By Douglas S. Wood

(CNN.com, June 7, 2000) -- U.S. companies have led the world of business in moving onto the Internet and launching e-commerce, but as the Internet becomes mobile, U.S. firms may need look to Europe not only for inspiration, but for customers already prepared to shop wirelessly.

Why Europe? At the end of 1999, 145 million people in Europe carried a mobile phone and that number is expected to continue to grow. While other items -- like PDAs and laptops -- are moving forward with wireless capabilities, mobile phones have already lost their leash to the hardwired network that connects buyers and sellers electronically.

More than 35 percent of the European population has a mobile phone and the Strategis Group predicts that number will increase to 85 percent by 2007. In the U.S. the wireless penetration rate stands at 31.8 percent.

In Italy, 28 million mobile phones have been sold over the past few years. In the United Kingdom alone, 4.4 million new wireless customers were added last Christmas. In Finland, the home of Nokia, the popular and huge mobile phone manufacturer, 68 percent of the population has a digital mobile phone. In the capital Helsinki, the number jumps to 75 percent.

The continent is not only home to Nokia, the number one maker of mobile phones, but also Ericsson, the world's number one maker of wireless network equipment, and Vodafone AirTouch, the world's largest cellular operator.

How has a market made up of more than 20 different countries speaking more than 20 different languages gotten such a head start in a medium that many experts predict could change the way business is conducted?

The answer lies somewhere between luck of the geographical draw and proficient planning and cooperation within the European Union.

The world of GSM

Although the European Union faced a rocky road implementing a single currency throughout the 11 member nations, the EU has been very successful in convincing European telecommunications companies to develop a single standard for mobile phones.

When mobile phones began emerging in the late 1980s, the European Union pushed companies like Nokia and Ericsson to forgo developing competing standards and instead collaborate on one digital standard for mobile phones. The resulting Global System for Mobile Communications (GSM) has ended up as the continent-wide standard.

The standard allows customers to buy one phone and choose from service and price plans offered by competing carriers -- like existing telecommunications companies such as British Telecom or from new companies like Orange. Carriers are barred from subsidizing the phone, so these costs are not passed onto the consumer like in the U.S.

The existence of this standard has also allowed the European mobile market -- operators and cell phone manufacturers -- to focus on developing new features and improving the technology for all for GSM phones.

Despite strong growth from competing digital technologies such as CDMA, TDMA and PDC, GSM has the biggest share of the world's digital cellular market. According to the EMC World Cellular Database, 66 percent of the world's digital cellular phones and a total of 383.8 million phones use the GSM standard.

In the U.S., the mobile phone market has multiple phone standards as companies fight for market share. A dominant standard has not emerged under this free-market approach. American consumers face at least three competing digital standards with many users still using analog phones that use yet another standard.

So in the U.S. consumers can buy a phone and a plan from one mobile phone operator, but if they want to switch to another operator offering better prices, their phone may not work with competitor's network.

The lack of uniform standards in the U.S. is a "very, very important factor" in the differences between the two markets, said Lars Godell, an analyst in Forrester Research's European office in Amsterdam.

The gulf between the U.S. and Europeans markets may get even greater as Nokia, Ericsson and Siemens are currently working on the 3G, or third generation, standard for mobile phones that is slated to replace GSM.

3G, essentially an extension and evolution of GSM, promises to provide higher-speed connections, allowing such advanced services as multimedia data and seamless connections with the Internet and other networks.

The first 3G networks are planned to launch in Japan in 2001, with European countries following in early 2002. The U.S. might not see 3G networks until sometime between 2003 and 2005.

Networks not developed

In addition to the differences in standards for the way the phones communicate, the U.S. mobile phone market also must deal with a less developed network of transmitters connecting the phones.

Godell says U.S. coverage suffers because U.S. companies haven't been very generous in their network investments outside of the big cities and highways, leading to dropped calls and poor quality for consumers.

Europe is more densely populated than the U.S., which allows European mobile operators to reach more people with less network investment.

"It's difficult and expensive to build mobile networks in Wyoming and the Dakotas and things like that," Godell said. "But in Silicon Valley, it should be fairly easy, you would expect, but even there the coverage is not very good in comparison to Europe."

The lack of nationwide roaming also hurts the U.S., even though companies like Sprint and AT&T are building national networks.

"A Dutch businessman can go to the U.K. and still use his phone due to agreements between the operators to exchange money for the traffic between competing networks," Godell said.

In fact, the widespread access in Europe is leading some consumers and businesses to drop fixed phone lines entirely in favor of mobile access.

