WEB.

DE AG – ComBOTS AG

From Internet Portal to the World’s Largest

Internet Communications Enterprise

Case Study

April 2003/July 2006

Dr. Karl-Heinz Rau

Professor
Department of Business Information Systems
Business School of Pforzheim University
Tiefenbronner Str. 65
75175 Pforzheim, Germany
Ph.: ++49-7231/28-6314
Fax: ++49-7231/28-6090
E-mail: rau@hs-pforzheim.de
Web: http://rau.hs-pforzheim.de

Prepared with the Assistance of

James Dymond, MBA-Student 2003
Xiaomei Hu, MBA-Student 2006
The Forward-Looking Innovation of the WEB.DE AG
On October 1, 2002 the Karlsruhe-based WEB.DE AG broadened their previous three seg-
ment business model (Media-Sales / E-Commerce / Digital Services) with the introduction of
the product "Com.Win 1.0" on the Internet telecommunications market. Previously, the
WEB.DE AG’s Internet portal WEB.DE (http://web.de) with 19 portals, around 220 subject
categories, and diverse, digital fee-based services was the center of its business model.
WEB.DE represented one of the most extensive online offerings in German. By 2002, every
third Internet user in Germany was already a WEB.DE user.

In 2002, digital fee-based services were WEB.DE’s growth engine,

and “more effort will be put into this in 2003,” according to CEO
Matthias Greve. With over 300,000 paying customers, the Internet
telecommunications firm earned 40 percent of its total revenue from
“Digital Services”. Matthias Greve looked optimistically into the
digital future: “We are just at the beginning, if you bear in mind that
the revenue is generated by ‘only’ about 2.5 percent of our more
than 10 million registered customers. The internationalization that
we are striving for with Com.Win will clearly increase the potential
once more. Along with WEB.DE’s large reach and the more than 10
Matthias Greve
million satisfied users, the success of our ‘Digital Services’ is based
on the fact that more and more users are ready to pay money for real value-added services on
the Internet, as well as trust in our secure and intelligent payment system,” Matthias Greve
said.

Internet telecommunications earned a special place among the ‘Digital Services’ since the
introduction of the product Com.Win in October 2002. Com.Win, which was available in ver-
sion 1.4 in April 2003, combined the advantages of the traditional telephony (quality of
speech) with that of the Internet (worldwide availability/functionality). The entry into tele-
communications with Com.Win was a successful step from WEB.DE AG’s view, and many
more steps were to follow monthly. Since the introduction of the Com.Win product family,
new versions and functions, such as synchronization with Outlook or a mobile Com.Win for
use on GRPS mobile telephones, have been continually introduced to the market. The
Com.Win technology as such was the cornerstone for many further products in the Internet
telecommunications area. Telephony was just the beginning and the first version of Com.Win
showed only one percent of the expected product family’s potential. “Through the expansion
of our most dynamic business platform ‘Digital Services’ to innovative, web-based telecom-
munications services, we are moving step by step from a classic Internet portal to our Internet
telecommunications firm,” Matthias Greve said. With the expansion of the three segment
business model the CEO expected sustained positive effects on the economic development of
WEB.DE AG. While the prospects of “paid content on the Internet” was being debated in
Germany, WEB.DE AG went forward on its own and assured themselves a deciding unique
selling position in the area of Internet telecommunications. Through the introduction of fur-
ther ‘Digital Services’, which made simple and comfortable everyday communication possi-
ble, WEB.DE AG planned to increase the per capita revenue and to at least double the number
of paying customers in 2003. The reasons for the expected strong growth of ‘Digital Services’
in 2003 were: a) the need for people to communicate, b) the marketing of WEB.DE AG’s
technological leadership as well as its end-user products, and c) the strong customer loyalty of
Germany’s largest independent Internet communications firm. The firm hoped to successfully
continue its growth by constantly expanding fee-based services and further developing its
Internet-telecommunication services, an outlook which many analysts shared.

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The Financial Times Deutschland, however, had some negative things to say in the article
titled “Web.de: Much Ado about Nothing” in the October 1, 2002 edition:

As of today Com.Win, an Internet service with which Web.de promises a lasting change in
the German telephone market, is on the market. This idea did not evidently convince inves-
tors and analysts. …The product was barely online – and the disappointment was wide-
spread. “I can’t see the advantages,” said Klaus Linde, analyst at SES Research in Ham-
burg. ”Similar applications already exist. As far as that goes, the value-added is only the
linking of the applications in a user-friendly interface. All in all it is a nice idea – but it is
not a revolution by far.” Other analysts expressed similar opinions.”

The entrepreneurial question was: Will WEB.DE be able to manage the change from a na-
tional web portal to an international Internet telecommunications enterprise through their
product Com.Win?

The Products and Technology of WEB.DE AG

WEB.DE has its roots in CINETIC (Corporation for the Development and Sale of Media
Technology) GmbH headquartered in
Karlsruhe, which was founded as a soft-
ware development company by brothers
Matthias and Michael Greve in 1987. The
first achievements of the Greve brothers
were well known, such as the “Screen Ma-
chine” and later the “Video Machine”, a
video editing machine for Macintosh that
was developed with their partner at that
time, Fast Multimedia AG. They were
awarded the “Best of Comdex Award” for
these achievements. No less than 34 na-
tional and international technology awards followed.

In 1994 CINETIC changed its focus to the developing Internet/World Wide Web. Just in the
year the business unit WEB.DE, with the focus on end-user services
and services for navigating and communicating in the Internet, was
brought to life. Matthias Hornberger, board member for business de-
velopment, called the then web catalog the German answer to Yahoo!.
In November 1995 the first commercial web catalog with around 2,500
entries was started. After one year the number of entries rose over
1,000% to 25,000. The brothers Matthias and Michael Greve developed
the editing system COPS (Corporate Online Publishing System), which
is the technical basis of the catalog used by WEB.DE since then and up
until today. In 1998 the catalog added services such as news, a travel
planner, and weather. The year 1998 also marked WEB.DE’s entry into Matthias Hornberger
communications. WEB.DE went online with the e-mail service “FreeMail”. Security was the
highest priority for this e-mail communications product. The address was verified through an
activator-key, which was delivered by letter. After the activation of the user’s e-mail account,
each user received a digital signature und encryption tool. At the end of 1999/beginning of
2000 FreeMail was expanded to a comprehensive Unified Messaging Service. With this ex-
pansion of the business model “Catalogue” to include Internet communications, the portal had
been expanded horizontally and vertically expanded portal. Alone in 2000 about 20 new ser-
vices were launched – the Product Search Engine, greeting cards and the SmartSurfer, to

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name a few. The software SmartSurfer, for example, lists all Internet-by-Call providers and
their rates, and searched for the cheapest rate before every dial-up and then connects auto-
matically without further set-up. At the end of 2000 WEB.DE Channels went online, this
made all the information within the 18 main categories and 200 themed channels accessible
with one click. “Digital Services” were offered for the first time at the end of 2001. These
were services that are ordered, delivered, used, and paid for over the Internet. The first of
these offered were logos and ring tones, the WEB.DE lottery service, SMS (text messaging
service available on GSM mobile phones), and the “01212 personal area code”. These ser-
vices were further expanded successively to over 15 today, including WEB.DE Club, My-
Page, SMS-Power-Rate, PowerMail Upgrade, faxing service, @email.de, and Fun-Domains,
as well as short classified ads. As mentioned above, WEB.DE launched its first telecommuni-
cations service in October 2002: WEB.DE Com.Win. Since November 2002 WEB.DE has
offered “Mobile Call-by-Call”, another telecommunications service.

