As electronic commerce burgeoned in the United States, what was happening across the Atlantic didn’t seem very important. No more. Thanks to the emergence of a single market and to the introduction of the euro—as well as the US demonstration of the power of e-commerce—the European sector of the Internet can now come of age.

Over the past 12 months, European companies have been running fast to exploit the possibilities of the World Wide Web. As a result, any thought that Europe will remain several steps behind the United States may well prove wrong. The very idea of following in the footsteps of the United States was probably inaccurate anyway: for a variety of reasons, e-commerce in Europe was always likely to follow a different course. For one thing, the technological and cultural infrastructures are much more heterogeneous in Europe than they are in the United States. Moreover, European players have had the benefit of hindsight from seeing what has succeeded and failed in the United States. The later entry of European companies into e-commerce also gives them the advantage of applying technology that has advanced considerably over the past two years.

From the broadest business perspective, there is one overriding difference between the US and the European situations. In the United States, the first round of the e-commerce game went resoundingly to the pure Internet companies. In Europe, if incumbent businesses can move fast enough they have a good chance of beating out the competition—both the local Internet pure plays and their big US brethren, which are now planning to expand across the Atlantic.

Europe will catch up—in its own way

E-commerce in Europe—measured by the share of its population that is currently on-line, Web purchasers as a percentage of Web users, and average spending per buyer—lags behind e-commerce in the United States by one to two years (Exhibit 1). Nonetheless, technological barriers impeding growth are fast coming down. Personal-computer prices are dropping. Much cheaper access devices, such as Web televisions and digital set-top boxes, are coming to market. Access fees charged by European Internet service providers (ISPs) used to be much higher than those in the United States but are now generally lower (Exhibit 2). And the evidence suggests that as telecommunications charges drop across Europe, Internet usage will increase (Exhibit 3).

Broadband technologies are on the rise as well. ISDN (integrated services digital network) is already established. Cable modem technology should rapidly reach reasonable penetration levels in heavily cabled European markets such as the Benelux countries, France, and Germany.¹ ADSL (asymmetric digital subscriber line) technology, though expensive, is emerging on a fairly broad front as telecom incumbents push it in response to the cable modem offerings of the cable attackers. Wireless too is on the way.

Along with the growing quality of content, these forces are likely to raise the number of quarterly Web purchasers (those who buy something on the Internet at least once every quarter) to 35 million people in Western Europe by 2002. At an average quarterly Web purchase of $700, that will represent a $25 billion market—something worth fighting over (Exhibit 4).

But the variety of cultures and languages in Europe is to some extent matched by the fragmentation of its e-commerce infrastructure. Although broadband is on the way, the distribution of access technologies varies greatly. Areas of very high and very low cable penetration exist side by side. The same can be said of satellite. Great variation also exists in the use of credit cards, the reliability and cost of package delivery, and the extent of catalog sales. Two things, however, are Europe-wide: there is no tax moratorium on e-commerce, as there is in the United States, and cross-border shipping charges remain high and complex.²

Yet the very fact that e-commerce in Europe is emerging a year or two later than it did in the United States is already changing the story. Some incumbents, seeing what happened across the Atlantic, entered early with substantial resources. As a result, most ISPs and portals in Europe are now in those incumbents’ hands. Freeserve, a major UK ISP, was launched by Dixons Group. The top four French ISPs are controlled by France Télécom, Vivendi (through its holdings in AOL CompuServe France), Deutsche Telekom/Lagardère, and Groupe Arnault/Kingfisher. In Germany, Italy, and Spain, too, the telecom incumbents control the main ISPs. France will soon have four big on-line book retailers, all with strong backing: Fnac.com (part of the Pinault-Printemps-Redoute group), Alapage.com (backed by France Télécom), BOL (Bertelsmann), and Amazon.fr (beginning in the first quarter of 2000).

On-line technology is now much more sophisticated than it was in the United States two years ago

For these and other companies starting up in Europe, the technology available is much more sophisticated than it was in the United States two years ago. Boo.com, for example, a European on-line fashion retailer founded by financial investors, needed only a few months to develop a site technologically superior to those of long-established US players.

Exactly how these effects will drive developments in Europe is impossible to predict with certainty; forces often combine to produce unexpected results. But "m-commerce"—retailing through mobile phones—may well emerge more quickly in Europe than in the United States, partly as a result of the very delay in personal-computer and Internet penetration in Europe.³ And in contrast to the United States, where the incumbents appear to have missed an important opportunity, the particular circumstances of Europe will probably allow incumbents to take control of its e-commerce.

Lessons for established European players

Several factors give an advantage to established European businesses:

• It is not too late to seize key parcels of virtual real estate—as it was, in many cases, for established US players by the time they appreciated the significance of the Internet.
• Having seen what happened in the United States, European managers can hardly be blindsided by the emergence of the European equivalents of Amazon.com and Yahoo!—and this makes it less likely that such businesses will emerge.
• Unless developments such as m-commerce unify the whole continent in a way that makes the constraints and differences of infrastructure irrelevant—which is unlikely—Europe’s heterogeneity will hamper the growth of pure Internet businesses.
• Broadly speaking, capital is still harder to obtain in Europe than in the United States, so start-ups may have difficulty getting that first $5 million in seed capital—or, indeed, the $100 million a decent initial public offering might raise.

