corona effects and the additional investments for branding of EUR 30 million, this brings us to an adjusted EBITDA of EUR 735 million. And compared to the year 2020 with EUR 482 million, here, on the one hand, we've got the EUR 34.2 million on MBA MVNO price correction that was corrected. The EUR 130 million one-off due to the unused VDSL contingent, the coronavirus pandemic effects of EUR 35.2 million, and in 2020, you also had some EUR 10 million higher investments that we had in branding, which leads to an adjusted EBITDA of EUR 681.6 million. So here, this shows you that the operating result in 2021 was some 7 -- planning some 7.8%, an increase in 2021. In the bottom diagram, you see, we're looking at prognosticating the 5G segment, we're expecting initial costs from EUR 30 million after EUR 13.9 million in 2020. And now I pass the floor back to Mr. Keil for the question-and-answer session.
[Interpreted] Thank you very much, operator?
[Operator Instructions] Our first question comes from Christian Fangmann, HSBC.
[Interpreted] I've got two. One is about guidance. The guidance, if you implicate that, the ramp-up costs of EUR 30 million are included in several other increased costs. It's rather impressive that we have here a figure of more than EUR 700 million or about EUR 700 million of guidance. What's important for me to know is what about branding? What is behind the branding and is there other sales or marketing costs included in the guidance? That's the one question. And regarding the guidance again, the EUR 30 million cost of 5G, that's OpEx as far as I understood it. But could you tell me something about CapEx -- any CapEx expenditure for 2021? Do you actually stipulate some of them or foresee some of them? Or will that come later? Second question, maybe to Mr. Dommermuth, your strategy into the future. What are the next steps from here? You mentioned in the presentation that in the second quarter, you want to have contracts with the vendors. But what can we expect now or for the next few weeks or months, so we have an idea of what is coming next?
[Interpreted] Yes. Thank you. Let me start with the next steps. We wanted to have a contract with Telefónica subscribed by mid of May. I hope it will work. If it were up to me, I would have it earlier and Telefónica would probably say the same. So we'll see whether we can do it earlier. But we'll do everything we can to get it quickly off the table because now the most important points were negotiated, more or less sufficiently because we've been dealing with this since 2018 already. So I assume it should be possible to do it now in not too long time. In parallel, we are in discussions with so-called tower cos. Because in the aerial sense, we will not do acquisitions ourselves, but we will use 1 or 2 partners as contractors, have contracts with them and then rent the locations for the coverage that we need for a test price -- for fixed price per location, that's the goal. And renting sites, and if it's on a roof, for instance, if you then negotiate with the landlord or maybe tower co will have a location there and can use the aerial that they have also -- the aerial carrier for our aerial too. That's a matter for tower co and also the construction of the carrier for aerials and the wiring in the house, that's also up to them. And then we would then come with -- in with a 1&1 Versatel because their core business is to bring optic fiber connections to companies and to connect it to mass and to areas that's part of our core business, of course. Then, in parallel, we have to decide where to get the software and hardware from. Would that be one vendor, who will deliver everything out of one hand? Or will we rather use the Open RAN options? And we'll have several vendors, so we're going to think about that. Then of course, we have already had negotiations for office, but we will sign it only right in the end so that we get the state-of-the-art technology at the very best price. And in the second quarter, this should happen, as I said, but I cannot tell you more about this. Maybe one more sentence with regard to the branding budget. Last year, for the first time, we did some sports sponsoring. Usually, our advertising campaigns always have as a target to transfer and transport the product benefit and also the price benefit. And this is for the first time that we only generate kind of reach for the 1&1 logo, and we connect a logo with the values that -- that are attributed to sports because we're sponsoring the football team of Dortmund BVB and that is the values they represent. So last year, we made available EUR 10 million for this budget in total. We started in summer and now we are in the year 2021. That's one complete year. And then will have another closure in the field of sports sponsoring. Again, with the idea to actually load up our brand and strengthen our brand with that or load up our logo and then strengthen our brand. But these are funds that we could do without, if necessary. This is why we put it into this, but because those were new budgets, which we didn't have before 2020, that's one reason. And the other reason might be that if necessary, this is a kind of math that we would actually think about. But now we want to build the network, it needs to be used, of course. And for this, we need a certain strong brand or even several brands, and this is why we decided to do that. Maybe there was another -- I think there was another question about 5G. Yes, the EUR 30 million are ramp-up costs. That's a pure OpEx position, that's right. Regarding CapEx, at the earliest in the course of the second quarter, when we have finalized the contract of the vendors, we can give you concrete information.
