Leaders of the UK’s Internet industry recently met at an ebookers/BusinessWeek seminar in London to debate the growth of the Internet industry in the UK to date, the market’s current challenges, and the roadmap for future expansion in Europe.

Gathered on the day were Dinesh Dhamija, CEO and Chairman, ebookers, Europe’s leading online travel company (DD); Andy Reinhardt, European technology correspondent, BusinessWeek, the leading global business magazine www.businessweek.com (AR); Bundeep Singh Rangar, COO, Ariadne Capital, a European venture capital firm (BSR); Sally Davis, President, Products & Customer Service, BT Ignite, the business services arm of BT (SD); Richard Duvall, Chief International Officer, Egg, a leading online bank (RD); Daniel Ishag, CEO, Espotting, Europe’s leading performance based advertising firm (DI); Henrik Kjellberg, Director of Lodging, Expedia, a leading online travel company (HK); Stephen Purdham, CEO, SurfControl, the world’s leading web and e-mail filtering company (SP).

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1.  What were the lessons of the dot com boom and bust?

DD:  The businesses that succeeded were started by people who were either in that business before the boom, or recognised that you need to get into the Internet whole-heartedly rather than just dip-in your toe.

It was crucial to know how to make a profit. When the bust happened there were many people scurrying for cash, who had not raised enough to run their businesses properly or get them to profit.  A lot of people just wanted to go for market share and many of those businesses have fallen. 

I found the Internet the perfect tool for developing a scaleable, cost efficient and profitable travel business.  Bricks and mortar travel agency business can only make net margins of about 1%.  Utilising the Internet, and our BPO in India for a cost-effective 24-hour sales service, we can make margins of up to 6% more.  The opportunity is massive as currently only 4% of travel in Europe is booked online. 

BSR: Getting to the right market at the right time has replaced the rush to market of 3 years ago. 

2.  First mover advantage.  Was there any value?

DI:  Many of the people who believe they had first mover advantage had great ideas but didn’t work out the best way to execute them.  In many cases the second and third movers recognised the great ideas and innovated on technology or on the business models to actually make them work.

BSR:  When you are starting a new venture, there is an opportunity and a capability.  First mover advantage gives you open territory on the opportunity but that does not mean that you have a better capability.  The companies that have been successful with first mover advantage are ones that have had good execution capabilities, and good management to capitalise their opportunity and maintain that lead.  eBay is a prime example.  Yahoo!, however, had a first mover advantage but forgot that Google was creeping up.  ebookers had a high capability from Dinesh’s previous travel businesses and that enabled him to capitalise on the Internet opportunity.

SP:  The opportunity for growth is immense, whether you are the first, second, third or a hundredth mover.  You’ve got to look at what the Internet bubble actually did.  Its biggest achievement was to create chaos and enable us to jump the evolutionary stage of the industry. 

AR:  The world went through a high speed university of B2B eCommerce.  We spent a few years learning, trying, and vastly accelerated the process of deploying this new technology.  So even if the original ideas didn’t all work we now all stand on the shoulders of those failed concepts.

RD:  If you look historically at the introduction of a new technology into the economy, what happens is you get a period of automating what used to exist.  So when electricity was introduced the first thing that it achieved was electric light and heating.  You then get a frenzied period of experimentation where tens of thousands of companies are set up and tens of thousands of companies go bust. 

You then get a pause (in electricity it was the 30s recession) when the technology becomes more understood.  This is followed by a golden age in which there is further dramatic innovation in a way that is not predictable in the first two or three stages. 

Whereas the frenzy period is venture capital funded, the golden age period is production capital funded.  In electricity, elevators were invented, so skyscrapers go up.  The Internet is now in its consolidation and learning period.  At some time we will go into the golden age, which will be characterised by dramatic amounts of innovation and production capital. 

Are American Internet companies inherent innovators and European players the followers?

SP:  One of the biggest influences is that US funding is far more generous than in Europe.  A business in the UK will get $50,000 and have to prove that they can deliver a profit within three weeks!  And at the end of the day the US has a 260 million population with a single language in a single market.

Europe has lead the mobile and internet banking markets.

SD:  There is enormous innovation in the UK and Europe but the US has its advantage because of market size.  This provides the opportunity for many niche Internet businesses. 

DD:  Expedia was certainly the first in the online travel market in 1996, but we (ebookers) started a month later with the first interactive web site in the UK. 

AR: What is really interesting is that Europe is very good at innovation but to leverage that innovation needs better marketing.  In general American companies are much better at selling products and managing customer relations.   We didn’t know, for example, that we had a problem with static cling until Proctor & Gamble told us and then created a demand for dryer sheets. 

BSR:  Americans are probably the best sales people around.  They follow the ABC rule - Always Be Closing.  In Europe there’s plenty of innovation, but there’s some kind of stigma about sales. 

SP:  I don’t think it’s because European’s can’t sell.  The issue is that they go to the wrong market, which is usually their home market.

3.  Internet capital markets.  Where’s the funding and who are the deal makers?

AR: In the last few years there has been a dramatic decline in venture capital investment in absolute terms and start ups are getting a smaller chunk of the private equity investment in Europe.  This raises some troubling questions about the future of innovation? 

