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Europe's Internet Bash


Business Week e.biz -- Special Report: Europe

Europe's Internet Bash

Its giddy discovery is likely to turn serious as rivals race to tap a huge new market

The music is blasting, and the crowd of hundreds at Brussels' CyberTheater is young and hip. But when the music softens and the spotlight focuses on the stage, it's no rocker that steps forward but an Internet entrepreneur--the newest brand of star in Europe. So begins the monthly program at this so-called First Tuesday meeting, a hobnobbing event for entrepreneurs and investors. By the end of the evening, Europe's Web-wannabes--a forlorn bunch just a year ago--are celebrating their wild popularity. "It's a gold rush here," raves Karel Wouters, who hopes to launch a company producing e-mail software for mobile phones.

Europe, a Johnny-come-lately to cyberspace, is celebrating its first Internet bash. Money is everywhere, and investors can't find enough companies to throw it at. Suddenly, French chefs, Finnish rockers, even European philosophers are launching portals and making noises about initial public offerings in the new exchanges, Germany's Neuer Markt and France's Nouveau Marche.

In this frenzy, try, just try to find a developer of software for the mobile Internet who hasn't landed at least one round of venture capital. "Two years ago, an investment of $250,000 was a lot of money," says Roel Pieper, who heads up Europe for Insight Capital Partners, a Denver venture capital firm. "Today, it's nothing."EXPLOSION. But Europe's celebration is likely to take a serious turn as competition mounts. Europe is the New e-World. In just the past year, the number of Europeans racing to the Net has surged 100% as businesses and consumers alike have found that its lightening speed and vast reach are opening new vistas. Suddenly, shoppers in Paris are heading to the Net for wine and cheese. But that's just the tip of what could be a huge transformation. Companies from KLM Airlines to BP Amoco are starting to use the Net to rethink their businesses--linking up with suppliers and customers, collapsing time and space, while cutting costs every step of the way. E-business transactions in Europe, a piddling $15 billion last year, are expected to explode to $178 billion in just two years, according to International Data Corp.

That's why waves of America's powerful online merchants and Net technologists, bolstered by their fabulous market valuations back home, are sailing eastward, to the new Net market in the Old World. They're opening offices in London's Canary Wharf, commissioning market studies in Copenhagen and Berlin, and buying billboards in Barcelona.

Meanwhile, Europe's own heavyweights, from Germany's Bertelsmann to Spain's Telefonica, are raising billions with Net initial public offerings of their own. Their goal: to stake out their home turf, crushing giddy upstarts and American interlopers alike. The result will be a dramatic ratcheting-up of competition on Europe's Web, a process that will create a handful of champions and turn legions of pretenders, big and small, into takeover bait.

Looking for odds? Amazon.com and eToys Inc. may be riding high on their home turf. But America's cyber dream teams are no slam dunk in Europe. Some of the greats, including America Online Inc., already have stumbled on the Continent. Even U.S. online pioneers can be slow to grok what's happening in Europe. Online auction giant eBay established its European outpost just six months ago, years after some local operators had been wheeling and dealing (page 48).PORTAL BATTLES. It's no easy feat, after all, to master a market fractured into three-dozen languages, a handful of currencies, a crazy quilt of laws, and convoluted consumer practices, some dating back to Medieval guild laws. What's more, Europeans are racing to route e-commerce through cell phones. Within two years, more Europeans could be surfing through a Web phone than a PC. This means that the crucial portal battles coming up in Europe may be waged on the tiny screens of phones, where Europe's phone companies, from Vodafone Group to Sweden's Telia, have a running start. And if Europe steals the march on America in the mobile Internet, it could not only catch up with the U.S. in e-commerce, but leapfrog, just as it did with cell phones. (page 50).

Yet Europe's champs aren't shoo-ins either. They may know their markets, but many of them are struggling through e-business 101. The Scandinavians, coming from the densest and most advanced Net market in Europe, are old hands. But elsewhere, newbies predominate. "We know how to get shoppers to click through and become paying customers," says Clive Mayhew-Begg, international vice-president at CDnow Inc., the leading U.S. music site that is just now wading into Europe. "Most of the Europeans haven't learned that."

