Net Losses

The Wall Street Journal

Europe endured WAP-lash, 3G worries, and a severe Internet-funding drought


LONDON — Nina Brink promised Dutch mom-and-pop investors a slice of Internet riches when the company she founded, World Online International NV, went public last March.

What they got instead was a sharp reality check when news broke that Ms. Brink profited on the sale of World Online shares during the first days of trading. The stock price plummeted 62% in a month. Since its ill-fated initial public offering, World Online’s board has forced Ms. Brink to resign, shareholders have started legal proceedings against the company and its advisers, and the company itself was acquired by Italian Internet-service provider Tiscali SpA.

As World Online’s investors found, the Internet revolution in Europe has been full of nasty surprises — the nastiest of all being a 50%-plus pullback in technology stocks from their March peaks. Feeding the downdraft has been a consumer backlash against wireless application protocol, or WAP, technology; concerns about the billions being spent on third-generation, or 3G, mobile-phone networks and the evaporation of funding for Internet start-ups.

Along with the billions in market capitalization European technology stocks have lost, investors in Europe have lost their naïve enthusiasm about the Internet.

‘Skewed Sense’

“You ended up with a skewed sense of what you could do,” says Lucy Marcus, an independent Internet consultant in Somerset, England. At the height of the euphoria back in the spring, both Internet entrepreneurs and venture capitalists came to believe it was possible to build a company and take it public within a year, says Ms. Marcus, who advises both VCs and entrepreneurs. “It’s one thing to build sand castles in the sky — it’s another thing to move in,” she says. “A lot of people moved in.”

Now those castles have come crashing down.

Germany’s Neuer Markt has skidded more than 65% from its March high of 8583 and hovers around 2876. Britain’s techMark index is down 55% from its spring watermark of 5743 and now is around 2595.

WAP seemed to embody European investors’ frustrations with the promises of the Internet in 2000. Consumers expecting WAP phones to deliver the experience and ease of a personal computer in their hand instead met with a slow, costly text-based service. Sluggish demand for WAP raised fears that wireless services may not be as compelling for users as operators had imagined and hoped — and that could have serious repercussions for the 3G wireless networks being built across Europe.

Billions on 3G

European telecommunications companies spent a total of $95 billion on 3G licenses this year and will spend an additional $125 billion over the next seven years to build base stations to deliver next-generation wireless services, according to technology research firm Strategis Group.

To pay for the huge bill, some telecoms — notably British Telecommunications PLC — have taken on massive debt. The British phone giant, a conservative spender in the past, expects its long-term debt level to be about 20 billion pounds ($28.65 billion ) by year end. The company spent several billion euros to acquire new wireless licenses in both the United Kingdom and Germany.

Not all companies have been as taken with the idea of building 3G networks. Confidence in 3G prospects plunged this summer after Hong Kong’s Hutchison Whampoa Ltd., regarded as a savvy mobile investor, pulled out of a 3G mobile-phone consortium with KPN NV after the Dutch operator paid 8.4 billion euros ($7.39 billion) for a 3G license in Germany.

Perhaps most worrisome for shareholders: It will be at least five years before operators can recoup their investments in 3G. Third-generation wireless networks aren’t expected to be launched until 2002 and won’t see any significant use until 2003, analysts forecast.

“Just because 3G has been released doesn’t mean everyone’s going to throw out their GSM handset,” says Jamie Moss, telecom consultant at Strategis Group, referring to the global system for mobile communication phones widely used in Europe. Mr. Moss expects 3G wireless networks to attain only 10% coverage during their first few years. “Within six or seven years, they might start to get close to recouping their costs,” he says.

Mobile Internet

The WAP and 3G concerns led to worries about a slowdown in sales of mobile phones and its impact on handset manufacturers. Finland’s Nokia Corp., Sweden’s Telefon AB L.M. Ericsson and other handset-makers issued pessimistic forecasts starting in the summer. But in early December, Nokia offered a rosy forecast for mobile-phone sales and the wireless Internet in general.

“In the mobile world, the best is yet to come,” predicted Nokia’s chairman and chief executive, Jorma Ollila, as the company estimated that mobile services will swell to a $600 billion-a-year market by 2005 from $200 billion this year. Nokia also forecast that industrywide mobile-Internet revenue will surpass voice revenue by 2004.

Other Internet-related companies see a different picture. Throughout Europe, early stage Web companies — particularly online retailers — who had little trouble raising funds during the height of Internet euphoria are being denied more funding. And venture capitalists have abandoned companies they had backed enthusiastically. That left dot-coms like Boxman, Clickmango and Dressmart with nowhere to turn.

Perhaps the most spectacular Internet failure was, which closed in May after going through more than $100 million in start-up funding in about a year. Boo’s overambitious technology meant frustratingly long download times for most visitors to the site. bought the name and relaunched the site in late October without all the flash.

Reviving confidence in the embattled Internet sector won’t be that easy. But Europe’s Internet stalwarts say a revival is already beginning.

Financing Outlook

Marc St. John, managing director at venture-capital group CVC Capital Partners in Paris, sees some much-needed sobriety returning to the venture-capital market. “Most IPOs won’t be attempted until three years after the company starts,” he predicts.

With an easy IPO a thing of the past, financiers are seeking trade sales as an exit strategy. “The golden age of start-up financing is now over,” declares Gregoire Chertok, managing director at Rothschild & Co. Banque in Paris. “Today the flow of IPOs has slowed and a merger or an outright sale appear a natural step for those who haven’t IPO-ed or who have burned through their cash.”

One company at the forefront of several of this year’s e-tailing failures, venture capitalist Atlas Venture, says it has changed its approach to investing in dot-coms. Atlas lost nearly three million pounds by investing in U.K. natural health-foods site Clickmango, which was liquidated in September. Then in November, Atlas wrote off another investment when start-up CitiKey, a portal providing restaurant guides for handheld devices, filed for bankruptcy proceedings.

Vic Morris, an Atlas partner in London, says the company will shy away from consumer-type investments next year. Such investments account for only about 5% of the firm’s $750 million European portfolio at this point. “We’re unlikely to do retail-oriented deals,” Mr. Morris says. “We’re quite interested in pure-play technology,” he says.

Atlas, which manages a hefty $1.6 billion world-wide of mostly early stage investments, has had a much easier time with its biotech portfolio this year. It saw 11 of its biotechnology companies successfully complete IPOs, compared with just three significant IPOs in other technology sectors this year, according to Graham O’Keeffe, a principal at the company. This doesn’t mean Atlas will back off investing in technology and the Internet and shift more into biotech, however.

In fact, Atlas is fairly sanguine about its investments in WAP-related companies. One such investment is digitalRUM, an application-service provider for WAP phones that compares prices for brand-name goods. Mr. O’Keeffe says digitalRUM’s sales to mobile-network operators haven’t been damped by WAP’s slow takeup this year. And he is confident WAP “will get much better next year when GPRS comes along,” referring to planned network upgrades with new technology called general packet radio service.


1 December 2000

In the Press Archive