[Interpreted] Maybe 1 reply to Mr. Dommermuth, the branding cost, the EUR 29 million. Is that only the Borussia Dortmund thing? Or is that something else, too, just for clarification?
[Interpreted] The EUR 30 million include a small budget, not to do with Borussia Dortmund, but I can't tell you how much that is because, of course, we need to keep the contract confidential. But I think we will be able to tell a little bit more about that in a few weeks' time.
Our next question comes from Ulrich Rathe, Jefferies.
[Interpreted] Ulrich Rathe from Jefferies. I've got 3 short questions. First thing is, as far as I understood it, there's a period here where the national roaming will be in parallel with the MVNO, right? If I understood it correctly, the commercial conditions are the same, but in the MVNO, you've got -- does have that in connection with the 5G network with Telefónica and national roaming? Can you tell me what that concretely means? Will you probably lose the access to MBA MVNO quickly in 2022 and '23? Or will that be a slow fade out so to speak? And the second question is the EUR 130 million of write-off are not cash effective, as I understood. But these are some contingents which you paid in cash some time ago. If you don't use them anymore the conditions that you got from Telekom for 1&1 Versatel should become much better. Could you maybe highlight that a little bit why it's worth EUR 130 million to have this business run through Versatel? And my third and last question is, well, initially, you just roughly explained what the network could look like. It was about 2,000 aerials and CapEx per year. You gave some rough details there. Is that totally different today? Because by Open RAN and the negotiations, things have totally changed? Or are these kind of older indications still a good framework you could think about?
[Interpreted] Well, let me start at the end. With regard to the planned locations or sites per year, I can't tell you anything concrete. And by Open RAN, of course, we will not have less aerials. All our aerials will be operated at 3.6-gigahertz. So with all these aerials, we will achieve speeds of 1-gigabit, of course, not at the edges of the cell, but in the center of the cell. And by the technological progress, we can save some aerials because now we've got more high-performance aerials. The next-generation is like that, but basically, our plans have changed. Then you asked about this parallel operation of the MBA MVNO and the national roaming. There will not be any parallel operation. There will be 1 day where we will switch on national roaming. And from that moment on, in the MVNO, we will not put any new customers in the MVNO contract. The existing customers will stay in that contract, then they will be transferred, and that will be kind of longer process. And that's because we've got, in the end, more than 10 million customers that come from the MBA MVNO contract and also from other advanced performance contracts and even if the growers stay in the MBA MVNO contract. So during this transfer period, the existing customers will come slowly out of the MBA MVNO and will get into national roaming, but there won't be any new customers in the MBA MVNO contract. The new customers will all go into national roaming. And at the start of national roaming, we will have a certain number of 5G aerials. And that's our strategy that at the start, in particular, in urban areas, we will have a certain number of aerials because it doesn't make sense to start if you've got only 1 antenna aerial. And then with 5G, and that's real 5G, true 5G and not an update from a 4G aerial. It's a real 5G that you can offer there. And where we don't have 5G, we can offer 4G. Although today, when you look at the office of 5G in Germany, then, as a rule, it's not faster than 4G. Regarding the EUR 130 million write-off of the prepaid expenses, it's, of course, true that these expenses will not again be incurred in the next years. But the new contract is not directly comparable to the old contract. So under the new contract, we will buy new contingents, which will then lead to prepaid expenses and expenses anyway. As a result, you can imagine it will be like this. In the next years, we will be on the margin level of the current year or the year 2020 rather, and the positive effects will then be incurred in the course of the next few years.
