Business Analysis of web.de AG

Table of contents

List of Figures

Abbreviations

Abstract

1 The Industry and the Market
1.1 Internet in Germany
1.2 Freemail Market in Germany

2 The Companies
2.1 Similarities
2.2 Target Company: Web.de AG
2.3 Selected Competitors
2.3.1 Freenet.de AG
2.3.2 United Internet AG
2.4 Other Competitors

3 Qualitative Analysis
3.1 Macro-Environment Scope: PEST Analysis
3.1.1 Political and Legal Factors
3.1.2 Economic Factors
3.1.3 Social Factors
3.1.4 Technological Factors
3.2 web.de scope: Ansoff matrix
3.3 Critical Review of Applied Models

4 Quantitative Analysis
4.1 Horizontal Analysis
4.2 Vertical Analysis
4.3 Key Financial Ratios
4.4 Cross-sectional Analysis
4.4.1 Definition of the Benchmark
4.4.2 Comparison of Web.de with the Chosen Competitors
4.5 Critical Review of Applied Models

5 Strategic Options (Scenarios)
5.1 Short-term Option: Acquire New Paying Customers
5.2 Mid-term Option: Focus on B2B
5.3 Long-term Option: Expansion
5.4 Evaluation of Web.de’s Vision

6 Outlook and Recommendations
6.1 Industry Outlook
6.2 Recommendations and Forecast for Web.de

References

Appendix A - 3-year forecast

Appendix B - Financial Statements of Web.de AG

Appendix C - Financial Statements of Freenet.de AG

Appendix D - Financial Statements of United Internet AG

List of Figures

Figure 1 - Internet users per 100 inhabitants

Figure 2 - Customer' s awareness of web services in Germany.

Figure 3 - Strategic development directions

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Abstract

ANGLIA POLYTECHNIC UNIVERSITY Ashcroft International Business School Master of Business Administration

BUSINESS ANALYSIS OF WEB.DE AG

SID:0371500 February 2004

The Internet has been emerging incredibly during the past decade. It has created new ways of communication and doing business. The companies operating via the Internet are confronted with speedy changes in their environment.

This term paper analyses the German Internet service provider web.de AG. First of all, the current industry and market of electronic commerce are subject to description. This is followed by a presentation of the current situation of web.de and its competitors.

The analytical chapter is split into two major parts: The qualitative analysis examines the environmental forces whereas the quantitative analysis puts emphasis on financial figures and ratios. Afterwards three options (short-term, mid-term and long­term) of future development of web.de are discussed. Finally, there is an outlook on the web service industry as a whole and some recommendations for web.de in particular. These recommendations are tested and modelled using a comprehensive spreadsheet which results in a three-year forecast.

1 The Industry and the Market

1.1 Internet in Germany

The Internet offers a technology that can connect everybody with anybody else. But there are regional differences in availability and usage anyhow. The technological development and social integration of the Internet is lead by the United States. In Europe, the spread of the new technology was pioneered by the Scandinavian countries which were the early adopters here. Germany belongs to the group of the “followers” (Empirica, 2002). Nevertheless, today nearly half of the Germans goes online. The following chart illustrates what percentage of the population uses the Internet.

illustration not visible in this excerpt

Figure 1 - Internet users per 100 inhabitants Source: BITKOM (2003)

As the Internet usage is becoming more and more integrated into daily life the e-commerce is growing rapidly. The UNCTAD (2002:19) cites Forrester Research reporting worldwide e-commerce at $2,293 billion for 2002 and forecasting $3,879 billion for 2003. This is about 2% of total commerce which implies high potential for future growth.

EITO (2003) forecasts a worldwide information and communication technology (ICT) market volume of 2,213 billion € for 2003 and estimates a growth of 3.1% in 2004. Western Europe accounts for 609 billion €. Germany is in the leading position (22%) according to market share closely followed by UK (21%). The mentioned surveys show that about two thirds of the ICT market is business-to-business (B2B) and only one third is business-to-consumer (B2C).

Germany has the biggest Internet user group in Europe with about 30 million people. In 2002, they generated online retail sales of 8 billion € which is 1.6% of total retail sales (ECIN, 2003).

