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INFORMATION MARKET OBSERVATORY (IMO)


ELECTRONIC INFORMATION SERVICES IN THE HOME: CONSUMER CD-ROM AND ONLINE MARKETS


Luxembourg, February 1995
Working Paper 95/1

The views expressed in this report are those of the IMO secretariat and do not engage the European Commission
Bat. J. Monnet, 
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direct line +352 4301 32889.
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Telegraphic address: EURDOC LU 2752.

CONTENTS

Highlights

Highlights


This paper was drafted on behalf of the IMO by the Information Group at Policy Studies Institute, London. Sources include industry newsletters and market reports (see Appendix for references), newspaper press and online databases (FT Profile and Textline). ECU exchange rates in this Working Paper have been calculated at the 1994 average of US$1 = ECU 0.84 (source: Eurostat).


1. INTRODUCTION

The aim of this Working Paper is to review key developments in two areas of the home information market: online and CD-ROM. In the last year it has become apparent that a mass consumer market for electronic information and entertainment is a real possibility. The home market represents an important new opportunity for the information industry, although at present the European market is fragmented and immature. Development has so far been polarised around television-based and computer-based services, and handheld games consoles. In the longer term, these functions are likely to converge, with hardware evolving towards a common technology base.

This paper is concerned primarily with home services delivered to the computer, and in particular with online, CD-ROM and multimedia CD. Home Internet access will become almost inseparable from consumer online, and is treated briefly in this paper. Interactive television, video-on-demand, dedicated games players and off-line television multimedia (such as CD-i, Video CD and 3DO) are not specifically dealt with except for comparative purposes.

This paper will examine technology availability in homes and forecasts of future penetration. It will then review the home CD-ROM and online markets, highlighting key development areas and future prospects.

2. BACKGROUND TO THE HOME MARKET

The scope of this paper reflects those areas of the home market which are most likely to bring immediate return. Television-based multimedia is unlikely to represent a major opportunity for European information and entertainment providers for at least another couple of years. Inteco's recent study, The Interactive Home, seems to confirm this view, suggesting that there is much greater growth potential for services based on computers than on those based on television.

Markets for video on demand, interactive TV and television shopping are still unproven in Europe. Important development work is taking place, both on broadband infrastructure and on content. But analysts are now suggesting that demand for network-delivered multimedia will come from the business sector first, and that initial predictions of a boom in consumer services such as video on demand may have been premature.

In spite of the efforts of suppliers, dedicated multimedia and games players such as CD-i and 3DO have not yet achieved mass appeal, although CD-i seems to have grown steadily in the last year or so. 3DO had an installed base of around 150,000 Interactive Multiplayers by the middle of 1994, the majority of which had been sold in Japan. Dataquest estimated that by the end of 1993, only 23,000 units had been sold in the US.

3DO is now facing similar problems to Philips in the early years of CD-i, with a very limited range of published titles. Sales of CD-i players were finally expected to reach the 1 million mark by the end of 1994, and there are now over 200 titles available in CD-i format. This is far from discouraging, but still falls way behind the installed base and predicted growth patterns for home computers with multimedia capability. (See table 5 on prospects for publishing on these and other platforms.)

A major take-off in home use of CD-ROM was observed in the US during the second half of 1993, and consumer online has a long history in the States. In Europe, it was well into 1994 before home CD-ROM took off in any serious way, driven mainly by the marketing activities of computer manufacturers and home electronics retailers. Consumer online has only recently become a major concern in Europe, with a cluster of new service announcements during the second half of 1994.

3. TECHNOLOGY IN THE HOME

The search for figures on the installed base of computers and other technology in homes has become something of an obsession in the information industry. Such figures have been notoriously inaccurate, however. It is difficult, if not impossible, to identify those hardware purchases destined for homes rather than offices. Analysts and computer research firms are often accused of over-estimating, and there are doubts as to how many archaic and unused computers are counted in installed base estimates.

