Europe's Got Net Fever
The symptoms are clear: Hot new companies, job offers featuring Ferraris and a
certain swagger as bright young businessfolk stake their claims in cyberspace.
By Rana Dogar
Rocketing Into Cyberspace
| |
Europe.com: Wild West ways cross the pond (photo illustration by Victor Stabin) |
Nick Denton didn't plan to leave his perfectly good job as technology
correspondent for the Financial Times when he moved to California. But after sitting
across from "one too many guys who were younger than me and having more fun,"
the 33-year-old former journalist simply couldn't help himself. After less than a year on
the job, Denton wrote a business plan, ditched the FT and started banging on venture
capitalists' doors for seed cash for his Internet start-up, Moreover.com — an online
news service with offices in Britain. Angel investor Richard Tahta, Amazon.co.uk's
strategic-development director, quickly came on board. During Denton's second meeting with
British venture capitalist Christopher Spray of Atlas Venture, he nabbed more money in
classic Sand Hill Road style — with a handshake over lunch, before either the
business plan or the main course had been served. Once a month all three men can be
spotted mingling in London at First Tuesday, the Internet-networking club Denton helped
create. Denton and Julie Meyer, another First Tuesday founder, like to help the crowd
along with a little icebreaker: the money wears a red dot, the talent wears green.
Subtle it's not. But in Europe's booming new Internet economy, subtlety is as
tired as three-piece suits, salaries sans stock options and working for one company your
whole life. Inspired by the incredible success of Silicon Valley, and lubricated by a huge
new wave of venture capital from major investors on both continents, Europe's youngest and
brightest are bringing the Wild West business mentality east, creating thousands of new
Internet companies that cover every dot.com concept under the sun. Yes, it has taken
Europe a few years to really embrace the Net. But the wave is rising, as not just small
new companies but big established ones rethink their futures in technological terms.
Throughout the Old World, more people are using more computers to spend more time than
ever online.
Thank British Internet service provider (ISP) Dixon's Freeserve for the latter
development. In Europe, unlike America, using the Net isn't cheap. Telcos charge by the
minute for local phone calls, and ISPs typically charge another monthly fee to log
customers onto the Net. Freeserve changed all that last fall by becoming the first ISP in
Europe to drop the access charge; it gets its revenues from advertising, e-commerce and by
sharing the money the phone companies rake in from all the new customers it attracts. Now
all customers pay is the phone charge for their time online. It was a simple change —
but one that revolutionized the market. Consumers rushing to sign up for Freeserve were
outrun only by investors trying to buy its shares in an eye-catching $500 million IPO last
July. The company quickly soared past AOL Europe to become the No. 1 ISP in Britain, with
1.3 million registered users. It also forced several other players, including AOL, to
launch their own free services in Europe, upping Net usership across the continent.
Freeserve didn't just reinvent the ISP game and prove to Europeans that the Net
could make them rich, too. It also allowed Europeans to swagger a bit, because they had
showed the Americans how things are done on their side of the pond. The Internet is, after
all, an American phenomenon. It grew up in Silicon Valley, where one generation of talent
mentored the next. Major U.S. players like Yahoo!, AOL and Amazon.com are all staking
their claims in the European market. What's now coming clear is the extent to which a feel
for local conditions matters in this famously global business — and how much success
the Europeans are having at making the Net their own.
Being a step behind the American growth curve has a major advantage for
Europeans: they get the chance to see what works, and what doesn't. They've been watching
carefully. European telecoms have embraced the Internet faster than their American
counterparts. In Germany and France, the top ISPs, T-Online and
Wanadoo, are run by
Deutsche Telecom and France Telecom, respectively. T-Online is also expected to be a major
competitor of Yahoo! in the portal business. Portals are like electronic malls — they
provide a user-friendly entry to the Net, from which consumers can easily shop, chat or
access content. European portals will likely take a healthy slice of the global
online-advertising dollar, which is expected to grow to nearly $33 billion by 2004,
according to Forrester Research.
European retailers have likewise learned from America. Instead of waiting for
Internet pure-plays to take a big bite out of their businesses — the way Amazon.com
took one out of Barnes & Noble's — they're setting up shop online. Dixon's, which
owns Freeserve, is a high street electronics seller. The German department store Karstadt
has an online mall called my-world, which averages about 5,000 visitors per day.
