Deutsche Telekom Has Designs On The Web

The German giant wants to expand in Europe and the U.S.

The hunger for Internet stocks in Europe borders on desperation. Facing slim pickings, investors have bid up an Italian Internet company, Tiscali, to a loftier stock market value than Fiat--in a country where less than 10% of the population surfs the Web. Spain's Terra Systems, a sprawling portfolio of Latin Internet companies, enjoys a market cap of $33.6 billion, well above's $22 billion.

But now investors have an even bigger Europe Net play to sink their teeth into. Deutsche Telekom is preparing to spin off 10% of its Internet access service, T-Online International, in an initial public offering that could value the unit at $40 billion. That's more than Dresdner Bank and four times as much as airline Lufthansa.

How could this be? T-Online, with 4.2 million subscribers, is Europe's most popular way to get on the Internet, a towering presence in the continent's richest market. What's more, unlike rivals such as America Online Inc., Deutsche Telekom has a precious link to the mobile phone, which could make T-Online a monster of the coming rage, the mobile Internet.

The share sale is crucial for CEO Ron Sommer's plans to make Deutsche Telekom a global force in the Internet. But more than that, this is the IPO that promises to trigger a boom in Internet stock offerings in Europe. Former phone monopolies in France, Italy and the Netherlands are preparing to follow Deutsche Telekom's lead. Armed with Internet stock, these European telecom powers will proceed to expand across borders.

Deutsche Telekom is even preparing to take on the Americans on their home turf. Sommer has said he wants a bigger presence in the U.S. and has been talking to several companies. Shares of Denver-based Qwest Communications International Inc., which operates a worldwide data network, jumped 27% on Mar. 1 on speculation of a possible merger with Deutsche Telekom. One source close to the negotiations confirmed that the talks have been going on for several weeks, although a merger would be difficult because Qwest has already agreed to buy US West. The source says that US West may voluntarily let Qwest out of its acquisition agreement. Then Deutsche Telekom would bid separately for the two U.S. companies. Qwest CEO Joseph Nacchio is said to support the deal, and would likely receive a high-ranking job at the new company.

A big U.S. deal would be a shot in the arm for Deutsche Telekom. Dominant in Germany, it's weak outside its borders. And it's still recovering from the shock of Vodafone AirTouch's takeover of rival Mannesmann. "We have gaps that we have to fill to go toe-to-toe with Vodafone-Mannesmann," concedes Jeffrey A. Hedberg, Deutsche Telekom's chief of international business.

Can Deutsche Telekom pull off its global expansion plans? So far nobody, not even AOL, has been able to dislodge dominant local players and rule the European Internet. The cultural and language barriers have proved too daunting. And Deutsche Telekom gets mixed marks for its efforts abroad so far. Joint ventures with France Telecom and Sprint Corp. fell apart after years of losses. Although it's tried to become a global player, the company is a force only in Britain and a few smaller markets like Austria.

EDGE. But Deutsche Telekom has one big advantage--the fattest wallet of any of the former European phone monopolies. With a stock market value of $260 billion, higher than AT&T and Yahoo! combined, Deutsche Telekom is in a position to make big moves anywhere in the world. After the IPO, Deutsche Telekom plans to use T-Online shares to swallow Internet and media properties in Europe as well as the U.S. Deutsche Telekom will also raise billions more as it spins off its T-Mobil unit and its German cable TV network.

Making the right moves is crucial. Pure service providers like AOL also want to control the mobile Internet business, which Deutsche Telekom figures will be worth $20 billion in Europe within two years. But it's far from certain that T-Online can export its success. Deutsche Telekom will face fast-moving competitors that don't share its legacy as a government bureaucracy. "We work at Internet speed, they work at monopoly speed," scoffs Nina Brink, executive chairman of Rotterdam-based World Online International. She boasts that her Internet access service already has overtaken Dutch ex-monopoly KPN in that business and has 1.5 million customers in 15 countries.

Moreover, Deutsche Telekom won't have the same advantages abroad that it does at home. T-Online owes much of its success to an internal network that lets users access accounts at practically every bank in Germany. "Banking is a strong point, but it works more on a national level," says Steffen Binder, a Frankfurt-based analyst at Forit, an Internet market research firm.

The real test will come over the next two years, as mobile use of the Internet takes off. Deutsche Telekom has a powerful advantage in Germany and Britain. Its D1 mobile service is the second-biggest provider in Germany, and in Britain it owns mobile phone provider One2One. Competitors such as AOL will have no choice but to use such networks if they want to reach their own customers and join in the mobile Internet bonanza.

KEY FOE. Outside Germany and Britain, though, Deutsche Telekom will be at a disadvantage. A key rival is Vodafone, which, with the acquisition of Mannesmann, controls the most mobile phone territory on the Continent. To prevail, Deutsche Telekom will need to offer local content and top-flight service. That's one reason the company last month traded a 6.5% stake in T-Online for Club Internet, France's No. 2 online service measured by regular users.

The race may go to the first company that can create a dominant European portal. T-Online will have to compete with companies such as Yahoo! Inc., which has used its image as an Internet pioneer to become Europe's leading portal. That helps to draw advertisers and e-commerce companies that would rather not have to purchase Web space from a dozen different local Internet access providers. "We want to ensure that advertisers can walk in and buy spots anywhere," says Fabiola Arredondo, managing director of Yahoo! in Europe.

But Deutsche Telekom is hoping more and more to let its money talk. If the German company can succeed in finding the right partners soon, it stands a chance of competing against companies such as Vodafone or AOL--and staying a player in the wired age.

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