Germany's Web Market: Pitfalls and Opportunities

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FRANKFURT, Germany -- As the holidays approach, Germany's Internet business is reporting both good news and bad news, making the market both attractive and dangerous for U.S. Web companies.


Many are swarming into the United Kingdom and are preparing to jump into Europe's largest market. The attractions are obvious: Germany has a population of 80 million, and, according to economics minister Werner Mueller, every third person will be online by the end of the year.


The negatives are less obvious but just as compelling: Dot-coms are dying on the new market here even more rapidly than in the United States, and bricks hoping to go click suffer from a bad case of beginner jitters.


Mueller said Germany has the largest mobile phone market in Europe and the most Internet users. Germany, he added, was cutting steadily into the lead of the United States, whose Internet penetration he put at 41 percent.


Access costs have plummeted by 80 percent over the past two years, with the cheapest Internet service providers asking only 1 deutsche mark (about 45 cents) per hour. Flat rates are spreading, with unlimited access available for DM 78 ($38) a month.


Broadband development is moving ahead rapidly, with 20 million households having broadband cable access, Mueller said.


A study that Emnid, Germany's leading polling organization, conducted for AOL Germany found that 9.4 million Germans have purchased something from the Web and that 24 million "are open to doing so."


The Allensbach Institute issued another study this fall showing that the number of online buyers between 14 and 64 years old had risen to 10 percent of the population this year, from 4 percent in 1999.


More significantly, 34 percent of online users younger than 55 had made a purchase on the Web. When asked if they would buy more online in the future, 63 percent said they would, and 29 percent said they would rather not. Most of the latter cited logistical problems.


Most products bought online in Germany, the Allensbach study found, tended to be in the information technology sector, with computers, telecommunications and online services accounting for roughly two-thirds of responses. Books and music followed, but there was also significant interest in automotive and video products.


A PricewaterhouseCoopers study found that Germany "is now the leading Internet nation in Europe and has the largest number of Web companies listed on the stock exchanges in the Internet 150 Index." German firms account for 45 percent of these companies' total capitalization.


Home delivery of goods ordered on the Web is also on the rise. Otto Versand, the world's largest mail-order house, has successfully tested food and grocery deliveries in Hamburg.


Rouge & Blanc, a French online wine merchant, has launched a two-hour home delivery service of holiday champagne in Berlin. Courier service cars take off 30 minutes after the order is received; delivery takes another 90 minutes because of Berlin traffic.


Arthur Andersen is betting its German business on e-commerce consulting, and the bet is paying off to the tune of 30 percent annual growth, moving from DM 660 million ($310 million) last year to DM 842 million ($410 million).


Planet Internet, a subsidiary of KPN, the leading Dutch telecommunications company, rented 12,000 square feet of office space in Berlin and hired a staff of 80 that it expects to increase to 250 next year.


"We want to become a top player among European Internet providers," Planet's German CEO Gyula dePloeg told the newspaper Die Welt, "and if you want to become that, you have to orient yourself by markets that are on the move, and that's why we came to Germany."


He is not aiming for heavy users but wants to target people who are on the Web for no more than three hours a week -- and are willing to pay more for the privilege.


But the negative side of the ledger is just as heavy. The AOL study found that even frequent German e-commerce users have their doubts, with 70 percent fearing misuse of data and fraud.


Nor is German business ready to move online. Most of them see the Web as a necessary evil they had better study in great detail before risking the move.


An Arthur Little study obtained by the trade journal Handelsblatt found that in Germany, "the change to an Internet economy is taking place at a snail's pace." The study surveyed 500 German companies.


The majority of those surveyed had not formulated an e-business strategy yet, although top management in all of the companies had high expectations.


Companies serious about going online tend to be large and active in IT or telecommunications. Small businesses lag way behind, the study said, with 17 percent admitting they have not given the Web a thought.


The number of initial public offerings on Frankfurt's new market has plummeted, with many companies postponing or scrapping planned IPOs even at the risk of losing staff, which is still tight in Germany.


It is so tight, in fact, that the German government launched a "green card" program last spring to attract foreign IT specialists. So far it has been, as one newspaper called it, "a flop."


Deutsche Telekom employs 20 green-card workers. IBM Germany is no better. In all, some 500 have entered Germany in the past four months, and one expert predicted that in 2003 Europe will be short 4 million IT experts.
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