Kingfisher, a U.K. retailer, just launched a free French ISP,
libertysurf.com, with one of
Europe's highest-profile businessmen — Bernard Arnault of LVMH Moet Hennessey Louis
Vuitton.
Big businessmen like Arnault have watched the American experience, too, of
course — which is why they're angling to own choice pieces of
europe.com. Rupert
Murdoch recently tapped BSKyB head Mark Booth to run a $300 million new-media investment
fund called e-partners. Television companies such as Canal Plus and the Kirch Gruppe are
exploring Net opportunities. France Telecom's venture fund Innovacom is already a key
high-tech investor. And then there are the dozens of traditional multinational
venture-capital firms, such as Atlas, Apax, Global Retail Partners and 3i, which are
pouring more and more money into high-tech start-ups. In the past three years, 3i, once
known as an old-style LBO firm, has tripled its investment in early-stage tech companies,
which now represent 30 percent of the business. Of course, Arnault's investments are among
the most-talked-about. And perhaps the luxury tycoon's sense of what's hot accounts for
his interest in some of Europe's sexiest Net start-ups. Through his newly created v500
million investment fund, Europ@web, he's looking to buy stakes in all sorts of Internet
companies with Pan-European potential. He already owns a piece of the London-based auction
company QXL. He's also invested in French search-engine company
Nomade, run by Gilles Ghesquiere, a Boston University grad who once developed new products for France Telecom.
He's also in peoplesound.com, an online music retailer that's similar to MP3.com (which he
also has a stake in). And then there's boo.com, a sportswear retail company that has yet
to launch a site but has already been the subject of major features in business magazines
on both sides of the Atlantic.
That could have something to do with the company's photogenic founders —
Ernst Malmsten, who looks a bit like a Nordic Elvis Costello, and his partner Kajsa
Leander, a former Elite model. Back in Sweden, the pair created
bokus.com, which has since
grown to be the world's third largest online bookseller. After selling the company in
1998, they turned their attention to the fashion market. Clothes are a tough sell on the
Net — you can't feel them, and you can't try them on. Still, Malmsten and Leander
thought there was a young, tech-savvy customer who'd pay full price for tough-to-find
sportswear items like Vans sneakers (worn by skateboarders) or Cosmic Girl T shirts.
Arnault, who likes to surf the Web in his spare time, thought so, too, as did the Italian
retailer Benetton. Boo.com quickly raised three large rounds of capital (though not the
$125 million that was widely reported, says JP Morgan's Chris
Bataillard, whose firm
helped the company secure much of its funding). Even in development, the site looks like
it might match the hype. Users have their own shopping buddy, a chic little avatar named
Miss Boo, who guides them through the 3-D selections and comments on clothes. Content is
localized down to the last detail (e.g., pants in the United States become trousers in
Britain). The company even had a stylist consult on the length of Miss Boo's hair.
From Boo's Carnaby Street offices, hot from computers running all night and too
many bleary-eyed young programmers and designers piled on top of each other, Malmsten and
Leander will oversee a simultaneous seven-country launch this fall. It's an incredibly
ambitious strategy, one that many other European Net companies will be forced to follow if
they want to survive the inevitable shakeout that will begin as more Europeans jump on the
bandwagon and more Americans turn their attention eastward. "There's been so much
growth in the U.S. market that American companies haven't had the time or need to look to
Europe," says Bataillard. "They'll have about another year before the U.S.
really turns full steam on the European market."
The smartest European e-commerce and content players aren't waiting; they're
trying to get big, fast. QXL sells computers, gifts and travel products in 16 European
countries, leaving America's eBay — which only recently acquired a tiny German
auction company — in the dust. QXL's founder, FT columnist Tim Jackson, is part of
the growing mafia of British media types who have brought their talents to the Web.
Chateau Online, a French site specializing in wine, also does a brisk business in Germany
and Britain. The Sportal Network, a new media company run by onetime Murdoch protege Rob
Hersov, is building a Pan-European sports platform, partnering with local sports stations
and top teams like Italy's Juventus, Bayern Munich and Paris St.