The WEB.DE AG Business Model

WEB.DE’s business model consisted of three segments:

• 'Online-advertisement', e.g. classic banner ads,

• 'E-Commerce', e.g. commissions from enabling third party sales transactions and
• 'Digital Services', e.g. fee-based services.

The reason that these three business segments generated revenues was the portal’s vast reach
and a large number of loyal customers. In the year 2002 WEB.DE had more than 12 million
registered users and reached almost every third home in Germany. Second to T-Online,
WEB.DE reached 32.3% of the Internet users in Germany, positioning WEB.DE ahead of
AOL.de, Yahoo.de, Lycos.de, and MSN.de. WEB.DE was the leader in ‘stickiness’ (the
user’s length of stay) with over 67 minutes, ahead of T-Online with 61 minutes. 8% of the
German population between 14 and 69 used WEB.DE weekly. The reasons for this high user
acceptance were intuitive navigation through the WEB.DE web pages, the fastest load time
because of compressed data transmission, and extremely high availability as well as award-
winning user-friendliness. The quality of the FreeMail service has played an important role.
In total 36 awards have been won; WEB.DE won the Stiftung Warentest’s test of 24 e-mail
providers. In 2002 the magazine PC Welt tested eight e-mail providers and, although they did
not provide a clear winner, they made the following comments about the FreeMail service:
“FreeMail is the best address for everyone who wants a mailbox with a professional range of
services. Only two megabytes are available for file attachments, however.” Matthias Horn-
berger indicated WEB.DE’s very specific focus on the needs of the typical German Internet
user. “We have ultimately claimed and proven that we have built a product which is a bit like
Mercedes. To use that analogy, it is like Mercedes and Yahoo like Cadillac. The latter is not a
bad car, but in Germany a Mercedes just sells better.” The use of national symbols such as
the Brandenburg Gate as the logo, and the simple name in comparison to Yahoo or Lycos
were answers to the specific German concerns regarding Internet-based communication. The
focus on data security and the possibility to have one’s own Trust-Center with digital certifi-
cate, etc. concentrate on the German user’s needs as well.

'Online Advertising'
These reasons also explained WEB.DE’s success in advertising revenue. In 2001, advertising
revenue was around 6 million euros, a substantial increase from 2000, but the market is mark-
edly larger. Compared to the advertising revenue of the weekly magazines Der Spiegel and
Focus of 237 million euros and 238 million euros respectively, which reach 8.8% and 9.6% of
the population between 14 and 69, it is clear that the use of the Internet as an advertisement

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medium lags far behind classic print media. While the whole advertising market volume in
Germany in 2001 was 17.1 billion euros, it was only 240 million euros for Internet advertis-
ing, which is barely 1.5%. Despite everything, WEB.DE was able to make gains in advertis-
ing revenues even under weak economic development in 2002. The advertising revenue in-
creased 49% annually while the online advertising market only grew 20%. This business unit
contributed 47% of the total revenue of 23.6 million euros.

'E-Commerce'
The E-Commerce revenue in 2002 was 3.8 million euros paid to WEB.DE as commission by
online-shops. The decline from the prior year was due to standardization of parts of the busi-
ness (per click) which were accounted for in the advertising revenue. According to market
research, WEB.DE users were very open to making an online purchase, as 26% of WEB.DE
users had made an online purchase in the 4 prior weeks. Beyond that the users have high buy-
ing power, since 22% of the WEB.DE users have a monthly income of more than 3,000 euros.
The acceptance of online shopping was limited though. This was illustrated by the 60% of the
users that informed themselves of offers online and then purchased the products in a brick-
and-mortar store.

'Digital Services'
From the beginning, the WEB.DE web pages and services were aimed at providing the user
with highly practical services. This was also true for the portal which followed the principle
of being as user-friendly and providing as much value as possible. Some examples are: fea-
ture-rich e-mail service, the travel planner, traffic reports, horoscopes, lotto service, and
SmartSurfer. Specific German trends, such as SMS, were picked up quickly. An opportunity,
which according to Matthias Hornberger, Yahoo completely missed because this service
played no role on the US market. Along with a number of free services, WEB.DE increas-
ingly offered fee-based services. A simple example of this was SMS service, where because
of the price policy of the mobile telephone providers, all competitors were forced to offer the
sending of SMS only for a fee. WEB.DE was able to persuade users to try the other services
with increasing success. In 2002, the revenue from ‘Digital Services’ was 8.8 million euros,
37% of total revenue. This revenue was earned from around 2.5% of all registered WEB.DE
users. Therefore, the revenue per paying customer in the third quarter of 2002 was 9.26 euros.
A few examples of such fee-based services are:

WEB.DE SMS Service EUR 0.15 to 0.75 / SMS

WEB.DE Directory Up to EUR 240 / year
WEB.DE Club EUR 60 / year
My.Name@eMail.de (neutral eMail) EUR 18 / year
01212 “personal area code” EUR 34 / year
Power SMS rate EUR 24 / year
Power Mail Upgrade EUR 35 / year
WEB.DE Mypage EUR 15 / year
…

Many of the individual services were already included with a membership in the WEB.DE
Club. In 2002 the number of Club members increased six times to about 60,000, with each
member paying 5 euros per month. The fee-based digital services’ economic attractiveness
was made clear by a gross profit margin of around 75%.

WEB.DE’s Competitors
Clearly defining WEB.DE’s market was not simple. WEB.DE’s market was fundamentally
broad simply because of the three segments of its business model, ‘Online Advertisement’,

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‘E-Commerce’, and ‘Digital Services’. Competitors were in the groups general consumer por-
tals (e.g. Yahoo.de or Lycos.de) and web-portals of internet service providers (ISPs like T-
Online.de or AOL.de), but also relevant providers of search engines (e.g. Google or Fireball),
pure e-commerce portals (e.g. Amazon.de or eBay.de), providers of current news (e.g. Fo-
cus.de or n-tv.de), or e-mail service providers (e.g. GMX.de, ePost.de). A quantitative over-
view of audience, reach, and length of stay for each of the individual providers are shown in
the following statistics from Nielsen NetRatings.

Company Unique Audience Reach % Time per Person

1. T-Online 14,920,447 55.18 1:37:11
2. Google 13,852,859 51.24 0:19:13
3. eBay 12,939,593 47.86 2:26:13
4. MSN 9,631,777 35.62 0:20:57
5. AOL Time Warner 9,357,655 34.61 0:19:45
6. Amazon 9,239,934 34.17 0:10:12
7. Microsoft 8,731,747 32.30 0:07:54
8. Web.de 7,999,275 29.59 1:18:59
9. Yahoo! 7,759,894 28.70 0:31:29
10. United Internet 7,591,246 28.08 0:38:54
(Source: Nielsen NetRatings, February 2003)

Measured monthly, WEB.DE reaches about one third of the Internet population. At the annual
general meeting in 2002, Matthias Greve named the companies Yahoo, AOL, Lycos, T-
Online, and MSN as the answer to the question of who its main competitors were. Matthias
Hornberger added GMX and freenet to the list. Defining the competition was also made more
difficult because, as Matthias Hornberger stated, “a complex network of competition and co-
operation can be observed.” For example, 1&1 Internet AG and its subsidiary GMX was a
direct competitor of WEB.DE, but at the same time 1&1 Internet AG placed advertisements
for its broadband products on WEB.DE. On the other hand, 1&1 Internet AG was WEB.DE
AG’s first distribution partner for Com.Win.