The U.S. also is held back by its dependence upon analog cellular networks. Godell said analog is still used in Europe today only to offer mobile coverage in forests or mountainous areas, whereas analog is used in the U.S. to augment new digital networks and serve existing analog customers. And with analog subscriber numbers declining rapidly, Godell said Europe's analog networks are in the process of being phased out to free spectrum for 3G and other wireless services.

Nigel Deighton, research director for the Gartner Group's Europe office, says few U.S. carriers can claim to have a real nationwide network and to really have true national access, customers must have a dual-mode phone that can work with both analog and digital networks.

Pricing is also an issue in the U.S. Although costs are coming down, Godell says it is very costly to use mobile phones in U.S. And in the U.S., the recipient of the call pays while in Europe the person initiating the call is charged.

E-commerce on the go

With a greater penetration rate and a more developed wireless network, Europe may be positioned to take the lead in the next wave of wireless connectivity -- e-commerce.

The technology to support e-commerce transactions over a mobile phone is already available. GSM phones use a chip for the phone's identity that can also be used as a smart card for e-commerce transactions.

European operators and companies also are rolling out phones and services enabled to use Wireless Application Protocol (WAP), an enabling technology designed to provide mobile phone users with access to the Internet.

"It's a new channel to a potential market ... and indications are that WAP phones are seeing exceptionally high growth," Deighton said.

In Germany, Forrester Research reports that there were waiting lists at phone stores for consumers who wanted to purchase Nokia's WAP-enabled 7110 phone when it arrived. Nokia and Ericsson estimate that by 2003, no major mobile phone manufacturer will produce a mobile phone without some form of an Internet browser.

The mobile phone also may be the first device that many Europeans use to regularly access the Internet. In Europe as a whole, there are three times as many mobile phone users as there are Internet users, so turning to a mobile phone to conduct e-commerce may be more natural for the European consumer.

Consider Italy, where International Data Corporation statistics show 8.2 million Web users compared to 30.4 million mobile phone subscribers. In the U.S., Internet access is predicated on fixed access, usually via PCs or set-top boxes, and Deighton says there is rough parity between Internet users and mobile phone users.

"The mobile phone has a very strong chance of becoming one of the preferred channels to access e-commerce from the Internet," Deighton says. He believes this new outlet may help European e-commerce companies that have lagged behind their U.S. counterparts.

Deighton also says mobile phones could play a role in business-to-business e-commerce, an online market where he says Europe isn't that far behind the U.S.

"There are certain business areas where mobile communications is actually primordial, like parcel delivery. If you don't have mobile communications to track the packages, all the time, you're not in the parcel delivery business anymore," he said.

Simple, timely and location-sensitive

But the road to widespread buying and selling over mobile phones may not be as simple as a GSM phone in the hands of an eager consumer.

Deighton says companies will have to take existing Web sites and redesign then for mobile phones to compensate for size limitations and for the fact that people interact differently with their mobile phone than with a PC.

Forrester's Godell believes that mobile phones aren't going to be useful for e-commerce anytime soon. Only items that meet three criteria -- simple, timely and location-sensitive -- will be useful to sell via a mobile phone, he said, suggesting that only a small percentage of Europe's online retail sales will come via mobile phones. However, Godell said the popularity of mobile phone messaging services among young people in the Nordic countries indicate a big potential for entertainment services.

Items that don't require customers to touch and feel them, like movie tickets and hotel and airplane reservations, meet those three criteria. With only five lines of text display in most mobile phones, Godell says big-ticket items that require a lot of research, like computers and furniture, are impractical for mobile e-commerce.

Instead, Godell says the phone has great potential as a customer service and business relationship tool, allowing businesses to give employees mobile access to intranets, e-mail and scheduling and calendar functions.

"Companies can start communicating with their customers over WAP phones this year, regardless of any transaction potential. We see the transaction potential over mobile phones as being quite limited because of the fact that many application and services will fail the test of the three criteria," he said.

For example, a furniture retailer could use the mobile phone as a marketing tool to alert customers to new products and sales. "We really see a big potential for any type of company to stay in touch with their customers with mobile phones," he said

Companies must be careful to target customers with right kind of ads because customers can easily turn off their phone if they get bombarded with too many marketing messages.

Deighton also says that while mobile e-commerce offers promise, the technology is still in its infancy. He says the full promise of WAP won't be realized until General Packet Radio Service (GPRS) is implemented, which is expected to first launch late this year.

GPRS is a technology that will bring Internet Protocol (IP) capability to GSM networks and will allow connections to a wide range of public and private data networks using industry standard data protocols such as TCP/IP. It also is supposed to increase the speed at which mobile phones access the Internet, from 9.6 kilobits per second to speeds up to 150 kilobits per second.