Germain. The idea is to
create something similar to interactive TV, but on the Net. You can get an audio stream of
the game, watch particular plays on your screen and order a jersey all at the same time.
"One year ago people thought we were crazy," says Hersov. "Six months ago
they thought maybe we had something right. Now big media companies are coming to see
us." Hersov says he aims to take Sportal public before the end of 2000.
And why not? The great European IPO rush is already underway. Eighty-three new
tech companies have gone public on Germany's Neuer Markt this year. One of them, German
online broker ConSors, is now the fifth largest broker in Germany. Even more amazing is
the fact that this Net company turns a profit — $14 million in the first six months
of 1999. Afraid to miss out on the boom, London is easing its standards for listings,
encouraging a crop of young companies to follow in Freeserve's footsteps.
Lastminute.com,
a successful travel site that specializes in great deals on eleventh-hour vacations, plans
an IPO within a year. The company, founded in 1998, already pulls in $10 million in yearly
revenue. But it will need serious support for its launch into the U.S. market, scheduled
for December. That's where American investors like Intel come into the picture. "We
were lucky," says cofounder Brent Hoberman. "There was so much buzz, the U.S.
came to us."
Consumer e-commerce companies like boo.com and last minute.com are undoubtedly
the glamour plays of the European Internet. But just like in the States, there are lots of
Internet ventures in Europe that are a lot less famous — and often more profitable.
For starters, there's plenty of money in the business-to-business applications that help
make existing companies more efficient. IBM, which services many of them, says the support
side of its European e-commerce business will quadruple by the end of the year. Intershop
will also cash in on the rush to e-commerce. It was East Germany's first Internet
start-up, and is now the world's biggest seller of software for online-shopping sites.
Developers like Peter Kabel of Kabel New Media in Hamburg make lots of money creating Web
sites for multinationals. Integra, founded by French entrepreneur Pierre Gerard, a Wharton
grad, will help host and operate the thousands of new sites expected to appear in France
in the coming months. Integra's stock, traded on the Nouveau
Marche, is at v42 a share, up
from the June IPO price of v20, and the 58 initial investors in the company have all
become millionaires. "It's not yet Microsoftian," says Gerard. "But we're
going to make a lot of money."
He's right on both counts. There's no European Bill Gates. Seed money in Europe
is still a fraction of what it is in the United States, despite phenomenal growth rates.
And plenty of smaller European Net companies are expecting to be swallowed up when
Americans finally awake to what's happening overseas. In fact, some are counting on it
(hey, it's an exit strategy). But something important has changed in Europe. It's become a
good place to take a risk. European business schools are teaching their students how to
become entrepreneurs. Government-sponsored incubators are supporting them. Smart money is
funding them. And the talent that once fled Europe for America is coming back home.
That's where the growth is. And the stories of wealth and competition are
starting to rival the tales from Silicon Valley and Route 128. Twenty-eight-year-old
Ernesto Schmitt, the founder of peoplesound.com, remembers the hiring battle for Martin
Turner, a former managing director of CompuServe UK, who was headhunted by a major
investment bank to help start a financial-services Web site. "The [banker] invited
him to lunch," says Schmitt. "When he got there, he asked if Martin noticed all
the cars in the parking lot. He pointed to one, and told him that if he signed right then,
he could have the keys." It was a Ferrari. Turner declined. "He doesn't like
red," says Schmitt, who promptly hired him to be peoplesound.com's COO.
The First Tuesday Web site captures the frenzy. A new job or business plan is
posted there literally every few minutes. The club, which can no longer accommodate the
hundreds of people who spill out the doors of its monthly London mixers, will be expanding
to 25 other cities in the fall. And there are investors clamoring to give it money. The
idea that venture capitalists would pay millions for a cut of a social club seems like an
"only in America" kind of story. But the entrepreneurs and investors who make up
First Tuesday are, as Nick Denton puts it, "spiritual Americans," people who
have blended American charisma with European style. He's one, too. And he's got the equity
to prove it.
With Omar Sacirbey in Dresden, Stefan Theil in Berlin, Scott Johnson and
Dana Thomas in Paris and Shehnaz Suterwalla in London
Newsweek International, September 6, 1999