T-Online
A key pillar of T-Online’s corporate strategy was the “combined business model,” which
unites the access business and the portal business. In the access segment, T-Online supplied
high-quality Internet access at competitive prices to private customers as well as small and
medium-sized enterprises.

The current developments in 2002 showed (see Group Report 3rd Quarter 2002) that a large
part of the revenue of T-Online was earned, as before, through the access-area with about 833
million euros. Revenue also increased in the non-access-area by 91%, and therefore made up
21.3% of total revenue. The gross profit margin (47.1%) was also improved from quarter to
quarter. Especially the non-access-area stood out because of its high gross profit margin and
therefore represented an important business unit for the future. This illustrates the strength of
the T-Online business outlook: Through increased use of the non-access offerings, the access
revenue was raised and therefore the access-area became more profitable. During the third
quarter of 2002, T-Online forged ahead with its transition from an ISP in the conventional
sense to an Internet media network. It has generated exclusive value added and premium con-
tent via its media alliances, working with its partners to secure new earnings potential. T-
Online provided users with exclusive new content presented in innovative, interactive
forms—for instance, the new live show, a daily, 30-minute format produced by T-Online it-
self. These shows, hosted by celebrities, brought stars, chats, trailers, previews and live inter-
action to an online audience—always in broadband quality. Both live and on-demand offer-

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ings were available. The selection was rounded out by premium events and TV content such
as the 2002 World Soccer Championship, the Tour de France, movie trailers and music vid-
eos. With this T-Online placed itself clearly ahead of the competition in the area of broadband
services. By sealing an e-commerce deal with Lycos Europe during the third quarter, T-
Online added to its network of high-caliber partnerships, and paved the way for further
growth.

Yahoo!
On January 17, 2003 the Financial Times Deutschland reported, “The internet pioneer Ya-
hoo!, which had suffered from slumping advertising revenues for a long time, increasingly is
picking up speed. The group has been profitable for three quarters in a row, realized a 51%
increase in revenue, and raised its expectations for fiscal year 2003. ‘In the preceding twelve
months we have taken over the business and turned a company with great potential into a
company with many strong business units,’ Yahoo CEO Terry Semel said at the presentation
of the quarterly results. Over a year ago, Semel had begun the expansion of new fee-based
services such as Internet access as well as help wanted and personal ads, in order to limit the
dependence on advertising revenue. In the fourth quarter, the revenue from the fee-based ser-
vices jumped 120% to $89.4 million. By the end of December Yahoo! had 2.2 million paying
customers, and this number is expected to rise 50% in 2003. A large majority of the 101 mil-
lion active Yahoo users continued to use only the free services. In the 4th quarter the revenue
increased 51 percent to $285.8 million compared to the same period the prior year, the profit
reached $46.2 million. A year earlier Yahoo! made a loss of $8.7 million. The restructuring of
the world’s largest Internet portal is still not completed. This was just the first act. ‘The sec-
ond act is coming’, said Semel. The former head of the movie studio Warner Bros. mentioned
the prospect of expanding other sources of income such as the DSL-connections introduced
by the telecommunications firm SBC Communications. A number of fee-based services that
are currently available in the only US market are to be introduced internationally this year.
Yahoo! wants to further invest in the European market and grow strongly in each country,
said Mark Opzoomer, Managing Director of Yahoo! Europe.” “ In 2003 they should grow by
around 20%. Experts are assuming growth of the online advertisement revenues in this year.
Another positive sign is a look to 2003: The forecasted revenues were raised from $1.08 to
$1.18 billion.”

AOL
AOL has its roots in Quantum Computer Services, which was founded in Delaware in 1985.
In 1991 the firm changed its name to America Online, Inc. As an ISP, AOL offered its users
primarily Internet access. In July 1995 AOL Deutschland, headquartered in Hamburg, was
founded as a joint venture of Bertelsmann AG and AOL Europe. The motto of the young
company was: ‘Simple to use, quicker and more comfortable Internet access, customer
friendly member service and an attractive price structure’. The takeover of Time Warner Inc.
in 2001 was spectacular.

AOL presents itself as follows: (see www.aol.de):

“Over 35 million members worldwide speak for themselves: Through the one of a kind com-
plete Internet software members can comfortably use all aspects of the Internet: AOL 7.0 is
comprised of high-quality content in 18 themed worlds, a broad communications package,
comfortable shopping opportunities, customer friendly member services, and an attractive
price structure. In addition, the online service has offered high speed content such as music
videos, the latest movie trailers, a radio station, news, and financial information since Sep-
tember 2001.” ” AOL Germany’s business model is based on member’s fees as well as adver-
tising fees and e-commerce commissions. AOL Germany reaches 6.45 million people weekly

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with its brands AOL, CompuServe and Netscape (AGIREV, Online-Reichweiten-Monitor,
2002 II). The online service has over 2.6 million registered members. That makes AOL one of
the leading Internet services providers in Germany..”

GMX
GMX introduces itself on its website as follows, “GMX was Germany’s pioneer and market
leader for quick, comfortable communication and information via the Internet. Numerous
possibilities for the individual management of personal data and information, as well as edi-
torial theme areas, which offer high-quality information and e-commerce opportunities, made
GMX the virtual home in the Net for millions of members.”

The GMX GmbH was founded in April 1998 and had 80 employees at the beginning of 2003.
1&1 Internet AG, Montabaur, as 100 percent subsidiary of United Internet AG was a found-
ing partner. GMX represented the business segment “Messaging” within the United Internet
Group. GMX offered private and business customers complete service in the area of e-mail.
The main source of revenue was the sale of online advertising space. The segment’s revenue
was 10.2 (7.0 prior year) million euros and the earnings before taxes clearly improved to mi-
nus 3.2 (minus 12.1 prior year) million euros. In February 2003, GMX had over 14 million
registered member-accounts. Since October 1, 2002 GMX has offered its members reduced
Internet access rates. The service’s high quality and ergonomics was reflected in the Stiftung
Warentest, where GMX received second place. GMX has continually expanded its market
position, and, according to a study by Active Reach, had a reach of 25 percent. GMX shares
first place with a competitor. GMX was able to start offering fee-based services with supple-
mentary product features: GMX had over 100,000 customer contracts and the number contin-
ues to grow. United Internet used GMX’s broad customer base to successfully pique the cus-
tomer’s interest in higher-quality and higher margin products of its sister company 1&1. De-
spite tight cost management, with small advertising and marketing budgets, GMX was able to
continually increase the number of users: The firm relied on a simple marketing strategy to
increase the awareness of its services. The users sent over 2 billion e-mails which included a
reference to GMX.

Lycos, and MSN are further competitors in the Portal business.