BSR: The purchasing power of funds is far greater today than it was three years ago.  What you were paying in premiums then was way above what the market was really going to reward you for.   The second point is that there are investors now, but they are only interested in seasoned entrepreneurs - the few people who have a strong track record in building businesses.

4.  The state of Internet advertising.  And what is Performance-Based Advertising?

DI:  Performance-based advertising (PBA) offers massive returns of up to six times more than other types of advertising.  As the world becomes increasingly digitised the opportunities for PBA will grow massively.  Espotting is at the forefront of developing this market.  Today we are delivering PBA through sponsored links - through web search with narrow band Internet – and we are developing other accountable electronic platforms.

5.  Will spam (and porn) spoil the Internet?

SP:  We run the risk of spoiling the Internet if we just focus on the Internet being the relevant element of what everyone wants.  The reason why I use the Internet is not because it’s the Internet - it’s because of what it gives me.  It’s the consumer that has to create the element of pull.  The Internet is just a distribution mechanism and that is exactly how the porn and gaming industries are utilising it effectively.  If they are the only ones that maximise it then the Internet will just become a medium for porn and gaming.  So it’s encumbered upon the world to start looking more seriously at other applications of value for the customer. 

Should there be regulation against spam?

SP:  Legislation will come to Europe but it won’t make much difference.  When the spammer is actually based in Lichtenstein for example, how are you going to find him?  90% of the sex, drugs and rock & roll type of spams are spoofed so it’s very difficult to find out who’s behind them.  Many of these spammers have a shelf life of 36 hours.  Their IP addresses & domains are actually changed as fast as someone locates them. 

The reality is that spam will stay but that technology will solve most of its problems to an acceptable level.  Unfortunately, however, within the next 3 years the volume of spam will get worse before it gets better.

Paid ‘bulk stopping’ services will increase, but these systems are also likely to block out legitimate business mail.  ‘One person’s Spam is another person’s ham’. 

6.  Is the European networking infrastructure up to the challenge of e-commerce?

SD:  Increasingly so, but there is much to be done.  We are seeing the emergence of an agile IP infrastructure to suit the needs of our clients who increasingly want an infrastructure to adapt rapidly to meet their customers’ individual circumstances.  For BT Ignite the solution is based on a central platform built on Internet protocols using MPLS technology to prioritise traffic.  Throughout the industry, however, the area requiring the greatest work is agility around the network Edge.  An example is broadband development and consumer access to corporate data from mobile devices in a ‘follow-me’ type scenario.

7.  What are the challenges in rolling out a UK-based Internet bank in Europe, especially given different banking regulations and the success of bricks and mortar banks’ simple online operations?

RD: Before we went into France we conducted 18 months of consumer research for an in-depth understanding of the market. 

This showed that while French consumers had some different needs (to British consumers), they had a similar level of dissatisfaction with what they were getting from bricks & mortar players. 

They were very willing to try something different as long as it worked and added value.  We found the French regulators wanted to promote greater consumer choice and position Paris as an international financial centre. 

Egg’s launch in the UK was huge and explosive.  Our launch in France has been explosive in a brand sense - we have about 60% brand awareness - but in a sales sense it has been more steady.  It’s hard to determine why, but we need to take into account that the UK launch was during the Internet boom time.

If Internet banking is so great why isn’t everyone doing it?

RD:  According to Datamonitor (2002) 50 million are banking online. That figure will be 85 million by 2007.  That’s a big market and about 25% plus compound growth over the last 3 or 4 years, and about 10% compound growth through to 2007.  In the UK alone last year 100 million money transfers were made on the Internet.

Our perception is that there has been no Internet boom and bust.  There may have been a dot com boom and bust, but every year more people use the Internet to do more things.  The Internet will continue to be an increasingly important medium for most people.

8. Expansion in Europe

Internet penetration in Europe is only 43%. What are the keys to making the Internet analogous to the phone or electricity systems?

SD:  That average masks enormous differences from the north to the south of Europe.  Cultural and climatic divergence probably means that southern Europe will never spend as much time indoors accessing the Internet as northern Europe.

Access to the Internet is important.  There is also a question of pull but at a certain point, most broadband users are just using the Internet faster.

However, there must be some applications for which you absolutely have to have broadband to experience them properly.  And frankly we have not yet seen that.

AR:  One of the great explanations for the success of mobile is not only that people like to talk while they are moving around but that people already knew how to talk, and it’s something that they wanted to do.

9.  Is the UK the best place to start a European Internet business?  And how well placed are US companies? 

HK:   The UK is a great point to start in Europe because it is a large market and Internet penetration is high.  There is a misconception, however, that American companies cannot be successful in Europe.  That would be like saying that Procter & Gamble couldn’t do business in Europe because they’re American.  As far as Expedia is concerned, we have the benefit of having a very mature online market in the US.  This means we’ve been able to invest in technology for three years, and get profitability into the system which can be re-invested in Europe where the market’s growing rapidly.

Consumer travel needs are fairly similar around the globe.  What’s important is to adapt the product, marketing and merchandising to local needs.  This is why all our European heads are country nationals rather than Americans.