[Interpreted] Yes. I've got one question regarding the data traffic and the cost savings. So if 30% is moving from O2 to you, does that mean that cost will decrease by 30%? Or is rural data a bit more expensive? And then the service revenues and the guidance, could you take us a little bit into the new contracts, the net number of new and the number of retail roaming, what are your expectations here?
[Interpreted] Yes. Regarding the cost of the data traffic, I cannot tell you because it is confidential under the contract. We said that the cost structure is in line with the MBA MVNO, and there was no distinction between gigabytes, whether the gigabyte was rural or urban. As everybody who builds new network, we are starting in the cities because they've got the best effects, the largest number of -- the highest population per network basically. And we're only -- new network is going to be or new frequencies are going to be added to the market -- new frequencies are going to be added to the market in 2026 and going to be handed out in 2024, which is when the rural areas will be okay to fit with this. So we're now going to focus on the cities, and we -- everything else is -- while, we have to purchase this with Telefónica. Not at once, not at all in one go, but every new antenna is going to generate new capacities and this less capacity that we're going to have to rent to get elsewhere. And our network needs to be utilized with dimensioning our network, not in such a way that we can only provide traffic to today's customers, but we are building our networks that can transport a much higher amount of data. So this is going to be our job for the next years to create the network in a sensible manner, to utilize it correctly and then to increase it -- increase our own data over the years. Customer growth is also important, of course. We're expecting customer growth for 2021. We would like to see this similar to the past business here, but we've also got effects in our existing customers, which lead to an increase, for instance, in landline, when customers move from ADSL to VDSL, where we also see increases, which, of course, are positive for service revenue, but the main effect comes from the actual -- from, yes, from the increased number of customers.
[Interpreted] If I may ask one other question, if I may. Regarding the price reviews in the national roaming contract. Is this on the same basis as the existing price reviews? Or are there any clauses that are different?
[Interpreted] Well, at the end of the day, I think it's the same. What we would like to agree on with Telefónica is streamlining the processes. Currently, the process take very long. This is supposed to be streamlined. We have some ideas, but the prices itself will not change.
And our next question is by Martin Jungfleisch from Kepler Cheuvreux Group.
[Interpreted] Yes, I've got a few questions, if I may. First of all, you said that the passive infrastructure is to be gained through towers and are you planning to build towers yourself, antennas yourself, for instance, on rooftops? Or are you building -- intending to build them yourselves? Or are you -- do you also want to rent them? And would there be an opportunity to rent active ones as well not just passive ones? And the national roaming contract is up to a maximum of 2034, correct? Does that mean that 2034 is the earliest when you're expecting full network coverage? Or could this be earlier? And the roaming contract is to be finalized by May. What do you think about the opportunities to include the elements that are still outstanding into this contract?
[Interpreted] Mr. Jungfleisch, thank you very much. Well, the outstanding price reviews don't have to be included in this. I believe because we've agreed that the price reviews will only be effective until the 30th of June 2020 because from the 1st of July 2020, the new prices are in effect that we just agreed on. So the new contract trumps the outcome of any price review that would have come before or would come afterwards. As regards the end date of the roaming contract, yes, it could run until 2034, but it doesn't have to. The second prolongation option is up to 5 years. So we could also choose a shorter time, if we like. I cannot tell you today when our country-wide network is going to be up and running or whether we're actually going to be building a country-wide country or whether we might decide to cover existing antennas from partners where it would make sense to build our own antennas, for instance, in rural areas as we're doing it today where Telekom and then Telefónica, for instance, are using thousands of antennas jointly. As regards to active equipment, yes, you can rent or lease active equipment. We have been looking at this too, but this is not our plan at the moment. Currently, we're thinking about buying the active equipment. And as regards to passive infrastructure, we are on the opposite path, we'd like to rent this as much of it as possible. We don't want to have our own -- purchase our own antenna locations or build them. We would like to use them in a turnkey fashion, which is a benefit for us, which is good for us because we don't have to build our own capacities in order to acquire locations, get the -- acquire the necessary approvals, build the antenna, build the radio towers and so on and so forth. It has developed in such a way that the German markets -- well, international companies are active in the German market or would like to enter the German market. And so we believe that it would make sense for us to have this done by experts who know how to do this and their synergies. If you work -- if you cooperate with a power -- tower crew, it's easier to use this antenna with different companies and if you negotiate -- do the negotiations right, then you have a price advantage.