Lycos was one of Europe’s leading Internet portals, offering a pan-European network of web-
sites in 10 languages. With the combination of a search function, communication services,
content channels, Internet access, home page hosting, and online communities, the firm di-
rected their services toward a number of target audiences. Lycos was not only an attractive
address for consumers but also for advertisers and e-commerce partners in Europe. Each
month more than 25 million users visited the European Lycos web pages. By the beginning of
2003, Lycos was generating more than three billion page views per month. In the fourth quar-
ter 2002 Lycos Europe reported a positive EBITDA (Earnings Before Interest, Taxes, Depre-
ciation, and Amortization) for the first time – and therefore reached its most important finan-
cial goal according to its plan. The EBITDA-profit of EUR 1.5 million came from operational
improvements as well as one-time effects, such as seasonality and decrease in the restructur-
ing provisions. Lycos Europe increased its gross margin significantly from 11 percent in the
prior year to 30 percent for fiscal year 2002. In the fourth quarter the gross margin even in-
creased to 39 percent.

MSN (Microsoft Network Online Services) is operated by Microsoft and as a portal offered e-
mail, search and navigation support, shopping, and community functions. In the media seg-

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ment, MSN cooperated with TOMORROW FOCUS AG, one of the leading media providers
of Internet and print products in Germany.

Development of WEB.DE’s Business Policy and Strategy

Situation, Prospects, and Goal at the Initial Public Offering in the First Quarter 2000:
In 2000 CEO Matthias Greve said regarding the initial public offering, “WEB.DE is a leading,
independent Internet portal that is focusing on the strongly growing German Internet. With its
tailor made products and services the clever webpage has reached a continually growing
share of users. After the initial public offering WEB.DE wants to become the most popular,
most successful Internet portal. WEB.DE systematically finds new revenues and sources of
returns as a preferred partner of e-commerce and e-finance firms as well as the advertising
market. In the summer of 1999 WEB.DE had already reached 24% of the around 9.9 Million
German Internet users (at that time) – a good result, since our marketing campaign had not
officially begun. By the end of 2001 we want to reach 50% of the German users. By that time,
their number could grow to more than 25 million.”

When asked which strengths WEB.DE had compared to its competitors, Matthias Greve re-
sponded: “Our biggest trump card is definitely the self-developed technology. It puts us in the
position to introduce new products and services at a speed that the competitors cannot match.
Another deciding strength is the independence from large media or telecom conglomerates.
WEB.DE sees itself as committed to its Internet users, not some corporation’s interests. We
decide ourselves our market strategy, product innovation, and quality standards. This entre-
preneurial freedom makes us flexible and creative and that is apparent in the WEB.DE Por-
tal.”

In regards to the sources of revenue the CEO said: “The basis for revenue and returns are the
users, who we bind to our offerings on a long-term basis. Because of this, we are an attractive
partner for advertisers and online-shops, for example. To say it in another way: we bring
together supply and demand in the virtual market. The main revenue drivers are online adver-
tising, sponsorships, and e-commerce.”

Robert Gratzl, CFO of WEB.DE AG had the following remarks about the reasons why
WEB.DE made losses three times greater than revenue in 1999: “To build up a higher reach
and familiarity of WEB.DE, the fiscal year 1999 was marked by special investments in prod-
ucts and marketing. Notable unique positions were 8.4 million euros for marketing and re-
search and development – an increase of 332% compared to the previous year – for the
forced development of new, innovative products for the German Inter-
net. That also explains the 1999 stated, but also planned loss of 10.2
million euros. On the other hand, we have increased revenue by 132%
compared to 1998.”

Considerable investments in marketing were planned for the years 2000

and 2001, in order to reach the goal of becoming the most favorite
German Internet portal and reaching 50% of all German Internet users.
"In 2002 we should reach the break even point,“ the CFO said around
the time of the initial public offering. Mr. Grazl commented further:
"From the long-term perspective WEB.DE wants to be one of the most Robert Gratzl
profitable companies on the Neuer Markt (a segment of the German
stock market compared to NASDAQ in USA) through revenues with a strong margin in online
advertising, sponsorship, e-commerce, and digital pay services. "

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WEB.DE’s growth strategy was based on the following three areas of focus: expanding the
product line, broadening the market, as well as acquisitions and investments. This led
WEB.DE to the development of a comprehensive revenue potential from multiple sources.
The introduction of about 25 new Internet services within 24 months was part of the product
strategy. Market growth strategy was started very successfully, first with high investments in
the consistent broadening of the market. The third strategic segment of growth was sought-out
acquisitions with the help of investment capital from the initial public offering in February
2000.

Market research institutes like Forrester Research saw the importance of the Internet as an
advertisement and business platform growing strongly. According to market researchers’ es-
timations the budget for online advertisement in Germany was forecasted to rise in the next
years at a rate of 136% and reach a magnitude of 1.241 million euros by 2003 (1998: approx.
40 million). Due to the improved security standards in the Web more and more businesses –
from producers to dealers, finance and travel service providers - were using the Internet not
only as an advertising platform, but also as sales and distribution channel. According to mar-
ket researchers, online sales of products and services in Europe should reach a value of 15.3
billion euros (1998: 651 million euros) by 2002. Of this amount around one third is expected
to be sold in the German market. By the beginning of 2003, the expectations in the e-
commerce market had apparently been met. The number of the largest online retailers’ regular
customers drastically rose in only a few months. According to the HDE (Association of Ger-
man Retailers) estimations, the e-commerce revenues were forecasted to rise to more than 11
billion euros in 2003 from 8 billion euros in 2002 (2001: about 5 billion euros). But the online
advertising budgets totaled only 240 million euros in 2002.

Situation, Prospects, and Goals at the End of 2000:

In the annual report 2000 WEB.DE looked back at the prior fiscal year and saw itself as the
leading communications platform in the Internet. The online advertising market remained a
highly attractive and profit-making market segment especially for portals with a high reach
and strong customer loyalty despite the temporary market weakness. In order to reduce the
advertising market’s dependence on seasonal and economic fluctuations, WEB.DE simulta-
neously developed further sources of revenue, and therefore broadened the foundation of its
business model. In e-commerce, WEB.DE had invented new ways to steer its customers,
where potential buyers were led to the e-commerce retailers. E-commerce revenue already
made up more than 40% of the total revenue in 2000, and was said to be the engine of the
future development.

WEB.DE took over all stakes in the WORKWAYS GmbH, Nuremberg (previously System
Design GmbH) as of May 31, 2000. The B2B-market was entered in November 2000 with the
introduction of WORKWAYS UC (=unified communication), a Unified Messaging System
(UMS) for businesses. WORKWAYS UC was a product that was primarily based on
WEB.DE’s Unified Messaging Technology, but was aimed at the demands of professional
application in day to day business. WORKWAYS UC increased the efficiency of communica-
tion in the firm: e-mails, fax-, SMS-, and voice messages could be composed and edited with
the highest level of data security regardless of location. WORKWAYS customers were of-
fered a state-of-the-art technology subscription service – therefore neither hardware nor soft-
ware investment was necessary and consequential maintenance costs no longer played a role.
According to a study by the market research institute Frost & Sullivan the market for Unified
Messaging in Europe was of gigantic proportion. The institute estimated that the Unified
Messaging market volume in Europe would increase from 0.4 billion US dollars in 2000 to

-9-
2.1 billion US dollars in 2001 and 10.8 billion US dollars in 2002. With a potential clientele
of about 2 million medium sized enterprises in Germany, WEB.DE expected a continually
rising flow of revenues from the closing of long-term digital services contracts. With the
product WORKWAYS UC, WEB.DE had positioned itself early on in this young market.
Since the beginning of 2001 the product has been actively marketed on a marketing policy
based on three channels. Key account management specifically targeted large firms. The mid-
dle customer segment was targeted through sales partnerships with IT-consultants and sys-
tems integrators as well as resellers. Small enterprises were contacted through direct market-
ing. The first successes in this young market were to happen in the fiscal year 2001 and estab-
lish customer references. For 2002 WEB.DE expected a breakthrough in the professional
B2B-communication solutions market.

