InformationWeek

October 23, 2000

First Stop On The Road To E-urope

Interested in E-commerce overseas? The British Isles can be a good place to start, but there's still an ocean of difference between the United Kingdom and Ireland and the United States

By John Lamb

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he British Isles, positioned on the western edge of Europe, arguably represent the geographic and economic gateway to the continent. More than 40% of all overseas investment in Europe is channeled through the region, and for many U.S. companies expanding abroad, the British Isles are the natural first stop along the way to building a global business.

But before setting up a virtual shop in London or Dublin, consider this: The United Kingdom and Ireland, like the rest of Europe, have a few years to go before becoming an E-commerce mecca. ActivMedia Inc., a research firm, estimates that last year, 72% of Web sites were hosted in the United States and 92% of E-commerce stemmed from U.S.-based hosts. European consumers seem suspicious of the new medium. A recent survey conducted in the U.K. by financial-news service FT.com revealed that although 94% of respondents say the Internet is here to stay, 93% say they don't want to be part of it. That ambivalence is passed along to U.K. businesses. When services company CMG asked CEOs about their E-commerce strategies this summer, 32% still didn't have a clear idea of what their companies were trying to achieve online.

That said, there's good news. Over the next four years, Europe can expect to capture about 25% of global E-commerce, valued at $1.5 trillion, says market-analysis firm Forrester Research. And the British Isles, which comprise the United Kingdom (England, Scotland, Wales, and Northern Ireland) plus the Republic of Ireland are determined to win the lion's share of that business.

The British and Irish governments have adopted aggressive policies designed to attract overseas investment, remove barriers to E-commerce expansion, and encourage businesses to trade online. Investments in dot-coms have gone up in both countries, and more U.K. companies are conducting business-to-business transactions over the Internet.

Despite the apparent skepticism toward online shopping, the United Kingdom is still one of Europe's largest E-commerce markets--consumers there spent $750 million online last year, according to Jupiter Media Metrix. "We're a bridgehead between the United States and mainland Europe," says John Higgins, director general of the Computing Services and Software Association, a U.K trade group. "But it's not a position we can take for granted. It's a very competitive industry. That's why we must work hard to maintain the image of our industry and to increase the numbers of people who see setting up a business as their first choice of career."

During the past two years, local venture-capital firms such as Apax Partners & Co. Venture Holdings and 3i Group have begun investing seriously in startups, encouraging smaller investors to take the plunge to make it easier for new ventures to get first-round funding. U.K. businesses such as search-engine company Au-tonomy Corp., which has established itself as an international player, have benefited from this more adventurous attitude.

Established Old Economy companies in the region are also actively pursuing E-commerce. Some 27% of businesses now trade online, the same percentage as in the United States and Canada and a higher percentage than in Germany and Sweden, according to a recent report commissioned by the United Kingdom's Department of Trade and Industry.

The survey, which benchmarked the United Kingdom against France, Germany, Italy, Sweden, the United States, Canada, and Japan, revealed that 34% of U.K. companies make online payments to suppliers or receive them from customers, more than any other European country surveyed.

Not everyone agrees with this upbeat assessment. "The U.K. likes to think it's ahead of the rest of Europe, but in fact it is extremely average," says Nick Rosen, founder of the Online Research Agency, a European business-to-business market-research company. "It's behind Scandinavia and the Netherlands and only on par with France and Germany in terms of the size of budgets for Web sites, design, and marketing. Most companies are spending no more than $375,000 per year, less than they spend on their Christmas party."

E-commerce spending aside, the importance of information technology in the U.K. economy is clear: It's worth about $60 billion annually and employs more than 350,000 people in almost 65,000 businesses. Changes in the regulation of industries such as finance, telecommunications, and public utilities have helped to drive growth in the IT industry.

In finance, for example, the rules have been relaxed so that a single company can sell insurance, run banking services, and lend money. Competition has also been introduced into telecommunications and public utilities, ending decades of monopoly by state enterprises--and ultimately triggering a boom in IT spending.

U.S. companies are drawn to the region not just by a common language, but also by a more familiar business environment in terms of labor laws and other regulation than in the rest of Europe. Tax rates are among Europe's lowest, and London is a major financial center.

"It's a liberal business environment," says Higgins. "Much of the legislation in the United Kingdom is similar to the United States. It's a very innovative place."

Many U.S. household names in E-commerce have used the United Kingdom as a staging post in Europe. America Online (operating under the name AOL in overseas markets such as the United Kingdom), eBay, and Yahoo are just a few that have set up shop there. Travelocity.com opened a London office two years ago to provide local services and telephone support to the growing number of U.K. customers who were buying from its site. "In the past two years, we've grown tenfold in the United Kingdom as people have moved from buying books and CDs to making travel purchases online," says Ned Booth, VP of global market development at the online travel company.

It appears that online shopping in the United Kingdom is evolving from mere curiosity to a part of everyday life. Low-priced items such as books, CDs, and videos are the most common products bought over the Internet, but sales of toys, groceries, clothing, and travel are growing. The United Kingdom is a world leader in online grocery shopping, thanks largely to the efforts of Tesco plc, a supermarket chain that has invested heavily online and even created a business as an Internet service provider.

Local auction sites such as QXL.com plc and co-buying sites such as Letsbuyit.com are benefiting from the willingness of British customers to spend increasingly large sums of money over the Internet. Jupiter Media Metrix expects to see consumers spending as much as $15 billion annually within five years, with much of that money going to superstore sites similar to Amazon.com, which sell a variety of products.