[Operator Instructions] There are no further German questions. So we're going to continue with the English question. So one moment while we're switching over to the English channel. The first question comes from Maurice Patrick, Barclays.
This is Maurice from Barclays. I apologize if there's some repetition here. I didn't really understand any of the answers on the translation from the previous questions. Can you just talk a bit more about the plans for the rollout? Did you talk about definitely using Open RAN? I wasn't quite sure. Rakuten talks about 30% to 40% savings. Is that what you see? Do you intend purely using third-party independent tower cos? Or is it -- do you have any plans to maintain your own? And about wholesale costs, should we see 2020 as the sort of the peak of wholesale costs as they start falling from here?
[Interpreted] Okay. So let's begin with Open RAN. We do see cost savings here with regard to production and maintenance, I cannot tell you whether that's going to be 30% or 40%. Rakuten has a lots more experience than we do. As regards the kind of locations, well, we would like to do this 100% using tower co. So we will not acquire our own locations or expand our own locations. We are going to -- we'll rent out the sites, including the wiring. Regarding the wholesale costs -- sorry, I was not able to interpret for a minute here because there was an interruption. So continuing here. It wasn't a peak, but the cost is going to develop in line with our customer generation. As regards the price per gigabit, last year was a higher price than what we're expecting for next year and the effects for national roaming are definitely going to have a positive impact on the wholesale cost from this year onwards.
Your question answered, sir?
I didn't really understand it, but maybe on that, we can catch up after the call is probably easier.
Our next question comes from Andrew Lee, Goldman Sachs.
I had a couple of questions. Firstly, on just the cost trends that you have seen in kind of network investments. So you laid out an interesting network architecture and you also laid out ongoing negotiations with tower cos. Do you -- does your understanding of the cost to roll out the network? Has that cost come down over the last year, given the network architecture advancements that you're making and given the negotiations you're having with tower cos today and potentially the different ownership for those tower cos? So that's question one. The second question, apologies, maybe I didn't fully understand the time lines that you laid out as well. So can you just clarify the decisions -- are your decisions going to be on the tower operators and the software and hardware vendors that you're going to use by the end of Q2? Or is it just the software and hardware vendors that you'll decide by the end of Q2? And when do you expect to be able to give us more detail on the cost and time line of the rollout? Is that at Q2 results? That would be helpful. And just finally on that time line. Are you anticipating starting physical rollout this year? Or is that a 2022 thing?
[Interpreted] Yes. Okay. Let's begin with the cost. In the past few years, we had the feeling that costs were -- did come down a bit, but it's not a huge disruption, but technical progress allowed us to reduce the number of technical -- well, towers in our planning that reduced costs for one and the possibility to use Open RAN and use tower cos, this also offers cost savings. As regards the conclusion of the negotiations, we're planning to close them in Q2, both with the tower cos and the hardware and software vendors. And the details for CapEx and rollout plans for 5G will only be finalized during Q2. So I think it's rather going to be June because we're going to -- it's going to take until then to have all these details. The start of the rollout will happen by the middle of this year.
Our next question comes from [ Evan ] Tang, UBS.