Europe is the logical next step for the U.S.-bred Internet revolution. And what a prize it offers. Its economy is as large as America's. And its population, if you stretch to the Russian border, is larger by 100 million potential consumers. Yet long punished by sky-high local phone rates and discouraged by the dominance of English on the Internet, Europeans have been slow to jump online. Even today, following a year of startling growth, only 13% of Europeans are online at home, compared with 43% in the U.S. And while American consumer e-commerce is blossoming into a big-time market, reaching $31 billion in 1999, Europeans are some two years behind, buying only $5.4 billion worth of goods online, says Gartner Group Inc.

But in business-to-business e-commerce, Europe's gaining ground much faster. Boosted by the new common currency, and far less hindered by the cultural and language issues that bog down consumers, French auto parts giant Valeo, for example, is not only moving all of its supplier and customer relations onto the Web. It is also pondering launching an investment fund focused on e-commerce ventures, say sources close to the company. Meanwhile, Scandinavian companies already are moving at a faster pace than Americans. And elsewhere, as in Germany's auto industry, manufacturers boasted sophisticated electronic links with even tiny suppliers long before the Net. Forrester Research predicts that a series of triple-digit growth years will drive combined business and consumer e-commerce in Europe, to $1.6 trillion by 2004, half of the American total.

So who's going to mine this treasure? For many American companies, Europe is the first foray abroad in a strategy designed to take them around the world. After all, even niche players in America, Autobuytel.com and Ask Jeeves Inc., for example, have won their multibillion-dollar market valuations with the expectation that they're creating global brands. But are they? Europe is the first test. And if they get whipped there, the market will likely punish them and cast about for other heroes.

For Europeans, the situation is perhaps more dire. From retailing giants Carrefour and Kingfisher to Europe's biggest phone company, Deutsche Telekom, the Internet is a pass-fail exam for the New Economy. If these companies don't mount a strong Web showing, they'll likely fade into history as 20th century relics. "Europeans must fight to stay on the map," says Pier Carlo Falotti, president for Europe at Oracle Corp.

There's a lot of work ahead before Europe functions as a single electronic market. Bill Nuti, Cisco Systems Inc.'s president for Europe, found that out the hard way. From his PC in London, he shopped over the holidays on Harrod's Web site for his top executives around the Continent. But when he tried to dispatch the baskets of luxury foods, from caviar to foie gras, he found that import regulations got in the way. "So I had to hunt for a different Web site in every single country, and make out a different order," he says. "It took me hours."

Despite these tangles, Europe's Net is a booming business for Cisco, IBM, and the other companies building it. A dozen telephone startups, many of them financed by American junk bonds, are racing to wire the Continent. New York-based Viatel Inc., for example, is linking 20 European cities with 4,350 miles of fiber-optic cable, all of it linked through a fat ocean cable to the U.S. "We're going to provide the bandwidth in Europe, and people will come up with content to fill it," says Michael Mahoney, Viatel's CEO.

Who's going to fill all that fiber with content? In the tiny niches are the Web sites in Danish, Catalan, and Dutch. Sure they're small, but they reach several million rich and wired consumers. Towering above them are the national phone companies. They are powerful Internet service providers, and they have a lot to say about a crucial element in their markets: the cost for local phone calls.

Then there are the Americans. AOL arrived in Europe in 1995, a transatlantic emissary from the New Economy. But Europe has been one rough ride. Early on, the American champ entered into a 50-50 joint venture with media giant Bertelsmann. It soon became clear, however, that a company with a star-spangled name and a big German partner is no easy sell in, say, France. Worse, AOL learned to its dismay that Europe's telephone giants could subsidize their own ISPs by offering cheap phone rates to their Net customers. Early last year, AOL sued in Germany for equal treatment, getting scant satisfaction.

