ONLINE'S NEXT BATTLEFRONT: EUROPE AOL ENTERS THE FRAY BUT MAY BE COMPETING FOR AN UNPROVEN MARKET

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Online service providers are clambering to dial up European consumers, but they may find few takers on the other end of the line.

America Online last week announced a partnership with Bertelsmann, an $11 billion global media company, to develop and launch interactive services in Europe beginning later this year.

The partners will compete primarily with Europe Online, a consortium of U.S. and European publishers and banks that bypassed America Online earlier this year when it decided to license technology from AT&T's Interchange online service.

They'll also go head-to-head with other U.S. services looking to gain a toehold overseas, including CompuServe, currently the largest service in Europe; Microsoft Corp.'s Microsoft Network; Apple Computer's eWorld; and News Corp.'s Delphi.

All of these players will be vying for a share of a market limited by low penetration of PCs in homes and an even lower percentage of home PCs with modems.

While 37% of U.S. households owned a PC in 1994, the percentage in Europe varies from a high of 30% in Denmark down to 15% in France, according to International Data Corp., a Framingham, Mass., market researcher.

But 46% of IBM-compatible PCs in U.S. homes have modems, giving them access to online services, while just 13% of European home PCs are equipped with modems. The U.S. figure is likely to surpass 50% by yearend, but the European number will remain below 20%, predicts David Moschella, International Data's senior VP-worldwide research.

The European modem market, a necessary precursor to near-term online growth, is held down by the expense of phone service in Europe and difficulties in connecting PCs to European phone systems, Mr. Moschella said.

Online services are among the computer products and services that "simply have not sunk into the European business today," he said.

Still, major media players are convinced the market will explode, and they want to be there when it happens.

"I think you'll see some pretty quick ramp-up over there," said S. Christopher Meigher III, chairman-CEO of Meigher Communications, a partner in Europe Online. Added Meigher President Douglas Pea-body: "It's open season" in Europe.

Mr. Meigher estimates there are currently just over 200,000 online subscribers in Europe-compared with more than 6 million in the U.S.-and CompuServe claims most of them. He expects that number to climb to 500,000 by yearend, but to explode to as many as 16 million by 2000.

Europe Online expects to start in June or July with a modest goal of 60,000 to 75,000 subscribers.

America Online and Bertelsmann declined to discuss how many subscribers they expect to reach when their service begins late this year in the U.K., Germany and France.

"The objective of the joint venture is to be No. 1 in the European market, and Bertelsmann will do everything it can" to make that happen, said Thomas Middlehoff, head of corporate development for the German media giant.

The partners will each own 50% of the new service and Bertelsmann is committing $100 million to the launch. In addition, Bertelsmann paid about $50 million for a 5% stake in America Online.

As part of the agreement, various Bertelsmann companies in the U.S. are expected to deliver content to America Online, possibly including Family Circle parent Gruner & Jahr USA Publishing and RCA Records.

Steve Case, president-CEO of America Online, said the European service will not be open to marketers initially, noting, "We need a critical mass of consumers first."

Europe Online also wants to test the consumer waters before adding online advertising, Mr. Meigher said. In addition to Meigher, other partners in Europe Online include Matra-Hachette and Burda Publishing Group.

Europe Online's decision to license technology from AT&T was somewhat surprising since AOL is an investor in Meigher Communications. In fact, Meigher's Mr. Pea-body is a former vice chairman of AOL and was on the company's board until a year ago. Mr. Meigher is also a former AOL board member.

But the rival Mr. Case seemed most concerned about is Microsoft, whose Microsoft Network is expected to be a major player in the U.S. and abroad when launched in the third quarter. And while AOL claims to be the largest service in the U.S., CompuServe, with 2.7 million subscribers worldwide, is currently standing in the way of its dream of being the largest global player.

Bradley Johnson contributed to this story.

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