| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
AOL Abroad: 'I Claim This Land...Whoops!' The online giant is meeting stiff--and free--resistance as it heads abroad In the U.S., America Online Inc.(AOL) may be a Goliath. But in Europe, it's still a David that is looking more threatened by the day. In the second-largest market for Web access, AOL is now being forced to aim its sling like never before at foes small and large, from upstart free Internet service providers to giant phone companies. Nowhere is the battle more pitched than in Britain. There, on June 1, the online giant slashed its monthly subscription fee from $21.95 to $16. And it's thinking the unthinkable: giving its service away free. Why? To fight back a dark-horse challenger to its global ambitions--a no-name, no-fee Internet service provider called Freeserve. Since its September, 1998 launch, Freeserve has nabbed 1.1 million users in Britain, surpassing AOL and CompuServe's 1 million. ''It's a massive threat,'' says Nick Ogden, managing director at E-commerce merchant WorldPay in Cambridge. ''In Britain, the whole of AOL's user base is under attack.'' Will Freeserve trounce AOL? On the surface, AOL isn't sweating the challenge. ''It's like Tiffany's saying it's worried about Wal-Mart(WMT),'' scoffs AOL President Robert W. Pittman. But even as AOL pooh-poohs Freeserve, the online giant is quietly considering launching a bargain-basement service in Britain by autumn using a brand different from AOL--possibly its Netscape name or ICQ, the company's popular free instant-messaging service. In the no-frills package, AOL may charge extra for such services as chat and instant messaging, which are now free on its flagship service, says Pittman. SNARLED PLANS. A lot is at stake. An electronic-commerce powerhouse with 17 million members worldwide, AOL ultimately wants to link cyberstores and advertisers to consumers from Stuttgart to Sydney. To create that world mass market, AOL aims to be No. 1 or at least No. 2 in each country where it does business. But just as it is achieving second-place status in most European countries, new threats loom to erode its position. These could snarl up more than AOL's E-commerce plans. By 2001, the pace at which AOL adds new U.S. subscribers is expected to taper off--as the Net widens its reach. That's when AOL is banking on growth abroad to make up the difference. Overseas customers could account for 40% of AOL's total of 25 million subscribers in 2001--and up to 10% of earnings, vs. less than 1% today, says analyst Abhishek Gami of investment bank William Blair & Co. ''We are the long-term growth driver of the company,'' says Jack Davies, president of AOL International. And, until Freeserve appeared, few seemed to question that notion. After launching its first foreign venture in Germany in 1995, AOL's overseas subscribers have grown to a respectable 3 million in nine countries--mostly in Europe. In key foreign countries, it has done this with the help of deep-pocketed local partners such as media giant Bertelsmann in Germany and Mitsui and Nikkei in Japan. Around the world, AOL puts a local twist on its offerings. In Britain, for instance, cricket gets No. 1 billing on the sports channel rather than just soccer, which tops most countries' lists. ''We're a global medium, and we have an opportunity to establish ourselves as preeminent,'' says Chief Executive Stephen M. Case. LITTER OF COPYCATS. But with increasingly savvy rivals, AOL could lose its top slots in European markets. Consumer-electronics retailer Dixon Group PLC's launch of Freeserve has spawned 77 copycats, says analyst George O'Connor of British investment bank Granville PLC. That accounts for 45% of Britain's market, estimates market researcher International Data Corp. The new Internet service providers (ISPs) range from British Telecommunications PLC's BT Clickfree to the Virgin Group's Virgin Net to Microsoft Network(MSFT), slated to start a British freebie on June 8. Now, ISP giveaways are popping up elsewhere in Europe. In July, Sardinia's Tiscali will launch a service for all of Italy. FNAC, a French book, music, and electronics retail giant, launched one on May 25. Even more ominous, on May 13, deep-pocketed BT announced it would provide free Net access Europewide through Sega's new Dreamcast games console. ''The genie is definitely out of the bottle, and consumer Internet services are likely to all go free in Europe,'' says media consultant Michael A. Chamberlain at Arthur D. Little Inc. in London. How can free services survive? Unlike U.S. telephone companies, those in Britain and many other nations share their local-calling revenues with the dial-up ISPs that give them business. Freeserve, for example, can make money by splitting the telecom fees with the phone carrier, while also charging customers for technical help and selling advertising space on its Web site. Indeed, credit high European phone costs for giving birth to the free services. In the Old World, phone companies--only now deregulating--still charge consumers by the minute for local calls, instead of a U.S.