It's Polo Tang from UBS here. Just have a few different questions. The first one is, you're previously obligated to take 20% of the utilized capacity on the Telefónica Deutschland network. But can you clarify if you're reducing the capacity that you're taking in 2021? And going forward, can you clarify if you have a minimum volume commitment with Telefónica Deutschland? For example, you don't have any low-band spectrum. So I'm presuming that you'll still utilize Telefónica Deutschland network in rural areas? And the next question is really just about trying to understand the offload of the traffic onto your own network. So under the spectrum auction conditions, I think you're required to have 25% population coverage by 2025, 50% population coverage by 2030. But could you maybe give us an indication as to what proportion of the traffic you think you can offload onto your own network? So is it as simple as we should just assume 25% of total traffic by 2025 and 50% by 2030? Or are there other factors to consider that could impact the profile?
[Interpreted] Our agreement with Telefónica, in the first 5 years, stipulated that we would have to take 25% of the Telefónica network capacity in the first 5 years. Then growing over those 5 years and in the past -- in the last, I think, 1.5 years, it would be 20%. Since July 2020, we foresee in the contract that we can also kind of do with less capacity, and that's what is in the commitment with Telefonica. We can actually add or reduce capacities up to a maximum of 30%. When we reduce capacity, there is no minimum agreed, but there are certain steps. So we cannot actually discontinue overnight. There are certain steps that we have to keep and every year, we can actually reduce capacity by x percent so to speak. And regarding the traffic that we want to produce ourselves in 2025 and in the year 2030, I currently can't tell you anything about that.
Our next question comes from [ Jack ] Bluestone, Crédit Suisse.
It's Jakob Bluestone here from Crédit Suisse. I had 2 questions, please. Firstly, just a follow-up from the previous one on the minimum volume commitment. I didn't quite understand, is it that you have the ability to reduce how much capacity take or have you actually reduced how much capacity you intend to take? So just to understand where you are on your current volume commitment? And then the second question is just on your guidance. So you've guided for roughly EUR 80 million increase in service revenues in 2021. And the adjusted EBITDA, as you presented pre-5G effects on Slide 17 shows your sort of underlying EBITDA going up by roughly EUR 55 million and more like EUR 75 million, if you hadn't had the step-up in branding costs. So can you maybe just help us understand what is it that's driving the growth in EBITDA? Is it that you expect very high gross margin revenues? I think it sounded like you weren't saying that wholesale costs would start coming down as soon as 2021. I think you said in answer to an earlier question, it would grow in line with the subscriber base. So if you can just help us understand what is it that drives that EBITDA growth during 2021?
[Interpreted] We have the ability the option to reduce capacity at Telefónica. But up to now, we haven't made use of that. Regarding the guidance, revenue increase -- or service revenue increase, in service revenues, we expect around EUR 3.1 billion, which would be about 2% growth that we see for 2021. One of the major drivers for the result is, of course, the improvement of the terms and conditions in the MBA MVNO contract, this is -- and with the national roaming, also that we now accept it. And last week already, we communicated that the EUR 30 million or EUR 34 million that we see as improvements for 2020 is just the part out of the price adjustment. And in addition, we have other mechanisms too, which only in the course of 2021 will have a positive effect on the costs. So in 2021, there will be another positive effect. And of course, we will do some optimization because we will transfer customers from the existing Vodafone contract on MBA MVNO contract to the new MBA contract. And that's the major drivers for the next year.
Our next question comes from Stephane Beyazian, Stifel.
Yes. Can I just come back on the comment you made that you expect cost to move in line with the customer development. Can we be confident that if there is an increase or an acceleration in traffic growth at Drillisch? Actually, the price mechanism that you have now in place with the new contract will fully absorb, for instance, if traffic, which I think is growing by 50%, actually, is going up 70%. Is -- what's the implication in terms of margin? And my second question is regarding the Drillisch Versatel agreement. Could you give any color on the sort of margin that Versatel is making and reselling the fiber to 1&1?
