Aol's European Adventure

Think global, act local, say the business gurus. But they rarely add what AOL Europe now knows: that second step is the hard one. When rival Freeserve introduced no-fee Net access in Britain last fall, AOL Europe chief Andreas Schmidt calmly observed that "free Internet access doesn't work as a business model." Then Freeserve rocketed past AOL as Britain's premier gateway to the Net--and Schmidt found himself in London last Tuesday, introducing a stripped-down version of AOL called Netscape Online. The business model? Free access to the Internet.

AOL is only one of several big-name Net companies to have eagerly surfed across the Atlantic--and then learned a lesson or two in the Old World. Bookseller Amazon had to adjust its billing practices to battle German media giant Bertelsmann on its home turf. Online broker E*Trade had to master a whole new set of financial regulations before it inaugurated its U.K. arm in July. Yahoo! became Europe's leading portal by producing localized versions in eight languages. But with 2.7 million subscribers across Europe and more than ¤375 million in annual revenues, AOL is the biggest--and has also had to change the most. "AOL thought it could just use its American model in Europe," says Anja Stemmer, online- industry analyst at Jupiter Communications in Munich. "But it's taken them until now to adapt to the local market."

To be sure, the model looked pretty formidable in 1995, when the company formed AOL Europe as a 50-50 joint venture with Bertelsmann. Bundling content with lots of advertising and unlimited Internet access at a reasonable monthly fee had been a huge hit in the United States. But in most of Europe back then, Net users were professionals who disliked AOL's flashy site, with its ads and lengthy downloads. Instead, they flocked to local services like Deutsche Telekom's T-Online.

AOL is now a distant second to the leading ISPs in Germany and Britain, Europe's biggest markets. And as its sudden reversal of fortune in Britain shows, it has some more adapting to do. Internet access fees represent more than 80 percent of AOL's revenues in the United States. Americans don't mind paying them because they're charged a small, flat fee for unlimited local phone service. In Europe, though, local phone rates remain painfully high. Freeserve's inspiration was to waive the Internet access fee and get the phone companies to share some of the revenue produced by all the new customers it was bringing in. As its subscriber base grows--and boy, has it ever--it also makes money from advertising and e-commerce billings.

Not surprisingly, those high local phone rates make Schmidt mad. Bad enough that powerful former state carriers like Deutsche Telekom are leveraging their local-service monopolies to win customers for their own online services. They're also charging so much for local calls that AOL says its European users log on only for an average 16 minutes a day, compared with an hour in the United States. "The carriers' whole system is based on high local rates that subsidize their long-distance business, where they have to compete," fumes Schmidt, a former Bertelsmann executive. "The Internet won't be a true mass medium in Europe until we turn off the meter and stop ripping off the consumer." He's battling DT in the courts and lobbying Brussels for more deregulation. But few analysts expect U.S.-style flat rates will emerge in Europe any time soon.

Frustrating? Sure. But if Schmidt's spirits need lifting, all he has to do is think about how AOL's killer apps--Instant Messaging and BuddyLists--will fare when the company rolls them out for use on any GSM mobile phone, anywhere in Europe, which it's about to do. That's not in the American business model either, but maybe it will be--someday.