Broadband Internet connections had been expected to come in the future so that the existing
media would grow together. The Internet would become the carrier of all forms of media. In
2000, WEB.DE expanded its starting position for the Internet portal’s expansion to a compre-
hensive communication platform. Through the 10 percent stake in the satellite channel B.TV
Television GmbH & Co. KG, Stuttgart/Ludwigs-burg, and the 12% interest in Radio 96 Ba-
den, WEB.DE took a further step toward the strategic integration of the classic media and the
portal WEB.DE and a move toward new target groups.

In June technology that allowed worldwide telephoning at a local price – with the highest
voice quality and without the common delays in the Internet – was acquired through a 12%
interest in the VolP Group, Miami. Internet-telephony was integrated as first Unified Messag-
ing provider in its own FreeMail service as early as November. WEB.DE had once again
demonstrated its technology leadership with the first offer of web-based telephone service
Germany-wide.

Although the Internet has changed many rules of the game, the fundamental principle of eco-
nomics remained untouched: ‘Without a loyal customer base, no success’. WEB.DE’s busi-
ness model was therefore structured on many levels ‘win WEB.DE users, build a long-term
trust and customer relationship, in order to make profit from direct and indirect revenue’. The
broad user basis of WEB.DE’s products, the close customer relationship based on the service
quality as well as trust built up over time were a substantial asset to WEB.DE AG.

WEB.DE’s growth was based for the most part on its innovative and user-friendly products. It
was above all its own technology that secured WEB.DE high margins. As for all businesses of
the new economy the rule of speed applied to WEB.DE. Therefore motivated and competent
IT-employees were the most important asset. Of the 355 employees (see Appendix) about 215
worked on the development of new as well as the improvement of existing services. WEB.DE
employees found the freedom necessary for their creativity in the open corporate culture with
a flat hierarchy. WEB.DE offered them state-of-the-art technologies that were continually
refined through the employee’s competencies. Since 1995 WEB.DE has combined the crea-
tive atmosphere of a start-up with the effectiveness of a mature company. With the end of the
fiscal year 2000 the phase of rapid employee growth in the group was ended. The existing
employee basis secured the innovation power and speed for the coming years.

According to a study by the investment bank Merrill Lynch the advertising expenditures of
German companies’ rose 101% in 2000 to a total of 140 million US dollars. This considering
that in the second half of 2000 the growth rate slowed due to the “dot-com syndrome” (the
loss of advertising revenues of venture capitalist supported Internet startups). WEB.DE
showed the strongest growth of all German Internet portals in 2000. According to analyses

- 10 -
from the market research institute Jupiter MMXI, WEB.DE was able to increase its reach
from 7.9% in December 1999 to 25.3% in December 2000. Specifically the Unified Messag-
ing Service FreeMail, the cornerstone of WEB.DE’s communications platform, was responsi-
ble for the successful growth in 2000. With the product launch of FreeMail in February 2000
WEB.DE had brought Unified Messaging to Germany. With FreeMail every WEB.DE user
received his/her personal, web-based, provider-independent communications solution. The
technological lead that FreeMail had, especially compared to the comparable products in the
German market, underlined the fact that FreeMail already was the winner in 20 tests of Uni-
fied Messaging services. No Internet service has succeeded to gather an abundance of victo-
ries and with this to stand out from the competition.

Because of the broad digital structure of the WEB.DE business model, the firm had very
small production costs that were directly connected to revenues. The resulting high margin
allowed for the corresponding scale effects in future revenue increases. In the fiscal year 2000
the gross profit in the WEB.DE Group was 78% of the net sales. The development of the new
B2B-business unit WORKWAYS burdened the results of the WEB.DE Group by 4.1 million
euros in 2000 (including amortization of the goodwill)

Situation, Prospects, and Goals at the end of 2001:

The industry development in 2001 showed that the future success of Internet providers was
dependent on three factors: high reach measured by the number of users, financial power, and
technological expertise in the implementation of new product ideas. WEB.DE’s growth target
in 2001 was the increase of the number of registered users from three million in December
2000 to six million by the end of 2001. This growth target had been achieved by August 2001.
By December 31, 2001 8.3 million users already registered by name. Therefore, the growth
targets for 2001 were exceeded.

WEB.DE Group’s financial situation was, as before, excellent. The portfolio of liquid assets
(including fungible stocks) was valued at 107 million euros on December 31, 2001. At the
end of the fiscal year 2001 there were no bank loans. The development of revenues in the area
“Application Service Provider” for B2B customers with the product WORKWAYS UC was
disappointing. Despite estimates of good chances on the market and considerable market and
product investments the product could not prevail on the market and realize any notable reve-
nues. The main reason for the lack of success was the aversion of medium-sized enterprises to
externally store and transact their communications. Because of this high deficit in this area
and in the doubtable short-term success WEB.DE parted with the product in November 2001.

In fiscal year 2001 painful restructuring measures had to be taken due to the economic slow-
down and the restraints in the advertising market. A cutback of about 75 full-time employees
and 73 freelancers was painful, but undoubtedly demonstrated the determination to ensure the
economic success of WEB.DE, to maintain the leading position in the German Internet mar-
ket, and to make WEB.DE a highly profitable company. Along with the discontinuation the
product Workways UC, a number of measures were taken to move the focus from WEB.DE’s
portal business to digital services and conversion projects (converting “free-users” to “fee-
users”). A number of cost reduction measures were necessary as well. The restructuring ex-
penditures amounted to about 2.3 million euros. The restructuring measures lead to a sus-
tained quarterly reduction of operating expense by about 3 million euros. Despite an increase
in revenue of 41% to 16.6 million euros and the resulting rise in the gross profit to 11.2 mil-
lion, WEB.DE Group profitability was influenced by the following expenditures:

- 11 -
• High investments and expenses for marketing, advertising and sales of 26.5 million euros
(26.6 million euros prior year) in the course to expand the reach and distribution infra-
structure;
• Expenses for research and development of 11.8 million euros (8.6 million euros prior
year) to secure the technological competence and leadership for the long-term; all costs for
the development of new technologies and services were reported as expenses in the profit
and loss statement;
• Restructuring costs of 2.3 million euros;
• A negative financial result of 1.8 million euros, resulting from the catastrophic develop-
ments on the stock market in 2001; although the majority of financial assets were invested
in marketable securities;
• Losses in connection with WORKWAYS amounted to about 15 million euros total. 5.9
million euros were from business operations write-offs and 9.1 million euros resulted from
the subsidiary’s write-offs.

On the basis of the attained growth in 2001, WEB.DE planned to increase the number of reg-
istered users in 2002 from 8.3 million to 11 million. In fiscal year 2002, WEB.DE hoped to
offer its users additional fee based, value-added services. In the area of ‘Digital Services’
there was a notable revenue potential, which was expected to be the large part of the increase
in revenues in fiscal year 2002.

