Europe’s Lagging ISP Market Heats Up

In the accelerating race for Internet traffic across Europe, Formula One driving ace Mika Hakkinen may suddenly have noticed tennis legend Boris Becker pulling up in his rear-view mirror.

The respective celebrity Internet promoters of German telephone company Deutsche Telekom’s T-Online and its rival America Online-Europe have become ubiquitous poster boys for the quest to conquer cyberspace in one of the most aggressive advertising campaigns conducted on the Continent. And although T-Online had a considerable head start as heir to the old German telecommunications monopoly’s client base, AOL-Europe executives insist they are catching up to their entrenched German rival.

Both leading Internet service providers, or ISPs, attracted hordes of new customers last year. T-Online boosted its clientele 54% to 4.2 million and AOL-Europe added 1 million subscribers in the last five months alone to boost its membership to 3.7 million on the Continent, company spokesman Alexander Adler said Thursday.

The big gains in clientele and usage reflect growing interest among Europeans--long the developed world’s Internet laggards--in online communications and commerce. And though Europe is still far behind the United States in market penetration, the surge in customers and Web site hits may herald a boom of the type that has put the majority of Americans online over the last few years, said market analyst Lorntie Jung of Commerzbank in Frankfurt, Germany.

One damper on the development of Internet use in Europe is the lack of flat-rate telephone charges. Online customers must pay by the minute for local calls to make Net connections on top of the monthly charges for their ISP. That has put monthly Internet bills for 50 hours of online time between $60 and $100--one reason the average European user spends less than 30 minutes a day online, whereas AOL’s U.S. clients average 63 minutes daily.

“For most people here, it’s not so important which ISP they have. They are more interested in how quickly they can get online and how much it is going to cost them,” said Dieter Elixmann of the Research Institute for Communications Services in Bad Honnef, Germany.

“Deutsche Telekom’s costs have dropped dramatically after years of being overpriced,” Elixmann said. “It’s very competitive now in Germany, but it’s still far above costs in flat-rate countries and will be a deterrent to growth until that changes.”

He attributes T-Online’s market-leading position in Europe to users’ familiarity with the service’s forerunner, an online banking option available since the 1980s to German customers of the former Bundespost, the federal mail and telecommunications monopoly. When the government began privatizing the Bundespost in 1996, Deutsche Telekom inherited the customer base for fixed-line services and continues to dominate that sector as competitors focus on the mobile market.

“We are the more successful company because we are close to our customers and we know what they want,” said Hans Enhert of Deutsche Telekom’s headquarters in Bonn. He noted that T-Online is the next-largest ISP in the world after America Online, although a distant second to the U.S. company that Wednesday reported its global membership had reached 21 million.

But the German phone company’s early success is seen by analysts as the consequence of customer habit and convenience, as T-Online charges show up on the monthly phone bill, offering one easy payment instead of separate invoices for Internet and voice calls. Deutsche Telekom also is able to cross-market T-Online, offering membership with new telephone installations or mobile contracts.

Then last summer, AOL-Europe embarked on a determined campaign to lure new customers from among the technology-phobic ranks on the Continent with a reported $100-million advertising campaign featuring tennis star Becker showing how quickly the uninitiated can get online and into e-commerce. It marked the first serious challenge to T-Online’s glitzy promotions featuring Hakkinen on billboards, in magazines and on television spots across Europe.

“We’re on a mission to tell people the benefit of content and how it can make daily life easier,” said AOL-Europe’s Adler from the Hamburg, Germany, headquarters of the company jointly owned by AOL and Germany’s Bertelsmann media empire. “Content is king, and we’re the only ones who can really offer our own content.”

Germany is the largest country in Europe, with more than 80 million people, most of them well-educated and financially secure. So it is the prime turf over which the Internet service providers are warring. Hundreds of tiny ISPs have cropped up to offer online access, bringing the share of Internet users to almost 25%. But few of the smaller ISPs are able to compete with the big names whose familiarity to a mass audience is the key to their success.

“In Internet access, it’s really a game in which only the largest players have a chance of surviving,” Commerzbank’s Jung said. “Anyone can open a site on the Internet, but to survive you need to reach a certain critical mass.”

Portals, which are the main vehicles for Internet access in Europe because they allow a user to move around more easily among local and international sites, are dependent on advertising, which is determined by market size, Jung explained. Portals with the biggest audience, measured by site hits rather than members, can command the highest prices for advertising, generating more revenue for the bigger players and leaving the upstarts on the local sidelines.

A report released last week by Nuremberg, Germany-based research firm MMXI Europe ranked the top 10 Internet firms for the Continent, showing search engine Yahoo the most-visited portal in Britain and the second-most popular in Germany after T-Online and in France after its national offspring, Wanadoo. AOL-Europe ranked third in Germany, fourth in France and fifth in Britain.

“Yahoo is simply the most recognized brand name for Europeans who want to reach local providers,” MMXI Europe analyst Thomas Pauschert said.

The company’s survey of European Internet users’ habits during the Christmas season showed a 15% rise in visits to e-commerce sites from November.

But fears about the security of online transactions apparently remain rife in Europe, as less than 3% of the visitors make a purchase, Jung said.

Those concerns, though, are giving rise to another service in Europe offered by banks in cooperation with ISPs to establish secure payment authorizations at a customer’s bank so that no account or credit card numbers need be transmitted during the purchase.