Tiscali Spa Business Information, Profile, and History

Company Perspectives:

Having consolidated its position in Italy, Tiscali continues to develop its business on a pan-European scale. Its goal is to establish itself as the leading ISP and portal in Europe, and to achieve "critical mass" it has a target of being one of top three ISPs in each major European country. Tiscali's strategy involves utilizing Internet technologies to build a successful business model based on a new concept of a proprietary, IP-based, interconnected network. The company will provide customers throughout Europe with a full range of services--voice, Internet, and audio/video streaming--to compete effectively with traditional telecoms and cable players. The company is convinced that communications-related services should be available to customers regardless of the access means: fixed or mobile telephones, PC or television. Being an independent player represents a key factor in successfully developing and providing the best and most innovative services to customers.

History of Tiscali Sp A

Italy's Tiscali SpA is leading the race for dominance of the European Internet access market. Founded in 1997, Tiscali has propelled itself to the top ranks, battling it out with Deutsche Telecom subsidiary T-Online for the top spot. At the beginning of 2002, Tiscali claimed the lead, boasting more than 16 million subscribers, including more than seven million active subscribers in 13 countries across Europe. Tiscali claimed a 16 percent share of the total market in 2001. In the major individual European markets, Tiscali ranks third in Italy, second in France and the Benelux markets, and fourth in Germany and the United Kingdom. Some 64 percent of the company's annual sales of EUR 635 million in 2001 were access revenues, that is, kickbacks from telephone companies from subscriber telephone charges (in most European countries, local telephone access is metered). In some markets, such as Italy, Tiscali receives as much as 50 percent of a subscriber's Internet access phone charges. Business-to-business services represents the next largest chunk of Tiscali's revenues, at 13 percent; portal revenues, generated through e-commerce and online advertising, accounts for 10 percent of the company's sales. Voice services--including Internet-based long-distance calls--reached 37 percent of sales in 2000, then dropped to just 9 percent of sales in 2001. After a long series of acquisitions, including the 2000 purchase of the Netherlands' World Online and the 2001 acquisition of France's Libertysurf, Tiscali is taking a break in its external growth to restructure its holdings and rebrand its entire network under the Tiscali name. The company, which trades on the Italian Stock Exchange, is led by founder, chairman, and CEO Renato Soru, whose 37 percent stake in the company, at times valued at more than EUR 14 billion, has made him one of Italy's richest individuals.

Internet Visionary in the 1990s

Few people would have bet that the future of Europe's Internet business was to come from the economic backwater of Italy's Sardinia. Yet there was some precedent: the island boasted the CRS4 institute, set up in 1990 to study the Internet and the computer industry, which became the first web site registered with the ".it" (signifying Italy) suffix. Sardinian newspaper Union Sarda went online in 1994, making it one of the first newspapers in Europe to launch its own web site. Yet Sardinia, where unemployment rates doubled the mainland average, remained, as Renato Soru told Newsweek, "closer to Africa than Milan."

A native of Sanluri, Sardinia, Soru's mother had run a grocery store while his father worked as a school administrator. Soru went to study at Milan's Bocconi University and planned to become an economics professor. When his father died when Soru was 20 years old, however, Soru began shuttling back and forth between school and home in order to help out at the family store. He brought to the business a concept that had not yet reached the island--that of the supermarket, converting the family's store to this format and renaming it GS (after his mother's initials). The store took off, and the family soon was running a string of supermarkets around the island. At one point, however, the company ran into trouble, having underestimated its purchasing costs, and ended up in debt.

After graduating in 1980, Soru remained in Milan and began working as a bonds trader for a merchant bank. It was there that Soru encountered the Bloomberg machine, which provided financial information, and first discovered the possibilities of the Internet. Soru was also intrigued by Michael Bloomberg's success story, telling Newsweek "It's the first time I saw that a start-up really could compete with older companies."

By the early 1990s, Soru had entered the real estate world as a shopping mall developer traveling about Europe, especially in the Czech Republic. In 1995, at the age of 32, Soru decided to return to Sardinia to continue his real estate career there. Instead, Soru encountered Nicola Grauso, who had set up one of Italy's earliest ISPs in Caligari, called Voice Online. Soru convinced Grauso to give him a franchise to set up a branch of Voice Online in the Czech Republic. Putting up some $200,000 of his own money, Soru launched the VOL Czech operation.

Unlike Italy, where the Internet was slow to take hold, the Czech Republic proved a fertile ground for VOL and the company was quickly profitable. Soru soon built VOL into the country's leading Internet provider, grabbing a 70 percent market share. He now decided to return to Italy to try his luck in the newly deregulating telephony marketplace. However, when he arrived back in Italy, he discovered that the VOL operation there had already been taken over by Telecom Italia, then in the process of extending its telephone dominance to the Internet market. Soru decided to take on Telecom Italia.

