If you're a serious net surfer in Germany, you pretty much have one choice for broadband service -- Deutsche Telekom is it. The former state monopoly has used its ownership of the nation's land-line network to scoop up virtually all the market for broadband based on digital subscriber line (DSL) technology, which makes use of existing copper wires. Meanwhile, Deutsche Telekom's T-Online unit dominates Internet access, too (Internet access and broadband are sold separately here). "Germany is one of the least-open markets," says Pierpaolo Festino, senior vice-president for marketing and sales at Sardinia-based access provider Tiscali. Festino gripes that Germany has dragged its feet implementing European Union competition rules.
Yet the walls of Fortress Telekom could soon start to crack. A revised German telecommunications law, to take effect no later than July 1, will allow competitors such as America Online Inc. (TWX ) to buy broadband connections wholesale from Deutsche Telekom and resell them. Meanwhile, companies like Kabel Deutschland are upgrading the cable-TV network, once owned mostly by Deutsche Telekom, in order to offer high-speed Internet access via cable, as well as digital TV.
Elsewhere in Europe, freer competition has led to steep declines in market share by the ex-monopoly. In Italy, Telecom Italia's (TI ) share of the retail broadband market has fallen to less than 50% as the country moved more quickly to comply with EU competition rules. The Germans could be about to experience the same shift. "Deutsche Telekom will remain dominant, there's no question about that," says Hellen K. Omwando, a Forrester Research Inc. analyst in Amsterdam (FORR ) "But market share is declining and will continue to decline." While Deutsche Telekom accounts for over 90% of DSL connections, signs of slippage are there. Measured by actual DSL usage, its share fell to 85% at the end of 2003 from 93.5% in 2001, according to Duisburg-based Dialog Consult.
Already, rivalry among Internet service providers is taking a toll on T-Online. Analysts were taken aback in May when T-Online disclosed that 3.25 million of its 11.07 million users in Germany are not subscribers but "pay as you go" customers who only incur fees when they use the service. The overwhelming majority of the pay-as-you-go customers dial in less than once a month and generate little if any revenue. That's bad news: T-Online is crucial to Deutsche Telekom's broadband future. Internet access providers will probably serve as the platform for revenue-generating broadband services like videoconferencing or online games. Without healthy subscriber demand for such services, DT would be just a commodity provider of bandwidth.
Now there is speculation about a dramatic shift in broadband strategy as Deutsche Telekom moves to protect its franchise. One possibility is that DT would buy up the 20% stake in T-Online that trades publicly and then merge the unit with its land-line business. Though Deutsche Telekom says it has no immediate plans for a merger, such a move would make for better coordination between the ISP side and the broadband business. Meanwhile, T-Online CEO Thomas Holtrop has begun cutting broadband prices in anticipation of heightened competition. Effective June 1, an unlimited-use DSL connection will cost about $48 a month, down from $72.
How fast Deutsche Telekom loses broadband market share will depend on how the new telecom law works out. The company must negotiate with rivals over the terms under which they will be able to buy broadband connections wholesale, as well as piggyback on DT's network. "It will be a bit easier to compete," says Ralph Dommermuth, CEO of Hamburg-based United Internet, which competes with T-Online. But he and others want more leeway to bolt their own technology, such as faster download speeds, onto the existing DT network before they're satisfied. "We're still a long way from a breakthrough," says Jürgen Grützner, president of the Association of Telecommunications & Value-Added Service Providers, a Berlin industry group. Because of weak competition, customers have been slow to adopt broadband services so far. At least Germans now have a chance to do some serious Net surfing.
By Jack Ewing in Frankfurt, with bureau reports