By Eric Nee

Why is the European market so hotly contested? In the U.S. the Internet caught nearly everyone by surprise. Small upstarts like AOL and Yahoo were able to get a head start on much larger firms like the phone and media companies, leads the usurpers have never relinquished. It couldn't be more different in Europe. Because the Internet developed more slowly there, established firms like the national phone companies were able to watch their American counterparts get skunked in the U.S. Now they are devising ways to make sure the same thing doesn't happen to them in Europe.

The Americans are bigger overall in Europe than the homegrown competition--mainly because they operate in more EU markets. Yahoo, for instance, is the biggest portal in Europe because it offers its service in eight countries. But the locals aren't standing still. Players like Deutsche Telekom, which spun out T-Online, the largest ISP in Germany; France Telecom, which owns Wanadoo, the largest ISP in France; and Telefonica, whose Tera Networks is one of the largest ISPs in Spain, are all determined to expand throughout Europe. Add to these a handful of European startups that also have Pan-European ambitions: Freeserve, the largest ISP in Britain; World Online, a troubled ISP out of the Netherlands that nevertheless has more than one million subscribers across Europe; and Tiscali, a fast-growing ISP in Italy. (Generally, the Europeans operate either an ISP combined with a portal, like the AOL model, or just a portal, like the Yahoo model.)

To complicate matters even more, a whole new set of players, the powerful cellular-service companies like Vodafone AirTouch, is looming on the horizon. These telcos will soon launch their own portals, aimed at the wireless market. Vodafone has already hooked up with France's Vivendi and has bought Germany's Mannesmann in a bid to create a European wireless giant offering a host of Web services.

Despite this formidable lineup of competitors, it's not going to be easy for the Europeans to take back their market. The Americans have years' more experience building strong ISP and portal operations. They know how to design an effective site, make it easy to use, aggregate content, sell advertising, and set up e-commerce operations. Those are skills the Europeans are just learning.

And the Europeans need scale to compete with giants like AOL and Yahoo, which already operate around the globe. With so many European companies vying to dominate the Web, most observers believe there will be a wave of consolidation. "It's going to happen sooner rather than later," predicts Freeserve CEO John Pluthero, 36. Indeed, in mid-May, Spain's Tera Networks announced that it would buy the U.S. portal Lycos.

T. Rex of Europe

One of the companies that everyone expects to be on the prowl is T-Online. Just south of Germany's bustling financial capital, Frankfurt, is the city of Darmstadt (pop: 140,000). A comfortable, midsized German city with a strong industrial base and a technical college, it is home to one international firm of note, Software AG, the $350 million mainframe company. Life in Darmstadt is about to get a bit more exciting. Two months ago it became home to Europe's most valuable Internet company, T-Online. While dot-com zillionaires haven't started bidding up the price of every home in the area (the company has yet to offer stock options), T-Online is likely to accelerate the city's pulse. With 5.3 million subscribers, T-Online is already the second-largest ISP in the world, after AOL, and the largest in Europe.

Sitting in the expansive conference room atop his firm's ten-story building overlooking the Autobahn is Wolfgang Keuntje, the 42-year-old CEO of T-Online. He's dressed in a short-sleeved blue cotton shirt, and a cell phone is attached to his belt. He moves and talks with the sort of energetic, informal style that would fit right in at a Silicon Valley startup. Keuntje is representative of the new breed of young, aggressive, rule-breaking entrepreneurs in charge of European Internet firms. That's hardly what might be expected from someone who until two months ago worked for the old-world German behemoth Deutsche Telekom. In April, that company spun off T-Online in one of the largest IPOs ever, creating a company now valued at some $35 billion, as much as Amazon and eBay combined. T-Online is not yet in the same league as Yahoo, AOL, or Microsoft in global reach--almost all of its customers are in Germany. But the company has high ambitions.

