Deutsche Telekom Chief Executive Kai-Uwe Ricke has some bad news for Germany's cable and TV operators: He wants to eat their lunch. Speaking to reporters at the CeBIT computer fair in Hanover, Germany, on Mar. 7, Ricke detailed the company's plans to get into the entertainment biz as a way of persuading customers to pay extra for ultra high-speed broadband. The strategy puts Germany's dominant telecommunications company in direct competition with traditional broadcasters.
For Deutsche Telekom (DT), selling ever-faster -- and more expensive -- Internet connections is a way to combat the inevitable slide in revenue from voice traffic. So it's crucial to further growth. "We're stepping on the gas in the content front," Ricke said.
"CREATING MORE COMPETITION." For existing cable and TV companies, DT is an ominous new rival. The deep-pocketed former telecom monopoly will be in a position to outbid other operators for key movie and sports rights. "Deutsche Telekom has more financial muscle than any [media] company in Germany," says Thomas Friedrich, an analyst at HVB Group in Munich. "There is no one who can afford to invest more money."
It has already acquired Internet rights to Bundesliga football, Germany's premiere soccer league. And it has agreed to broadcast programming over the Internet from ProSiebenSat.1 Media, the Munich-based broadcast group controlled by Los Angeles-based investor Haim Saban. The agreement will allow users to watch ProSieben, which accounts for about half the German commercial-TV market, on their computers.
That's nice, but what will really motivate people to pay extra for turbocharged broadband is content they can't get elsewhere. DT has already experimented with broadcasting episodes of a popular German soap opera before they aired on TV, via its T-Online Internet service. DT's managers also have mused about buying the rights to blockbuster Hollywood movies, which would be shown over T-Online before they run in German theaters.
"We're creating more competition. We're giving customers more ways to get entertainment," says Walter Raizner, the Deutsche Telekom management board member responsible for the company's T-Com landline business.
MOBILE ENTERTAINMENT. DT is following in the footsteps of other European telcos, such as Spain's Telefonica (TEF) and France Telecom (FTE). For the entertainment push to work, though, the German telco needs better broadband infrastructure. The company's T-Online division already offers a limited number of films and videos on demand, but the picture quality is not as good as regular television.
So DT has set aside $4.3 billion (€3.6 billion) to upgrade its digital-subscriber-line broadband network so it can transmit data at more than 15 times the current rate. It plans to have major urban areas online by midyear. Regulators are likely to allow DT exclusive use of the new broadband infrastructure for several years, so the company can recoup its investment. And even if DT is forced to open the network to competitors, it will probably be permitted to charge high access fees.
DT's T-Mobile unit plans to start pushing entertainment over mobile phones. Last fall 100,000 customers tuned in to a concert by pop star Robbie Williams broadcast live via T-Mobile, and more such concerts are planned. T-Mobile also has an agreement to show MTV (VIA) programming.
Generally, though, this type of entertainment on the go is a more difficult business proposition. T-Mobile has acquired the German mobile rights to this summer's football World Cup, and will offer live streaming of 20 games as part of a package costing $9 a month. But will viewers be able to see the ball? Not very well.
HIGH STAKES. Even 3G mobile networks can't deliver quality to compare with high-speed broadband or normal TV. And there's also the problem of the small screen on most mobile phones. For that reason, analysts think the service will appeal primarily to hard-core fans desperate not to miss any games.
The investment sums for these new multimedia offerings are huge, but so are the stakes. With prices for its traditional voice service dropping rapidly, even for mobile, DT must search for new sources of revenue. Its domestic sales slipped 2.5% in the fourth quarter of 2005, to $10.5 billion. Entertainment could help reverse that slide, or at least slow it down. HVB Group estimates that entertainment services could raise the average monthly revenue per broadband customer to about $84 a month from $48 per month currently.
Therein lies the big threat to cable and pay-TV companies: German consumers aren't likely to spend more money than they already do on entertainment. Instead, they will be more savvy about where they get it. In this zero-sum game, DT is the player with the biggest pot of money.
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