Situation, Prospects, and Goals at the end of 2002:

As planned, WEB.DE AG had reached profitability in Q4/2002: According to the annual re-
port 2002, and as announced before in February 2000 (IPO), the breakeven point had been
surpassed. Compared to Q4/01 the revenues increased 67% from 4.2 million euros to 7.0 mil-
lion euros. For the whole year 2002 this meant an increase of 43% to 23.6 million euros. The
growth engines were, above all, the innovative digital fee-based-services, which were intro-
duced in 2002. The gross profit increased to 17.5 million euros (or 74% of revenue) compared
to 11.2 million (or 67% of revenue) in 2001. Through WEB.DE’s low and very constant cost
structure quarterly shortfalls continually lessened. With a quarterly surplus of 0.1 million eu-
ros the fourth quarter 2002 showed the first profit. The earnings before interest, taxes, depre-
ciation, and amortization (EBITDA) improved from -8.8 million euros in Q4/01 to a positive
0.8 million euros in the fourth quarter 2002. The operational cash flow also developed posi-
tively and closed the fourth quarter 2002 with +4 million euros. The financial situation of
WEB.DE was (according to the management) still on solid ground: The portfolio of liquid
assets increased in Q4/02 compared to prior year for the first time to about 98 million euros
(+3 million euros). This (according to the company’s reports) proved WEB.DE’s business
model sound. Beyond this there were enormous chances in the new business area of Internet
telecommunications. WEB.DE’s board expected the positive developments of 2002 – increas-
ing revenues and clear profits – to continue through the whole year 2003. CFO Robert Gratzl
did not name plan figures for 2003, but referred to studies from Dresdner Bank (48 million
euros revenue, 12 million euros EBITDA), the CSFB (43.6 million revenues, 1.3 million eu-
ros operating profit), and the DZ Bank (33.8 million euros revenue, 1.9 million euros operat-
ing profit).

Amortization of financial assets in the sum of 4.8 million euros (due to the insolvency of
B.TV and the intention to sell the equity in more.de AG) was reported on September 30,
2002. Both were no longer of strategic importance to WEB.DE. The main point of the efforts
in the third quarter was the extensive preparations for the market entry in the area of Internet-
telecommunications. Along with the introduction of Com.Win on October 1, 2002, yet an-
other Internet telecommunications product was brought to the market in October – the mobile

- 12 -
phone call-by-call. For WEB.DE AG additional prospects and chances in the telecommunica-
tions market opened up. Already in 2002, 29 worldwide patents for the Com.Win product
family were pending.

WEB.DE AG’s future challenges

Matthias Hornberger described WEB.DE AG’s situation in December 2002 as follows,
“WEB.DE AB has reached a critical mass to be profitable in their portal business. The rea-
sons are: WEB.DE has about 12 million registered users and about 300,000 paying custom-
ers, of which about 70,000 are using subscription services, such a notable reach, measured in
page impressions per month of 833 million and measured in users per week 8% of the total
population. Along with the market basis, the slim cost structure, this came about from the
restructuring in 2001 and led to a consequential cost management, contributed to this profit-
ability. For this reason we are aiming for a mid-term growth in this business segment of 35%
- 40%. With this background we were faced in 2002 with the question how we could secure
our profitability from a strategic point of view. In the search for fields in which we could ex-
pand unique selling points we identified three business areas that play a role in the portal
business and offer room for expansion beyond the classic business. We see these as telecom-
munication, e-commerce, as well as media and entertainment. In the e-commerce area eBay
and Amazon are far at the top, but no one is following them, at the most the classic mail order
catalog that is using the Internet as a distribution channel. In the area Media and Entertain-
ment, the business model is based on ‘paid content’ audio and video. Here AOL, Yahoo, and
T-online have well developed broadband access services. Above all there is the challenge to
make the customers willing to pay and to increase this willingness. For WEB.DE it is clear
that we are not a media company, and we do not have the necessary size and internationality
to efficiently purchase attractive and exclusive content. Based on our expertise in the area of
Unified Messaging with the integration of FreeMail, SMS, Fax, personal area code, as well
as in the billing area with our own billing system and the understanding of technology in da-
tabase management that comes with this system and in the area of TCP/IP, we have decided
to combine genuine telephony with the Internet. As a result we have brought Com.Win 1.0 to
the market in its first step in October 2002. With this decision we enter a market that is larger
than 1000 billion euros worldwide. Com.Win will not only be marketed nationally under the
brand WEB.DE, but also be offered in license/OEM business to international Internet compa-
nies and telecommunications companies (Telcos) as a white label solution. Even if we have
only a portion of the success that we have in online advertising, it is a huge potential. Above
all, we are conscious that this requires an enormous change of company approach. Building a
website and generating services and content is different than taking on the role of a technol-
ogy provider with a guaranteed service level for third parties. This transformation process is
an exciting challenge for us.”

Com.Win Present and Future

Com.Win is not only making telephone calls,
but also a new communications paradigm.
The e-mail address should become a personal
Communication Window (Com.Win), which
allows screen-to-screen communication and
feels like human to human contact through a
transparent glass window. All possible ways
of direct communication will be possible, and
simply that: exchanging documents, joint
document editing, videoconferencing, imme-

- 13 -
diate faxing, and reading of e-mails while they are being written...

The expansion of the digital business model of WEB.DE AG to Internet telecommunications

is supposed to have a lasting positive effect on the financial development of WEB.DE AG. In
the future, WEB.DE expects, next to revenues from the direct sale of telephone minutes, re-
peating revenues from the directly related ‘digital services’, basic and subscription fees. The
first products from the telecommunications family to be introduced have provided a positive
cash flow immediately.

The Com.Win user was anyone who was often on the phone, both privately and profession-
ally, among others, the self-employed, freelancers, etc. Through the central server of
WEB.DE the user had access to his/her telephone directories. She/he only needed an Internet
connection and Internet Explorer as browser and every user then has a comfortable private
branch exchange with favorable rates at their service. Existing landline or mobile telephone
service were used and the billing takes place through WEB.DE’s own prepaid-based billing
system.

Technically, this is an application that combined the Internet and telephony with one another
in real time. The operation happens with a soft-switch that was directly controlled by the cus-
tomer through the Internet. The logistics on the side of the client was realized through
ActiveX-Control. The client communicates with the server over a connectionless protocol,
which was modeled on an SSL (secure socket layer), offered encryptions and authentification.
In December 2002, the synchronization of the telephone directory with the contact directory
from Microsoft Outlook was made available, and in January 2003 Com.Win Mobile was an-
nounced, which enabled a mobile use of the Com.Win communications platform. About 70
developers work on the product in eight teams, which has only realized one percent of the
total potential and technological possibilities in its current state of development. WEB.DE has
already submitted 29 patents for the product, in order to secure its technological leadership.
The following important releases were planned for the year 2003, among others:

• Com.Win Business, configured for companies and, for example, supports multiple users
and post-payment instead of pre-payment.
• Com.Win OEM, which targets businesses that wish to integrate the software in their ser-
vice spectrum. In this version, any billing method, any telecommunications company, cus-
tomizing capabilities, and multiple languages are supported.

Matthias Hornberger outlined the following possible application, which could be of interest a
telecommunications company: “If a telecommunications firm offers a digital telephone direc-
tory on the Internet, then the user finds the telephone number, writes this down and dials the
number on the telephone. This telecommunications firm cannot be sure that its own network is
being used to make the telephone call. When the telecommunications firm integrates
Com.Win’s functionalities with its web-based telephone directory, then the value for the cus-
tomer can be increased through the direct connection and the customer produces revenue for
the telecommunications firm through the telephone call. The telecommunications firm does
not have to charge the user to obtain return on investment.”