-style flat rate. Metered pricing keeps many Europeans from exploring cyberspace. For 15 hours a month online in Germany, it costs $53 for ISP and phone fees, says market researcher International Data Corp. That compares with all-you-can-eat Internet usage costs of $19.95 a month in the U.S. on top of an average monthly $20 phone connection. To stoke usage, free ISPs eliminated consumers' Web-access charges, leaving them to pay only their phone fees. AOL claims that per-minute phone charges are its real enemy. The company plans to fight metered phone-pricing on the regulatory front. It has filed complaints with the European Commission and German courts, charging Deutsche Telekom(DT) with unfair competition. So far, the company has had some success. Federal telecom regulators have opened a formal inquiry into whether Deutsche Telekom is improperly subsidizing T-Online, its ISP service, by offering it at $2 an hour, including the cost of the call. At certain times of the day, that's less than the cost of a regular phone call, and it effectively prices T-Online below even free services. SNOB APPEAL. In the meantime, AOL is hoping that its pricey, content-rich service will prevail against the onslaught of free plain-vanilla Web hook-up services. ''Some people get on first class, and some fly standby,'' says Pittman. Indeed, AOL user Robert McIndoe, a 40-year-old market manager for business services company Hays DX in the English town of Iver, likes AOL's snob appeal. ''It's the difference between a gentlemen's club and a public bar,'' he says. ''You can roll up to any public bar for a pint of beer, but you don't get the newspapers and services you get in a club.'' AOL maintains that premium services will survive, and a few rivals are making that bet, too. British Telecom(BTY) offers both kinds of services. Its $18.80-a-month subscription service BT Internet comes with E-mail and the ability for subscribers to set up home pages. Its no-fee Clickfree offers basic Net access. And Virgin Net may reintroduce a pay-for service along with its free one to attract all types of users, says David Johnson, the company's business-development director. ENCROACHING. Natch, not everyone wants AOL's extras. ''I'm not keen on service providers [like AOL] that push a lot of their own content,'' says Neil Rumbold, a 27-year-old software developer from Slough who pays to use Britain's Global Internet as his ISP. Meanwhile, the freebies are getting fancier. Freeserve, for one, is bulking up on content, such as personal-finance and local-entertainment sites. Virgin Net has doubled its budget for content development. And LibertySurf is going for the same tactic in France. Says analyst Nick Gibson of investment and research outfit Durlacher, ''While no one has a general content service as developed as AOL, the free access providers will start encroaching on AOL.'' This has some E-commerce merchants worried that their costly AOL partnerships won't bring in the new subscriber growth they're counting on. ''If they're not getting new people, it's not attractive to retailers,'' says one AOL merchant in Britain. AOL disagrees. Executives insist that AOL will remain attractive to its core group of subscribers--newbies who don't want to pay for customer service. In the face of attack, AOL likes to remind industry observers that it has been presumed dead many times. Three years ago, when U.S. ISPs started charging flat-rate unlimited usage, AOL abandoned its per-hour fees and joined in, signing up a rash of new members. ''I'd never write them off,'' says IDC analyst James Eibisch. Still, the deft marketer is finding how hard it is to transfer that old U.S. magic overseas. By Catherine Yang in Washington, Kerry Capell in London, Jack Ewing in Frankfurt, and Marsha Johnston in Paris _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS AOL Abroad: ``I Claim This Land...Whoops!'' TABLE: Overseas, AOL Is the Avis of the Internet ONLINE ORIGINAL: AOL's Pittman: ``You Can't Be Tempted to Do Something Stupid'' INTERACT E-Mail to Business Week Online | |||
