Aol Germany -> Telecom Italia

[AndreA]

Dan Bieler

Telecom Italia becomes Germany's second-largest broadband operator
Telecom Italia has announced its intention to acquire AOL Germany for ?675m in cash from Time Warner (we estimate about 1x revenues). The deal concerns only the access business of AOL Germany, not the portal operations. AOL Germany has about 1.1m DSL and 1.3m narrowband subscribers. The deal is expected to close in four to six months after receiving customary regulatory approval.

Comment: The announcement to acquire AOL Germany comes just days after Telecom Italia's announcement that it is to focus more on content delivery through its fixed line division. We do not view the AOL Germany acquisition as an integral part of this new strategy - although it could prepare the ground for such a scenario. AOL Germany will merge with Telecom Italia's existing German operation, Hansenet, which operates on a nationwide basis under the 'Alice' brand.

By combining Hansenet and AOL Germany, Telecom Italia becomes the second-largest provider of broadband access, practically in line with DSL reseller United Internet, with about 2m DSL customers, but well behind Deutsche Telekom, which had 6.4m DSL connections (excluding resale) in H1 2006.

The move cements Hansenet as a leading communications provider in Germany. But we believe that the integration of the AOL customer base will be a real challenge. As part of the acquisition, a five-year partnership was signed, under which AOL will provide co-branded audience services and content on a joint web portal for all of Telecom Italia's residential subscribers in Germany and will handle all online advertising sales.

We are sceptical whether this is a wise move. AOL Germany has a different history and culture to Hansenet. More importantly, over the last few years the brand of AOL Germany has not had the same pulling power as 'Alice'. Whilst AOL Germany no doubt brings expertise in online advertising, we are less certain that it is in a position to operate a portal that caters to the tastes of existing Alice customers.

Alice does not operate a fully-fledged portal in the traditional sense, but only a very functional ?control panel?. We would argue that this is part of its attraction. Whilst Hansenet must preserve the kind of service AOL Germany's customers are used to in order to control churn, the company should be carefully not to irritate Alice customers with an ?all singing, all dancing? portal.

The move could of course be the preparation for a more convergent positioning of Hansenet, including the development of a triple or quadruple-play offering. In this sense, the acquisition would overlap with Telecom Italia's reorientation. However, at this point, the exact strategy for Telecom Italia's European broadband activities remains unclear, especially given the abrupt departure of Telecom Italia's Chairman Marco Tronchetti Provera last Friday.


http://www.ovum.com/news/euronews.asp?id=4872