The main focus of Com.Win was to remain on product development in 2003, and significant
revenues are expected for 2004 and beyond. The business model of Com.Win combines two
revenue models that have already been proven to be successful: on the one hand revenue from
software licensing with a high profit margin, and on the other hand repeating income of the
typical telecommunications firm.

- 14 -
Future Challenges in 2003 Onward
According to the words of Matthias Hornberger, the future financial success of WEB.DE de-
pended on, “how successful we are (1) in realizing a growth rate of 35%-40% with constant
costs in the portal business, (2) making Com.Win a success on the national and international
market, and (3) we are successful in reinventing WEB.DE as a OEM-provider, technology
company, and international company. We see ourselves, with our many years of experience,
well equipped for the portal business: We have a well-rehearsed and motivated team, our
financial autonomy makes us as a small ‘speedboat’ between large tankers, flexible yet capa-
ble of making decisions. We will secure our competitive position on the one hand with a con-
tinuous enhancement of our innovative and user-oriented service spectrum and on the other
hand by our slim cost structure. We work, for example, with only 2-3 content partners, who
constantly deliver content, which we constantly and automatically process through a man-
agement system. Through the use of our innovative technologies it is not noticeable from the
outside, with how much straightforward effort we manage the whole information portal. A
high uncertainty exists in the area of Com.Win. Our success in this sector is dependent upon
how Com.Win will be accepted. Furthermore, the speed of the competition and that of the
large customers which are telecommunications firms, play an important role. Here we must
try to win and build up effective reference customers. Referring to the future role of WEB.DE,
which definitively distinguishes itself from a classic portal provider, we trust to our manage-
ment capabilities. Which organizational adaptations are necessary, remain to be seen. It is
conceivable that we have two business units under the roof of WEB.DE or that the ‘daugh-
ters’ become independent and that WEB.DE takes over the role of the holding company, like
that of the Cinetic Medientechnik GmbH demonstrates."

Situation, Prospects, and Goals at the end of 2004:

2004 was a very successful business year in WEB.DE’s history. As the digital Internet busi-
ness model continued to attract profits, WEB.DE saw strong growth momentum in almost
every segment. WEB.DE was continuing to try to put itself in the right place. In 2004, it had
managed to build itself on two footholds: the traditional, profitably growing portal business,
as well as the future-oriented Web Telecommunications which targeted the international mar-
ket.

In 2004, Germany witnessed a development in Internet use. The Internet spread amounted to
around 55% and WEB.DE was ranked No. 2 in the German portal market. In 2004, the “inter-
net facts” study of the German Online Research Association (AGOF e.V.) recorded around
10.5 million monthly users for WEB.DE. This figure amounted to one third of the German
Internet users and was ahead of competitors like MSN, AOL, Yahoo or Lycos.

With the business model - which allowed relatively low costs of sales and high economies of
scale - WEB.DE generated revenue of 43.0 million Euros at group level in 2004, increasing
the figure by 10.2 million euro compared to the fiscal year 2003. The portal segment ac-
counted for the largest share of the revenue by totaling 42.3 million Euros.

Both the advertising market-based business (Media Sales and E-Commerce) and the end cus-
tomer business (fee-based Digital Services) grew with profitability. The notable growth en-
gine of portal business was the fee-based Digital Service. It generated revenues of 25.4 mil-
lion euro, a figure 74% higher than that in 2003. There were high margins of 75% in fee-
based Digital Services. WEB.DE attributed the success of fee-based digital Services mainly to
WEB.DE Club in its annual report, “the top seller of fee-based Digital Services was once
again the flagship WEB.DE Club, the multiple award-winning premium e-mail service which

- 15 -
had 370,000 members (at 60 Euro p.a. incl. VAT) on December 31, 2004”. News about the
Online Advertising market in Germany, however, was not so cheering. The German Online
Advertising market grew 4% in year 2004, lagging behind not only the American and British
online advertising markets, but also the overall development of advertising expenses in Ger-
many. In this slowly growing market, customer-oriented Online Advertising products and a
high reach helped WEB.DE to expand its revenue in this market by 13% y-o-y to a total of
12.6 million Euros.

In 2004, WEB.DE put great emphasis on software development, investing 43% of revenues in
this sector. Web Telecommunications absorbed about half of the investments. WEB.DE re-
garded Web Telecommunications as “optimum prerequisites to success all over the world”.
For its Web Telecommunications, WEB.DE planned an international product rollout in 2005.
In the portal segment, WEB.DE broadened its spectrum of service to include the next genera-
tion WEB.DE FreeMail; the proprietary Internet telephony application WEB.DE FreePhone;
WEB.DE Mail-Domain; and WEB.DE DSL, an attempt of entering the booming DSL broad-
band market. To fight international competitors in the search engine market, such as Google,
WEB. DE also developed SmartSearch, a next-generation internet search engine which en-
abled WEB.DE users to enhance search result structure.

In the financial reports, the highly positive growth in net income in Q4/2004 (+350% y-o-y)
was impressive. But the annual reports indicated that the non-recurring effect of a non-cash-
effective book value write-off in Q3/2004 (3.9 million Euro) burdened the consolidated result
for the full year and it reached –2.4 million Euro as a result (2003: net income for the year 0.8
million Euro). Compared with the previous years, the operating cash flow of WEB.DE in
2004 was strong. The total was 13.8 million Euros, with 20.9 million Euro in the Portal seg-
ment and – 8.8 million in the Web Telecommunications segment.

At the end of 2004, WEB.DE AG planned 35%-40% growth in revenues in the following
year. The greatest growth momentum was expected to lie once again in WEB.DE Club, which
was expected to reach a Club membership of 530,000 by the end of year. Media Sales (Online
Advertising) was also regarded as a growth driver by WEB.DE in 2005, as analysis suggested
a positive general economic environment in Germany. In the Web Telecommunications seg-
ment, the international product of the integrated communications solution was planned to ar-
rive in 2005.

Situation, Prospects, and Goals at the end of 2005:

At the end of year 2005, the company ComBOTS drew a picture of the history and the future
of internet and digital communication. In this picture, it had claimed the No 1 position of
Internet-and portal services provider in Germany by taking the WEB.DE portal business into
alliance with United Internet Group. Its strategic focus was shifting to ComBOTS, the next
generation Personal Digital Communication product. 2005 was a year of change for
WEB.DE: It changed its name to ComBOTS AG; it sold the profitable portal business to
United Internet AG; and it became (through the aforementioned acquisition) a shareholder of
United Internet. Michael Greve stayed as CEO of the ComBOTS AG and Matthias Greve
become a member of the management board of the United Internet AG.

The transaction was set into action on September 30, 2005. WEB.DE, now named ComBOTS
AG, received 200 million euros cash from United Internet and 5.8 million in freely tradable
United Internet AG shares with a tax value of 26.60 euros-per-share on the day of the actual
transaction (October 31, 2005). After the transaction was executed, the Internet portal busi-
ness of WEB.DE (including all employees, technologies, fixed assets and branding and li-

- 16 -
cense rights) belonged to United Internet, and ComBOTS AG became to hold 9.31% interest
in United Internet AG.