According to BITKOM (2003) the German ICT market was heavily affected by the economic downturn since 2001. In 2002, this market declined by 1.3% with about 2,000 companies vanished.

From the technological point of view Germany is in a leading position. It ranks second behind Austria in satellite communication and third behind Denmark and Sweden in broadband Internet access. In both technologies Germany is far ahead the EC average and the USA (BITKOM, 2003).

1.2 Freemail Market in Germany

When analysing the freemail market in Germany it is helpful to look first at the customer’s awareness of web services in general. In Germany the web services’ customer’s awareness is researched by the working group for Internet research (AGIREV). The 2003 study shows following results (million people aged 14 to 69, on a weekly usage base):

illustration not visible in this excerpt

Figure 2 - Customer's awareness of web services in Germany Source: AGIREV (2003)

Amongst the top ten web services there are 7 companies that offer freemail services (all except Google, eBay and AOL.de). This clearly shows that freemail is the most frequently used web service and a catalyst for commercial services. Web.de is in the third place of freemail services being close in Yahoo!.

The freemail market is still growing although the growth rates lowered in the last years. Nevertheless this market has potential because only half of the Germans use the Internet yet. If the other half would start going online, this resulted in an extending freemail market for sure.

2 The Companies

2.1 Similarities

All the companies that are mentioned in the scope of this assignment have one thing in common: They offer freemail services. The nature of freemail services is offering e-mail services for free thus not contributing to turnover. Hence, the market players have different business models to compensate the costs of freemail services.

The companies use freemail services as a tool to attract potential customers. Not offering such services would result in not being recognised as a leading Internet service provider.

The three selected companies are busy in this sector since mid of 1990s. They are among the leading Internet service providers in Germany. All companies operate from Germany and primarily target the German market. They all are public limited companies that are listed on the Frankfurt Stock Exchange. Freenet.de AG and United Internet AG reported profits the first time for 2002. Web.de is looking forward to reach the break-even point in 2003. All companies are well established players of the new economy in Germany.

2.2 Target Company: Web.de AG

Web.de was founded in 1994. It is the leading German Internet portal. In 2002, web.de accounted for sales of 23.6 million € and reported an annual loss of 12.9 million 6 (web.de, 2003a). Nevertheless the business development is quite positive: For the third quarter of 2003, web.de reported a profit of 63,000 6 (web.de, 2003e) while overtopping the sales of 2002 in the first three quarters of 2003. Web.de accounts in accordance with US-GAAP.

At the beginning the core product was freemail services and the revenues were generated by placing online advertisement upon its Internet portal pages. Today the business is based on three main pillars (web.de, 2003a):

- online advertisement / media sales:

This segment accounted for a turnover of 11 million € (47%). This is an increase by 49% compared with 2001. The whole online advertisement market in Germany grew by 20% in 2002, thus web.de gained market share.

- digital pay services:

This is the fastest growing segment of web.de. It accounted for turnover of 8.8 million € (37%). This is an incredible increase compared with 2001 (0.8 million €). This business includes premium e-mail services, online micro payment, lotteries and Internet telephony. In 2003, this part of the business will become largest.

- e-commerce:

This segment strongly depends on the economic situation. It markets and sells services via the Internet. Therefore it cooperates with well-known companies of the financial sector (banks). This business accounted for a turnover of 3.8 million € (16%) which is a decrease by 45%.

Web.de’s vision is “becoming the world’s largest Internet telephony provider within the next 10 years” (web.de, 2003b). This is very ambitious and will be subject to further consideration in chapter 5.4.

2.3 Selected Competitors

2.3.1 Freenet.de AG

Freenet.de AG is a spin-off of Mobilcom AG. It was founded in 1999 and is the No.2 Internet provider in Germany. In 2002, it accounted for revenues of 42.2 million € leading to a profit of 1.3 million € (Freenet.de, 2003). Freenet.de makes up its financial statements according to IAS. The revenue sources are online advertisement (32%), e-commerce (24%) and connectivity (42%), the latter including broadband Internet access (DSL) for end users which is very popular in Germany.

Freenet.de has the vision “to become the most comprehensive and user-friendly online service on the German Internet, providing support for all access technologies” (Spörr, 2003).

