Cheap Net access key to wooing German users

Germany is Europe's largest Net market, with 11.2 million citizens--or 17 percent of the nation's population--who regularly surf the Internet. According to a recent study, however, that number is expected to double over the next two years, making Germany one of the most coveted new markets for Internet service providers.

High local phone charges are commonly seen as the main obstacle to an Internet boom in Europe, as local calls are still charged by the minute. While this system spells steady profits for former state monopolist Deutsche Telekom, it also means Germans must keep one eye on the clock while surfing the Net.

Until now, Deutsche Telekom's own T-Online ISP has managed to keep its international competitors at bay. It boasts a subscriber base of 3.4 million users, making it by far the most popular online service in Germany. America Online, in contrast, runs at a not-so-close second, with 900,000 German members.

But recent shifts in the industry may help turn the tables for Telekom's Net competitors. AOL Germany plans to charge a flat Internet access fee beginning in October--a move away from the metered price model it previously promoted.

While charges for local calls to access AOL aren't included in this flat rate, AOL will offer discounts up to 46 percent on Deutsche Telekom's local call charges, depending on the time of day. For people who surf the Net for more than seven hours a month, AOL's service would be cheaper than T-Online's.

Meanwhile, Sony Europe is trying to get a foothold by introducing a German version of its free "FriendFactory" Web community, already established in Britain. Unlike its U.K. counterpart, FriendFactory Germany will not only offer free Web hosting, email, chat, and instant messaging, but also free Internet access. Users will still be responsible for local phone charges, however.

That makes FriendFactory Germany a de-facto free ISP, similar to those that have taken Britain by storm--a situation that could spell trouble for AOL, as well as for T-Online. Freeserve, the first free ISP in Britain, managed to boost its membership to 1 million users in just 4 months, forcing AOL to introduce Netscape Online, its own free ISP venture.

But according to AOL Germany spokeswoman Britta Doering, free Internet access is not yet a threat in Germany.

"Fortunately, there isn't anything comparable to Freeserve at the moment, but we have to watch out," she said. "We've slashed prices to meet consumer demand for cheap Internet access to the point where we can't go much lower. Now it's time for Deutsche Telekom to offer cheap local calls."

But Deutsche Telekom doesn't want to abandon its per-minute pricing for Internet access and local calls, according to company spokesman Joerg Lammers.

"Flat pricing doesn't have a future, because it just isn't profitable," Lammers said. "If you look to the U.K., all the free ISPs that have emerged may charge nothing for Internet access, but the local phone charges of British Telecom can run up to 6 cents a minute."

With prices expected to plunge once competition for local calls heats up, neither Sony nor AOL has ruled out offering a combined flat rate for Internet access and local call charges, possibly through a deal with one of Deutsche Telekom's rivals. But there are other players on the horizon willing to take a stab at the lucrative market.

Microsoft announced this week that it is going to relaunch its MSN online service in Germany over the next 12 months. MSN Germany had a less-than-successful debut, as consumers complained of high prices and lack of content. The software giant closed its service a year ago, after its user base shrunk to a mere 30,000.

No details about pricing or partnerships have been announced, but all competitors agree that Microsoft will be a force to be reckoned with the second time around.

"We will have to watch the market very closely. It's going to be very competitive in the months to come," Lammers said.