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High-Speed Europe


Douglas L. Clark has waited a long time for this. The 65-year-old retired British businessman bought his first personal computer, a Commodore Pet, in 1979, and ventured online in the late 1980s. But despite graduating to ever-more-sophisticated computers and software, Clark could never get the one thing he wanted: a fast, always-on Internet connection. Then, six weeks ago, his remote hamlet in Berkshire was finally wired for digital subscriber line (DSL) broadband.

The $26-a-month service, from discount provider ADSL4Less Ltd., has already changed Clark's life. He listens to streaming music over the Net from BlueBeat.com. He posts higher-quality photos on his family Web site. And he spends more time online perusing pictures of vintage motorcars he might add to his collection. The downside? Clark admits sheepishly that he sometimes leaps up from the dinner table in mid-conversation to look up information on Google (GOOG).

The besotted Englishman is just one of the more than 14 million Western Europeans who have signed up for broadband access in the last year alone, bringing the total number of subscribers to 44 million, says consultant Pricewaterhouse-Coopers. That's more users than in the U.S. Some 25% of European households now have high-speed Net access -- enough to qualify as a mass-market phenom. "Broadband has become mainstream" in Europe, says Charlotte Davies, an analyst with London-based telecom researcher Ovum Ltd.

It's already a big business for telcos. PricewaterhouseCoopers figures European clients will spend $24 billion this year alone for zippy cable and DSL connections, rising to $42 billion by 2008. More important, broadband is a rocket booster for the rest of the Net economy. London-based Continental Research found that when British Web surfers upgrade from dial-up service, they're more than twice as likely to download music, use instant messaging, or frequent online auctions. Use of Net radio stations and online games more than triples. And while a quarter of dial-up users buy books and DVDs online, the figure jumps to 40% for high-speed subscribers. "Broadband changes customer behavior and makes it possible to do things that weren't realistic before," says Nick Hazell, alliances director for Yahoo! Europe (YHOO).

The surge of super-surfers is helping plump up results for companies across Europe. Telcos such as Deutsche Telekom (DT) and Britain's BT Group (BT) are signing up DSL subscribers as fast as they can. France Telecom, for instance, boosted its DSL subscriber base by 65% in one year, to 3.4 million as of the end of March, yielding record quarterly broadband revenues of $410 million. And in the Netherlands, which leads Europe in broadband penetration at 47% of households, market leader KPN saw a 51% first-quarter rise in DSL revenues vs. the same period in 2004, to $131 million.

The broadband effect is most dramatic for companies that specialize in digital content and services online -- music, games, gambling, and the like. Take Photoways Inc., the largest European online photo printing service, based near Paris. "There would be no Photoways without broadband," says Chief Executive Michel de Guilhermier, who figures 98% of his customers have high-speed connections. A few years ago, he says, the company's busiest day was Monday, when photo buffs uploaded their weekend snapshots from their office computers; now, with home hookups so much more common, the peak time is Sunday evening. The privately held company doesn't disclose results, but de Guilhermier says revenues tripled in 2004 and will do so again this year.

A SONG OF SALES

Online music sites are also ringing up record sales. Deutsche Telekom's T-Online unit has drawn 1.5 million users to its Musicload service, which sells more than a million downloads per month. Apple Computer Inc.'s (AAPL) iTunes is now available in 16 European countries. And European users listened to 14 million songs in June via Yahoo's new streaming music service. By 2008, online music could be a $2.4 billion business in Europe, predicts Forrester Research. Online viewing of music videos is taking off as well. "We're seeing massive increases in the numbers of videos consumers are accessing," says Barney Wragg, senior vice-president of Universal Music Group eLabs in London.

At the same time, high-speed Net access is changing the way Europeans communicate. As consumers switch to broadband, many are trying out phone calls over the Net for the first time using so-called voice-over-Internet protocol, or VOIP, technology. London-based startup Skype Technologies, which offers free Net calls PC to PC, has signed up 47 million users around the world, 82% of them on broadband connections. U.S.-based rival Vonage launched $17.50 per month all-you-can-call Net phone service in Britain in May. And mainline carriers like BT and France Telecom are pushing flat-rate VOIP packages to combat erosion of their traditional voice services. All told, figures market researcher IDC, Net-based phone calls may be a $4.2 billion business in Europe by 2008. "The killer application for broadband could be telecom," says Greg H. Garrison, director of the PricewaterhouseCoopers Menlo Park Europe Technology center.

E-commerce benefits from faster connections, too. Richard Ambrose, a category manager for eBay UK, says broadband customers spend twice as long on its site. But the real boost is richer graphics and sound clips. Some sites offer 3-D "fly-throughs" only possible via high-speed links, such as the virtual real-estate tours on Britain's findaproperty.com. Milan-based Yoox.com, which sells discount designer fashions, has a feature that allows users to create custom ensembles. "Customers enjoy the interactivity," says Chief Technology Officer Gabriele Tazzari.

The same interactivity is giving a lift to online advertising. Movie distributors, phone companies, and carmakers, among others, are taking advantage of faster connections to add animation, music, and even video to their banner ads. A 2004 report from ad services firm DoubleClick Inc. found that "rich media" banners drew click-through rates of 1.17%, nearly twice the level for static ads. "We've seen some very high response rates with rich media," says Ed Ling, strategy director for London-based agency i-Level PLC, which specializes in digital media. Ling cautions that interactive ads still represent less than 10% of the online market. Nonetheless, PricewaterhouseCoopers predicts the spread of broadband will help drive European Net advertising to $8 billion in 2008.

The next wave could be even more disruptive. Broadband surfers are now starting to create their own rich media, from video blogs to podcasts. Within a few years, the entertainment and communications businesses could be dramatically transformed. And you can bet that Doug Clark will be along for the ride.

By Andy Reinhardt in Paris


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