Keuntje's plan is to use his strong home base and the company's $35 billion market capitalization to venture across the rest of Europe, acquiring existing portals and ISPs or opening his own. "It depends country by country whether we use the T-Online brand or not," he says. ("T" is the brand Deutsche Telekom uses for its corporate identity.) The company recently opened a T-Online service in nearby Austria, because its brand is familiar in this German-speaking country. In France, however, T-Online bought an existing company, Club-Internet, that nation's third-largest ISP, behind France Telecom's Wanadoo and AOL. There it plans to keep the Club-Internet brand name. Recently there was speculation that T-Online might acquire Freeserve, Britain's largest ISP, with 1.9 million subscribers, and one of the country's most popular portals. Freeserve's Pluthero dismisses this as "just rumors. I haven't even talked to anyone at T-Online."

"To compete with the Americans, we need size," says Keuntje. His aim is to be a major player in each European market. Why? Suppose an e-commerce company that sells French wines wants the best distribution possible. The wine seller could do separate deals with different portal firms in each country, but that would be time-consuming and inefficient. Instead, it could align with a giant like T-Online and sell its wine through all its local country portals. One-stop shopping, if you will. The same holds true for advertisers. Big firms that sell products like autos or televisions across Europe generally would prefer to deal with one large portal company that can get them in front of millions of potential customers. "Since we went public we've gotten a lot of calls from big, worldwide players," says Keuntje.

T-Online's recent efforts have not gone unnoticed by the Americans. "The incumbent telcos in countries like Germany and France were very smart," says Fabiola Arredondo, 33, managing director of Yahoo Europe. "They recognized it was important to make Internet plays early, and they've done well. They've invested a tremendous amount of money in developing their sites. That's different than the U.S. and the U.K." In the U.S., large telcos like AT&T, MCI, and Sprint were either late or ineffectual when it came to offering Internet consumer products. Deutsche Telekom and France Telecom learned from those mistakes. They moved aggressively into the Internet-access market, leveraging their parent's near-monopoly control of the telecommunications infrastructure to become dominant ISPs.

But telecom access fees continue to drop because of heightened competition--they fell 40 percent last year in Europe. That means these giant telecoms won't be able to depend as much on these fees. Instead they'll need to build strong sites. And that race will be won by companies that provide the most compelling content and services. "That's our single biggest competitive advantage," says Michael Lynton, president of AOL International. He's probably right. Across Europe, AOL's customers spend an average of 25 minutes a day on its site, compared with ten minutes for T-Online and five minutes for Wanadoo. The more time consumers stay on the site, the more ad dollars--and potentially the more e-commerce revenues--the site gets. That's how Yahoo makes its money.

The Europeans, however, aren't ready to give up without a fight. Just ask France Telecom. Across the Seine from the Tuileries gardens lies the headquarters of France Telecom Multimedia, the company's Internet arm. That is where I met CEO Nicolas Dufourcq. The 36-year-old Dufourcq heads a group that comprises not just an ISP service, Wanadoo, but also a Web portal, Voila; the company's cable TV business; video production units; and numerous other businesses. France Telecom is considering spinning off all or part of this group into a separate company. Dufourcq wouldn't comment on the possibility of an IPO, but he was happy to talk about France Telecom's Internet efforts.

"The plan is to be able to offer our ISP, Wanadoo, across Europe," boasts Dufourcq. "It's just a matter of organization." Wanadoo has 1.4 million Internet subscribers in France and another 750,000 spread throughout the Netherlands, Spain, Belgium, Denmark, and Morocco, where it offers ISP service together with a local-language portal. Voila, the company's other primary Internet site, is now active in nine countries. In some places Voila is just a search engine. (The technology was developed in France Telecom's research labs.) In others Voila is a content-rich, localized portal. Voila is aimed at a more sophisticated audience than Wanadoo's portal. Only 20 percent of Voila's audience are Wanadoo subscribers; the remaining 80 percent get Internet access from other providers. "You need to go after the market with different products," says Dufourcq. Besides Wanadoo and Voila, France Telecom has created Goa for online gaming and @pres l'Ecole for kids.