The transaction posed positive effects on the financial performance of both companies: The
value of United Internet AG increased more than 130% within one year and ComBOTS
achieved an annual profit of 273.1 million euros in financial year 2005. The portal business
segment continued to drive profits and achieved a record high in revenues of 41.2 million
euros until it was purchased, with a rise of 35% in sales revenues compared to the correspond-
ing period of previous financial year. The major growth driver in this segment was still, as
expected, the WEB.DE Club and the media sales.

In the financial year 2005, ComBOTS devoted great efforts to research and development. The
13.1 million euros investment led to 21 new patent applications in 2005 alone. With this
heavy investment, the normal business activities of 2005 were – 12.8 million euros and EBIT
was – 17.3 million. The annual profit of financial year 2005 came to an astonishing high re-
cord of 273.1 million euros, compared to the – 2.4 million euros in 2004, and the balance
sheet profit was 269.8 million euros, which was – 3.3 million euros in 2004.

Being the newly established market leader in German Internet-and portal services together
with United Internet AG, ComBOTs believed that it was time to launch its next step - to be-
come a successful international player in the Personal Digital Communication market. The
Personal Digital Communication division became the only remaining division after the trans-
action.

The shift of strategic focus to this market had been regarded by ComBOTs as an investment
for the future. It concluded its future plan in the annual report of 2005, depicting the expecta-
tion towards the new product,”Our next major objective is to make ComBOTS AG the world’s
most successful company in the field of Personal Digital Communication; we will not accom-
plish that overnight, but work hard for it with the determination and careful preparation that
we have already shown over the last three years. After the completion of the alliance with
United Internet, our financial strength at the end of 2005 was 439 million euros in liquid
funds, representing 12.24 euros per traded share. By the end of March 2006 this is now more
than 500 million euros or more than 14 euros per share. With more than 50 patent family
applications internationally registered and a technology designed for well in excess of 100
million users from the outset, we have already laid the foundation for future development.”
ComBOTS was waiting to unveil its new product, whose introduction was scheduled on July
13, 2006.

ComBOTS Present and Future:

On July 13, 2006, ComBOTs company introduced its new Personal Digital Communication
service to the general public. The product ComBOTS, named after the company itself, fea-
tured the attraction of simplicity, fun and privacy.

Aiming at diluting the over-complexity and monotony of personal digital communication, the
ComBOTs incorporates functions like instant message, document transfer and free calls into
one package. It promises secured one-to-one connection which helps the user to gather his/her
friends on desktop, sending of anything via drag & drop (hundreds of photos, media mes-
sages, large documents, XXL files even when the receiver is offline), sharing of emotions,
free calls and exchanging of messages with just one click. Labeled as “Secure, Private, Per-
sonal”, the product, as many of ComBOTs’ products, is user-friendly. The company also de-
signs it to be easy to use and 100% spam-free.

- 17 -
In the market introduction process, ComBOTS can be requested online for free (they call it
friendlyware). Internet users can send a request to the company and ask for product test. A
subscription is only necessary when they want to use it on a regular basis. For a monthly fee
of about 2 Euro the customer has full access to the provided services. The marketing strategy
is based on a high quality of the product, focused on user-friendliness and perfect privacy.
The product will be distributed by word-to-mouth recommendation. One user will invite his
friends to communicate with him by using ComBOTS, the company calls this 'social distribu-
tion' and have already successful experience with this approach in the WEB.DE business.

Although three years of heavy investment had gone into the product, the market did not re-
spond too enthusiastically to it. The stock of ComBOTS closed on July 13 at 12.35, 1.75
lower than 14.10 of July 12 and the stock closed even lower at 11.60 on July 14. But on the
other side the analysts of DZ Bank draw a fair picture of the company and the product, their
estimate for the fair value per share is Euro 15.

ComBOTS has realized that after launching the first product, their stock still trades close to
the value of their liquid assets. But they believe their strengths lie in their intellectual prop-
erty, worldwide markets, their experience, fast distribution concept, as well as their attractive
business model. In essence, ComBOTS see huge potential for themselves. The speed and the
extent of customer acquisition will be the main determinants of when the breakeven is
achieved. In a positive scenario the management expect to reach the breakeven in the 2008
financial year, in a negative scenario with a slower assumed timeframe of market penetration
the breakeven would be expected in 2009. Until then the management is assuming a negative
result before tax of up to Euro 25 million per year at least for the years 2006 and 2007.

If the ComBOTS business model will not be successful, this might have considerable adverse
effects on the earnings position and might require the total realignment of the business pur-
pose, business model and strategic aims of the company. Owing to the outstanding financial
situation of the company, however, in such a scenario a threat of the existence of the company
is not anticipated.

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Appendix (in Thousand Euro)
2005
Excerpts from the P&L 1999 2000 2001 2002 2003 2004 ComBOTS
Sales revenues 3525 11760 16558 23553 32824 42965 616
Cost of sales 973 2435 5365 6089 8107 10781 102
Gross operating profit 2552 9325 11193 17464 24717 32184 514
Gross margin in % 72,4 79,29 67,6 74,15 75,30 74,91 83,44
Marketing and advertising 8427 26577 26455 13555 11710 12980 670
General administration costs 917 1233 2064 2131 2120 3100 3983
Research and development 1145 8631 11817 11751 13725 18707 13146
Goodwill amortization 0 647 1846 0 0 0 0
Nonrecurring expenses/Restructuring
expenses 2604 1074 2337 0 0 0 0
Operating result -10541 -28837 -33326 -9973 -2838 -2603 -17285

Net income from associated companies -36 -3512 -235 -3862 0 -3901 -85
Financial income 372 6587 -1772 1995 3796 4074 3946
Net result from continuing activities -10205 -25762 -35333 -11840 958 -2430 -12810
Result from discontinued activities 4185 15032 1086 -199 0 285935
Net result -10205 -29947 -50365 -12926 759 -2430 273125

Excerpts from the Balance Sheet 1999 2000 2001 2002 2003 2004 2005
Assets
Cash and cash equivalents 31861 24378 30078 11770 5554 16145 150757
Marketable securities 3005 144052 76827 18834 30698 14747 40325
Trade accounts receivable 657 2189 3948 4606 4751 5555 2178
Prepaid expenses and other short-term
assets 2367 3425 4982 2650 2617 3691 10395
Property, plant, and equipment 433 8297 20139 19208 17655 21117 23669
Intangible assets 8 20036 10611 10861 9922 10576 567
Other - - - - - - 830
Investments 30 8540 13779 80539 77622 84389 247947
Total assets 38361 210917 160364 148755 148819 156220 476668
Liabilities
Bank accounts payable 0 58 0 31 0 0 0
Trade accounts payable 383 1828 1149 1583 819 790 9808
Deferred revenues and other short term
liabilities and provisions 3547 5419 6884 7316 9455 18166 25714
Long-term leasing liabilities 0 0 8727 8452 8161 10154 12269
Shareholder’s equity 30000 38198 38198 38198 38198 38203 38361
Capital and other reserves 14636 206524 206524 102824 102824 102841 136896
Treasury stock 0 0 -8401 -10405 -11755 -13003 -16175
Accumulated total profit/loss -10205 -40152 -90517 257 1016 -1414 269795
Other comprehensive income 0 -958 -2200 499 101 483 -
Total Liabilities 38361 210917 160364 148755 148819 156220 476668

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