It is also difficult to distinguish between purchases made for the home out of household budgets and those funded by companies. For those who are self-employed, or who run small companies from their homes, the distinctions are more blurred. But in many respects, the initial impetus for technology purchase and the origin of the funding is irrelevant. Once a household has acquired a computer and CD-ROM drive or modem, it becomes a potential customer for electronic information and entertainment.

Growth in home ownership of computers has begun from a low base, especially in Europe. In some countries, however, the penetration of PCs into households is already higher than cable, satellite and video games. Whilst acknowledging that penetration figures can only be rough guides to the true position, it is worth reporting on the following comparative statistics recently released by Inteco. 


Table 1: Comparative Penetration of Home Technology, 1994 (Approximate %)

                     US    France    Germany    Italy        UK    -------------------------------------------------------------    VCR                88        60         64       56        74    Cable              65         8         50      N/A         4    Satellite           4         2         18        2        11    Video Games        42        20          8       12        18    PC                 35        13         14       17        22    Source: Inteco    

3.1 Europe

A boom in home computer sales was experienced in many European countries during 1994, but in most cases growth is starting from a very low base. Christian Bruck of Europe Online has suggested that this is an advantage; the European home market for electronic information is developing on the basis of state-of-the-art technology, unlike the US, where the market took off at a time when the technology in homes was fairly basic. Dataquest has suggested that nearly 2.5 million PCs were sold into European homes in 1994, representing a fifth of the total PCs sold. According to Europe Online, around 19 per cent of European homes have PCs or Macs at present, and this will grow to 33 per cent by 1999. The 24 million SOHO (Small Office, Home Office) PCs will grow to 40 million by 2000, according to the same source.

The penetration of PCs varies considerably from country to country, as indicated by Table 1. In Less Favoured Regions such as Portugal, Greece and Ireland, penetration is much lower. At present, computer ownership tends to be concentrated in certain social groups. A study by WordPerfect and Mori, published in May 1994, suggested that 27 per cent of all UK households had a PC, compared with 47 per cent of households with school children. In theNetherlands, the penetration of PCs into homes rose from 9 per cent in 1989 to 29 per cent in 1993.

Europe is still well behind the US in terms of CD-ROM drives installed in homes. Inteco suggests that the installed base in Western European homes was 2.74 million in 1994, compared with 13.43 million in the US. However, during the course of the next three to four years, Europe is expected to begin catching up with the US, as indicated by Table 2 below. This growth will be largely thanks to an influx of low-priced, consumer-range computers with integrated CD-ROM drives into retail outlets throughout Europe.


Table 2: Installed Base of CD-ROM Drives in Homes (millions) 

                      1994      1995      1996      1997      1998    ----------------------------------------------------------------    Western Europe      2.74      9.04     17.69     26.85     35.96    USA                13.43     21.96     29.89     36.43     42.18        Source: Inteco    

3.2 North America

The commonly quoted figure for households with computers in the US is around 35 per cent, although a recent report by Odyssey Homefront suggested that the real figure was closer to 27 per cent, once outdated and unused models had been factored out. Certainly, the number of home computers capable of playing multimedia CDs is much lower.

The US Electronics Industry Association undertook a study of consumer attitudes to multimedia in Autumn 1994. The survey of 1,500 randomly selected US homes indicated that nearly half of all adults were familiar with the term `multimedia'. This in itself is not particularly exciting, as multimedia has become a somewhat meaningless phrase, or at least can be understood to mean many different things. More interesting was that eight per cent of households had multimedia-capable computers. Reflected nationally, this would imply an installed base of around 7.5 million multimedia computers in homes. A further nine million homes intended to buy a computer in the next 12 months, 53 per cent of which planned to use it for entertainment and 55 per cent for school work.

Europe Online has estimated the penetration of PCs into US homes at 36 per cent, and suggests that around 4 million PC homes (around 8 per cent) were already online via a modem and the telephone in 1994. This figure was expected to rise to 10 per cent by 1996. In the UK, on the other hand, Inteco estimates that only 3 per cent of UK households were using home PCs for electronic communications in 1994.