Deighton says enabling technologies like WAP, GPRS and Bluetooth -- another low power radio technology being developed to connect devices wirelessly --- are in the "process of arriving. They're not really fully there yet."

And while some WAP applications are being used, Deighton said people aren't going to pay a lot for current services like receiving news headlines on mobile phones because they can get similar services elsewhere for free.

"A lot of these services are initial hooks to see if people are interested," Deighton said. "The revenue models aren't clear, the revenue sharing isn't clear ... anything goes right now."

European mobile market isn't perfect

But Europe has its own difficulties. Godell says the European market is very fragmented; only in the past six months have continent-wide pricing and calling plans begun to appear, and there is still no pan-European mobile operator. "But it hasn't held the market back," he said.

Merger and acquisition activity among telecommunication firms is high and American companies are using this opportunity to jump in. Vodafone, the British mobile operator, bought U.S.'s AirTouch for $56 billion last year, creating the world's largest mobile-phone company with aspirations to be to be first pan-European provider.

In late May, France Telecom spent $37 billion in cash, stock and debt assumption to buy British mobile phone operator Orange from Vodafone AirTouch, creating the second-largest Europe mobile phone company. France Telecom will combine its mobile operations with Orange with the idea of forming a separately traded company. Orange had already changed hands twice last year after Hong Kong company Hutchison Whampoa sold Orange to German-based Mannesman for $36 billion and then Mannesman was bought by Vodafone for $173 billion.

Deighton also sees possible trouble on the horizon from the emerging 3G standard. 3G requires operators to acquire governmental licenses to operate in the spectrum that 3G uses. European countries are taking differing approaches to offering the licenses but the auction model has proved to be the most lucrative for governments.

The United Kingdom recently sold five licenses for £22.5 billion, or $34 billion, more than four times initial expectations. Part of France Telecom's desire to acquire Orange was due to Orange's 3G license, which it won for £4.1 billion or $6.3 billion.

France Telecom's Chief Executive Officer Michel Bon told CNNfn.com that the French telecom giant stepped up its effort to purchase Orange after NTL, a U.K.-based cable company in which France Telecom has a 25 percent stake, quit the auction for a 3G U.K. mobile-phone license.

Deighton says while 3G offers "significant performance improvement and promise," he feels the auction method to award licenses will ultimately hit consumers' pocketbooks. Operators will need to recover those licensing expenses, he said, by passing the costs onto consumers through more expensive 3G phones. Those costs could hurt adoption rates and might dampen the entrepreneurial spirit that would allow Europe to stay ahead of the U.S. in the mobile marketplace, Deighton warns.

Deighton likes the "beauty contest" model of offering licenses, which Finland used. This model uses an equitable license fee but also requires companies to detail how many jobs they will create, what development will be done in the country and what innovation the conpany will bring to the table. This approach keeps costs down and leads to more mobile phone users.

"Wide access to low-cost wireless is a proving to be a tremendous accelerator of adoption," Deighton said.

In Britain, the government wants to ensure Internet access for all but Deighton said by using the auction model for 3G licenses, the government placed a "huge tax on terminals that could have democratized the Internet."

U.S. Internet players enter the wireless fray

While the millions of analog phones still in use in the U.S. can't handle the data traffic generated by the Internet and even digital phones offer only limited Internet access, the big U.S. Internet players aren't sitting on their hands.

America Online has announced a partnership with Sprint PCS and BellSouth will put one-button AOL access on some Nokia and Motorola phones. Microsoft has a similar arrangement with Nextel and AirTouch for its Hotmail and MSN services. Yahoo has hooked up with Sprint PCS for the same function and has an agreement with AT&T to provide Yahoo's content as part of AT&T wireless Internet service.

Amazon.com now offers one-click shopping for WAP browsers and Web-enabled phones. British mobile phones users with Nokia phones can access Amazon's site now and so can customers with Web-enabled phones in Canada.

Web portal Yahoo has its Yahoo Everywhere initiative in hopes of linking mobile users around the globe to access Yahoo's Web content and services on data phones, personal digital assistants, and an array of other alternative and wireless devices. In Europe, Yahoo has agreements to distribute its content via mobile devices with D2 Mannesman Mobilfunk in Germany, Radiolinja in Finland, Telecom Italia Mobile in Italy and Telenor in Norway.

Agreements and hype aside, the true test of wireless Internet usage will come in the next few years as the mobile marketplace defines itself and consumers and businesses figure out how to harness a wireless Internet to suit their own needs.