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Globalizing the Net Experience

If you think Internet companies are overvalued in the U.S., take a look across the pond.

Listening to the U.S. media, one might conclude the Internet is largely an American phenomenon. It is often suggested the astronomical valuations of Internet firms are a function of unrealistic earnings expectations, a product of the raging bull market. However, by placing the Internet experience in a global context, we can grasp its fuller potential and appreciate what is truly unique in the American approach.

There should really be no doubt: Internet equity fever has caught on in Europe. By market capitalization, Spain's

Terra Networks


is the largest European Internet company. Valued at about 25 billion euros ($24 billion), it is Spain's fourth-largest company. The most recent earnings data from the middle of last year show a loss of about 21 million euros on revenue of about 8 million euros. Or consider,


, a Finnish investment company whose shares jumped 400% in two sessions after announcing it was going to invest in Internet companies.

was France's first dot-com offering; it was oversubscribed 94 times.

According to a recent study by

Merrill Lynch

, the top-performing European Internet stocks in the fourth quarter were


, up 958%;


, up 771%; and

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, up 741%. The conventional estimate of the capitalization of Europe's Internet sector is around $100 billion, and Merrill Lynch expects it to grow nearly 16-fold in the next four years.

Traditional valuation measures are stretched as much, if not more so, than in the U.S.

Deutsche Bank

calculates that based on Terra Networks' market value, an investor is paying about 27,000 euros per subscriber compared to around 3,500 euros for each unique




The high prices do not reflect investor madness as much as a shortage of supply. Specifically, it is common in both the U.S. and Europe for this sector to have small floats. Only 23% of Terra Networks is available to the public. No wonder the stock has increased eightfold since going public. Only 350,000 shares of trade. Only 20% of U.K. Internet service provider



shares are traded.

Deutsche Telecom

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is preparing to spin off


, its ISP, later this spring, when a number of new issues are likely to be offered. Its market capitalization will likely eclipse Terra Networks'. Deutsche Telecom is only going to part with 10% of T-Online's shares.

While the way Internet stocks trade may be similar on both sides of the Atlantic, the Internet experience itself is not. This is partly a function of past development in the telecommunications industry. In the U.S., local calls are practically free, but Internet access is not. In Europe, telephone calls are more expensive, but Internet access is free or nearly so. In the U.S., companies that weren't around 10 years ago are leading the way in the development of the Internet. In Europe, the telecommunication giants are leading it to a greater extent. In the U.S., the computer has deeper penetration than cell phones. In Europe, the relationship is reversed.

In the U.S., we access the Internet through the computer. It is largely a stationary experience. In Europe, it is becoming a mobile experience as the Internet is increasingly accessed through cell phones. In the next couple of years, industry observers expect more mobile European Internet users than fixed-line users.

Europe's telephony infrastructure is superior to that in the U.S. in many important respects. Its Global System for Mobile Communications (GSM) is a continental digital network, which when coupled with the extensive agreements among carriers, provides for seamless access throughout Western Europe.

That said, Europe needs to upgrade and improve its Internet infrastructure. Most Internet traffic takes place on leased telecom circuits. The cost of leased circuits is significantly more expensive in Europe than in the U.S. Often the largest part of the costs is for local access. According to some accounts, it is sometimes cheaper for two European cities to route Internet traffic through the U.S. and back to Europe directly. European telecommunications are engaged in a large capital expenditure program. Some industry analysts suggest Europe's Internet infrastructure is about two years and $5 billion behind the U.S. Europe is also in the process of upgrading its GSM, which will allow a dramatic increase in the transmission of data.

The decentralized approach that works so well in a broad range of areas appears to be part of the U.S. handicap. The U.S. has been slow to replace its national analog network with a digital system. An analog system makes Internet access with cellular-ready modems slow and unreliable. Industry estimates suggest that less than half of U.S. cell phones are digital compared to 95% in Europe.

Digital access in the U.S. is highly decentralized. There are four different standards, including a version of GSM, which operates at different frequencies from the rest of the world. Telephones built for one system won't work on another.

U.S. Internet companies seem to be working out deals with European telephony manufacturers rather than seeking to join forces with competitors. Recently



struck a deal with



, which will manufacture new cell phones that give customers easy access to Yahoo!'s Web site. In Europe, AOL recently struck similar agreements with


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. Meanwhile, the U.S. appears to be moving toward a more mobile Internet experience with a new generation of cell phones.

Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at