Europeans who enjoy surfing the Net pay dearly for the privilege. Unlike in the U.S., where consumers enjoy low monthly rates for unlimited Internet access, European Net junkies are charged high telephone charges for every minute spent online. With the meter ticking, the expense of surfing the Web not only limits the growth of Europe's Internet but also hinders the development of a U.S.-style New Economy.
Now, two American companies are challenging the Europeans on their home turf, with a bold bid to break this pricing model. In March, Internet search engine AltaVista Co. in Palo Alto, Calif., and cable and communications group NTL Inc. in New York introduced flat-rate, unlimited Internet access in Britain.
Almost instantly, a host of others, including British Telecommunications PLC and PLC, Britain's largest Net service provider, followed suit. "Rates vary, but the underlying concept is all-you-can-use Internet access for a one-time fee," says Noah Yasskin, an analyst at the London office of Internet research firm Jupiter Communications.
Britain's price war has quickly spread across the channel. Deutsche Telekom, which owns Europe's biggest Internet service provider, T-Online, says it will introduce unlimited Internet access to T-Online customers for a flat rate of about $50 starting May 1.
But the push toward U.S.-style pricing comes as especially bad news for two independent Internet service providers--France's LibertySurf and World Online of the Netherlands--both of which are set to go public in high-profile IPOs during the third week of March. Like most ISPs, they make their money by splitting with the phone company the revenues generated from Internet calls. The shift to cheap, unlimited access makes their business models look obsolete. As phone charges plummet, they will have to find new sources of revenue. "Eventually, access fees will only be charged for quality content, value-added services such as video-on-demand, and faster connection to the Internet," according to Standard & Poor's European Internet analyst David Freddi.
TAKEOFF TIME. In Britain, the switch to a fixed-rate pricing scheme is expected to slash the cost of Web surfing and dramatically increase usage. Within 18 months, one in two Brits will be online, compared with one in five now, says Andy Mitchell, managing director of AltaVista in Britain and Ireland. In the short term, competitive pricing will squeeze the revenues of Britain's dominant phone company. British Telecom still controls more than 80% of the country's local calls, much of which now consist of Internet traffic. "BT is likely to lose a lot of that traffic to tough competitors such as NTL," says Tim Johnson, a network analyst at telecom consultant Ovum in London.
A relative latecomer to the British telecom scene, deep-pocketed NTL hopes its unmetered, Internet-access offer will be a means of getting users to buy its other offerings, which include cable and digital TV as well as phone service. New Internet customers must buy an adapter that reroutes calls from the local carrier onto NTL's network. Although the service isn't available until Apr. 17, NTL claims more than 100,000 new customers have already signed up. "The access service we're offering will pay for itself," says NTL CEO Barclay Knapp.
If the NTL approach carries the day, Europe's 3,000 Internet service providers will suffer the greatest casualties as the cost of access plummets. Yet consumers should benefit not only from cut-rate access to the Internet but also from a speedy rollout of exciting new services. Europe's Web surfers can hardly wait.