The German Internet Access Market Germany is the largest Internet market in Europe with approximately 35 million Internet users and approximately 23 million Internet subscribers (defined as persons subscribing to Internet service provider contracts). According to industry sources for the year 2003, the German internet access market was worth approximately €5.2 billion. Internet access technology currently available in Germany includes analog dial-up modems, ISDN, DSL, wireless local loop technology, broadband cable, fiber optic based access and UMTS (Universal Mobile Telecommunication Services). While analog dial-up modems may be used throughout Germany to connect to the Internet, access via the other technologies depends upon the local availability of the services. The Internet access market offers significant growth potential in Germany, particularly in high speed Internet with just 18% of the 39.1 million households having subscribed to such services. High speed Internet services have shown growth rates of approximately 40% in 2003 and approximately 53% in 2004. At the end of 2004, about 6.9 million (approximately 30%) of the estimated 23 million Internet access subscribers were subscribing to broadband Internet access technologies that offer connection speeds of more than 128 kbit/s. At the end of 2004, approximately 6.7 million or 97.2% of the 6.9 million broadband Internet subscribers, either directly or indirectly, used DSL Internet services provided by DTAG, the dominant player in the German broadband Internet access market, which offers a range of different DSL packages based on bandwidth and price. Only 145,000 Internet users were subscribing to broadband Internet services via cable and approximately 50,000 Internet users were subscribers to broadband Internet services via satellite or Powerline. While broadband Internet continues to grow, cable as an access technology has a limited share of the overall broadband Internet access market, estimated at 2% for 2004. This low level of penetration has been the result of low levels of investment in the infrastructure and the separation of network levels in Germany. However, all of the Level 3 operators have recently intensified their network upgrade plans and marketing efforts to promote their Internet service offerings. An advantage of cable as an access technology is the simplicity of the technology deployed to connect to the Internet. While DSL solutions require the installation of a series of technical devices (splitter, a/b converter, DSL modem), Internet access via cable merely requires the installation of a cable modem between the consumer’s television wall socket and the computer. In addition, there is no need for a subscriber to cable Internet access services to subscribe to telephony services in order to access the service, as is the case with the majority of DSL offers. The following chart shows the historical development of the German broadband market by access platform. Broadband Subscribers (‘000s) 2001 2002 2003 2004 CAGR (1) DSL 1,865 3,160 4,400 6,723 53.3% Cable 30 45 60 145 69.1% Other (satellite, Powerline) 2 17 53 50 192.4% Total 1,897 3,222 4,513 6,918 53.9% (1) Compound Annual Growth Rate for the years 2001-2004. Source: RegTP 2004 The German Telephony Market Historically, the provision of public telecommunications services in Germany was a state monopoly formerly established by the German constitution. In 1989, the Federal Republic of Germany began to transform the postal, telephony and banking services administered by the former monopoly provider into market-oriented businesses and divided the former monopoly provider into three distinct entities along lines of business, one of which was the predecessor of DTAG. At the same time, the Federal Republic also started the liberalization of the German telecommunications market. The operation of networks (including cable networks) for all telecommunications services other than public fixed-line voice telephony was opened to competition in Germany on August 1, 1996. The telecommunications sector in Germany was further liberalized on January 1, 1998. Since then, DTAG has been required to offer competitors access to its fixed-line network at regulated interconnection rates. Despite being forced to give access to its network, DTAG continues to dominate the German fixed-line telephony market, worth approximately €35.3 billion as of 2003 according to industry sources with a market share of 74% and, through its subsidiary T-Mobile, is one of the major players in the Germany mobile telephony market with a market share of 38.5% in 2004. The other providers in the fixed network area include: Arcor, BT Global Services (Viag Interkom), Colt Telecom, and Versatel. The major providers of services and/or network operators in the mobile telephony sector are: T-Mobile, Vodafone, E-Plus, O2, Mobilcom and Debitel. 146
In the domestic market, the German telecommunications regulator fixes the terms on which DTAG provides interconnection to competitors as well as access to the unbundled local loop so that competitors have direct access to customers. The terms for interconnecting DTAG’s telephone network with the networks of other national network operators and service providers are contained in bilateral contracts. In the last couple of years, the growing penetration of Internet has spawned Voice over Internet Protocol (VoIP) services. At the end of 2004, approximately 15 companies provided VoIP services in Germany to some 400,000 users, nearly all through reliance on DSL, whereof approximately 50% are believed to be frequent users. Cable operators in other international markets offer this service, frequently bundled with television and Internet access services to create a full “tripleplay”. In Germany, the former owners of KBW and ish pursued a full “triple play” strategy. As a consequence, both operators were endowed with the technological infrastructure and know-how which enables a VoIP roll-out. Neither company has been promoting telephony services as a standalone offer, but in a bundle with its Internet access products. KBW offers telephony services as a bundle with its Internet access services at no incremental base fee, whereas ish’s telephony service may be subscribed for a monthly fee of €5.00 in addition to ish’s Internet service offerings. iesy and KDG do not offer telephony services. Hesse Market Overview The central German state of Hesse has approximately six million inhabitants, representing 7.3% of the total German population and is home to most of the Rhine-Main area, a densely populated conurbation that encompasses Frankfurt, one of the largest financial centers in Europe, and Wiesbaden, the capital of Hesse. Hesse’s per capita GDP is the highest of the nine former DTAG cable regions in Germany. GDP per capita has increased by an annual rate of approximately 1.1% since 2000 resulting in a higher disposable income. Moreover, Hesse has a relatively diverse population, with approximately 821,000 foreign inhabitants, approximately 13.5% of the total population. The urban areas of Hesse are also among the most densely populated regions in Germany. In addition, Hesse’s population density is characterized by a high proportion of inhabitants living in multiple-dwelling units, which would support a cost effective potential upgrade of the cable network. We believe that such economic and demographic characteristics make Hesse an attractive region for a cable services provider relative to the other German Federal States (Bundesländer). High population density leads to certain cost efficiencies in the implementation and operation of cable network infrastructure. Higher levels of disposable income are likely to lead to greater demand for new services offered via cable. Finally, high numbers of foreign residents indicate that a significant market exists for foreign language pay television offerings. 147 2000 2001 2002 2003 CAGR (1) Population (million) (1) 6.068 6.078 6.092 6.089 0.12% Density (population / km²) 287 288 289 288 0.11% GDP (€ billion) 183.4 188.1 188.8 190.1 1.20% GDP / Capita (€) 30,224 30,948 30,991 31,220 1.09% Population breakdown (million) German citizen 5.228 5.244 5.263 5.268 0.25% Foreign nationalities 0.840 0.834 0.829 0.821 -0.76% (1) Size of Hesse as of the end of 2003 was 21,115 km 2 . Source: Hessisches Statistisches Landesamt According to industry sources as of December 2004, Hesse has about 2.75 million television homes, approximately 1.4 million or 51.3% use cable television, approximately 1.3 million or 45.6% use satellite and approximately 0.1 million or 3.1% use terrestrial transmission via antenna. North Rhine-Westphalia Market Overview North Rhine-Westphalia is one of the most densely populated regions in Germany, with approximately 18 million inhabitants and an average population density of 530 people per square km, compared to a national average density of 231 people per square km. The region includes nine of the 20 largest cities in Germany, including Cologne, Essen, Dortmund, Düsseldorf and Duisburg with populations exceeding 500,000 inhabitants, and has 30 cities with populations exceeding 100,000 inhabitants. The region has a GDP of €470 billion accounting for approximately 22% of total German GDP. GDP per capita has increased by an annual rate of approximately 1.4% since 2000 resulting in a higher disposable income.