2.3.2 United Internet AG

United Internet AG is a holding of 21 smaller Internet companies. These smaller companies have their own brands, like GMX, 1&1, Schlund and twenty4help, which are well known to the German public. These companies have a different focus and attract different user groups: GMX offers e-mail services to private customers, whereas 1&1’s product portfolio includes solutions for small businesses, Schlund covers services for demanding professionals and twenty4help offers IT support and outsourcing services to companies. United Internet AG is busy across Europe and is currently expanding to the US (Manager Magazin, 2003).

The consolidated income statement reports revenues of 320 million € and a profit of 37.3 million € (United Internet 2003). United Internet accounts according to US- GAAP.

United Internet AG wants “to be amongst the most successful German Internet providers and likes to be first choice for sophisticated private customers and Internet professionals” (United Internet, 2003:1).

2.4 Other Competitors

The nature of the Internet in general and e-mail in particular is global, i.e. from technical point of view it does not matter where an e-mail provider resides. That’s why German e-mail providers also compete with large multinational companies like AOL, Microsoft (MSN), Yahoo, Lycos and many others.

Concerning the German market there is another big player: T-Online. This subsidiary of Deutsche Telekom AG offers its Internet services to customers of Deutsche Telekom only. Nevertheless it is the market leader and thus a major competitor reaching 16% of Internet users while web.de reaches 8% of Internet users (AGIREV, 2003).

3 Qualitative Analysis

3.1 Macro-Environment Scope: PEST Analysis

As a starting point, it is useful to examine the environmental influences affecting the organisation. The PEST framework checks the key forces of the macro-environment categorised into four main types (Johnson and Scholes, 2002:102). The Internet industry is in a very dynamic environment which is changing rapidly. That’s why the following chapters only focus on factors that directly influence web.de’s operations to avoid information overload.

3.1.1 Political and Legal Factors

The overall political and legal framework in Europe is defined by directives of the European Parliament. The directives that influence e-commerce and web services most of all are the directive on electronic commerce (European Parliament, 2000) and the directive on privacy and electronic communications (European Parliament, 2002). These directives where translated into German law. Today, e-commerce and web services are mainly affected by the following laws:

- law on telecommunication (Bundesgesetzblatt, 1996)
- law on electronic commerce (Bundesgesetzblatt, 2001b)
- law on distant selling (Bundesgesetzblatt, 2001a)
- law on usage of tele-services (Bundesgesetzblatt, 1997)
- law on data protection (Bundesgesetzblatt, 1990)

In addition to the definition of the legal framework, the government fosters the further integration of the Internet with everyday life with a project called “Initiative D21”. Another example beside many others is the upcoming introduction of online elections.

3.1.2 Economic Factors

The economic downturn of the recent years affected mainly online advertisement activities of web service providers. But the losses there were compensated by growth of other activities though. Today, the market is highly fragmented and consolidation process has not started yet.

More serious for this branch is the mentality of “whole Internet is for free”. This prevents commercial services being widely accepted. In Germany this is paired with “stinginess is cool” mentality which makes it even harder to make the customers paying for services.

The challenging business environment forces companies like web.de to increase marketing spending to create higher brand awareness and to gain new customers.

3.1.3 Social Factors

E-mail plays a key role for communication nowadays. It is a non-disturbing media (opposite of the telephone) which lets one communicate at the time of own choice. In addition, it facilitates the communication between people living in far-distant time zones. Companies like web.de foster e-mail communication thus having a good standing in the public opinion because supporting people to keep in touch with others.

The possibility to shop online has changed the shopping habits. The Internet is a very transparent platform and it makes it easy to compare prices and order a product where it is cheapest. On the other hand this form of retail excludes people without technical knowledge or equipment. From the retailers point of view e-commerce has the advantage to offer products and services to customers that do not live in his area, like web.de which serves the German market from only one location.

After some financial scandals discussions are going on about common business practices. Web.de has committed to German Corporate Governance Code (Regierungskommission DCGK, 2002) to show that transparency and confidence are respected values within the company.

3.1.4 Technological Factors

Web.de has to keep up with technological development to maintain a leading position. Short time to market is most important here. Whereas technologies come and go very fast only a few very popular are mentioned here: broadband access makes new services possible (e.g. video on demand), spam* protection safes users Spam is an acronym for unsolicited e-mail.

[...]