After IPO, T-Online Faces Challenges

MUNICH (04/25/2000) - One thing cannot be denied about Deutshce Telekom AG: It did everything it could to make T-Online International AG's initial public offering (IPO), launched last week, a success story.

For weeks leading up to the IPO, the company implemented a peerless PR campaign, which included a new advertising character, "Robert T-Online." Though the T-Online IPO issued fewer shares than the offering of its parent, there were high hopes for the spin-off. As it stands, the IPO has done reasonably well in a turbulent market, trading right before and after the long Easter holiday weekend at approximately 37 euros per share (about US$35), up from its opening price of 27 euros per share.

But uncertainty about the company's future remains.

Continuing skepticism stems from two major sources: Telekom management has alienated many institutional investors with its unfocused information policy.

For a long time, it could not decide which area of the Frankfurt stock markets to enter, the traditional Amtlicher Handel or the Neuer Markt. Only at the last minute, fantasies about the possibilities of the Internet led to a decision for the Neuer Markt. In addition, however, there was an odd hesitancy when it came to revealing important figures.

"Even the smallest garage companies publish turnover and revenue figures as well as plans for the next years weeks before the IPO; Europe's largest online service doesn't even announce the market segment it is aiming for to its investors," the Süddeutsche Zeitung criticized.

Analyses by several financial institutions such as Bavarian Landesbank and the company's prospectus did not necessarily tell a story of huge growth that is common with Internet businesses today.

Estimates are that T-Online will increase its revenue from 270.7 million to 428.3 million euros compared to last year. Internal plans call for revenue to rise to 1.8 billion euros by 2002. After a profit in fiscal year 1998 of 4.9 million euros, last year ended with a loss of 1.4 million euros. Estimates are that this trend will continue over the next few years, with losses of almost 140 million euros expected.

T-Online chief Wolfgang Keuntje blames the performance on falling margins of ISPs (Internet service providers), rising costs for marketing to try to attract new customers, and increased costs for providing "high quality" content. In addition, there will be fees for network infrastructure projects and fees, payable to the mother company. Even the prospectus was blunt about it: "There is no guarantee that T-Online will produce profits in the future."

That T-Online reveals a less-than-ideal performance on second glance cannot entirely blamed on the immediate reasons for the losses, which are typical of most Internet companies and virtually unavoidable. Rather, many industry insiders do not regard the company's strategic plans as very promising.

T-Online is "the market leader in Europe and number two ISP in the world and therefore plays in a whole other league," Keuntje and Ron Sommer, chief executive officer of Telekom, boasted at the announcement of the stock's initial issuing price. But that exactly is the problem. The numbers of T-Online users has grown substantially, with more than five million customers using the service to do their banking or other Internet business. However, only about 300,000 of these are outside of Germany (in Austria and France).

In contrast to this, America Online Inc. (AOL), the biggest competitor to T-Online, has 21 million subscribers. This makes AOL the number one ISP worldwide. The company is represented in all major countries, including Germany. In addition to AOL, T-Online is now getting more competition from smaller ISPs in Germany and throughout Europe, such as the Spanish ISP Terra, or the Hamburg-based Freenet, which is part of the Mobilecom Group.

Aside from the barely attempted international expansion, T-Online suffers from another handicap. The lucrative business-to-business model -- aiming at electronic trade between companies -- will be assigned to the yet-to-be-formed system solution division, including Debis Systemhaus and former subsidiaries DeTe System and DeTeCSM. And apparently, the lion's share of mobile e-commerce will in all likelihood be handled by the subsidiary T-Mobile, which will need to push hard on offering Internet surfing with WAP mobile phones for its own campaign to hit the stock market in November.

Another problem for T-Online management could be the further opening up of competition in the online banking area. Up until now, the Telekom spin-off more or less controlled the market for online banking services. But new companies, such as Consors and Comdirect (which will own about 2 percent of T-Online), have started to aggressively enter the market T-Online plans to use the newly raised money from its IPO to build up its ISP and portal services in Germany and internationally. Until now, management has not made more specific statements. In 1999, the ISP business was responsible for about 90 percent of revenue. But this alone can not be the "visionary" part of the company's future, observers agree.

Sommer has in recent weeks made no secret of the fact that T-Online (and the stock market entry of T-Mobile) is primarily a means to collect "cyber currency," which will afford the company spectacular acquisitions to rebuild itself as a Global Player.

Deutsche Telekom and French media company Lagardère SCA already have decided that T-Online will purchase 99.9 percent of Lagardère's Club-Internet.

Lagardère is also taking what currently amounts to a 6.5 percent stake in T-Online.

Right now, the bottom line is that the Telekom subsidiary has launched itself into an industry segment with dozens of much smaller Internet companies so that it remains the only heavyweight. This virtually has forced many investment fund managers to add shares of the company to their portfolios -- hence the fact that the company, in a rough market, is trading above its issuing price.

Many fund managers though appear to still be focusing on the parent company, Telekom, however. Juergen Wetzel of Berlin's BB Invest GmbH recommends another strategy: "For those who cannot afford the T-Online shares or for those who are not satisfied by the allotment, they can simply invest in T-shares. If T-Online becomes a success, the Telekom stock will, too."

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