Burning Rubber on the Infobahn

A broadband surge is helping Europe catch up on the Net

Amid the gloom of sagging PC sales and slowing technology spending across Europe, there's a surprising nugget of good news. The long-awaited rollout of broadband Internet access is finally arriving.

In the first six months of this year, the number of cable and digital subscriber line (DSL) hookups--which offer Net access 8 to 100 times faster than conventional dial-up connections--nearly doubled across Europe, says a report prepared for the European Commission by London-based Business Development Research Consultants Ltd. "The demand for broadband is just tremendous at the moment," says Marc van der Heijden, co-founder and chief regulatory officer for Amsterdam-based broadband startup Versatel Telecom International (VRSA ).

That ray of light comes none too soon. Plodding deregulation and lower PC sales have kept Net penetration in Europe to about 36% of households, compared with 45% in North America. Broadband kicked off even more slowly because monopoly carriers didn't face the same competition or incentives as their counterparts in the U.S. The upshot: Europe lags about two years behind the U.S. in high-speed Net access, an essential precursor for services such as streaming digital music and subscription-based software.

GROWTH SPURT. Now, Europeans are catching up. Growing interest in the Web and e-commerce are boosting demand for better connections, and spurring broadband growth that should outpace North America's for the next four years, says London-based researcher Strategy Analytics. By the end of 2001, the firm says, Europe will be home to more than 5 million broadband connections, up from 1.7 million in 2000. And by 2005, the installed base should hit 35 million, or about 22% of all European homes.

That still leaves the Old World trailing North America's expected 48% penetration in 2005. But it's enough to cheer up beleaguered telecom execs. By 2005, figures Framingham (Mass.) researcher International Data Corp., broadband services will generate $15 billion in European revenues for phone and cable companies.

Sales of broadband gear, too, are one of the few bright spots in the depressed telecom equipment industry. And fast, always-on connections should be a boon to companies such as Vivendi Universal (V ), Bertelsmann, and Yahoo! (YHOO ), which are counting on broadband Net surfers to gobble up bandwidth-hungry content such as online video and games.

Not that there aren't wrinkles. The broadband business in Europe today is far different from the vibrant landscape envisioned a few years back. For one thing, incumbent telecom and cable companies--not upstarts--are providing some 90% of the connections.

The startups--ranging from Spain's Jazztel PLC (JAZZ ) to German operator QS Communications--got launched, all right. But like their counterparts in the U.S., many were mowed down by the freeze in capital markets. Among the recent casualties: British-based OnCue, which went broke in June, and Atlantic Telecom Group, which filed for insolvency in early October, though it's still operating.

Government inertia has also stymied the newcomers, who banked on new rules that would force the monopolies to lease their phone lines to rivals for broadband and other services--a process called local loop unbundling. In France, Spain, Greece, and Ireland, not a single phone line has yet been freed up for use by voice and DSL rivals. Even in Germany, which leads Europe with about 400,000 unbundled lines, Deutsche Telekom (DT ) still has more than three-quarters of the 1.7 million broadband subscribers. To grab even more, it's pushing broadband with a marketing campaign featuring an avatar named Robert T-Online.

TUMBLING PRICES. The best hope for accelerating broadband lies with Europe's cable-TV companies. Overall, cable is less prevalent in Western Europe than in North America. Limited competition also keeps average prices for broadband services about 20% higher than in North America. But those prices are starting to decline. Now, with aggressive plays from American moguls Richard Callahan and John Malone, cable TV and Net access could surge in Europe, further driving down prices. By 2005, cable could make up 45% of broadband installations.

A few million cable and DSL lines won't cure Europe's technology gap overnight. But at least they'll keep the Old World alive in the New Economy.

By Andy Reinhardt in Paris

    Before it's here, it's on the Bloomberg Terminal.