Euro Giants Buy Back Offspring
Light Reading
07.12.2004

Europe's major carriers are embarking on a major strategic U-turn by regaining total ownership of some of the business units they spun off during the telecom boom.

France Telecom SA led the way when it bought out the minority shareholders in its mobile unit Orange SA last April.

Now Telecom Italia SpA is set to do the same, and is due to announce a plan to buy back the 44 percent of Telecom Italia Mobile SpA it doesn't own for about Euro 20 billion ($26.9 billion).

Why? The mobile operations generate billions of euros in cash, and having total ownership gives the operators greater control over its future network and service integration plans.

Deutsche Telekom AG is doing something similar, but its focus is on broadband. The German giant reckons it needs to completely own and control T-Online International AG to properly pursue its triple-play (voice, video, data) ambitions, and is buying the 26.1 percent it spun off in 2000.

DT's offer of Euro 8.99 per share has not been well received, however, as that is below the current share price and about a third of the stock's launch price.

DT has said it won't increase the price, but won't want anything to stall the process, as the carrier is keen to lock down all the rewards that come with total ownership of T-Online, including the cashflow.

The broadband service provider has just become profitable, and expects its customer base to grow to 14 million by 2014, compared with 3.2 million at the end of September 2004, and just 2 million in June 2003.

That growth coincides with a decline in DT's revenues from traditional services, such as circuit-switched voice. In the first half of 2004, national turnover at T-Com, DT's national German operation, fell more than 6 percent year on year from Euro 12.74 billion to Euro 11.97 billion ($17.1 billion to $16.1 billion), while T-Online's revenues grew almost 10 percent from Euro 802.4 million to Euro 879.7 million ($1.07 billion to $1.18 billion).

Without doubt, DT is looking to strengthen its already tight grip on the German broadband market, which is unusual in that broadband customers sign two separate deals -- one for the DSL line, and another for Internet access.

T-Com dominates the provision of DSL connections, which total nearly 6 million, and sells Internet access services over 3.2 million of those connections. The remaining DSL users source their Internet service from alternative ISPs.

Those 6 million or so DSL customers account for about 90 percent of the total German broadband market, with the remainder split between cable, satellite, and alternative infrastructure players such as HanseNet.

That puts DT in a much stronger position than many of its fellow European incumbents, such as BT Group plc, which faces fierce competition from the U.K.'s cable companies.

BT also faces a new challenge from alternative operators unbundling the local loop and installing their own equipment in the national carrier's local exchanges, a major competitive threat also being faced by France Telecom.

DT doesn't believe there will be much further competition at the infrastructure level. "I don't think anyone will invest money and start digging," says T-Com spokesperson Walter Genz, but there are plenty of service providers that will seek to resell T-Com's service, he adds.

One such reseller is BT, which says it has had a greater than expected response from service providers, retailers with strong sales channels, and telecom players not yet in the German market, to its DSL-with-bells-on wholesale offer.

That sort of business drives some revenues for T-Com, says Genz, but "we prefer to have a direct relationship with the customer."

That direct relationship comes from owning the infrastructure, systems, and the customer account, so the reintegration of T-Online makes sense for DT, says Werner Lauff, independent consultant and former VP of AOL's European business.

For Lauff, DT's biggest challenge is in developing a credible triple-play strategy, and reuniting T-Com with T-Online will boost the carrier's potential to dominate the entertainment market that incumbent carriers are increasingly targeting.

"The big task for DT is to become a successful vendor of broadband content. It's all about triple play," says Lauff, adding that "the combined marketing power of T-Com and T-Online is huge."

Lauff believes the only real threat to DT in the triple-play space will come from city or regional operators that have a strong local identity, such as NetCologne and HanseNet.

And there's little sign that DT will encounter multimedia competition from Germany's cable operators, which, between them, have only 60,000 Internet access customers and little appetite to mount a challenge to DT.

That appetite was dampened further when regulators barred Kabel Deutschland, one of the few cable players to offer broadband access in selected areas, from merging with some of its smaller compatriots earlier this year, a move that may have introduced much needed competition in the German broadband sector.

Lauff says the cable operators "are not eager to invest in broadband any more. They would have a hard time competing with the rather low DSL prices and they need to push forward with their digital TV program offerings."

Meanwhile, DT will push ahead with its takeover of T-Online and work towards its goal of 10 million DSL connections by 2007. That target is "hard to achieve, but has a high strategic priority," says Lauff, "but ultimately it's not about the connections, but about the content that will be sold over these lines."

- Daniel Sokolov, special to Light Reading, and Ray Le Maistre, International News Editor, Light Reading