(Updates with analyst comment starting in fourth paragraph, shares in sixth.)
June 27 (Bloomberg) -- Germany favors Deutsche Telekom AG to replace Verizon Communications Inc. as a network provider after deciding to end the American company’s contract in the wake of reports about spy surveillance by the U.S.
“The federal government wants to win back more technological sovereignty and therefore prefers to work with German companies,” Tobias Plate, an interior ministry spokesman, said today at a press conference in Berlin.
Germany is using an option in the current Verizon contract to end the arrangement next year, Plate said, declining to confirm whether the government had any evidence that the provider handed information from the network to the U.S. National Security Agency.
The move is the clearest sign yet that concerns in Europe about spying by the U.S. may harm the business of American companies in the region. The decision doesn’t bode well for communications providers such as Verizon and Dallas-based AT&T Inc., which have sunk billions of dollars into winning large clients outside the U.S., said Roger Entner, lead analyst at Recon Analytics LLC in Dedham, Massachusetts.
“Verizon is the victim here -- they tend to be faster, more flexible and cheaper than local providers,” Entner said. “But now security is the trump card in the deck and that’s why Deutsche Telekom wins.”
Deutsche Telekom shares rose 0.3 percent to 12.81 euros at 4:23 p.m. in Frankfurt. Verizon slipped 0.5 percent to $49.99 and AT&T fell 0.4 percent to $35.13 in New York.
Chancellor Angela Merkel’s government plans to combine three separate networks under one service provider, Plate said. A proposal to award the contracts to Deutsche Telekom has already been discussed in the parliament’s budget committee, though no contract has been signed yet, he said.
Harald Lindlar, a spokesman for Bonn-based Deutsche Telekom’s T-Systems unit, declined to comment.
German prosecutors and lawmakers have begun investigating allegations that U.S. intelligence agents tapped Merkel’s phone, underscoring the effect on U.S.-German relations of documents leaked by former NSA contractor Edward Snowden.
Merkel and President Barack Obama failed to end the dispute during talks at the White House in May, with Merkel saying “differences of opinion” persist and require further discussion.
“It has pained me to see the degree to which the Snowden disclosures have created strains in the relationship” with Germany, Obama said.
Spying contentions have soured relations between the U.S. and other countries as well. China last month suspended its cooperation in a cybersecurity working group with the U.S. after American authorities indicted five Chinese military officials, claiming they stole trade secrets.
Verizon’s services won’t be retained because the German government now requires telecommunications providers signing new contracts to confirm they’re not legally obliged to share information with foreign governments, Johannes Dimroth, an Interior Ministry spokesman, said by phone yesterday. Plate, who wouldn’t comment on the value of the services, said that Germany won’t face damage claims from Verizon, based in New York.
Verizon, whose contract with Germany expires in 2015, provided data on the phone use of millions of customers to the NSA under a court order, Obama’s administration confirmed last June.
The “relationships between foreign-intelligence services and companies revealed during the NSA affair” mean that Germany’s government has to apply “especially high” security standards to its communications infrastructure in the future, the Interior Ministry said in an e-mailed statement.
In a blog post earlier this year, Verizon said the U.S. can’t compel the company to produce customer data stored in foreign countries. In the post, Verizon said it would challenge the U.S. government in court if it sought such data. The U.S. can seek assistance from local law enforcement in other countries under international treaties to obtain data stored on foreign soil, Verizon said.
“Verizon Germany is a German company and we comply with German law,” the New York-based company said in a statement yesterday. “We have outlined our position on the inability of the U.S. government to access customer data stored outside the U.S. in our policy blog.”
A representative for Verizon in Germany didn’t immediately have a comment today beyond that statement.
Deutsche Telekom is “mostly a German company, and Verizon is mostly an American company,” Plate said when asked about how the government views the two competitors.
Germany’s stated preference for national providers runs against the spirit of the planned Transatlantic Trade and Investment Partnership, known as TTIP. Talks between the U.S. and European Union to establish the world’s largest free-trade area began last July.
Merkel is promoting TTIP to a skeptical German public as a way to boost growth and jobs in Europe. She and Obama also support the deal as a way to bind Europe and the U.S. together. “We need big projects together that unite us,” Merkel said in an interview with Bloomberg News last June.
--With assistance from Scott Moritz in New York and Rainer Buergin in Berlin.