ISP market buzzes with merger talk

Analysis
By BBC News Online business staff

Companies are hoping faster connections mean bigger profits

The takeover rumours are flying.

On Thursday, a German newspaper reported that T-Online, Europe's largest internet service provider, was planning to buy a majority stake in AOL from US media giant Time Warner.

Although T-Online's parent company, Deutsche Telekom, denied the plans, the report sparked a fresh bout of speculation about the future of the ISP market.

With the advent of broadband sharpening competition, analysts are forecasting a period of mergers and acquisitions, leaving revenues in the hands of only a few pan-European companies.

"You need size to be profitable," said Oliver Maslowski, an analyst at Vontobel bank.

"We are talking about a big, big growth market."

Repenting at leisure

Analysts were sceptical that any T-Online/AOL tie-up was imminent and said there would be regulatory concerns about such a deal, especially in Germany.

But they did say there would be some sense in it.

The German firm has about 4bn euros ($4.7bn; £2.8bn) in cash and is thought to be keen to expand in France and the UK where it is relatively weak and AOL is particularly strong.

Time Warner, on the other hand, has been repenting at leisure after merging with AOL at the height of the dot.com boom.

Executives who arrived at the company from AOL have mostly been shunted aside, the AOL prefix has been dropped and the internet arm's business is performing poorly.

Under these circumstances, any realistic offer to buy into AOL might prove difficult for Time Warner to resist.

Waiting game

What makes broadband customers so attractive for ISPs is that they "are more profitable and less price sensitive" than dial-up users, says Mr Maslowski.

They are more willing to pay higher monthly fees for unlimited access because they use their computers often and for longer periods of time.

Advances in technology will also help drive demand - more sophisticated services available online will attract new customers.

It will also become cheaper to get online as the telecommunications industry is deregulated and the price of new products comes down.

European giants Deutsche Telekom, BT Group and France Telecom have all said their online businesses are key to future profit growth, especially as demand for traditional fixed-line telecoms services wanes.

But analysts believe Telekom's T-Online is in no rush to buy and may play a waiting game, hoping to pick up assets more cheaply.

The only problem with that, they say, is that others might get there first.