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Rotterdam is the world's largest port, a gritty, down-to-earth, working-class place -- and perhaps the least likely city for an outfit like World Online International, with its pastel green leather Italian sofas and bright red furnishings. The Dutch Internet service provider (ISP) and portal aimed to be Europe's answer to AOL and Yahoo! -- cool, hip, and, most important of all, independent of Europe's stodgy telephone monopolies.
World Online founder Nina Brink figured the road to riches could be paved with free Internet access, stimulating content, and clever marketing. She hired celebrities like renegade royal Sarah Ferguson, actor Christopher Reeve, and rocker Joe Cocker to tout her company. Costs? Hey, you have to spend money to make it. Revenues? They would come later from e-commerce and advertising.
U.S. MODEL. These days, World Online's plush Rotterdam HQ is shuttered and its flashy, ambitious business model is in tatters. The company was recently sold off at a rock-bottom price to Italy's Tiscali, another independent access provider, which is also struggling with huge losses. It's a saga worth reexamining in the wake of the Yahoo!'s own troubles. (See BW Online, 3/8/01, "At Yahoo!, It's Goodbye to the Future").
From one perspective, what went wrong at World Online is a tale of greed and hype that replicated the rise and fall of the Internet bubble in the U.S. But this saga also illustrates the differences between the Old World and the New. Online advertising, for example, has failed to take off on the Continent. Also, Europe's Internet users are as likely to access the Web via mobile phones and TV as they are through PCs.
As for the "borderless Net," the strong Internet presence that was supposed to span Europe's national boundaries, it has been far more difficult and expensive to build than expected. All of these handicaps will likely make it even harder for Internet companies to achieve profitability in Europe than in the U.S. -- and that's saying something given the red ink that has engulfed so many of America's Internet hopefuls.
OLD GUARD TRIUMPHS. The downfall of upstarts like World Online could signal more expensive Internet service for Europe's consumers, which in turn would slow Net penetration. So could innovations such as voice over the Net. That's because the emerging winners in Europe's Internet-access war appear to be the subsidiaries of European telecommunications giants -- Deutsche Telecom's T-Online, France Telecoms's Wanadoo, and Telefonica's Terra-Lycos. While it's true that those outfits also are struggling, they can at least count on their corporate parents' deep pockets and mobile-phone expertise. "The innovative independents just couldn't make their business model pay off, and the traditional companies are taking advantage," says Noah Yasskin, chief analyst for Jupiter MMXI in London.
The tale of World Online provides a perfect example. When Brink launched it in 1996, it was a search engine that rapidly expanded into a general consumer portal -- one that produced much of its news content in-house. It grew fast, going public in March, 2000, with 1.9 million customers, which placed just behind behind AOL and its 2 million European customers.
But World Online's revenues totaled a scant $64 million, and net losses had already reached $88 million at the time of the IPO. Nor could Brink tell investors when she expected the company to turn a profit. Most important, while World Online was a giant in the Netherlands, it was a pygmy elsewhere. It couldn't break into the ranks of the top five ISPs in France, Germany, or Italy, where formerly state-linked telecoms held sway. "Europe's telecom companies all had seen how AOL and Yahoo! beat American telecom companies to the Internet gold rush and they didn't want to make the same mistake," says Therese Torris, chief analyst at Forrester Research in Amsterdam.
DEFENSIVE DISCOUNTS. The powerful telecoms gave no quarter. Deutsche Telekom, France Telecom, and Telefonica ruthlessly exploited their near total control of local phone services, discounting rates for their own ISP customers. Even bricks-and-mortar retailers poured into the sector -- with surprising success. British consumer electronics retailer Dixon's launched Freeserve, which supported its free Internet subscriber access by cutting deals with telephone companies that allowed it to take a cut of call revenues.
