Businessweek Archives

The Net War In Europe


International Business: Europe

The Net War in Europe

It's AOL vs. a tough German rival for the lead in the ISP market

America Online Inc.'s fight with Germany's T-Online International got nasty a long time ago. So it was no surprise when the two giant Internet access providers landed in court again this month. The accusation of the week: AOL Europe claimed T-Online was giving users of T-Online better phone rates than users of other online services. On June 6, a Hamburg judge issued an injunction against Deutsche Telekom, and AOL crowed about another legal victory.

But AOL needs more than court rulings to beat T-Online in Europe. Ron Sommer, chief of Deutsche Telekom, T-Online's parent, has been hard-pressed for years, as the telecom company has seen profits battered by a host of new rivals. But with T-Online, Sommer has a weapon he can use to go back on the offensive. The Internet service provider and portal is already Europe's biggest ISP, with 5.3 million consumers, thanks to its domination of the large German market.FEELING GROOVY. Now it's getting aggressive internationally. Armed with shares worth $17.7 billion following its April initial public offering, T-Online is circling Freeserve, Britain's No. 1 ISP. Deutsche Telekom could bid for Freeserve, worth $5.6 billion on the stock market, within the next few weeks. In February, it bought French ISP Club Internet. It's also looking to buy stakes in online banks, Web portals, even makers of groovy Net applications, all across Europe. "I don't rule out anything," says T-Online CEO Wolfgang Keuntje.

Europe's Internet market is on the verge of a consolidation. Early entrants such as AOL are learning the hard way that the Continental market isn't as wide open as America's. It may be the world's biggest ISP, but AOL lags behind T-Online in Germany, and it's getting beaten in France and Spain by the big telecom companies. France Telecom's Wanadoo, for example, is the country's No. 1 in audience reach, far ahead of No. 5 AOL, according to market researcher MMXI Europe. In Europe, established telecom companies have been able to exploit their power over phone networks and convert existing customers to Net surfers. And unlike pure portals such as Yahoo!, subscriber-based AOL sells the infrastructure to get on the Internet, a business that puts it in direct competition with telecoms.

AOL Europe's challenges come from inside the company, too. Its management is in flux after European partner Bertelsmann pulled out following AOL's merger with Time Warner Inc., a Bertelsmann competitor. AOL Europe President Andreas Schmidt left to become Bertelsmann's chief of e-commerce, and now AOL Europe is being run from the U.S.

The end of the Bertelsmann partnership could turn out to be good, because it gives AOL Europe a clearer line of authority. But at the moment, there's a vacancy when decisive leadership is urgent. European access providers are bracing for the arrival of new technologies. The mobile Internet could displace PCs as the main platform for European surfers. Unlike T-Online, AOL owns no mobile-phone providers. It has technology partnerships with Nokia and Ericsson, but must forge strong links with mobile-phone companies to avoid being shut out of the main channel for Net growth.

Michael Lynton, president of AOL International, says the company has deals pending with providers of mobile technology in Europe. "The deals will all come to fruition in the next few months," he says. But a few months is an eternity in this business. European rivals already have links with cell-phone providers, and they are bulking up through acquisitions. Spain's Terra Networks has snapped up Lycos Inc., the third-largest portal in Germany.

Terra notwithstanding, T-Online is still the one to beat. Of course, the German ISP must prove it can prevail in a fair fight. It owes its success in Germany to its parent company, which still owns an 83% stake.

Deutsche Telekom dominates local phone connections in Germany and under CEO Sommer has mercilessly used that control to promote T-Online. Users of T-Online have been first to get benefits such as lower access charges for Net surfing--a major competitive advantage in Europe, where even local phone calls are billed by the minute. Time and again, AOL has battled Deutsche Telekom in court or before regulators. AOL has usually won. But meanwhile, T-Online has the advantage of a months-long headstart. T-Online's Keuntje doesn't concede AOL's legal points but acknowledges that the connection to Deutsche Telekom is a plus. "We won't make deals in other countries except with partners that can help us, like Deutsche Telekom," he says.

The scenario is playing itself out once again as Deutsche Telekom rolls out broadband Internet access--known as TDSL--which will allow users to download movie clips and other applications that use huge chunks of bandwidth. T-Online users will be able to take advantage of the new technology first.

AOL has strengths. Since its launch in 1995, AOL Europe has attracted a respectable 4 million subscribers. AOL users stay with AOL content longer, making them more attractive to advertisers. German customers spend an average of 24 minutes a day online, compared with 10.5 minutes for T-Online, says Lynton. "I would take usage over reach most of the time," he says.HUGE BOOST. For both companies, Britain is the next battleground. It leads Europe in the uptake of new platforms to access the Net, ranging from next-generation mobile phones to digital TV. Net penetration in Britain is close to 40%, compared with 28% in Germany, according to International Data Corp. Deutsche Telekom owns Britain's fourth-largest mobile phone company, One2One, which it can use as a platform for mobile-Internet applications. If it buys Freeserve, 80%-owned by electronics retailer Dixons Group PLC, it will be acquiring a company that in 1998 shot from obscurity to the top spot by offering users free access. AOL is No. 2.

AOL still has a shot at Europe. It offers users a rich variety of information, entertainment, and e-tail possibilities that are not available anywhere else, such as services that compare prices for package tours or allow users to receive faxes as e-mail. T-Online is strong on home banking but otherwise functions largely as a gateway to the Web. And AOL may yet exploit its U.S. content and advertiser relationships in Europe, especially now that it has full control. T-Online still hasn't shown it can duplicate its German success elsewhere.

But AOL must prove it can master the shift to new technologies like mobile access and broadband, where T-Online's telecom company heritage will be an advantage. "The skills you need to win will be very different in the future than in the past," warns one London-based Net analyst. The winner will be the first who learns to speak European.By Jack Ewing in Frankfurt, with Kerry Capell in London and Catherine Yang in WashingtonReturn to top


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus