Originally created 04/02/00

International competition squeezing German e-commerce startups



FRANKFURT, Germany -- Joerg Rheinboldt is a new breed of entrepreneur in a country where tightfisted investors usually steer clear of Internet startups and young business leaders seek shelter in well-established blue chip companies.

Last year, the 28-year-old and five friends gave German's pinstriped business establishment a jolt by quitting their high-paying posts at media and consulting firms to set up the country's first online auction house -- and make it a publicly traded company.

In a matter of weeks, the cheeky entrepreneurs bowled over cautious investors and went online with Alando.de. Less than four months later, they were bought out by the U.S.-based global powerhouse eBay.com.

Many companies had courted Alando for a buyout, Rheinboldt said. But the young startup initially was adamant about staying independent and prepared to duke it out when U.S. competitors came into Germany.

That is, until eBay offered Rheinboldt and his friends $42.8 million in eBay stock to hand over the keys to Alando. On June 15, one of Germany's most promising Internet startups became history, coopted as "eBay.de" into the tide of U.S.-dominated e-commerce.

It wasn't the first case of a successful German startup getting snapped up.

It also happened to the country's pioneer online bookstore, ABC-Buecherdienst. Today, it's better known now as Amazon.de -- the German subsidiary of Seattle-based e-commerce giant Amazon.com.

U.S.-based e-retailers have already scooped up 20 percent of the western European market, according to the Boston Consulting Group. And more are on the way.

"Why are we going to Europe? The Internet is happening all over again just like it was in the States three or four years ago," said Sean Malatesta, founder and international strategist for New York-based Yack.com, which is cruising Germany for a buyout partner.

His company operates a guide for chat rooms, celebrity interviews and live events on the Internet.

"In Germany, they're just complete upstarts that don't have the muscle yet. But give them a year and they could," he said. "We're at the point of trying to build up Yack at home and stave off competition abroad by merging with them."

The number of young Internet entrepreneurs -- such as Rheinboldt -- is growing in Germany, but many are finding it difficult to remain independent in an industry where the global leaders keep a careful eye on newcomers and are always prepared to swoop in and pick them off, flashing mountains of money and wielding years of experience and know-how.

"Only if you get big enough fast enough is it possible to compete," said Malte Feller, spokesman for eBay.de.

But getting big is the hard part in Germany. Despite the Internet's recent explosive growth, Germany still lags about two years behind the United States in usage, with only 14 percent of German households accessing the Web.

German startups generally lack the risk-taking instincts of their Silicon Valley counterparts and find it hard to get loans from Germany's notoriously conservative investors.

Alando turned to eBay, in part, to secure financing for expansion. As eBay.de, it kept its original staff of 18 and expanded to 70, securing a tight grip on the No. 1 position in German online auctions.

"I don't think German investors are stodgy, but they have less understanding of the market in this new industry," said Pierre Omidyar, the chief financial officer at eBay who engineered the buyout of Alando.

That doesn't mean German online companies are just lying down and getting trampled.

Two startups, Amiro.de and Ciao.com, announced in February that they would merge their online shopping guides just to keep American poachers off their porch. Ciao already operates in several European countries with sites in Spanish, French, Italian and Turkish telling users where to find the best e-commerce prices.

Their merger was a defensive move against unwanted offers from U.S.-based Epinions.com.

"We figured that merging would allow us to stay independent without a parent company in the U.S. dictating our whole business strategy," said Gerrit Hein, founder of Amiro and director of business development for the merged company.

Meanwhile, big German players, such as media giant Bertelsmann AG, are now looking to flex their own muscle in their home market. Bertelsmann sold off its half stake in the Internet service provider AOL Europe in mid-March, saying it would use the $9 billion in proceeds to expand into e-commerce -- mainly through takeovers.

Already Bertelesmann operates the No. 2 online bookstore in Europe, BOL.com, and is looking for a bigger piece of Germany's e-commerce pie.

Internet business in Germany has tripled to $1.1 billion from 1998 to 1999 -- and online retailers, citing the explosion in U.S. online business, expect exponential growth. By 2002, Germany could be ringing up $94 billion on the Internet, catapulting it to second place in online spending behind the United States, says the Institute for German Business, a think tank in Cologne.

In order to capitalize on that growth, small players in Europe must take a more aggressive international approach, said Stefan Rasch, an analyst with Boston Consulting in Munich. Traditionally, they have milked a captive audience that prefers buying from sites in their own language and in their own country.

That's particularly true in Germany, where 80 percent of the online shoppers buy from German sites, largely out of fear of having no legal recourse if they are ripped off by a foreign site.

Local sites have other advantages.

One reason Amiro and Ciao fought off foreign buyers was because they thought it would slow down their decision-making in the breakneck European market. They didn't want to deal with executives in the United States who aren't always clued into the latest developments on the continent, said Amiro's Hein.

U.S. investors could also overlook new trends in Europe, such as far greater implementation of wireless access protocol, a technology that allows people to access the Internet via mobile phones. Amiro made its site accessible from cell phones in February.

In the meantime, Hein said the company is ready to go head-to-head with Epinions, its former suitor, in a quest to lock up the European market and go public by the end of the summer.

"Of course we'd be happy if there were not other competitors in the European economy right now," Hein said. "But we have such a big lead in Germany after the merger that it will be hard for anyone to compete with us."