[Interpreted] Regarding the traffic growth, of course, it's one of the major questions, how will the price change in the next years if traffic is growing? And I just mentioned that the EU has had an assessment, I think this was from October till February. And in that assessment, they dealt, particularly with that question, whether by price reductions, a margin squeeze can be avoided or not. And the EU had the result that the prices that Telefónica offered us will make us competitive in the long run, but I can't tell you more right at the moment. Regarding the question of the margin of the 1&1 Versatel, I can't tell you what margin 1&1 Versatel has. But actually, we negotiate contracts with 1&1 Versatel, as we would do with any other third party. And if we see a benefit, and this is the case in the contract that we've concluded now and if we get an overall performance, which is much better than we would directly, if we would directly buy this, then, of course, it makes sense. Basically, it's a continuation of an already existing partnerships. So already in the past years, we worked together with 1&1 Versatel and so led to VDSL complete packages were bought. And we are just continuing this now and intensify our cooperation. And of course, we will take care that the prices will become competitive and can be comparable to third parties.
If I can just follow-up on the price mechanism. If there is a new disagreement again, what is the process that could happen? Would you go to an independent expert again?
[Interpreted] Well, you can imagine it like this. You've got annually decreasing prices in order to compensate the increasing data volumes. And then there is another mechanism we had that in the MBA contract as well. Then we've got high protective rebates or discounts, if capacities are exceeded. So in a strong capacity growth, we'd have a great and a large discount, a large rebate, so that prices would not come through without any limit. If this doesn't work -- if none of this works, then we can have negotiations. And if the negotiations don't lead anywhere, then we'd have an independent expert or an independent opinion making the decision.
Our next question comes from Josh Mills, Exane.
It's Joshua Mills. So first is for Mr. Dommermuth. I think a couple of years ago, you said that the wholesale payments you were making in 2018 were about EUR 600 million in terms of MVNO payments to Telefónica Deutsche and to Vodafone. Could you give us a number or kind of a ballpark for where that payment level is today, just as a starting point to how we think about the wholesale fees going forward? And then the second question is slightly related to that is I think both you and Telefónica Deutschland have indicated that there's a margin squeeze component within the deal so that the margin that you make in mobile shouldn't go down as a result of increasing data volumes. What margin do you think is the most directly referenceable one to look at today? Is it gross profit margin? Or is it EBITDA margin? And then the final question for me is just on towers. So I know it's early days, but do you have a preference to them at the moment between signing a tower deal with 1 operator or several different tower operators?
[Interpreted] Okay. Let's start with the margin. We are looking at the gross profit margin, not the EBITDA margin. I think that's relevant because at the end of the day, the idea is what you're doing with the gross profit, that's your own business, that's what it's all about. And your last question, if I understood this correctly, was whether we prefer to work with 1 tower co or with several tower operators. If I understood this question correctly, we haven't decided yet. Currently, I tend towards 1 or 2 partners in order to keep overheads in line. And as regards to the wholesale purchase price, well, special landline and mobile is clearly above EUR 1 billion.
Our next question comes from Jonas Blum, Warburg Research.
I just got a couple of follow-ups. Firstly, on your EBITDA guidance for 2021. I was just wondering if this step-up in EBITDA is simply related to the improved wholesale of TEFD? Or is there also some parts of, well, renewed GT wholesale FTTH agreement? That's basically first. Second, since I didn't get it completely. Since Mr. Dommermuth, you once stated that your goal is to -- well, produce 2,000 antennas per annum. Does that goal have significantly changed these days with tower cos entering the market. Just firstly, in terms of your commercial strategy? Well, since you start to cover urban areas for 5G services while getting NRA 4G and legacy technologies from TEFD, does that have any implication on how you want to start servicing or start offering your customers, 5G services, meaning that you see perhaps less room for upselling?
