Go abroad for growth, Net firms

Just like McDonald's and Coke before them, American Internet companies cannot underestimate the opportunities that exist in foreign markets, a new report by Hambrecht & Quist says.

Companies such as America Online (AOL), CompuServe (CSRV), Microsoft (MSFT), and Yahoo (YHOO) are already venturing abroad, but an intensified expansion will "quickly materialize," the study predicts.

Why? "Regional markets overseas--with underserved audiences--offer incremental opportunity to reach broader audiences and charge higher ad rates," the report states.

While personal computer ownership and online usage are still growing in the United States, these are occurring at somewhat slower rates than in previous years. This means that international markets, which traditionally lag a few years behind those in North America, could soon see a rapid rise in PC sales and Internet access.

The major growth is expected to take place in Europe and the Pacific Rim, led by Japan, Germany, the United Kingdom, Australia, New Zealand, and France. In Australia, for example, Yahoo has been quietly advertising for staffers with Web production skills in that country. The company already has a presence in Japan, Canada, the United Kingdom, France, and Germany.

Just this week, America Online said it had signed up 750,000 members in foreign markets just 18 months after launching its first international service. The company expects to have 1 million non-U.S. members by this fall. It said a newly launched service in Japan was "off to a fast start" but gave no figures.

In the broadcast and cable television business, companies such as CNN, MSNBC, and ABC News are expanding their brand internationally with Web-based news services.

"The time is now" for this type of expansion, said H&Q digital media analyst Paul Noglows, an author of the report. Both audiences and advertising are poised to grow oversees, he added. The report cites predictions by Jupiter Communications that the number of online households will jump to 67 million by the year 2000 from the current 23.4 million. Likewise, Jupiter predicts that online ad revenue outside the United States will jump to $704 million by the year 2000, up from just $25 million this year.

In addition, the report says: "Some of the main drivers of international Internet/online growth will be increased modem penetration, decreased telecommunications costs, and more enthusiastic acceptance of online services such as banking or shopping."

There are hurdles, however. H&Q analysts' main concern is that U.S. companies will expand into foreign turf without being sensitive to local tastes and preferences. "The last situation you want is a situation like EuroDisney," Noglows said, referring to France's resistance to Disney's theme park there. (Disney has since rectified some problems, which included complaints that park employees were not allowed facial hair.)

CompuServe's well-publicized difficulties in Germany are another example of the challenges Net companies face abroad. In April, the head of CompuServe Deutschland was indicted because he was running the operation when the online service carried Internet newsgroups that allegedly contained child pornography. The company has no control over Internet content such as newsgroups.

Earlier this month, the executive, Felix Somm, resigned, but CompuServe said it was unrelated to the indictment. CompuServe calls the charges groundless and vows to fight them.

To make the expansion go more smoothly, many Net firms are striking partnerships with local companies, just like in other industries. "The benefits of strong local partners--be they media or telecommunications players--cannot be overstated," the report says. "Beyond reducing both the cost and time-to-market of international rollouts, local partners provide critical advantages, [such as] a solid understanding of the cultural and political environment."