In 1997, Soru sold his house and, together with two friends, set up Telefonica della Sardegna in Caligari, Sardinia. (Soru sold the VOL Czech company to Deutsche Bank for $10 million in 1998). The new company acquired a license to lease telephone lines from Telecom Italia for a capacity of up to ten million customers. Because Sardinia itself had only 1.5 million potential customers, Soru targeted the new company at the Rome and Milan markets as well.

However, Soru quickly took the company national, rolling out the country's first telephone debit cards. Whereas credit cards had never caught on with the Italian consumer, the new type of debit-based phone cards were a success, and pioneer Telefonica della Sardegna's share of that market soared to nearly 30 percent.

Despite his position as head of a growing fixed-line telephone provider, Soru had not forgotten his earlier Internet success. Then Soru read about Freeserve, an Internet provider in the United Kingdom that had become the first ISP in Europe to offer free Internet access (that is, with no subscription fee--European consumers still paid metered rates for their online access to their local telephone companies). Soru decided to adapt the Freeserve model to the Italian market and created a new Internet service, which was called Tiscali.

Soru approached Telecom Italia, which agreed to kick back 50 percent of subscribers' phone charges to Tiscali, and in March 1999 he launched the first free Internet access service on the European continent. Tiscali was an instant success and became in turn a motor for Italy's Internet and computer market in general, as the Italian consumer, who had long shunned computers and the Internet, now began buying up PCs and going online. At the same time, the presence of Tiscali forced other providers, including Telecom Italia itself, to adopt the free subscription model.

European Domination in the 21st Century

The instant success of Tiscali, which now became the company's name, encouraged Soru to enlarge his own vision of the company's future. By the middle of 1999, Soru became determined to expand Tiscali across Europe and build a market leader. In order to accomplish this, Soru took the company public in October 1999, listing it on the Italian stock exchange in Milan.

The initial public offering was a huge success, oversubscribed by some 40 times, and valuing Tiscali as high as EUR 14 billion--making it the country's highest-valued company, ahead of even automaker Fiat. Soru, who had retained two-thirds of Tiscali's stock, became the country's wealthiest person, at least on paper. Despite the company's success, and its international ambitions, Tiscali remained firmly rooted in Caligari.

Tiscali set out a multi-pronged growth plan based on international expansion through acquisition; development of Internet-based voice communications, e-commerce activities, and both pay and free content, as well as advertising revenues and the winning of a next-generation mobile-telephony UTMS license.

Tiscali had already begun its acquisition drive prior to its public offering when it acquired Italian company Infomedia Srl in June 1999 for EUR 400,000 in a move to form the basis of its e-commerce and online payment platform. In December 1999, Tiscali reached an agreement to acquire fiber-optic network developer Nets SA., in France, which was in process of building a high-speed network between Paris and London. Under Tiscali, Nets operations expanded to include the creation of fiber optic loops enabling Tiscali to operate a single European-wide network. An important feature of Soru's acquisition program was an insistence on acquiring only company's with significant cash reserves.

The year 2000 saw the company's acquisition drive take off in earnest. Among the first of its new acquisitions was that of Switzerland's DataComm SA, one of that market's leading independent ISPs, in January 2000. Next came Marseilles, France-based A Telecom SA, a telephone services provider which held an important interconnection agreement with France Telecom. Tiscali next targeted the Germany market, acquiring Nikoma Beteilgungs GmbH, an ISP and telephone services group in Hamburg, for EUR 370 million in Tiscali shares. Like Tiscali, Nikoma--which changed its name to Tiscali Germany--had been operating as a free Internet access provider with a subscriber base of 180,000.

After acquiring majority control of search engine developer Ideare in February 2000, Tiscali took a 60 percent share in the Motorcity SpA automotive portal joint-venture startup in March 2000. Similarly, Tiscali formed a travel and tourism portal joint venture with UVET SpA, called FreeTravel SpA. In June 2000, Tiscali acquired Quinary SpA, a software and hardware integration specialist in Italy. Another acquisition came in July of that year, when Tiscali bought Best Engineering SpA for EUR 5.6 million, giving it that company's online road mapping service.

Tiscali's Internet operation grew into a new market when the company acquired Belgium's Link Line SA, an ISP with more than 110,000 subscribers, in February 2000. In April, the company acquired another leading Belgium ISP, Interweb SA, with more than 85,000 subscribers. Later that year, Tiscali bundled both services under the brand TiscaliNet. At the same time, the company extended its fiber optic network to Brussels, as well as to the major urban markets in Germany. The company also moved into the Czech Republic, acquiring CD Telekomunikace sro, which not only held a telecommunications license but also the exclusive rights to lay a fiber optic network along the country's railroad system. In December 2000, the company acquired another German Internet provider, AddCom, formerly part of the Ebner Media Group. By the end of 2000, Tiscali had rebranded most of its Internet acquisitions under the TiscaliNet brand.

