ISPs in Western Europe:
Dynamics of an Evolving Market

With explosive growth in Internet usage in the EEU, the near-term growth picture for service providers is rosy. As the market consolidates, however, the nature and identity of the players is likely to change drastically, and many extant ISPs will disappear.

by Philip Lakelin [July 1, 1999]

This article is a condensation of the executive summary of an exhaustive study on the Western European Internet Service market published by Analysys Publications. Click here to read the full Executive Summary.

Western Europe's market for Internet services is now the second largest in the world and is still very much in its early growth phase. Demand is rising rapidly, fueled by falling costs and an ever-expanding range of services being developed for the Internet. Over the past five years, the number of organizations offering commercial Internet services has grown exponentially to meet this demand, and it continues to increase at an astonishing rate.

Demand
By the end of 1998, Western Europe's Internet market comprised around 12.5 million households and over 1 million businesses, and growing at an annual rate of around 30 percent. Estimates of the value of this market vary from $1.17 billion US (Forrester Research), to almost $10 billion US (Frost and Sullivan) in 1998. The latter expects it to continue to grow at over 30 percent per year reaching around $418.7 billion US by 2000.

European Internet penetration (relative to the U.S.) has so far been impeded by three principal barriers to adoption:

• Price. Telecom prices are in Europe are multiples of their equivalents in the US, so costs for European ISPs are much higher. The price of leased lines, for example, can be 20 to 30 times more.
• PC penetration. PC penetration in Western Europe is currently around 25 percent, compared to around 50 percent for the USA.
• Language. The current default language of the Internet is English. This is discouraging to those who are not native English speakers.

All these conditions are currently changing, however. Infrastructure and telecom costs prices are dropping. During 1998/9 a number of ISPs around Europe began offering subscription-free and unmetered Internet services. Proliferation of inexpensive hardware (e.g., set-top boxes) is also lowering costs to users. The language problem is also resolving itself as more European users create content in their mother tongue.

Over the coming years, a number of positive drivers will also fuel more rapid adoption of the Internet in Europe:

• Growth of e-commerce. E-commerce activity in Europe is approaching critical mass, as more and more businesses perceive it as essential to remaining competitive in the increasingly global market.
• Proliferation of IP-based intranets. Intranet penetration is increasing at a tremendous rate: Among large corporations, it's projected to have reached 99 percent by the end of the first quarter of 1999
• Mass marketing of the Internet. More and more large, consumer-focused organizations-banks, retailers, news services, content providers-are moving to the Internet, resulting in a richer array of content and services.

These factors will combine to drive up Internet penetration in both business and residential sectors extremely rapidly over the next few years-and the growth will begin to feed on itself.

Supply
By the end of 1998, there were around 3,000 ISPs in operation in Western Europe, falling broadly into three groups:

• Local/regional ISPs. Small operations with a few hundred subscribers, comprising 60 to 80 percent of the total.
• National ISPs. Operators with subscriber bases ranging between a few thousand and several hundred thousand, usually, but not always, owning a nationwide POP and Internet backbone.
• Pan-European/international ISPs. The smallest group of ISPs comprises operators with an international focus, either pan-European or global, with subscriber bases ranging between 50,000 and several million.

Classifying ISPs on the basis of their size and geographical coverage in this way masks significant differences in the type of business model that they work with, however. Simple service providers—those offering little more than basic connectivity and Internet transport services over networks composed of self-owned POPs connected by lines leased from telecom operators (TOs)—have recently been joined by a large number of organizations from different backgrounds, including:

• Online service providers (OSPs) and content-based ISPs, such as AOL-Bertelsmann, CompuServe and Planet Online
• Incumbent TOs, such as BT, Deutsche Telekom and Telia
• New-entrant TOs, such as Level 3, Qwest and Tele2
• Cable operators, such as A2000, NTL and Telenet
• IT companies, such as IBM, Microsoft and Mitsubishi
• Brand-driven ISPs, such as debitel, Freeserve and Virgin Net.

With so many players-operating on such a variety business models—the structure of the Internet market is highly dynamic. Paradoxically, the industry is being driven through parallel cycles of fragmentation and consolidation.

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