Can Wanadoo Keep Doing It?

Wanadoo is a giant of the European Internet. Over the past year, the Paris company boosted its subscribers 32%, to 8.8 million. That makes it the No. 2 Internet Service Provider in Europe, behind Deutsche Telekom (DT ) T-Online. Add a strong push into broadband, and Wanadoo's revenues for this year's first quarter surged 38%, to $625 million. More important, it became the first major European ISP to turn a profit, earning $30 million last year on $2.2 billion in revenue. "Our success provides a sound basis from which to set more ambitious goals," says CEO Olivier Sichel.

Investors certainly agree: They've bid up Wanadoo's share's 38% since Jan. 1 -- far more than the 1% gain registered by the Paris bourse.

One secret to Wanadoo's success is that it does more than just provide Net access. The company, which is 71% owned by France Télécom (FTE ), also manages its parent's cash-cow yellow- and white-pages unit, which generated 31% of Wanadoo's sales in the first quarter. Though directories are a slower-growth business than Net access, their high margins help underwrite Wanadoo's cyber expansion. Wanadoo also operates its own Web portal and runs an online bookstore, called Even rivals admire the formula. "It's a really strong competitor," says Olivier Rosenfeld, chief financial officer of Iliad, a Paris company that runs France's No. 2 ISP,

But Wanadoo has to face some serious demons. In December, 2001, the European Commission launched a probe into charges that the company abuses its relationship with France Télécom to undercut rivals. The allegation: Wanadoo unfairly prices rivals out of the market. The Financial Times reported in February that the EC has reached a decision to force Wanadoo to raise rates, and a ruling is expected this summer. Wanadoo denies wrongdoing.

Another concern continues to dog Wanadoo. The company is a pariah among Net administrators the world over, who gripe that it provides a haven for spammers and hackers. Many organizations, including the U.S. Defense Dept., now simply turn away all Wanadoo traffic from their Web sites and e-mail systems. The company says it has made strides combating the problem in the past year. These challenges are substantial. Still, imagine how strong Wanadoo will be if it can fix them.

By Andy Reinhardt in Paris

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