Most of the early attention devoted to multimedia has emphasized American opportunities. However, the focus is now shifting to Europe, probably the next frontier in the industry’s evolution. How will Europe’s experience resemble that of the United States, and how will it differ? Who will be the principal competitors, and in which battlegrounds will they fight? And how will the nature and intensity of competition affect the eventual shape of the European multimedia landscape?

European companies face a real danger: that opportunities will be grasped by others as the competition for multimedia supremacy hots up. The most menacing entrants into Europe are Americans, either exploiting the experience and scale they have gained at home or using Europe as a dress rehearsal for future domestic battles.

Rapidly intensifying competition

Under assault from the United States, many of the established European players—public service broadcasters, public telephony operators (PTOs), and equipment vendors—are looking increasingly vulnerable. European PTOs generally have much lower labor and capital productivity than their US counterparts. The European personal computer market is dominated by Compaq, IBM, Apple, and Hewlett-Packard—and, of course, by Microsoft operating system software. US companies lead the UK cable market and have the rest of Europe in their sights.

Hollywood overshadows the European film market. European television is under attack from CNN, MTV, NBC, and Disney. All this despite the fervent attempts of the European Union, and France in particular, to safeguard its cultural independence by imposing quotas and introducing other protective mechanisms.

The Europe of old might well have put its faith in national champions—probably under public ownership—to resist these threats and drive industry development, seeking to capture the economic benefits for the national coffers. Indeed, some countries, notably Germany and France, may still look to their state industries to build the multimedia highway. It seems likely, however, that the balance of power will shift away from incumbents, allowing newer players—including those entering Europe from the outside—to make much of the running.

Some of the best-positioned European multimedia companies have come from nowhere over the past decade. Canal Plus now dominates the pay television market in France, while Lyonnaise des Eaux and Générale des Eaux—water utilities until recently—are operating much of the country’s cable infrastructure. Luxembourg-based SES has made Astra into by far the leading distributor of satellite TV across Europe.

In the mean time, BSkyB has established a stranglehold over UK satellite television, and has just been partially floated at a value for the whole company of around $10 billion. Nethold, through its Film Net subsidiary, leads the Scandinavian pay-TV industry. Kirch has built up the strongest film and music library and production business in Germany, and owns one of the most successful television stations.

European companies are under pressure to create an identity they will be able to sustain in the multimedia era

In this new environment of liberalization and competition, European companies are under pressure to reinvent themselves to create an identity they will be able to sustain in the multimedia era. While this is always a difficult process, there have been some notable successes.

Reuters, for instance, has positioned itself to control both the flow of information and the technological gateway for the financial "community of interest," and is now applying the same approach to others, such as health care. Traditional publishing corporations like Reed Elsevier, VNU, and Pearson are applying multimedia technology to deliver content in new ways to targeted consumer and professional segments. The BBC, Europe’s oldest and most respected public service broadcaster, is becoming a multimedia content provider for both domestic and world markets in such genres as news and education. In common with several PTOs around Europe, BT is poised to offer a full range of entertainment, information, and transaction services on top of its core telephony business as soon as regulations permit.

New competitive battlegrounds

There is already a pretty clear picture of what the long-term multimedia environment will look like, in terms both of the structure of the industry and of the services that will be offered using the principal multimedia technologies (Exhibit 1).

In the long term, successful competitors in European multimedia will either provide distinctive content that consumers value highly or control the "gateway" to that content. A few may succeed because they control a vital component in the distribution chain. But with distribution rapidly becoming a commodity in oversupply, competitive advantage is more likely to derive from offering additional services that allow customers quickly to navigate to the content that they seek.

The battle for distribution

Distribution will quickly become crowded, making competition all the more intense. The next few years will see a variety of distribution technologies competing with each other in the transition from the single-lane analogue highway to the multi-lane digital Eurobahn (Exhibit 2). Distribution "pipes" are already proliferating in television, though terrestrial signals will remain the dominant means of reaching viewers in the home for the foreseeable future. If it becomes possible to digitize these signals, many more channels could be made available through traditional household aerials.

It will, however, be satellite television distribution that first goes digital in Europe, with the piloting of digital services on the Astra satellite in late 1995. Digital cable distribution will follow, providing the capacity for hundreds of channels and a range of interactive services, such as near video on demand and ultimately true video on demand. By the end of the century, many European households will be able to choose between terrestrial, satellite, and cable TV channels. They will offer competing but often overlapping services with varying degrees of interactivity—near video on demand, true video on demand, home shopping, home banking, and other online services (Exhibit 3 and Exhibit 4).

Television will not have things all its own way, however. The personal computer is becoming a standard item of household as well as business equipment across Europe. As PCs penetrate homes, the array of peripherals is expanding, most notably with the spread of CD-ROM technology, providing entertainment and education for adults and children.

The third force in distribution will be telephony. A combination of optical fiber and digital technology will allow the telephone "pipe" to deliver new services. BT and others are already seeking to apply ADSL (asynchronous digital subscriber loop) technology to supply entertainment and information on demand using existing telephone wires, television sets, and set-top boxes. At the same time, European PTOs are an essential link in the creation of PC-based networks, capable of communicating massive amounts of data and graphics via the open-access Internet system or via proprietary systems tailored to specific consumer needs.

Each of these developments is a stepping-stone on the way to the information superhighway—the high-speed interactive network that will allow users to obtain a full range of services through either a single pipe or a mix of distribution mechanisms. Given the proliferation of distribution technologies, the latter outcome looks more likely: an increasingly complex and competitive "mixed economy," with multiple pipes into homes, businesses, and schools. Similarly, from among the PCs, set-top boxes, personal digital assistants, wide-screen televisions, video recorders, games, consoles, and advanced telephones that will jostle for a market, a killer device may emerge to drive out all other competitors—but more likely a range of devices will coexist, each supplying variations of the same services.

The battle for content

With so many distribution routes available, content providers will have plenty of opportunities to reach their markets, and consumers of multimedia will equally have many choices open to them. This being so, it seems likely that the key battles will be fought around quality of content, product range, customer service, and price, and will focus on existing revenue streams rather than new sources of income. While press speculation has tended to focus on how long it will take to create the information superhighway, telephone and cable companies in Europe have been engaged in a much more pragmatic fight over revenues from basic telephony and cable television.

What that early battle has shown is that content owners and producers who control scarce talent, essential information, or exclusive rights over movies, sport, or written material will be well positioned to extract premium value from other participants in the multimedia value chain. Packaging such content will allow these players to secure a competitive advantage, particularly if they manage to establish a brand status in the consumer’s mind.

The leading UK satellite broadcaster, BSkyB, for instance, has paid more than $300 million over five years for exclusive rights to live coverage of the national premier football league. Bundling this with its exclusive pay-TV rights to Hollywood movies has helped it achieve rapid penetration of the UK market. Canal Plus put together a similar package of sport, movies, and events to create a compelling proposition for the French market, and has seen off most natural competitors.

The growing importance of premium content will inevitably attract those who might otherwise be confined to "utility" roles in distribution. Viacom’s acquisition of Paramount, US West’s stake in Time Warner, MCI’s recent investment in News Corporation (the owner of 20th Century Fox and of the principal stake in BSkyB), and TCI’s stake in many of its principal content providers are examples of the drive to control content. In Europe, Deutsche Telekom is seeking to ally with Bertelsmann and others to establish a position in the German market.

The battle for the gateway

Control of content has always been a critical competitive weapon, but the battle for the electronic gateway is new. This is the part of the service that helps users find their way around the multimedia environment, and enables content providers to extract revenues for their services. It links a vast array of content providers at one end of the chain to a multitude of users at the other.

If regulations allow, the gateway owner can use the customer knowledge it obtains through billing and account management to tailor new services such as home shopping, home banking, and interactive advertising to specific market segments. Online service providers like Prodigy, America Online, and CompuServe have been playing this role for some time in the United States. Similar European services such as Europe Online and Italia Online are starting to emerge. America Online is working with Bertelsmann to establish a European service, and soon the Microsoft Network will be delivering a range of online services to over 35 countries, including most of Europe.

Gateways will not be confined to PC-based information networks. Major players in the satellite and cable TV industry are already jostling to establish audiovisual gateways that link consumers to entertainment, information, and education services through televisions and set-top boxes. BSkyB, BT, and Canal Plus are among a number of European companies seeking to set up an audiovisual gateway. Much of the necessary infrastructure is already in place or upgradable at low cost, with consumers able to access gateway services via the telephone or through their PCs and modems.

US companies are scrambling to set the European standard for the gateway operating system software

European companies will not have an easy ride in the development of the gateway, which needs to link access devices, distribution networks, and file servers. Software suppliers are old hands at making electronic devices talk sense to one another—and US companies dominate the software industry. Accordingly, Oracle, Microsoft, Apple, and others are scrambling to set the standard for the operating system software that will sit on the access devices and file servers, in the hope of achieving the same kind of dominance that MS-DOS gave Microsoft in PC software.

Scenarios for multimedia development

Europe will almost certainly continue to be a patchwork of different multimedia environments, each progressing at its own pace and in its own direction. We believe that two key factors will shape development: the extent of competition and the level of ambition among participants and governments. Depending on the balance between these factors, four distinct scenarios can be identified for the industry. Each is likely to materialize—permanently or temporarily—in at least one of the major European markets.

Scenario 1: "Competitive leapfrog"

Some European countries will pursue a scenario characterized by full-scale deregulation, liberated competition, and "leapfrogs" in technology and services. In this scenario, governments and state-owned enterprises will play little or no role in the building of the information superhighway; instead, market forces, freed as much as possible from regulatory constraints, will drive an ambitious program of infrastructure and service development.

With deregulation encouraging competition, distributors and gateway owners will invest heavily to secure rapid penetration of the consumer, business, and education markets—and to avoid being locked out by other suppliers. In particular, they will invest in the latest technology and services, "leapfrogging" over those employed in more constrained or less ambitious regimes.

Benefits will quickly emerge for the end user. As a choice of pipes into the home becomes available for most consumers, distributors will battle to secure the highest possible quality of content in order to distinguish their services from those of competitors. Their search will spread beyond entertainment into education, information, and key transactions such as home shopping and banking. More and more money will flow into developing and supplying excellent content.

Distributors will bundle services so as to optimize their customer offering, for instance, by packaging entertainment and telephony in a single value-for-money package. This intensive value-based competition, combined with high-quality content, will attract consumers to new services and technologies, making the information superhighway at least as much demand- as supply-driven.

The UK is fast becoming one of the world’s most competitive multimedia markets with proportionately more optical fiber than any other country

The United Kingdom is the principal pioneer of this scenario, which represents the explicit aim of government policy. From the mid-1980s, with privatization of BT and the deregulation of telecommunications, the unfettered development of satellite TV, the relaxation on ownership rules in cable TV, and conditions that allow cable operators to offer both telephony and entertainment, the country is fast becoming one of the world’s most competitive multimedia markets.

The effects are already visible. BSkyB will soon deploy the capabilities of the Astra satellite to deliver digital channels to the UK market as the first step toward near video on demand. Cable operators trying to catch up with this head start will deploy digital cable to provide additional services including near video on demand. BT is gearing up to offer a range of services down its telephone wires, initially using ADSL technology to bypass regulatory restrictions.

The United Kingdom already has proportionately more optical fiber in place than any other country. But it will not be alone. Scandinavia and the Benelux may also adopt this approach, particularly given the latter’s already high level of cable penetration.

Scenario 2: "Competitive stepping-stones"

Interim technologies may siphon off demand for more advanced services by providing all or most of the benefits customers want

While deregulated competition will foster market development, it will not necessarily encourage participants to pursue the technological nirvana of digitization and full interactivity. In some European countries—even those embracing competition—progress toward the information superhighway will be slow. The reason is that certain interim technologies will attract customers by providing all or most of the benefits that they are seeking. These technologies will siphon off demand for more advanced services.

There is evidence of this tendency even in the United Kingdom. BSkyB has grasped the opportunity to secure rapid returns from a low-cost—some would say inferior—satellite technology that meets the primary market demand for sport and movies. While others invested in the long-term game of building fiber-optic cable systems, BSkyB’s market power enabled it to sign up leading movie studios and program sources in exclusive deals.

Now that it has built a successful direct-to-home satellite business, BSkyB is hardly inclined to force the pace of industry development. Its interest lies rather in leading consumers through a series of incremental technology advances, and discouraging them from leapfrogging to the ultimate solution. So it will develop digital satellite as a means of providing near video on demand, and hope to divert attention away from the fuller range of interactive services that cable and BT will seek to deliver.

In Italy, consumer demand for satellite and cable may be lower since most homes can already receive up to 20 channels

This pattern of gradual competitive evolution will be even more marked elsewhere. In Italy, for instance, consumer demand for satellite and cable multichannel television, let alone for the more advanced on-demand and online services, is likely to be dampened by the fact that most homes can already receive up to 20 channels by conventional terrestrial distribution. It is not that the Italian TV market is uncompetitive, but that with so many choices already available to them, customers have little appetite for still more entertainment. Hence the country has effectively evaded the early steps along the path to the superhighway.

Scenario 3: "Monopoly leapfrog"

Some European countries may prefer large-scale public or "national champion" investment and a planned approach to infrastructure development

Despite all the attractions of the competitive model, some European countries will still prefer the more traditional route of large-scale public or "national champion" investment and a planned approach to infrastructure development. Under this scenario, monopolies will prevail in both distribution and gateway businesses, justifying heavy investment and rapid market penetration.

This kind of centralized approach to infrastructure development has significant attractions for many in Europe. For some European countries it is a tried and tested way of achieving both technological advance and economic stimulus.

In France, the state-owned PTO, France Télécom, built the Minitel network—a national online computer system, initially designed to replace telephone directories, in which miniature computers were distributed free to French telephone subscribers. This gave a boost to the French computer industry, created a market for information providers and direct marketing organizations, and created one of the world’s first online marketplaces.

In Germany, the similarly state-owned PTO, Deutsche Telekom, was required to build the entire cable network. It did so at an unprecedented rate, despite the heavy investment costs and the limited prospects of securing a return on that investment. As a consequence, Germany has one of the highest levels of cable penetration in Europe—more than two-thirds of homes are passed and more than 40 percent are connected to cable. Deutsche Telekom, now on the brink of privatization, continues to invest heavily in both telephony and cable infrastructure, with the aim of building a world-leading broadband superhighway for Germany.

France appears to be on the brink of adopting a similar approach. Its government recently approved a project to link every household in the country through a network of fiber-optic cables by 2015. This national infrastructure will connect users to a network of interactive television, telephony, entertainment, and data services. Its cost is estimated at between $30 and $50 billion.

Scenario 4: "Monopoly stepping-stones"

In most European countries, France and Germany included, scenario 3 is viewed with skepticism, a sentiment vindicated by some notable historical disasters in technological development. For every example of coordinated national investment leading to a satisfactory outcome, there has been at least one dismal failure.

In 1982, for instance, the French government launched the Plan Câble, committing over $5 billion to create a state-of-the-art cable network. But subsequent competition from an increased number of terrestrial and satellite TV broadcasters, coupled with the high cost of subscription and a shortage of services, kept demand low. The scheme was widely condemned as technological overkill, and France today has one of the lowest levels of cable penetration in Europe.

Some countries that are not prepared to follow the competitive route may be tempted to adopt a gradual approach

Given this background, countries that are not prepared to follow the competitive route will be tempted to adopt a gradual approach. France’s Minitel, for instance, is often cited as a pioneer in multimedia online services. But the system that operates in 7 million French homes is a pretty archaic piece of technology. With more and more sophisticated PC-based systems appearing on the market, its demise is predicted again and again.

For the moment, though, France Télécom has managed to persuade domestic users to stick with their Minitel machines and progress gradually toward more sophisticated successors. It may well be able to move France on to the next online stepping-stone.

Key success factors

Given these varying possibilities for multimedia development in Europe, how can industry participants ensure that they hold a strong position in this competitive market? While there are many possible answers to this question, we believe that successful companies will pursue four main strategies:

Smart operators will recognize the need for a tightly focused, country-specific strategy in each of the main local markets

1. Adopt a local approach. Many of the leading multimedia pioneers will be international players at a global or at least pan-European level. As such, they will benefit from the experience, technological capability, and capital resources that they have acquired elsewhere. But the smart operators among them will recognize the need for a tightly focused, country-specific strategy in each of the main local markets. As we have suggested, countries as physically close as the United Kingdom and France or Germany and Italy are likely to pursue fundamentally different approaches in line with their political and cultural circumstances. And the difference in physical infrastructure and economic potential will continue to vary enormously by country (Exhibit 5).

Given such differences, the greatest risk would be to adopt a blanket Europe-wide strategy for multimedia development. A competitor seeking to pursue a gradual stepping-stone approach is much more likely to succeed in, say, Italy than in the United Kingdom; conversely, a full-scale commitment to the latest technology is unlikely to be appropriate in Italy, at least for the time being.

2. Respond to trigger events. The smart operators will be looking out for the events that indicate how the market is evolving. For instance:

• If rival players start trumping each other by announcing more and more ambitious plans for service and infrastructure development, the industry is almost certainly following scenario 1, the "competitive leapfrog."
• If the pace and ambition of these announcements are much more measured, and incremental service enhancements are taking precedence over brand-new services, then scenario 2, the "competitive stepping-stone," will be more likely.
• In a monopolistic environment, the key issue will probably be how much money is being invested in infrastructure development. If budgets are in the region of $30 to $50 billion—at least in large European countries—then scenario 3, the "monopoly leapfrog," is in prospect.
• However, if public announcements and investments emphasize pilots and trials at relatively low cost, a "monopoly stepping-stone," scenario 4, is probably involved.

Smart operators will establish a network of alliances and partnerships to secure access to local expertise and influence

3. Build value-creation networks. Given the complexity of the European market and the differences between countries, it will be almost impossible for any player to achieve a leadership position on its own. Most smart operators will establish a network of alliances and partnerships to secure access to local expertise and influence. This pattern can already be seen in the online services market, with Microsoft working alongside BT to build capability in the United Kingdom, and America Online allying with Bertelsmann to do the same in Germany.

4. Influence local regulation. Smart operators will spend a lot of time understanding local regulation so as to influence it. The fundamental issue is the degree of competition that will be allowed within individual markets, which ranges from full competition in the United Kingdom to constrained monopolies in Germany and France. Even in a competitive environment, it may be necessary to encourage regulatory intervention.

The UK government, for instance, has been persuaded to prevent BT from participating in broadcast services because of fears that an alternative cable infrastructure would otherwise never get built. At the same time, it is becoming concerned about the growing power of BSkyB as a gateway to satellite TV with its proprietary conditional access system.

The whole field of cross-media ownership is fast becoming a key regulatory issue right across Europe, including at the European Union level. If operators are to realize the full potential of multimedia development, they need relaxed conditions for cross-media ownership. But the issue remains politically sensitive, and there are strong pressures to set limits.

Multimedia in Europe offers more opportunities—and poses more headaches—than perhaps any previous development. Few industries have faced such rapid change amid so much technological and market uncertainty. Markets are both fragmenting and coalescing at bewildering speed. While Europe remains some way behind the US, it is catching up fast, posing real challenges to incumbents and new entrants alike. The winners will be those that identify and deliver the range of new technologies and services that meet local market needs in each part of Europe.