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e.Biscom offers the Web at warp speed. Will customers care?

Italians went crazy for cellular phones in the late 1990s, turning their country into Europe's leading market for wireless communications. But will they fall for a hot new broadband service that combines telephony, Internet, and video for one fixed monthly price? e.Biscom Chief Executive Silvio Scaglia is betting on it--and so are the investors who snapped up $1.6 billion in e.Biscom shares on Mar. 30, valuing the company at $11 billion. The nine-month-old Milan startup is attempting to leapfrog existing technology such as cable modems and offer faster broadband services to the home using fiber-optic networks.

It's a risky wager that no large company anywhere has been willing to make, since the cost for extending fiber networks to the home is punishingly high and the demand uncertain. e.Biscom will spend $850 million in northern Italy alone. Only Palo Alto, Calif., and Sweden are testing fiber networks for the consumer market, and so far paying customers are scant. "It's a very aggressive move. I applaud them, but the market is not really ready for what they offer," warns Lars Godell, an analyst at Forrester Research in Amsterdam.

Scaglia is out to prove the skeptics wrong. He sees broadband's superfast access to the Internet and a slew of new services using high-quality video as prime attractions. Only 8.5% of Italians use the Internet, compared with the 21% average for Europe; but Internet use in Italy grew at a brisk 17% rate in the first three months of 2000.

Like most broadband hopefuls, e.Biscom aims to offer rich content from entertainment to e-commerce. "Demand follows the offer, not the reverse," says Scaglia, a 41-year-old telecom engineer who transformed Omnitel Pronto Italia into Europe's second-largest cellular operator. He put up $9 million of e-Biscom's $20 million in seed capital and now owns a 36% stake worth $4 billion.

The fledgling company so far has little content to pipe into the network that e.Biscom's FastWeb subsidiary plans to offer Milan residents this fall. But Scaglia's strategy, like that of cable companies, combines telecom and Internet services with media development. The monthly fee of roughly $50 is about the same as Italian consumers pay for telephone service. His only deal to date is a nonexclusive pact with Italian broadcaster RAI to develop news and entertainment content for FastWeb's video portal. But Scaglia is also seeking alliances with financial services and entertainment companies.

Meanwhile, Scaglia is already selling high-speed Internet and data services to businesses in Milan. Scaglia forecasts FastWeb sales of $12.5 million in 2001, with roughly 40% coming from the residential market. The company lost $1.4 million last year and is not expected to show a profit for three to four years. e.biscom also holds 33% of Metroweb, a joint venture with Milan energy utility AEM, which already has a 630-kilometer fiber network. They plan to expand that network to 3,200 kilometers.

DUAL KING? e.Biscom has one undeniable ace in the hole--Italy has no big cable operator that can convert its service into a rival broadband network. So e.Biscom could become broadband and cable king in one fell swoop. Its fiber connection will start out offering 10 megabits per second--enough to see two TV-quality videos simultaneously. "The only thing I'm afraid of is not getting to market fast enough," says Scaglia.

One risk is that rivals such as Telecom Italia will outflank Scaglia with broadband technology known as Digital Subscriber Line, or DSL. It's less powerful but cheaper and easier to deploy. Fiber networks, for example, involve digging up the ground and converting optical signals to electrical signals in the home to make them work with TVs and computers. Metroweb's national rollout will take 10 years. Telecom Italia and other operators will start offering DSL technology at 640 kilobits per second this year, which permits faster Internet connections but is too slow for quality video.

Scaglia figures e.Biscom has a 12-18 month lead on the competition. After floating 20% of its stock, his company won't need to go back to the capital markets soon. It's also targeting the Milan area, the richest market in Italy, with some 30% of total telecom and data traffic. A promising start. The question is whether enough Italians will get hooked on broadband to make e.Biscom a star.

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