How Are Europeans Surviving The Net Economy's Shakeout?
By KARA SWISHER
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Visitors from Silicon Valley touring this scenic capital city might be excused for feeling as if they were still strolling the streets of San Francisco.
London and most other European cities these days are outfitted as if they were at ground zero of the dot-com revolution, with www.anything.com ads plastered to the sides of elegant London cabs, a multitude of tech gadget stores in Paris touting the nouvelle economie, and giant billboards over Rome's famed Piazza Navona hawking Internet-enabled cell phones.
But along with sharing America's online obsession, the region is also sharing its growing pains of the Internet economy. In fact, some think the carnage over here could turn out to be more wrenching than it has been in the U.S. for many reasons, including lack of a solid venture-capital infrastructure, a smaller and less mature consumer base and a tougher market for consolidation. At the same time, Europe could see a Web market emerge very much apart from the U.S. with lucrative opportunities in fast-growing areas such as wireless communications.
Only last fall, a lot of industry observers were predicting that the region -- with its educated, affluent populations -- would experience the same kind of growth and stock-price trajectories that U.S. Web companies had been enjoying. Local versions of successful U.S. firms such as Yahoo!, Amazon, eBay and America Online popped up en masse last year as funding from venture firms and traditional businesses flooded the once-barren private-investment market here, quickly followed by investment bankers eager to push public offerings. U.S. Internet leaders also piled on in a much bigger way with a variety of international services. The dot-commies became heroes in their respective countries and lauded as the hope of the European economy.
The mood here changed after the U.S. stock market last April showed disdain for all things Internet. In May, Boo.com, a much-hyped upscale fashion site based in Britain hit the wall, as spending ran amok and sales did not. It was bought last week by American online retailer fashionmall.com Inc. Boo's story is typical of many others filling European newspapers today with reports on restructurings, rejiggerings, re-evaluations and promised rejuvenations in the Internet industry. As the European market sorts itself out, here is a look at where it's headed and how it compares with the U.S. Web economy:
TAKING STOCK: As in the U.S., publicly traded Euro Web companies have been massively devaluated as investors look for quicker returns and solid profits. Consider the much-hyped Internet auction company, Britain's QXL.com, previously considered an eBay killer, which has seen its soaring stock drop through the floor (about 96% this year). Then there was the shopping site Letsbuyit.com, also based in the United Kingdom, whose initial public offering was postponed twice before it got out in July -- with lackluster results.
OUT OF THE FRYING PAN: Unlike many U.S. start-ups, few European Web companies have strong venture firms willing to continue funding through the hard times. That means the news keeps getting worse for once-favored firms that have been bleeding cash -- from the Boo.com (which blew through more than $120 million in investments), to the more careful but no luckier Dressmart.com of Sweden (about $18 million in funding gone). Both saw shadows of their former selves sold off for a fraction of the money dumped into them, something several recent studies posit will be occurring with regularity all over Europe over the next few months.
THE URGE TO MERGE: As in the U.S. right now, retrenchment is the buzzword of the hour. "Some of these start-ups will make it through as stand alone entities," notes Fabiola Arredondo, managing director of Yahoo's European operations. "But there have been many businesses placing themselves on the selling block this summer and there will no doubt be consolidation in the industry in the upcoming months." She says her division is on the lookout for opportunities -- if they offer unique technology or services.
Among those reportedly in play are companies such as Dutch Internet access provider World Online International, which at one time was thought to be a major independent player in the access business. The bigger traditional companies here, however, seem less willing than their American counterparts to spend significant sums for dot-com efforts, considering them only marginally important to their futures.
BUSY SIGNALS: Getting people hooked up remains a major problem to the growth of services, especially considering the costs of local phone services, which are still metered by the minute in Europe. Web-access services have half the penetration rate of similar services in the U.S.
Companies that offered both flat rate and free-access plans were all the rage last year, signing up multitudes of customers quickly, but the actual deployment of such services has proved problematic and costly. In late August, for example, a plan offered in March by the British arm of the U.S.-based AltaVista search service for unlimited surfing at a single low price was never deployed because of cost problems. After the fiasco was uncovered, its high-profile managing director was forced to quit and AltaVista adopted a more modest by-the-minute offering.
WIRELESS WORLD: The future of online here is in alternative devices. Sophisticated and interoperable digital phones that easily access the Internet and offer other interactive services are marketed heavily and are used throughout the region. A recent poll by International Data Corp. predicts there will be 300 million mobile subscribers in Europe by 2004 -- far surpassing the U.S. rate.
THE YANKS AREN'T COMING: One factor that will hinder growth and recovery of the Internet sector in Europe is the dominance of U.S. powerhouses world-wide. Many U.S. companies make a lot of noise about their international efforts, but at least in the short term they are expected to continue to concentrate on their strongest market -- the U.S.
At the end of last week, for example, the bellwether Internet holding company, CMGI of Andover, Mass., said it was dropping plans for a highly touted, $1.5 billion international Web venture fund with overseas investors Hicks Muse Tate & Furst and Pacific Century CyberWorks, as part of its restructuring plan. CMGI chief Pete Mills says the focus of management now is to build up the company's U.S. properties. "We think there is strong opportunity in Europe, especially in certain sectors like wireless," he says. "But until the market is fully recovered, it's probably one of six priorities all Web companies have competing with each other, so it might take a bit of a back seat."
The top priority is to get on solid financial ground, and that is something all Web-related businesses share, regardless of their real-world address.
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