Kabel Deutschland Takes Aim at $1.29 Billion Market for Small Businesses

Kabel Deutschland Holding AG, will increase average revenue per customer and sell Internet and telephone services to businesses, taking market share from Deutsche Telekom AG, its chief executive officer said.

“The market opportunity for us is over 1 billion euros ($1.29 billion),” Adrian von Hammerstein said in an interview, referring to the market’s total revenue from home-office and small and medium-sized businesses in the areas reached by his company. Kabel Deutschland, Germany’s biggest cable-television operator, had sales of 1.5 billion euros in the fiscal year ending March 31.

German cable companies are far behind European peers in average revenue per customer, mostly because they didn’t start selling Internet and telephone services until much later, von Hammerstein said. Kabel Deutschland had average revenue per user of 12.1 euros ($15.55) at the end of March, compared with an average of 45 pounds ($68.74) for Virgin Media Inc. in the U.K.

The gap “represents opportunity for Kabel Deutschland,” von Hammerstein said in the interview at the company’s headquarters in Unterfoehring, north of Munich. “We’re very confident that we can get to 20 euros by 2015.”

The main method for increasing average revenue “is continuing to cross-sell new services into the customer base,” and to start selling services to smaller businesses and home- office users, von Hammerstein said. Kabel Deutschland had about 8.9 million customers at the end of March.

Business-to-Business

“We haven’t really focused on” the business-to-business market, which has higher average revenue potential than the retail customer market, von Hammerstein said.

As many potential small-business clients already take Kabel Deutschland products for their private use, Kabel Deutschland is well positioned to win customers, von Hammerstein said.

The CEO also aims to persuade more consumers to buy Internet and phone services or increase their use of these services.

In the fiscal year ending March 31, 12 percent of homes connected to Kabel Deutschland’s network subscribed to its Internet and phone services. By comparison, 31 percent of European cable homes subscribed to Internet services and 24 percent subscribed to both phone and Internet services from their cable operator at the end of 2009, according to Guy Bisson, an analyst at Media Researcher Screen Digest in London.

Acquisition Strategy

“Because network business is by its very nature a scale business, further consolidation of the German cable industry is essential to fully unlocking this potential,” von Hammerstein said. “Cable and the telecommunications companies have similar capabilities, so there is no reason not to allow cable to consolidate if you’re allowing telcos to consolidate.”

Kabel Deutschland has about 4 percent of the German broadband market, while Deutsche Telekom has about half the market, von Hammerstein said.

“We’ve always said we’re interested in consolidation opportunities in our footprint,” von Hammerstein said. “Beyond the purchase price, integrating any of these networks and their customers would be quite smooth and wouldn’t require huge investments to make it happen.”

German cable companies have faced little regulatory resistance when buying smaller operators owning the last mile of the cable connection into people’s homes, also known as level 4 operators.

For possible acquisitions, von Hammerstein pointed to level 4 operators, and other cable companies with their own trunk lines that he called “network islands” within Kabel Deutschland’s existing territories. These companies, which include Pepcom GmbH, and the troubled cable operators Tele Columbus GmbH and Primacom AG, could add as many as 2.5 million customers to Kabel Deutschland’s total, he said.

High-Definition

Von Hammerstein said customers are “enthusiastically” adopting digital TV services, such as high-definition options.

“We’ve seen a big uptake in demand for HDTV around the World Cup,” von Hammerstein said. “That really got people interested. They looked at their new flat-screen TVs and thought ’Wow, wouldn’t it be nice to have HD.’”

Another possible new source of income may come from providing so-called backhaul-services, where the cable company carries some of the data traffic that is straining phone operators’ networks.

“It’s an opportunity that’s out there,” von Hammerstein said, though so far he’s not “engaged” in backhaul activities. “We’re looking at the opportunity.”

Kabel Deutschland will release results for the first quarter of the fiscal year 2010/2011 on Aug. 24.

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

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