France Telecom knows a fair amount about providing online content and commerce; it has been doing it for close to 20 years with a proprietary online service called Minitel. Even in the era of the Internet, Minitel continues to thrive. France Telecom billed its nearly nine million Minitel customers about $1.4 billion last year in fees, returning half of that to the Minitel content providers. People use special Minitel terminals, attached to their phone lines, to buy train tickets, look up lottery results, bank, play games, send e-mail, and chat. Increasingly the French are accessing Minitel from their PCs, using special software. So while the French have been slow to adopt the Internet, they aren't averse to using an online service. Dufourcq's challenge is to move those nine million Minitel customers over to Wanadoo and Voila before someone else does. That someone else just might be an American.

The Yanks are coming!

Tucked into the garret of a nondescript five-story building on a narrow Parisian street packed with fabric wholesalers are the offices of Yahoo France. When I entered the offices, I knew immediately that I was in the right place. There were the same purple chairs, brightly colored balloons, and yellow stars with employees' names on them tacked above people's desks that I'd seen at Yahoo's headquarters in Santa Clara, California There was also the obligatory foosball table, a Christmas gift from co-founder Jerry Yang, ready to keep the troops loose. And there was something different: hardly any employees. At 1:30 in the afternoon, everyone back at U.S. headquarters would have been glued to his seat, eating a quick sandwich or gulping a Coke. But here in Paris most of the Web surfers and content producers were out eating lunch at one of the local brasseries. Vive la difference!

Yahoo has done as good a job as any company, American or European, at creating strong, country-specific portals, blending universal attributes like site design and technical features with local content, language, and cultural nuance. It serves as a model for how to build powerhouse portals throughout Europe. In France, Yahoo has 52 employees, all dedicated to creating and selling a portal unique to France. The famed Yahoo directory of Internet sites is constructed entirely of French-language sites for the French market by 12 Web surfers, all working out of the Paris office. The search engine turns up only French sites. The basic structure of the directory is similar to that of others around the world but has some unique tweaks. In the land of Francois Truffaut, Cinema is grouped on the home page under--where else?--Art et Culture. (In the U.S., where life is a bit crasser, Movies is under Entertainment.) Another example: France has "a much deeper hierarchy [list of entries] for wines than the U.S.," says lead surfer Diego Diaz. No doubt.

All this attention to local detail has helped Yahoo thrive in Europe, where the company now has more than 300 employees. "We are the No. 1, 2, or 3 player in every market [the company competes in]," boasts Yahoo's Arredondo. Yahoo France is the second most visited portal in France, after Wanadoo, according to the latest figures from MMXI Europe. Yahoo is the No. 2 portal in Germany, after T-Online, and the No. 1 portal in Britain. Yahoo also has local portal operations on the ground in Italy, Spain, Norway, Sweden, and Denmark. Spain was the most recent European portal launched by Yahoo, in November 1998. Since then, the company has focused on making its existing sites stronger players rather than on launching new sites in new countries.

Across Europe, Yahoo now has 1,500 advertisers on its sites. In the first quarter of this year, Yahoo Europe reported $22 million in revenues, about 10% of the company's total. And, adds Arrendondo, "we are profitable."

Even with all the resources Yahoo has poured into Europe, its sites there still lag behind those of the U.S. in a number of ways. The ability to buy products online was not available on Yahoo France's site until late last year. "E-commerce is just getting started in France," says senior producer Gregoire Clemencin. Chat functions were launched only in March of this year. And the ability to conduct auctions was delayed because of complex legal issues. Auctions in France have to be conducted by commissaires priseurs, officers of the French government. Yahoo eventually decided it didn't need to use them, but "even when we launched it, we weren't sure it was legal," says Philippe Guillanton, general manager of Yahoo France. (Apparently it is.)