By that time, an even greater menace was rising in Britain. In late 1998, an electronics chain called Dixons started handing out free diskettes, AOL-style, for its Internet service. But there was one difference: Dixons' Freeserve was free--unless you counted the charges for the local calls to access it, part of which the phone company kicked back to Dixons. In just months, Freeserve catapulted past AOL and others to become the No. 1 service in Britain.

In the past year, free access has jumped the Channel and taken Europe by storm. It has fueled a binge of computer purchases and has helped double Europe's Net population to 34 million. In the process, it has created new Net powers, including Italy's Tiscali, the Netherlands' World Online, and a host of sites in France and Germany.

This means that AOL, which despite its problems is still among the leaders throughout Europe, is likely to be facing rich and focused ISPs in every market. The new president of AOL International, Michael Lynton, says that the merger with Time Warner Inc. will provide the company with brands and content to battle on the European Net. "The music and the film business and CNN are all very strong in Europe," he says.

Megabrands such as AOL--or CNN--still leave plenty of niches uncovered. Netherlands native Michael Kraland, who runs an investment company in Paris, launched a Dutch-language investment Web site, IEX InfoExchanges, a year ago, offering stock tips and analysis. Now, Kraland runs the second-biggest financial site in Holland.

Bigger portals, anxious to expand, will doubtless be shopping for niche sites such as IEX. At the same time, they must prepare for the next frontier of Europe's Net: Internet access through a cell phone. The phones, along with other portable devices, should expand the Net-surfing population dramatically--since cell-phone subscrisptions outnumber online computers 3 to 1.

In the mobile battle, Europe's phone giants have the upper hand. From Vodafone to Telecom Italia's wireless company, TIM, developers are preparing "mobile portals" for the smart phones coming out this year. The phone companies want to be the AOL and Yahoo! of the Net. With their mini-portals, they will offer a host of services, from portfolio updates to e-commerce.

There's only one complication: The fixed portals are all eager to occupy the same precious spot on the phone. Indeed, it's with an eye to developing a mobile browser that Microsoft signed a joint venture with Sweden's Ericsson in December. Yahoo and AOL also are maneuvering. And Nina Brink, CEO of WorldOnline, is busy negotiating mobile-portal deals. "We understand the importance of telephones" more than the Americans, she says.

Europe's mobile Internet could spread even more quickly into the workplace. Software powers such as Germany's e-commerce superstar, Intershop, as well as Oracle and SAP, are hurrying to stretch out their programs linking suppliers and customers all the way to the cell phone. This would enable a salesperson to check inventories on the fly, or deal with contractors simply by punching in an order from a building site for a ton of cement.

Meanwhile, European startups are stitching business-to-business links across borders. Alexander Straub, a German Rhodes scholar, got the idea for a B2B business while working a summer job at Goldman Sachs & Co. in London. Within months he launched Mondus.com, a portal that hunts down goods and services for business customers. In less than a year, he has raised $60 million in venture funding and landed 11,000 business customers.

Other e-merchants are focusing on where they see big opportunities. In the auto market, for example, Europeans rarely shop across borders. And car companies' exemption from antitrust laws in distribution has led to price differentials of up to 40%. "The Internet can blow this system apart and find the best price," says David Dehaeck, CEO of Auto3000.com, an Antwerp-based online car site.

That doesn't sound like much, but the introduction of comparison shopping across the Continent could well wrench apart commercial patterns cobbled together over centuries. Esther Dyson, chairman of EDVenture Holdings thinks so: "I don't think Europe has realized yet how subversive this is going to be," she says. "It will disrupt the Establishment and completely shift the balance of power."

That could be. But getting blown away by America's Net economy would inflict much the same damage, and with none of the fun. By throwing their own Internet party, the Europeans, cell phones in hand, are stampeding onto their own large expanse of cyberspace. The thundering will be felt on both sides of the Atlantic.To learn more about the growth in Europe, read a Q&A with industry pioneers including venture capitalist Roel Pieper at ebiz.businessweek.comBy Stephen Baker and William Echikson; By Contributing: Andy Robinson in MadridReturn to top


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