Europe is late to Web fever, but it's catching up fast

One year ago, Europe seemed so uninterested in the Internet that it risked falling light-years behind market developments in the U.S. Suddenly, though, Europe is awakening to the Net and its vast commercial potential at warp speed.

Businesses all across the Continent are racing to get wired and to flood the Net with new services. Some Northern European countries are moving so rapidly that they may serve as test sites for 21st-century cyberbusiness. Indeed, the number of European computers linked to the Web will grow from 4.2 million last year to 9.6 million by yearend, according to market researcher Dataquest. Says Matthew Moore, director of European development for Netscape Communications Corp., a leading Web-software maker: ``Europe has caught on to the Net. There's a real change in mentality.''

NEW TWIST. Business is the driving force behind the changes. As competitive pressure mounts from American and Asian rivals in global markets, Europe Inc. is starting to use the Internet to avoid paying normally burdensome communications tariffs. The Continental market for consumer online services is off to a slower start, largely because of those high costs. But that's prompting an unexpected twist: Because they were late to the party, Europe's online companies have moved directly to the full Internet, leapfrogging the first generation of intermediaries such as CompuServe Inc. and America Online Inc.

The shift began six months ago, as huge telecommunications monopolies, media conglomerates, and cable companies jumped into a field previously populated only by startups and U.S. transplants such as CompuServe. Deutsche Telekom, with 1.2 million Internet subscribers in Germany alone, has raced past CompuServe and its 750,000 European members. AOL, which entered Europe last December, claims some 250,000 subscribers, but market researchers believe the actual count may be half that.

As in the U.S., the entry of such big players is making simple Internet access a low-margin commodity and forcing the market to consolidate. In June, Telecom Italia snapped up Italy's largest service provider, Sardinia-based Video Online, prompting howls of protest by smaller rivals. Founder Nicola Grauso had racked up several million dollars in debt trying to build a worldwide network. ``The stakes were getting too high for us,'' he says. Likewise, Europe Online, backed originally by powerful British, French, and German publishing companies, planned to offer a rich selection of content geared to local tastes in five languages. After some major supporters bailed out, it went bankrupt on Aug. 2, just eight months old. ``I wouldn't be surprised if half of Britain's Internet access providers disappear over the next year,'' says Maria Porto, marketing manager at UUnet Pipex in Cambridge, the British subsidiary of UUnet Technologies Inc., which itself was purchased in April by MFS Communications Co. for $2 billion.

Ceding basic Net access to the giants, smaller players are scrambling up the food chain to focus on creating new digital information and services--so-called content. Lyon-based Infonie tried launching a slick imitation of American-style services in 1995, using its own software and network, but now it's rushing to switch gears. ``We would like to get rid of network management,'' says Bruno Bonnell, CEO. ``Our strategy is to do 100% management of content.''

CompuServe and America Online, although still growing in Europe, have been unable to match their success in the U.S. ``AOL and CompuServe are building proprietary networks at a time in the European market when the migration away from a large part of their business model has begun,'' warns Emily Green, an online analyst at Boston-based market researcher Forrester Research Inc.

Eventually, says Green, the consumer market will resemble that of cable TV: Some companies will offer access, others content. ``Telcos will have problems developing new content,'' says Gian Pablo Villamil, senior manager at Andersen Consulting in London. ``They will host others' content.'' Spain's Telefonica already has carved out a strategy as a wholesaler of Net access, with no retail online service of its own.

The real battle over Europe's Internet business, though, is for corporate market share. Roughly 80% of the Internet access market is high-speed connections for business, not dial-up consumer services. ``The business side is where there is large potential to make money,'' says John Moroney, a senior consultant at London-based market researcher Ovum Ltd.

Indeed, European companies have a powerful incentive to embrace the Net for moving all kinds of data: Dedicated telecommunications lines cost considerably more in Europe than in the U.S. By switching to intranets--data networks based on Internet standards that companies use to move information internally and to their trading partners--companies can reduce their costs dramatically. ``We're not talking about savings of 10%,'' says John Sidgmore, CEO of UUnet Technologies: ``It's more like 10 times less expensive.'' Sidgmore and others believe the price differential for companies could drive the development of new applications in Europe. ``We're betting a lot of money on that happening,'' he says.

Telephone and cable companies will likely have the low-margin consumer market to themselves, but competition for the business market promises to be fierce. Powerful rivals such as MFS, ATT/Unisource, and cable operator TeleWest are racing to build their European networks for use by corporations. MFS's UUnet Pipex unit, getting 80% of its revenues from businesses, has lined up partners throughout Europe and in Asia to offer one-stop intranet shopping to multinational companies.

The most serious Internet activity in Europe is up north. Scandinavian countries are already running neck and neck with U.S. companies in developing business and consumer-oriented Net services. Personal computer use in Norway, Finland, and Sweden matches the U.S. at about 35% of households, and fierce telecom competition has driven phone rates down to some of the lowest in the world. As a result, Europe's northern rim is now sprouting so-called aggregators, which package and market multiple services. ``In many cases, Scandinavia is leading the U.S.,'' says Netscape's Moore.

FAST PROFITS. Last year, Norway's largest media group, Oslo-based Shibsted Nett, acquired Oslo Nett, a small Internet access company. Since then, the unit has boomed, with 200 partners providing online newspapers, databases, financial analysis, and brokerage services to 25,000 subscribers. For consumers, Shibsted has everything from a mortgage-processing service to travel-booking services that show three-dimensional tours of hotel rooms. Also, Shibsted has just launched one of the first debit-based payment schemes for the Internet, with a pilot now letting people order and pay for theater tickets electronically.

``The Internet is all about niche marketing,'' says Erik Hagen, Shibsted Nett CEO, who says the company's content partners will start to earn profits on their content this year. That's a feat that many U.S. companies would love to match.

By Gail Edmondson and Marsha Johnston in Paris, with Heidi Dawley in London


Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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