[Interpreted] The number of antenna we see every day hasn't changed yet. It's roughly 2,000. And as regards to 5G, well, we'll try to build as quickly as possible and to build whatever we've got in places where we've got lots of customers so that we've got a good 5G coverage as quickly as possible. But as I said before, today, in Germany, even with Deutsche Telekom or with Vodafone, as a rule, you don't have 5G with a speed of a gigabit, but you've got a 4G antenna that has been upgraded to 5G, which is why I currently don't see that much of an effect. I don't see that much of a difference between 5G everywhere and true 5G with the gigabit speed in the cities and 4G elsewhere. I think it's fair to say this should work today in today's environment. And as regards to the guidance and the result increase that we're expecting for 2021, the main effect is from the mobile business and thus, also due to the improved prices in national roaming and the MBA MVNO. As regards the result situation in landline in the landline business with regard to FTTH, VDSL agreement for 2021, we roughly are the same level of effective efficiency and economic efficiency as 2020.
Our next question comes from James Ratzer, New Street Research.
First question I had was coming back to the point around the MBA contract that you're still going to be running in parallel with the national roaming agreement. Could you talk us through precisely what your flexibility is now to reduce the capacity on that over time? I mean, if theoretically, you wish to reduce that to 0, I mean, I know that's very unlikely to happen, but is that possible under the current contract? Just interested in terms of just understanding how fast and by how much you can scale that back, please? And then the second question was just if you are able at this stage to share any more details around your kind of network plans. In the past, I think you've talked about potentially going out to around 12,000 sites. Is that still your current working intention? And could you give us a range you're thinking of, of the potential CapEx per site involved?
[Interpreted] Let's begin with the network plans. I cannot give you any figure that we're planning of CapEx per site, but some 12,000 sites is a figure that is still correct. If you're aiming at 50% of coverage, then this would bring you to 12,000 to 13,000 sites for any sensible coverage. As regards to capacities in national roaming, we can discontinue the capacities in national roaming. We could even reduce it down to 0. However, over a certain period of time, for the different sizes, for increasing or decreasing capacity. And they are -- there are certain thresholds and certain steps over time, which is -- which makes sense in order to enable Telefónica to plan additional capacities and to allow them to plan if we want to reduce their capacities, but that is all I can tell you on this at the moment -- I can't tell you in principle about this.
Our next question comes from Usman Ghazi, Berenberg.
Sorry, can you hear me? I just wanted to check.
Yes, perfect.
Okay. Great. Yes, I've got maybe 3 or 4 questions, please, apologies in advance. The first question, I just wanted to come back because I think it's quite important. The price adjustment mechanism that you mentioned that -- where if the traffic growth at Telefónica is forecasting over the next -- over the medium term proves to be too conservative, and it ends up being higher, there is an automatic rebate mechanism that's built in that allows dealers to control its cost to Telefónica. I mean that was -- I remember that, that was a mechanism that was in place over 2014 to 2018, and it was key in avoiding these price disputes that arose after 2018. So I just wanted to confirm that, that price adjustment mechanism that you've confirmed is in the new national roaming agreement that, that is in place for the entire 5-year period? Or is it that it's in place for 3 years? And then it gets removed much like what happened with the situation with the MBA MVNO. So that was my first question. Perhaps if you could answer that, then I can go onto the next one.
[Interpreted] Yes. Well, the price mechanisms are in place for the whole 5 years. And there are no discounts that could actually be terminated in any way or not extended or prolongated. We had that problem in 2018. So the 5 years, regarding the price per gigabyte, per minute, per SMS and also regarding the mechanisms, the prices are defined in final way, and they cannot be changed.
My second question was on the -- just so I understand, you've mentioned that there are a backlog of customers on MBA MVNO and that now you will be transferring these customers from the MBA MVNO to the new national roaming agreement. Is it the case that because I'm assuming it, I obviously don't know, but I'm assuming that the new national roaming agreement has terms that are more beneficial than the MBA MVNO. So is it that as you migrate this backlog of customers from the MBA to the national roaming agreement, that's what's resulting in this uplift in effectively margin per customer? Is that what's happening or not?
