The Western European Internet Market: Key Developments and Prospects

1  Introduction

Western Europe’s market for Internet services is the second largest in the world and is now firmly entering its mass-market growth phase. Levels of demand among users are rising rapidly, fuelled by falling prices and declining underlying costs, and by the ever-expanding range of services being developed for the Internet. By March 2000 the 16 Western European countries profiled in this report had a total of over 80 million Internet users, and more than 41 million Internet subscribers (see Tables 1 and 2 overleaf). The highest levels of growth are still occurring in Germany and the UK, but the majority of markets have been witnessing rapid uptake during the past two years. Growth in 2000 is particularly healthy: if the current growth rate of over 20% for the first quarter is repeated throughout the year, the number of users in Western Europe will have more than doubled by the year’s end to reach a total of around 140 million. This compares to growth of around 71% for 1998 to 1999. Penetration rates are also naturally still variable, ranging from around 4% in Greece to nearly 47% in Sweden, but they have risen from an average of approximately 17% for the 16 profiled countries at the end of 1999 to just under 21% by the end of March 2000.

Not surprisingly, the supply side of Western Europe’s Internet market is extremely diverse, in part reflecting the cultural and sectoral fragmentation of Europe’s user base. Over the past five years, the number of organisations offering commercial Internet services has grown exponentially to meet the rising demand and continues to increase at an astonishing rate. By the end of 1999 there were around 4000 Internet service providers (ISPs) in operation in the region. As a result of the existence of so many operators functioning on the basis of often quite divergent business models, the structure of the Internet market is highly dynamic and is being driven through parallel cycles of fragmentation and consolidation.

	1997	1998	1999	2000
Austria	760 000	1 750 000	2 050 000	2 370 000
Belgium	300 000	380 000	1 220 000	1 470 000
Denmark	650 000	1 150 000	1 940 000	2 080 000
Finland	700 000	1 100 000	2 000 000	2 075 000
France	1 600 000	2 800 000	6 500 000	8 900 000
Germany	5 500 000	8 100 000	14 500 000	17 200 000
Greece	110 000	170 000	300 000	410 000
Ireland	110 000	400 000	650 000	740 000
Italy	1 334 000	2 850 000	7 000 000	9 250 000
Netherlands	850 000	1 950 000	3 950 000	4 900 000
Norway	830 000	1 250 000	1 750 000	1 900 000
Portugal	145 000	300 000	630 000	750 000
Spain	1 160 000	1 830 000	3 100 000	3 900 000
Sweden	2 000 000	2 900 000	3 700 000	4 150 000
Switzerland	675 000	1 100 000	1 900 000	2 310 000
UK	4 100 000	10 000 000	14 500 000	17 975 000
Total	20 824 000	38 030 000	65 690 000	80 380 000

Table 1: Internet users in Western Europe, 1997 to 2000
[Source: Analysys, 2000].

Against this background, ISPs are struggling to identify where the value in the Internet service provision market lies. There is a considerable lack of certainty about what modes of operation will ultimately prove to be profitable, with new business models founded often upon exploiting and undermining the business models of already established operations, or upon seeking to gain first-mover advantage in an area where the underlying technology is still at the emergent stage. The two most recent trends that illustrate this effect and which are likely to have a significant impact on the ultimate shape of the market are as follows.

·     In the residential sector, the emergence of unmetered dial-up interconnect offerings such as BT’s SurfTime marks the first real move away from the traditional interconnect models and threatens to force ISPs to accelerate their move towards alternative sources of revenue such as advertising and ecommerce transactions.

·     In the business sector, ISPs are seeking to transform themselves into application service providers (ASPs), combining their basic connectivity offerings with potentially higher-margin services such as Web hosting and design, ecommerce solutions and systems integration.

	1997	1998	1999	2000
Austria	250 000	425 000	625 000	825 000
Belgium	100 000	210 000	740 000	890 000
Denmark	300 000	575 000	800 000	870 000
Finland	270 000	410 000	620 000	645 000
France	650 000	1 600 000	3 490 000	4 100 000
Germany	3 500 000	6 500 000	9 000 000	10 750 000
Greece	38 000	98 000	192 600	245 000
Ireland	35 000	100 000	240 000	295 000
Italy	533 600	1 142 000	2 900 000	3 800 000
Netherlands	595 000	1 080 000	2 130 000	2 590 000
Norway	400 000	600 000	900 000	965 000
Portugal	85 000	190 000	440 000	500 000
Spain	650 000	900 000	1 700 000	2 275 000
Sweden	900 000	1 600 000	2 000 000	2 175 000
Switzerland	375 000	575 000	1000 000	1 200 000
UK	1 100 000	3 750 000	7 400 000	9 175 000
Total	9 781 600	19 755 000	34 177 600	41 300 000

Table 2: Internet subscribers in Western Europe, 1997 to 2000
[Source: Analysys, 2000].

This chapter provides an insight into the evolution of these trends and their role in shaping the supply side of the market.

1. Introduction	3. The Business Sector
> 2. The Residential Sector	3b. Developing Competitive Advantage
2b. ISP and ILEC as Interconnect Partners	4. Market Outlook