America Online and Microsoft have followed a similar path, putting teams on the ground throughout Europe to develop unique sites for each country. "We're very focused on providing a localized service," says Sharon Baylay, marketing manager for MSN in Europe. Microsoft actually has more localized country sites than Yahoo: 16, including two for Switzerland (in German and French) and two for Belgium (in French and Dutch). MSN's portals typically don't get as many visitors as Yahoo's, but the sheer number of sites has vaulted Microsoft to the No. 2 spot overall in Europe. AOL is No. 3. AOL's strategy, as in the U.S., is to provide Internet access along with a special portal for its subscribers that has loads of content, commerce, and services. AOL is also the second-largest ISP in Europe after T-Online, with about four million subscribers. It's the No. 2 ISP in Germany, France, and Britain, where the bulk of its subscribers are located, with a handful of subscribers in Switzerland and the Netherlands. AOL plans to move into additional countries by the end of the year, says Lynton.

The future is wireless

Of course, one can't talk about Europe and the Internet without addressing the subject of wireless. As everyone knows by now, Europe is ahead of the U.S. in its use of cellular phones. In Western Europe, 41 percent of the population uses cell phones, compared with only 31 percent in the U.S. And Europe will no doubt be ahead of the U.S. in providing wireless access to the Internet, over phones as well as over other portable devices. No one quite knows how quickly this will evolve, but everyone is sure it will happen. All the companies, like Deutsche Telekom and France Telecom, that are competing in the wired ISP and portal market are launching efforts in the wireless space. Yahoo, AOL, and Microsoft are also in the game. And just to complicate things, a host of new players are ready to enter the market with wireless portals of their own. Chief among them are the cellular providers. Which brings us across the Channel to London.

Everyone talks about the Scandinavian countries as being the center of the wireless revolution, which makes sense because they are home to cellular equipment powerhouses Nokia and Ericsson and because so many of the Swedes and Finns carry the little things around with them. But there's a strong argument to be made that the real power lies in London. That's where Vodafone AirTouch, the largest cellular service provider in the world, has its headquarters. And it's also where T-Motion, the 60-40 joint venture between T-Mobile International and T-Online, is based. (T-Mobile is the third-largest cellular vendor in Europe, with 18 million subscribers in Austria, Germany, and Britain.)

T-Motion will introduce its first wireless Internet services this August. The first set of services will be based on WAP (wireless applications protocol). Designed for low-bandwidth and small displays, WAP is mostly a text-based service that bears little resemblance to the fancy graphics and large color displays we've all come to associate with the Web. It will be another year or so before portable devices are able to display full Web capabilities easily. But no one is waiting for that, least of all the Europeans, who are jumping all over WAP portals, figuring it is their chance to leapfrog the Americans. Companies that can offer customers the ease of a single portal, whether the person is connected by a wired PC or a wireless cell phone, will have an advantage.

So far, the European telephone companies seem to hold the early lead. They are devising ways to leverage their ownership of both cellular services and wired phone services into a single ISP-and-portal offering. "Our goal is to offer a wide variety of Internet services to people anywhere at any time and independent of the device used to access these services," says T-Motion CEO Nikesh Arora. That's going to be a tough game to beat. "Their ability to provide multiple products on one customer bill is an advantage," admits AOL's Lynton.

Where will it all end up? Over time a handful of companies will emerge as dominant players around the world, not just in Europe. These companies will offer services that have a local flavor in each country, but they will also be global players with global brands and global financial resources to call on. Yahoo and AOL are almost certain to be among those players left standing. In Europe, Vodafone is on track to become one of the survivors too, on the basis of its domination of cellular service. Deutsche Telekom, with T-Online and T-Mobile, might be a global player as well. The same holds true for France Telecom and for Spain's Terra Networks. For the rest, Europe's portal wars are likely to be brutal, with consolidation the new watchword.