Deutsche Telekom challenges German TV market, again: in Germany, it will take at least another two years before DSL-based television-like services will become serious competition for traditional TV.

T-Online International, the largest European Internet service provider (ISP), successfully exploits the field of Video on Demand and streaming media and is consistently challenging the highly competitive German TV industry.

This fall, Deutsche Telekom AG (DT), the German telephone giant, pursued a merger with T-Online. Only four years ago, DT floated its T-Online Internet access business but remained the largest shareholder.

DT currently holds 73.93 percent of the T-Online shares. For the merge with DT to take place, a 75 percent vote is necessary by the general shareholders of T-Online, so this is not seen as a problem.

The entire DT investment for this re-integration deal will be priced at 2.9 billion euro, making it one of the largest purchases by the company in history. However, critics see it more as a large financial deal in favor of DT, since the current price per share offered to the free investors is 8.99 euro, far less than DT made with the unit's IPO price of 27 euro.

T-Mobile, the mobile daughter of T-Com (DT's fixed wire business), and the T-Systems branded business service unit, T-Online, were once DT's fourth ranking business areas.

The former state telecommunications conglomerate, DT, now intends to merge the T-Com and T-Online units into one common strategic business segment called "Broadband/ Fixline." Since broadband access is expected to be one of the strongest growth fields in the future, DT hopes to increase coordination between T-Com and T-Online. According to the memorandum of understanding agreed upon by T-Online and DT, the ISP will remain an independent unit with its own management and financial control.

DT dominates the German DSL (broadband via phone lines) market via cooperation with AOL Germany (the Deutsche subsidiary of the American internet provider) and has already increased its forecast for German DSL penetration from 10 million subscribers by the year 2006 to 20 million in 2007. Last August, DT announced having passed the five million DSL-subscriber mark. Similarly, T-Online announced growth in the number of its DSL clients: almost 800,000 in the first nine months of 2004, making it likely to succeed with its forecast to serve 50 percent of DT's broadband clients directly as ISP by the end of 2004.

Considering that the German market has about 34 million TV homes, T-Online is gaining strength as a serious competitor for the country's pay-TV industry. The development of cable TV has, once again, been slowed down after the largest German cable operator, KDG, withdrew notice of its intended merger with three smaller regional cable systems, as a result of the cartel office's intent to block the deal. German cable operators and channel providers are now trying to figure out what their plans are for the future. It was only a couple of years ago that DT, which was also the state monopolist in cable TV systems, sold its cable assets due to pressure from the EC's anti-trust watch dogs.

Indeed, T-Online Vision offers TV-like services: such as streaming video on demand, blockbuster movies; the best of the first German soccer league, an adult entertainment section, via DSL/broadband to the PC--and, since early this year, to the TV set as well. In cooperation with launching partner Siemens/Fijutsu, it markets a set-top-system that brings DSL services onto the TV set and allows instant switching from TV to Internet and vice versa. However, Siemens has not been very satisfied with sales of the box. Analysts are not surprised: The box is still considered too expensive for regular users. Also, the marketing activities of the manufacturer are considered poor and not fit to promote the new product. This, however, is likely to change: Last fall, Samsung was the first of a number of new manufacturers bringing out cheaper boxes that promised an increased penetration effort.

Hollywood studios have become aware of the new TV potential in Germany. In July, 20th Century Fox was the last of the majors to sign a deal with T-Online, bringing its library and blockbuster content to German broadband screens. And in October, Discovery Communications signed an alliance, taking the first step towards making selected documentation available to T-Online-Vision subscribers. However, a survey stated that, in Germany, it will take at least another two years before DSL-based TV-like services will become serious competition for traditional TV. T-Online has not given any forecast in its financial reports for 2004 or 2005, thus no predictions can be attempted. The most important strategy with T-Online Vision seems to be in position for when the market takes off. For its part, T-Online insists it does not intend to become a new player in TV: To them, it's merely a new distribution pipe used for online services. In Germany this distinction makes a big difference, since German law differs between online and TV services. While TV is under strict control of the multi-layer regulatory system, online services can operate and expand more freely.