[Interpreted] No. Maybe we didn't bring this across properly. The terms for the MBA and for national roaming are the same. So 1 gigabyte is 1 gigabyte, no matter under which contract we get it.
And just two last questions, please. The subscriber base of 1&1 Drillisch, do you have a view on whether that is primarily urban or rural, because obviously, that could influence for example, you could build 13,000, 14,000 sites and that could account for 80% of the traffic, let's say, because your customer base is primarily urban. So I mean, do you have a view on the mix of subscriber base between urban and rural?
[Interpreted] We have our focus in the urban area, so we are overrepresented in the cities.
Okay. Great. And just my final question was on -- you mentioned Open RAN as the architecture to build out the network. But Open RAN needs fiber to the node, whereas most of the networks today, I guess, are reliant on microwave for backhauling. So just wanted to understand how much the fiber, do you think you would need to build out to enable an Open RAN strategy for your network?
[Interpreted] Each aerial will be connected to optic fiber. And the idea is that we will actually rely on 1 supplier or vendor that will be 1&1 Versatel. And similar to the aerial carriers, we will here agree a kind of fixed price or lump sum for connection to an aerial, independent of how far the aerial is away from the transport network of Versatel. But basically, we have to connect every aerial to optic fiber because, as we said, we will transmit the radio signals directly. And over short distances, you can do it through optic fiber. You can't do it over long distances, of course, and you can't do it through other options.
[Operator Instructions] We haven't received further questions in the English room. I will just continue with the German room. We have 1 more question. Our next question is from Martin Hammerschmidt, Citi.
[Interpreted] Just 2 short questions from my side. Is there a fixed annual fee again? Or is that no longer the case in the prolongation of the contract for national roaming? And the second question is, if the Vodafone customers, when they're migrated, will they first be migrated to the national roaming contract? Or will they all be in the MBA MVNO contract by that time?
[Interpreted] Let me start with the Vodafone customers. For new customers, we do not offer contracts on Vodafone basis anymore. So existing clients, we will not have a growth of new customers there and the exiting customers, unfortunately, tend to churn sometimes. Are they select new contracts, for instance, if they get cell phones cheaper than -- and customers who are on the Vodafone network they generate performance on the Telefónica network. This is because we can offer these contracts at a cheaper price. But I think it's also due to the fact that Telefónica meanwhile has a very good network quality in Germany. And because of this, there is a tendency that the existing customers on the Vodafone platform, for quite some years has diminished, has been going down more and more. And we see that situation also for the future, and there will come a time when the Vodafone contract will probably be emptied so to speak, and the remaining clients on that one will then have to be moved. I don't think it will be too many customers over time, but we will have to migrate them either to national roaming or we have to migrate them through an interim step, which would be the MBA MVNO. If we want to do without an interface to Vodafone, but we have decided how to do that. Regarding the cost components for national roaming or the MBA MVNO, we don't have fixed components. Just at the beginning of the extension period, we've got a one-off payments for the rights to the MBA MVNO contract that we had to pay that was in -- that was EUR 165 million in ''25 that we communicated. Apart from that, we will build this in accordance to the capacity. So the 20% that we ordered, of course, we have to pay them, no matter whether we use them or not. But we have an option here, as we explained before, that we can react to the demand. So we can reduce capacity to a certain extent. So the national roaming agreement should be extended or prolongated, then there is not a one-off fee anymore, which needs to be paid. Oh, if that was the background of your question, so if we want to extend our national roaming agreement by 5 years, then we would have, again, to make the one-off payment. Okay. Thank you.
We have no further questions. So I pass back to the speakers.
[Interpreted] Thank you very much for your interest. As usual, we will be available to you for calls after this conference. In our current case, I would ask you to send a mail to IR, and I will then contact you all individually and ask each of your questions. Thank you for your time. See you soon, and goodbye.