View all newsletters
Receive our newsletter - data, insights and analysis delivered to you
  1. Technology
August 20, 1996


By CBR Staff Writer

On paper, Europe On-Line SA was a great idea. First launched early last spring at a time when great editorial content was considered key to building an on-line services empire, Europe Online was a newborn positively draped in ermine. Flaunting internationally known publications such as Elle, Car & Driver and the Financial Times from its backers, three of Europe’s largest media conglomerates – France’s Matra Hachette, Germany’s Burda and the UK’s Pearson Plc – Europe Online was poised to challenge CompuServe Inc for supremacy in Europe’s still-young on-line services market. But when a Luxembourg court granted Europe Online protection from creditors on July 9, it was clear that content alone is no longer a king-maker, and that the traditional on-line services model that made CompuServe and America Online Inc world leaders is rapidly breaking down. For Europe’s several hundred small and medium-sized Internet service providers, the CompuServe-America Online business model that includes managing a telecommunications network and computer center, as well as producing and packaging editorial content, is particularly onerous. Little wonder, in a region where the Internet services market for both business and consumer is still nascent and where telecommunications infrastructure can be prohibitively expensive. To make matters worse, the last year has seen every telephone company in Europe make an aggressive push into Internet service provision, for both the business and consumer s egments. Deutsche Telekom AG’s T-Online, for instance, added some 35,000 new subscribers in November 1995, to bring its total to 933,000, well in excess of leader CompuServe’s 700,000 in Europe.

Viewdata service

Telekom said it was the biggest monthly increase since the service was launched in 1983 as a proprietary viewdata service similar to France’s Minitel. The alternative telecommunications operators springing up around Europe, such as Siris, the joint venture between France’s Generale des Eaux SA and Unisource NV, have also joined the fray, making Internet access a low-margin commodity. Just a few weeks before Europe Online’s near-bankruptcy, Telecom Italia got the green light from Italy’s Antitrust Authority to gobble up the country’s leading provider of Internet to consumers, Video On Line srl of Sardinia. Founder and owner Nicola Grauso’s ambition to make Internet service in Italy as affordable as a loaf of bread by fire-selling it, fo undered on the high costs of its worldwide network of high-speed leased lines. for its Internet business. Europe Online’s chief executive Jurgen Becker says the food chain of the Internet business has evolved into four segments: access, which comprises operation of the network and its so-called points of presence that provide local-call rate access; hosting, which is the computer center that handles maintenance and billing for Web sites; content, which is the production and packaging of editorial services; and marketing of the service. Access will be a telecommunications business, because the major [European] telecoms companies are ramping up fast with their IP nets, most of which didn’t exist 24 months ago. It is clear that an on-line service like Europe Online cannot win at the access-hosting end of the value chain because the telcos will just throw lots of money at it, so we will not fight them, but will partner with them, says Becker, adding that several of the six potent ial new shareholders he is talking to are telecommunications operators. The squeeze is particularly brutal in the consumer end of the Internet service market. Both Europe Online and Video On Line targeted exclusively that market, and other providers concede that the European consumer segment is, as yet, no goldmine. The amount of money you can make on the consumer side of the Internet market in Europe is very small, says Sergio Giacoletto, head of AT&T International’s newly created value-added services business unit. It is coming on very quickly, but there is still another 12 to 18 months of consolidation of existing players.

Corporate services is undoubtedly the most promising specialization, with its need both for developing Web sites and setting up groups of Internet and intranet users. At one of France’s leaders, Grolier Interactive’s Club Internet, which is owned b y Matra Hachette Multimedia, the Studio, which creates Web sites for companies like Renault, is the only profitable part of the business, says 28-year-old chief executive Fabrice Sergent. The consumer side will take another three years to break even, when we have enough of a subscriber base, Sergent says. It’s a long-term investment. In the meantime, Grolier Interactive is moving the majority of its Internet traffic to Matra’s own satellite, to save money on the cost of leasing lines from France Telecom. In a recent study of the European Internet market, London-based Durlacher Multimedia Ltd predicts that, as more and more companies target corporate clients, that market will see some downward pressure on margins as companies lose mo ney in the early stages in order to gain market share. With the current cost of leased lines in Europe, any drop in margins on services that use them would be disastrous. Per Bilse of EUnet notes that an E1 circuit, either across the Atlantic or to a bordering European country, costs $40,000 per month, while one to a more distant European country can cost $60,000 or more. In contrast, a T3 circuit coast-to-coast in the US – much greater distance, and with more than 20-fold capacity – is $80,000 a month. Thus the cost per mile per Megabit is less than 0.5% as much as in Europe. America Online 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, says Emily Green, an on-line analyst at Forrester Research, Boston. At what point is America Online going to realize that it really needs to sell its network and get out of being a network operator? CompuServe has already been able to amortize the cost of its enormous network investment in the US, but in Europe it is having to spend new dollars, which becomes very expensive. Ms Green says she expects that the on-line services market will ultimately be like the US cable TV market, where you have the cable operator who brings the wire to your house, and the companies providing and distributing the programming are not necessarily at all the same ones operating the network. AT&T’s Giacoletto believes that France’s Minitel m odel is a good example of what will happen. You have the access provider, but this time we will have more than one, because of deregulation, and various service providers, where you will pay for serious business-to-business and consumer information and services. Judging by their strategies, neither America Online nor CompuServe puts much stock in such predictions about the way the market is evolving. We are very optimistic about the prospects for the growth of on-line services in Europe, and we will continue to expand our European network two ways: as the customer base grows, we will add more modems and, as we grow out of the UK, we will expand our geographic coverage, declares Jack Davies, president of America Online International.

Transition or death

Although telecommunications costs in Europe are higher, he says, as a percentage of revenues, they are about on a par with the US. He adds that America Online’s marketing costs are far more critical, in terms of getting to a break-even, than telecommunications costs. For its part, CompuServe is revamping its European network infrastructure with new technology that enables more customers to dial in with a local call, as part of a $200m worldwide network investment announced early in the year. For the on-line service providers like Lyon-based Infonie, however, who lack the critical mass of CompuServe and America Online, the future is clearly different. Infonie chief executive Bruno Bonnell is impatient to move to a new business model: I’m convinced that access will be ultimately provided only by telecoms companies, and I hope it happens very soon. We only put in a network because the technology was not there, but as soon as possible would like to get rid of network management – when somebody proposes the right technology. Our strategy is to do 100% management of content. Indeed, only the on-line services like Grolier’s Club Internet that are lucky enough to have everything in house may be spared transition or death. Says Sergent, If we didn’t have Matra and its technology, we would be faced with the same problems the others have.

By Marsha Johnston

Content from our partners
Scan and deliver
GenAI cybersecurity: "A super-human analyst, with a brain the size of a planet."
Cloud, AI, and cyber security – highlights from DTX Manchester

Websites in our network
Select and enter your corporate email address Tech Monitor's research, insight and analysis examines the frontiers of digital transformation to help tech leaders navigate the future. Our Changelog newsletter delivers our best work to your inbox every week.
  • CIO
  • CTO
  • CISO
  • CSO
  • CFO
  • CDO
  • CEO
  • Architect Founder
  • MD
  • Director
  • Manager
  • Other
Visit our privacy policy for more information about our services, how Progressive Media Investments may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.