Red-stars Sees Booming Eastern Europe Web Market

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VIENNA --, a 4-month-old Austrian start-up, plans to take advantage of US disinterest in Eastern Europe to exploit a market niche that has been left undeveloped.

Internet use in Russia and in Eastern European countries from Ukraine to Hungary and the Czech Republic is growing at a much faster clip than Western companies realize, CEO Thomas Huber said.

"Right now, the region has more than 5 million Web users, and we look for their numbers to rise to 60 million in 2003," he said. "In Russia alone, the Internet market is growing five- and tenfold a year."

While the numbers may be small by Western standards, they are three times higher than the 1.8 million Austrians online -- and Austria claims to be Europe's third richest country per capita.

Internet transactions in Eastern Europe are 30 percent to 40 percent higher than in the West, Huber said, because "in order to have access to the Web, you need to be well-off and well-educated. The Internet there is strictly for the elite, which improves prospects for investing companies."

Access is costly, Huber noted, whereas in most of Western Europe it is practically given away.

"We moved in at the right time," Huber said, "and we did it from the right place." Austria, he said, benefits from historical precedence -- ties forged during the Austro-Hungarian empire.

"We can make deals others can't," he said. "No Pole will deal with a Russian, but we can do it. We can cross those historical barriers." He is already active in Russia offering financial services on the Web. A deal with a major Russian newspaper is in the works.

The start-up got its first boost when electronics giant Siemens upped its stake from 10 percent to 25 percent. Negotiations are underway with a financial institution to take another 10 percent. That should assure financing for the next eight to 10 months.

Austrian analysts put the value of the company at 60 million euros (about $56 million) last month, but Huber claims it has grown closer to 80 million to 100 million euros (about $73 million to $91 million) in a matter of weeks.

Huber said he also was in talks with two major Western financial players he declined to identify, except to say that one had specialized in Eastern European investments.

The CEO, who won his spurs in Eastern Europe as chief financial officer at Billa Holding, a supermarket chain active in Austria, Hungary and other Eastern European countries, is looking for an IPO next year or possibly sale of stakes to other investors.

Red-stars has offices in Moscow, Poland, the Czech Republic and Hungary, and regional development managers in Romania, Bulgaria, Slovenia, Croatia and Ukraine. It plans to open a facility in Istanbul, Turkey, before the year is out.

Investments in Eastern European start-ups tend to be small -- $1 million to $1.5 million -- not large enough for major players to bother, but interesting enough to provide financial support.

Among the company's investments so far is a stake in the Czech e-business Samba Digital Media and a 30 percent investment in Puls Biznesu Net, a new online firm launched by Poland's largest business newspaper.

Huber is careful to limit red-stars' activities to the service sector, which does not require a warehouse, satellites, cable or other infrastructure.

Asked whether the company's name might not be an obstacle in an Eastern Europe that shucked off communism only a decade ago, Huber said it might be "if we were selling automobiles," but the Internet is different. "Our target audience is young. Red-stars establishes brand awareness, but it does not have any negative connotations. When I meet with a 30-year-old, he laughs and moves on to the next subject."

Huber said he is besieged with project ideas and has 150 on the table. One hundred are likely to be rejected right away and 30 after study. He might tackle three or four from the remaining 20.

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