Deutsche Telekom has some good reasons not to be excited about providing payphone service nationwide. The most convincing, arguably, is that the debt-loaded German operator continues to lose money on the service.

So why is Telekom so determined to hang on to the payphone business? Because payphones are a good advertising vehicle, and if Telekom does not offer them, someone else will. Despite the popularity of mobile phones, there is still plenty of money to be made from payphones, particularly if they go beyond traditional telephony to offer value-added multimedia services, such as messaging and web surfing.

Rival independent operators agree. "The future for payphones is multimedia," says Keith Gurdon, managing director of New World Payphones in Hamburg. "People on the go want more than just voice and are willing to pay for it."

Like many other former monopoly telephone companies in Europe, Deutsche Telekom is looking for ways to eke out a profit from a service it must provide to the general public cheaply and uniformly.

The problem is that wireless has cannibalised the payphone industry in Germany, as it has in many parts of Europe. The comfort and convenience of cellphones, together with plummeting handset prices and phone tariffs, have led to an exploding growth in the numbers of subscribers who once relied on payphones for service on the run.

For the first time last year, the number of mobile phone subscribers in Germany topped 50m, exceeding the number of fixed-line customers at around 49m. An end to this growth is not in sight. Having recently forked out E8.4bn for a next-generation mobile phone licence, Telekom cannot help but want people to use wireless even more.

To what extent mobile phones have undermined the bottom line of Deutsche Telekom's payphone business is anyone's guess. Thomas Hille, director of payphone services at Telekom, refuses to disclose revenue figures, conceding only that the last five years have been "tough" and that although the situation has since "stabilised itself", the division continues to bleed money to meet its universal service obligations. And these are substantial.

Deutsche Telekom currently operates a network of around 135,000 payphones, a number that can go up but not easily down under federal law. During reunification, the number rose briefly to 160,000 to serve the immediate needs of former East Germans without phone service.

Under the universal service obligation, payphones must be available within a three-kilometer radius in populated areas.

Local officials must approve all plans to add, drop or relocate public phones. Prices are regulated: 20 pfennigs per minute for a local call, 40 pfennigs for long-distance ones.

According to Telekom, the installation of a new payphone costs around DM15,000, which includes building the booth, connecting electricity, and installing hardware and software. Monthly costs for cleaning, software and hardware maintenance, electricity and coin collection average between DM350-700.

While payphones located in airports, train stations and hospitals can generate upwards of DM1,000 per month, others in less frequented areas often don't bring in enough money to cover maintenance costs.

So how to make money? The answer lies in prepaid phone cards and value-added multimedia services, according to Mr Hille.

In an early move not only to curb vandalism but also increase payphone revenue, Deutsche Telekom introduced prepaid phone cards. The cards reduce the cost not only of collecting coins by hand but also of repairing booths destroyed by vandals.

At the same time, they are an additional source of revenue from companies seeking alternative advertising opportunities.

Moreover, the phone cards have become popular collectors' items and, no less important, studies have shown that people using prepaid cards spend more money on an average call than those who do not.

Prepaid cards are only a small part of the equation, however. Like BT, the German carrier now hopes to breath new life into its stagnant payphone division by rolling out a new generation of multimedia kiosks that offer phone, fax and internet services with some content and plenty more to come.

The new kiosks will accept coins and credit cards, in addition to prepaid phone cards. "The multimedia kiosks are part of Telekom's initiative to bring internet to the masses," Mr Hille says. "There are still a lot of people who don't have PCs and internet access, and there are also a lot of travellers and business people who seek this kind of service on the road."

To date, Telekom has installed 100 kiosks in Berlin and Munich, after piloting the technology at the Expo show in Hanover last year. The target is 1,000 by the end of the year, with a still undisclosed number to follow.

The web-enabled pay phones support numerous interfaces, such as ISDN and DSL, where available, and also allow advertisers to deliver four-colour display advertising.

In addition to touchscreen-based e-mail and web browsing, users also have access to Telekom's directory services and local street guides. In the future, they can expect even more new services from T-Motion, the venture in charge of developing content for the group's online and mobile units.

Telekom is also testing a service to allow users, primarily business people, to connect their notebooks at busy centres, such as airports. Both cable and cableless services using Bluetooth short-range wireless technology are planned.

Unlike BT, however, Deutsche Telekom has no plans to use its extensive network of phone booths to locate transmitters for mobile operators. At least not yet.

Introducing new innovative services is certainly one way to increase payphone revenue. But keeping a lid on the competition is equally helpful. Although the market for payphones has been liberalised for over a decade, it has attracted only a handful of small independent operators, due in large part to Telekom's tough sideline manoeuvering.

ISIS in Dusseldorf, NetCologne and Mannesmann Arcor are among the competitive German telephone companies that tested the payphone market and abandoned it. "There is definitely a business model for payphones, but we need to be given a fair chance," says Horst Schafers, ISIS managing director. "Telekom doesn't see it that way."

The German incumbent, according to Mr Schafers, has struck deals with numerous municipal governments to keep rivals from cherry-picking or selecting popular locations and neglecting the rest. In some cities, such as Dusseldorf, rival operators are prohibited from installing payphones within a 200m radius of Telekom's equipment.

In Hamburg, independent payphone operators, such as New World Payphones, must observe a 100m distance or choose between paying an additional fee or subsidising a payphone outside the inner-city ring.

"This is certainly an obstacle," concedes Mr Gurdon at NWP. "But what really irks me is Telekom's delay tactics in providing lines."

Despite these and other hurdles, such as paying a monthly site rent of between DM50-200, Mr Gurdon sees a market, however small, for independent operators in Germany. He says company revenue has been increasing over 10 per cent quarterly since the middle of last year.

New World Payphones currently operates around 2,000 payphones around Germany. It has a contract with the German railway company, Deutsche Bahn, to install and operate coin and credit card payphones in and around its train stations. Deutsche Bahn has 6,154 train stations. Mr Gurdon plans to put phones in between 3,000-4,000 of these.

The company is also targeting private buildings, such as banks, hospitals and restaurants. New World Payphones also intends to follow Deutsche Telekom in rolling out multimedia kiosks that will provide e-mail, web surfing, short message service and more in select, protected locations.

In addition, the company's current and new multimedia phones will be equipped with remote terminal management software.

"A couple of years ago, when mobile phones were becoming available to the mass market, I started to get worried," Mr Gurdon says. "I'm not worried any more." Handset subsidies, he points out, are coming to an end, and mobile operators would need to hike the price of their service if they intend to make money from 3G.

Mr Schafers agrees. "I was also sceptical about payphones given the growing popularity of mobile phones, but not any more," he says. "A lot of people, especially teenagers and housewives, are realising that mobile phones, even prepaid ones, are downright expensive to use. And even heavy mobile phone users appreciate a backup when their battery or prepaid card runs out."