Tiscali's breakthrough came in December 2000 when it acquired Netherlands' troubled ISP World Online in an all-share deal worth EUR 5.9 billion. That company had already blazed the trail in creating a pan-European Internet group, amassing more than 3.5 million subscribers in 15 countries. Founded by Nina Brink in 1996, World Online had stumbled over a scandal surrounding its initial public offering in 2000--shortly before the IPO, Brink had sold off more than two-thirds of her own shares for just $6 per share, far lower than opening stock price. The resulting scandal forced Brink's resignation and torpedoed World Online's share price.

The World Online acquisition instantly catapulted Tiscali to the top ranks of European Internet access providers. The Dutch company also brought with it a war chest of some EUR 1.6 billion, enough to fuel Tiscali's continuing acquisition program.

By February 2001, Tiscali had made another significant acquisition, that of France's Freesurf, that country's second-largest ISP, in a cash and stock transaction worth $615 million. Then, in April, Tiscali expanded its German presence with the purchase of Guglielmo GmbH, which operated the ISP Planet-Interkom, from VIAG Interkom for a cash and share deal worth EUR 77 million, followed by the acquisition of SurfEU.com--an ISP and portal operator active in Germany, Austria, Switzerland, and Finland--for a total cash and share price of EUR 70 million. These two acquisitions added more than 1.3 million active subscribers to Tiscali's subscriber base.

In the United Kingdom, Tiscali acquired Springboard Internet Services Ltd in April 2001, which included the LineOne ISP and portal service, with more than 400,000 subscribers, for EUR 100 million. In July of that year, the company moved into Spain with the purchase of Inicia Comunicaciones SA, an ISP provider with 82,000 active subscribers, for EUR 8.2 million. Other acquisitions through the year included that of Tiny Online Ltd in the United Kingdom, Planetone Internet Service GmbH in Austria, Yucom and Infosources in Belgium, and Wish-NokNok in the Netherlands. By the end of the year, the company counted more than 16 million subscribers, including more than 7.3 million active subscribers.

At the beginning of 2002, Tiscali was forced to take a break in its acquisition plan as its losses mounted against slumping revenues. The poor climate of the Internet market had forced the company to write down the value of many of its acquisitions, which resulted in exceptional charges of more than EUR 1 billion that pushed the company's losses for the year to more than EUR 1.6 billion. While pointing out that most of its losses had been occurred by its subsidiaries before Tiscali had acquired them, Soru pledged to control the company's losses by the end of the year, cutting back on spending while simplifying its organization into a smaller number of Tiscali-branded subsidiaries. Soru also forecasted a rise in revenues to EUR 1 billion by the end of 2002.

While some observers had begun to question the company's business model--unlike many of its competitors, Tiscali remained committed to its free subscription model, meaning its revenues depended highly--64 percent of sales in 2001--on kickbacks from telephone companies. Although Tiscali had been slow to launch ADSL broadband service, a market that began to build in 2002, by the end of the first quarter of that year the company could point to its success in reducing losses and even claimed to be the first European ISP to turn a profit. As the European Internet market slowly consolidated--many analysts expected the market to shrink to just a handful of major, internationally operating groups--Tiscali appeared certain to fight hard to keep its place in the ISP winners circle.

Principal Subsidiaries: Nacamar Internet Services; Tiscali Belgium; World Online s.r.o. (Czech Rep.); Denmark Tiscali A/S; World Online France SA; Tiscali GmbH; B2B Tiscali Business GmbH (Germany); World Online BV (Netherlands); World Online AS (Norway); Tiscali Luxembourg S.A.; Tiscali Telecomunicaciones (Spain); World Online AB (Sweden); Tiscali DataComm AG (Switzerland); Vodacom World Online Ltd (South Africa); Tiscali UK Ltd; NETs S.A. (France); Liberty Surf UK.

Principal Competitors: T-Online International AG; France Telecom SA; AOL-Time Warner; BT Group Ltd; Telecom Italia SpA; Terra Lycos, S.A.; Swisscom AG.

Chronology

• Key Dates:
• 1995: Renato Soru starts up Czech Republic franchise of Italian ISP Voice Online and builds it into dominant Czech ISP.
• 1997: Soru founds Telefonica della Sardegna in Caligari, Sardinia, a regional telephone services provider that goes national.
• 1998: The company sells VOL Czech Republic for $10 million to Deutsche Bank.
• 1999: The company is renamed Tiscali and launches a free subscription Internet service in Italy; Tiscali goes public in October.
• 2000: Tiscali caps the year with the EUR 5.9 billion purchase of World Online, propelling it into the top ranks of European ISPs.