Instead of regrouping, however, Brink and Goldman Sachs, World Online's main banker, revved up the hype machine with an expensive pan-Europe ad campaign. While Brink valued the company at an astounding $12 billion, shares were being sold at a discount even before the IPO -- a decision which, when revealed, helped send the stock plummeting from $40 per share to about $10. Shareholders were furious, and Brink resigned in April, 2000.
After Brink's departure, World Online needed an outsider, "a more disciplined person," as Victor Bischoff, managing director of the Sandoz Family Foundation, World Online's biggest shareholder, put it. James Kinsella, former CEO of Microsoft's MSNBC.com, was hired in June, 2000. Early on, Microsoft's MSN portal had tried to produce much of its own news content -- and floundered in the attempt. Just before Kinsella took over, Microsoft struck a joint venture with General Electric's NBC to provide news. Under his leadership, the site became the world's No. 1 Internet news site, well ahead of rival CNN.com. Kinsella also revitalized the advertising sales force. "He took an organization that was in some state of confusion and turned it on its head," says Merrill Brown, MSNBC's editor-in-chief.
BACK TO THE DRAWINGBOARD. At World Online, Kinsella followed the same rules, junking Brink's strategy of creating an online media and marketing giant. Instead of building expensive proprietary e-commerce sites, he forged partnerships with established e-tailers. Kinsella ended endorsement contracts with celebrities such as Fergie, who was paid $1.1 million to promote World Online. He all but closed down the editorial department and fired 150 employees at the Rotterdam corporate headquarters -- laying off almost 10% of the staff. "We didn't have the resources to produce our own content," he explained.
Kinsella also discovered that the American model didn't work in Europe. Unlike Americans, Europeans pay by the minute for local phone calls -- and much of World Online's revenues depended on fees from telephone companies. In order to gain users, Kinsella offered American-style, all-the-Internet-you-want for a fixed-price monthly subscription. His goal was to make up the lost revenues with gains from e-commerce and advertising.
But Yahoo! had tried the same thing and found it didn't work. "A Louis Vuitton advertiser in Paris can walk into our French office and buy [ad] space for eight countries," bragged Fabiola Arredonda, Yahoo!'s European president. Trouble is, Louis Vuitton and other potential advertisers have never seen much inclined to advertise on the Net. The mathematics were grim: Although foreign viewers represented 40% of Yahoo!'s page views, they generated only 16% of group revenues. In addition, customizing sites for local markets was expensive. For each foreign employee, Yahoo! earned only half as much as for a U.S. employee. Just before Yahoo!'s shocking earnings announcement last week, Arredonda resigned.
INNOVATION GAMBIT. World Online suffered even more than Yahoo!. Kinsella was forced to drop flat-fee service. In all, he managed to increase the subscriber base by only 3% before World Online was sold in December, 2000, to Italy's Tiscali, which is the only surviving European ISP not tied to a former telephone monopoly (see BW, 2/26/01, "An Italian Underdog Develops a Bite"). Kinsella saw the Tiscali buyout as a ray of light. "We should be able to innovate faster [than phone-company rivals]," Kinsella promised. For example, Tiscali is introducing Internet voice services, which the former monopolies have hesitated to adopt for fear of cannibalizing their core phone businesses.
But the Italian company, too, faces huge challenges. After clashing with Tiscali founder and Chairman Renato Soru, Kinsella resigned on Feb. 9. The company lost $400 million last year. Internet voice technologies remain nascent, and the online advertising environment is not improving. Meanwhile, the big phone companies are launching second-generation mobile-phone systems with relatively fast data speed. "Our customers will access the Net through our service," promises Brian Stout, business marketing manager for KPN Mobile, which has 5 million subscribers.
For Europe's New Economy, the shakeout leaves an uninspiring landscape. Other than Tiscali, no Internet access service exists across the Continent that isn't linked to a telecom behemoth. France Telecom's Wanadoo recently gobbled up innovator Freeserve. Most Internet access providers also have dropped flat monthly access plans. Analysts expect the cost of Web surfing will begin to rise again. With Europe already behind the U.S. in Internet penetration, now it could fall further behind.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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