None of these factors will make e-commerce easy for established businesses. To achieve leading positions, they will have to move quickly, master "clicks-and-mortar" (or "clicks-and-bricks") integration, and manage consolidation in the on-line world.

Claiming territory swiftly

None of the differences between the United States and Europe suggests that European Internet customers will be any less "sticky" than their counterparts on the other side of the Atlantic, where loyalty to a single site in a particular category appears to be high. Indeed, early indications suggest that the loyalty effect is higher in Europe than in the United States: European e-businesses convert new customers into repeat ones more effectively and hold on to more of them (Exhibit 5). A constellation of factors is probably driving this phenomenon: European businesses are learning from the US experience; they are still dealing with early adopters, who are more likely to become repeat customers or heavier users; and they don’t all face US levels of competition, at least for now.

The usual advantages of being first—or, rather, first to achieve scale—also apply, so businesses must move quickly to develop their on-line offerings and capture traffic. The fundamental steps in launching an e-business are well known:

1. Set up a separate group (either within or outside the current organization but typically relocated) and protect it from the larger organization’s management structure and bureaucracy.
2. Develop an initial business proposition quickly.
3. Run like mad to establish vendor networks for Web design, Web hosting, systems integration, database management, and transaction systems.
4. Outsource everything that isn’t fundamental to the business.
5. Give everyone stock options or similar incentives geared to the success of the e-business.

These organizational models are still fairly new in Continental Europe, where stock options and start-ups are less common than they are in the United States or even the United Kingdom. The cultural adjustment will be difficult.

Mastering clicks-and-mortar integration

When e-commerce first developed in the United States, observers were quick to extol the unlimited advantages virtual players had over those dragged down by physical assets. Then Internet pure plays such as Amazon began to need networks of specialized warehouses and distribution centers—and were new to the game of building them.⁴ Suddenly, traditional retail assets—physical scale, purchasing capabilities, assortment planning, and even pick-and-pack skills—became valuable in building an on-line business.

Observers began to predict that the second wave of US e-commerce might go to traditional "landed" (physical-world) businesses, already blessed with these strengths. If that hasn’t happened yet, the reason is probably the commanding lead the Internet players have established. In Europe, however, they don’t have such a lead. If the European incumbents can bring their traditional assets to bear on their new on-line operations quickly, they will be well ahead of the competition.

Building an on-line operation is difficult enough. Making it possible for the new entity to leverage the assets of the traditional business (and most probably cannibalize it) without creating huge organizational tensions or slowing down the new or the old organizations is another enormous challenge. In the United States, Barnes & Noble, for instance, not only waited too long to respond to Amazon but also, at first, did not allow the B&N on-line operations to cannibalize the off-line stores—thus allowing Amazon to increase its lead. Later pricing changes further added to customer confusion.

There is also a second challenge, this time for the marketing arm. When a retailer opens traditional stores, it knows the profile of each area where it does so: rich, poor, middle class, a mixture. Pricing on the Internet has none of these geographic clues. Even so, the Internet will promote new kinds of price discrimination, as indicated by the current price disparities among sites and their different pricing models (for instance, auctions, reverse-auctions, and purchasing aggregation). Moreover, some new services—such as the home delivery of groceries bundled with dry cleaning and video rentals—should make possible an even more refined segmentation as additional information on customers is captured. This should permit savvy retailers to match prices and service levels to customer preferences more closely.

Finally, from a technical standpoint, a new on-line operation is also likely to make a company’s existing systems far more complex—and this complexity can endanger the whole business. Batch processes usually have to be converted to real-time order processing. Fulfillment processes must change completely to handle multipoint delivery and an order-of-magnitude increase in the difficulty of handling returns. And all systems must satisfy higher standards of sophistication, security, and stability.

Managing consolidation

In the on-line world, mergers and acquisitions provide a speedy way for traditional retailers to achieve scale, capture traffic, and acquire e-commerce skills. While pursuing on-line acquisitions, store-based European merchants will be competing with one another, with US retailers planning to expand in Europe, and with European start-ups attempting to build pan-European operations. So far, only US on-line retailers such as Amazon and CDnow have been able to achieve much of a pan-European on-line presence, and even they are struggling to adapt to local tastes.

As more companies aim for scale in on-line retailing, purchasing small local players will be a quick way to acquire skills and capabilities

As more companies attempt to achieve scale in European on-line retailing, the purchase of small local players will be a quick way for early movers to acquire local-content development skills, customer databases, links to suppliers and fulfillment partners, key local physical assets, and logistics expertise. Those companies that can acquire their electronic retail operations at a decent price during this early phase of consolidation and then integrate such operations with their existing on-line presence (and store-based assets) will capture leading positions.

As merchants in Europe attempt to secure virtual real estate, companies that can emerge as the big content providers in Europe and win huge numbers of on-line customers will naturally attract much interest, as both alliance partners and potential M&A candidates. European merchants such as Marks & Spencer and Fnac, which have developed strong customer franchises in the off-line world, now have a chance to carry their "retail anchor" on-line. In other words, their presence in a virtual mall, as in a real one, increases the traffic around them. That gives these merchants the power to negotiate favorable rents and locations.

Europe is the next e-commerce battlefield. But history rarely repeats itself; conditions peculiar to Europe give incumbents a reasonable chance to win. Establishing a pan-European e-business is a new and complex affair, and no one company has become undefeatable. This is the year when competitive advantage will be established.