Commentary: Why Italy May Squander Its Net Future

With pricey phone lines, paltry R&D, and a rigid labor market, e-business is lagging

Italy certainly looks poised to develop an Internet economy: Dot-com mania has gripped the Milan stock exchange. And when it comes to the next big trend--the mobile Internet--Italy seems to have a big advantage. Every other Italian owns a mobile phone. Italy's market for cell-phone services, now Europe's largest, is growing at a 28% clip and is expected to top $12.5 billion this year, according to International Data Corp. "It's a gold mine," declares Michele Boccaccio, director of the new research and development center that Finland's mobile phone giant, Nokia, has set up in Sicily.

Look a little closer, though, and you'll discover that Italy's New Economy gloss is only a thin veneer. In fact, the country is in danger of squandering an unparalleled opportunity to play a leading role in Internet innovation. While the Net is already changing the way companies around the world do business, Italy lags behind. Only 8% of Italy's population has an Internet connection, vs. 15% in Germany and 23% in Britain. And just 14% of Italian businesses use the Net to communicate with suppliers--way less than the European average of 25%.

RIGHT NOISES. That's because Europe's fourth-largest economy suffers from an outdated, expensive telecommunications infrastructure, inadequate spending on research and education, and a rigid labor market. In short, Italy has failed to modernize its economy as quickly as the rest of Europe. It's even trailing Spain, Portugal, and Ireland. Government and industry leaders need to tackle these problems--quickly--to keep Italy from falling even further behind.

It's a tall order. Italy ranked just 15th out of 17 European countries in attractiveness to investors in a recent survey by Rome consultancy Business International. It lagged Portugal and narrowly beat Greece and Turkey. One reason: The cost of a 34-megabit leased phone line, at $5,929 per month, is 70% higher than the European average and four times higher than in the U.S. R&D spending is just over 1% of gross domestic product--half Europe's average and one-third of the U.S. level. In Italian elementary schools, 51 students share each computer, vs. 31 in France, and 11 in Finland.

To be sure, the government of Prime Minister Massimo D'Alema is making the right noises about the Internet. Stefano Passigli, vice-minister of technology innovation, says the government plans to wield the Internet to modernize the economy. But he and other officials fail to grasp the speed at which the Net economy is moving. Take the effort to get schools wired: D'Alema's government hopes to spend $237 million over the next three years to increase the number of computers in schools. In contrast, British Prime Minister Tony Blair plans to spend $2.7 billion over the same period.

To give Italy a chance, D'Alema must speed liberalization and open the door to greater competition--especially in telecoms. That's vital to lowering prices and creating a favorable climate for Internet startups. Indeed, mobile-phone use has boomed in part because service for fixed-line phones is poor and expensive. To support a Net revolution, Italy needs a strong fixed network, too. "The basic infrastructure will be put under severe stress over the next few years," says Rodolfo De Benedetti, chief executive at CIR, a Milan holding company with venture capital and incubator investments. "We're starting late. It's a major drawback."

What's more, conditions for entrepreneurs remain unfavorable and need a radical overhaul. Problems range from sky-high taxes to red tape. After social security and income taxes are deducted, Italians take home only 49% of their gross pay. Political infighting has slowed economic liberalization--a baseline condition for a Net economy.

The good news is that Internet use, while lagging behind other countries, is on the rise. The country's online population tripled last year after telecom upstart Tiscali began offering free Internet service in November, 1998. But it doesn't help to have Italians surfing the Net if the country's entrepreneurs flee to more dynamic shores like Silicon Valley.

D'Alema needs to benchmark his country against Finland and the Netherlands--countries where competition is fierce--if he wants a bigger slice of the Internet pie. If Italy doesn't start moving as fast as the competition up north, it's likely to remain stuck on the wrong side of the Net divide--no matter how many cell phones you see on the street.