What are the challenges to developing online businesses in Germany?

DD:  Germans have a real culture of making payments through the Post Office.  We find that many of our German customers do their research on the Internet then go to the Post Office to pay.  To stimulate online transactions a key part of the answer is for Internet businesses to host Post Office payment forms on their sites.  That’s what ebookers does.

HK:  We have seen about 400% year on year (credit card) growth, albeit from a low level.

How is Internet growth in southern Europe?

DI:  I believe 30% of online business in Spain actually comes from one department store.  There’s also a heavy Internet café culture in Spain.  This is far stronger than in Italy which is much more driven by PC ownership.

10.  What will drive mass penetration of broadband?

HK:  I don’t necessarily believe you need a lot of new content or new services to drive penetration.  What will definitely be important are greater access speeds.  For example, Expedia already has 360 degree views of hotel rooms online. With fast access speeds these types of services become very valuable to the consumer.

BSR:  Two of broadband’s key commercial benefits are as a collaborative tool and for peer-to-peer networking.  Business collaboration on a broadband network enables massive crunching power through always-on computers with unutilised processing power.  This will have a major impact on industries requiring huge grid computer power such as pharmaceutical and space research.  On the consumer side, however, peer-to-peer networking will help solve problems caused by the increased demand to watch high-speed multimedia videos via broadband.  The problem with broadcasting and the traditional client/server architecture is that technically whereas the broadcaster’s interest is maximum audience, the broadcasting server’s interest is in minimalising the audience.  This is because the more the audience, the greater the load on the servers.

The solution is peer-to-peer networking where every peer recipient is also a potential transmitter.  This has great implications for financial transaction business models and, of course, wireless broadband takes it even further.  There are many interesting experiments to capitalise on these capabilities here and in the US.

SD:  For the consumer the imbedding of richer content within every application will be important.  Bandwidth services must also develop.  Ultimately the vision must be that customers can sign up for a basic level of bandwidth, which is always on and can cope with most of their every day needs.  There must also be additional levels of bandwidth that can be bought on a ‘needs be’ basis such as that required to watch a film.

SP:  It’s not ‘broadband’ or ‘3G’ that are the answers.  It is actually instant communication when I want it and instant services when I need them.  Broadband and 3G are just the technologies of the instant.

BSR:  Companies we are working with are looking at the human and technology cost benefits of broadband.  Technically the focus is now on web services, interoperability and security.  These developments will help scale internet businesses cost effectively and enable exactly the kind of rich customer experience packages being developed by ebookers and Expedia. 

From the human perspective, there is the growth in outsourcing of services such as call centres through broadband connections to cost optimised locations like India and the Philippines. 

Cost optimisation is one of the things we look for in a company very early on as a critical part of its DNA. 

11.  Creating customer satisfaction and the value of call centres

DD:  ebookers started off in shops.  Then we went into call centres, and now we utilise the Internet.  It’s crucial to allow customers to come in any way they like and it’s particularly important to have an efficient call centre.  Often customers will phone to ask questions and then book on the Internet.  They might even then want to collect their ticket from a shop.

SP:  There is a real problem with call centres in actually getting to talk with someone who can help with a ‘non-regular’ problem.  SBC, in the States are having a tremendous problem in California because their call centre response is entirely automated and script based. 

SD:  Increasingly consumers expect to get a better deal when they go on the Internet.  Sometimes this is not the case so there is the danger that if people don’t get that better deal on the Internet they will think ‘why bother?’

HK: You can add value using the Internet in two ways.  You can either give the consumers more, which is what Amazon is doing, or you can lower the price.  Obviously we need great deals to be successful like any business, but the future is more about adding other values.  For Expedia, like ebookers, it’s about making packages.  We believe that ultimately we’re in a $3.2 trillion travel market.  Of that about $2 trillion is about what people do when they get to a place, like buying a Mamma Mia musical ticket, or the wedding in Vegas.  (We’ve sold over a thousand weddings in Vegas).  For online travel companies there is a massive technology investment to be made to get there.  With this added value people will move away from ‘it has to be the lowest service’ to ‘this is pretty good, it simplifies my life’.

12.  The future of the online travel market

DD: The European Internet travel sector will definitely consolidate.  There are likely to be three or four successful players left in Europe, just like there are 3 or 4 in the States (which are about 3 years ahead of us).  Right now there are about 5 main players in Europe: Expedia and Hotels.com (owned by USA Interactive), ebookers, Lastminute and Opodo.   Even with growth rates of about 50% plus per annum, online only accounts for 4% of the European travel market.  So there is massive opportunity for growth in Europe.  We have 380 million people and the largest vacation time in the world - about 2 ½ times that of the US.

Point-to-point flights like Easyjet & Ryan Air, or very specific, high volume routes such as London – New York will become increasingly commoditised.  Our growth  market however is in enabling customers to design their own packages and this will be very difficult to commoditise.  What this means is that from ebookers people will not only book flights but also hotels, cars, insurance packages and local entertainment and restaurants.  These will be very valuable and convenient services.  If you’re going away to a large city for a short break, for example, you’ll need to book the best restaurants before you get there.

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