E-Commerce Starts to Click on the Continent

At last, European customers are flocking to the Web

Philippe Estela has joined the Internet generation. The 35-year-old Paris marketing executive used to buy his train tickets through one of the simple but clunky Minitel terminals distributed to households by the French government in the 1980s. Now, he's a convert to the national railroad's Web site, where he can check schedules, book train and plane tickets, and even reserve rental cars and hotel rooms. "Minitel had become a dinosaur," says Estela. "The Web is a lot more practical, functional, and comfortable."

Estela is far from alone. The French railroad, Société Nationale des Chemins de Fer Français (SNCF), logged nearly 2 million visitors to its Web site in June, up 63% from a year earlier, and sales in the first six months topped $122 million, 70% more than the first half of 2001. Those numbers helped voyage-sncf.com break even for the first time, while it grew to become the No. 1 e-commerce site in France, according to researcher NetValue. "The market is in full development, and we're just trying to manage our growth," says Denis Wathier, director of SNCF's Internet unit.

Did somebody say growth? Yes, indeed. While the world's attention has been diverted by slumping stocks, accounting scandals, and telécom turmoil, something remarkable has happened to the Internet in Europe. This year alone, 12.7 million new users have signed on in Europe's five largest nations--Britain, France, Germany, Italy, and Spain--says researcher Nielsen/NetRatings Inc. in London. That brings those countries' active Net population--those who log on at least once a month--to 60 million, up 14% in just the past six months. By comparison, active users in the U.S. have held flat, at 105 million, over the same period. "There's been a lot of gloom and doom and a lot of bankruptcies, but consumers don't care," says Jaap Favier, an Internet analyst at Forrester Research Inc. in Amsterdam. "They're still flocking to the Net."

Sure, a lot of these newbies are only chatting and sending e-mail. But as SNCF has discovered, Europeans also are spending more money online. Europe's largest discount carrier, easyJet Airline Co., sold $80 million more tickets online in the six months ended Mar. 31 than it did a year earlier. Kelkoo.com, the region's largest price-comparison and referral service, saw revenues soar 65% in the second quarter, to more than $3 million, and plans to be profitable by the fourth quarter. And London travel discounter Lastminute.com, the best-performing stock on the London exchange this year, posted second quarter revenues of $12.9 million, up 90%, while slashing losses before goodwill and taxes by 57%, to $6.1 million.

Call it the New Old World Web revolution. After a slow start, usage of the Net across Europe is finally beginning to catch up to levels seen for years in the U.S. The biggest growth is occurring in lagging southern countries. According to Nielsen/NetRatings, Spain's active Net users have increased by 54% since January. France's online population has surged 25%, and users are spending 22% more time online. "Europe's Cinderellas are finally coming to the ball," says Nielsen analyst Tom Ewing.

What they're finding is a changed Internet. After the dot-com carnage, Europe, like America, is seeing increasing consolidation and domination by a small number of Web survivors. Many are American companies, such as Amazon.com (AMZN ) and job-finding site Monster.com, which increased its lead over European rivals with a 61% gain in traffic in the past year. But there are European success stories, too. Take Egg PLC of London, the leading online financial-services company in Europe. It added a record 205,000 customers in the second quarter, thanks in part to a Web-site redesign. Egg more than doubled its operating income in the second quarter, to $121 million.

Europe's Internet service providers (ISPs) are also getting a boost from the new Net surge, although as a group they're still losing money. Deutsche Telekom-owned T-Online reported first-quarter revenues up 31%, to $365 million, and a narrower pretax loss, of just $14 million. Wanadoo, a division of France Telecom, tripled its base of broadband subscribers, to 833,000, helping boost first-half revenues 33%, to $915 million. And Europe's largest independent ISP, Milan's Tiscali, logged a 72% spike in subscribers in the first quarter, breaking even for the first time on an operating basis.

The uptick isn't spurring a renewed wave of investment, though. Venture-capital financing of European Net-related businesses plummeted 58% in the first half from the same period in 2001, to just $1.4 billion, says Thomson Financial/Venture Economics. One reason investors are so skittish--despite evidence of a Net boom--is that online advertising remains flat in Europe, averaging only about 1% of total ad spending, or less than $500 million. On top of that, Europe's initial public offering market is in a deep freeze.

Despite these choppy conditions, the Net giants see Europe as a growth opportunity. Microsoft Corp. (MSFT ) has invested heavily in the region, helping drive its MSN portal to the No. 1 position in Europe, some 10 share points above Yahoo! Inc., with 119 million visits per month. Judy Gibbons, MSN's vice-president for Europe, Middle East, and Africa, says Microsoft hired 40 salespeople and invested $30 million in a campaign to boost advertising on the company's sites, which include MSN.com, Hotmail, and Messenger. There has already been some payoff, she says: MSN's regional revenues grew 27% in the year ended June 30.

Results have been even better at e-commerce giant Amazon.com Inc. Combined revenues for the company's four non-U.S. domains--Britain, France, Germany, and Japan--grew at more than 70% annually in each of the past three quarters, topping $218 million, or 27% of Amazon's total, in the quarter ended June 30. Including non-U.S. purchases made through the company's flagship site, Amazon.com, international sales now constitute 34% of Amazon's revenues. Amazon's French traffic has nearly tripled in the past 12 months, and the company has overtaken French retail giant FNAC, in part through clever programs such as a "boutique" on the Web site featuring comic books, and a committee of mothers who review and recommend 15 children's books each month.

Will Europe's Net boom leave no room for local players? That may be the case in categories such as portals, books, and auctions, where eBay Inc. is gobbling up the lion's share of business. But fortunately for European entrepreneurs, some categories are still up for grabs. Lastminute.com and Britain's eBookers.com are giving Expedia a run for its money in the fast-growing online-travel sector. Local banks dominate online finance in most countries. And some fast-growing fields, such as online gambling, aren't even on American radar screens. Europe's love affair with the Net is only beginning.

By Andy Reinhardt, with Christina White Passariello, in Paris

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