Home computer purchases have been growing steadily in Canada over the last few years, with an increase of 18 per cent between 1992 and 1993. According to Statistics Canada, more than 2.3 million households (representing some 23 per cent of Canadians), had computers in 1993, having risen from over 2 million in 1992. A survey by Decima Research of Toronto at the end of 1993 suggested that the proportion of Canadian homes with computers might be as high as 30 per cent, compared with six per cent of homes with fax machines. The survey also suggested that a home computer was the average consumer's next intended technology purchase.

The key factors in bringing about growth in the Canadian home computer market are thought to be pricing, ease of use and availability of a wide range of software. Evans Research of Toronto, however, suggests that much of the growth is attributable to the widespread establishment of home offices. This has been faster in Canada than in the US because of favourable tax benefits. Evans Research estimates that 364,900 units were sold into homes and home offices in 1993.

3.3 Japan

In Japan, the penetration of computers into homes is still relatively low. At the beginning of 1994, an estimated 10 per cent of Japanese households owned a PC (source: Nikkei Weekly, 7.2.94). Retailers and manufacturers in Japan believe that the home market represents a huge opportunity, and are targeting family users.

In Autumn 1993, Apple Computer Japan released its Performa range of easy-to-use computers in Japan, packaged with word processing and other basic applications software and designed for family use. The computers are being sold through suburban electronics retailers, and nearly 70 per cent of buyers are estimated to be computer novices. Retailers such as Step Co. and Sofmap Co. have re-designed some of their outlets and opened new ones intended to appeal to consumers and non-specialists rather than computer buffs. Retailers and manufacturers have also been targeting the schools market, although teachers have so far been unenthusiastic. 

4. CONSUMER CD-ROM AND MULTIMEDIA CD

4.1 Who Buys?

Whilst it is important to look at the installed base of home computers and CD-ROM drives when assessing the consumer market, their significance can be over-stated. It has been suggested that many multimedia-capable computers are being bought for features other than CD-ROM use and that many built-in CD-ROM drives in homes are unused. A recent consumer CD-ROM survey by Dataquest indicated that only 46 per cent of consumers buying MPCs with bundled software went on to buy further titles. And, of those who bought hardware with no bundled software, 58 per cent bought titles to go with it. This implies that some 42 per cent bought MPCs with no immediate intention of using the CD-ROM drive.

Who, then, is buying CD-ROM titles for their homes and why? Inteco, who recently interviewed 11,500 people in the UK, France, Germany and Italy, suggests that the impetus will come from `people's educational aspirations for their children'. A high disposable income is an equally important characteristic of the CD-ROM consumer, however. A study of new media use in the Netherlands suggested that 64 per cent of users were male and that users tended to be well-educated, white-collar workers. The survey was carried out in September 1993 and involved interviews with 1,300 people aged 15 upwards. The most popular products were floppy-disk based, with the railway guide, tax guide and road map on disk gaining the top three places.

Another study by BIS indicates that early CD-ROM adopters are as avid in their consumption of titles as were CD-Audio adopters in the early 1980s. BIS carried out a survey of 150 purchasers of multimedia computers and CD-ROM upgrade kits in Germany, France and the UK. On average, early adopters had bought 14 titles within the first year of ownership, whilst ten per cent had bought up to 30 titles in that time. Multimedia computers were used on average between 13 and 18 hours per week, although usage was greater amongst households with children. The study also found that time spent on multimedia computers meant less time spent on other screen-based activities, such as television viewing and playing videogames. 

4.2 Market Size and Sales

A June 1994 report by Simba Information on the market for multimedia titles suggested that revenues would reach US$ 394m (ECU 331m) by the end of 1994, representing an increase of 77 per cent over the previous year. Consumer titles, which accounted for the bulk of sales in 1993, were expected to generate revenues of US$ 319m (ECU 268m) by the end of 1994. Table 3 shows Simba's breakdown of revenues for 1993 and 1994.


Table 3: Multimedia Title Sales, North America (US$m)

           Consumer       Education       Business          Total    1993       172             40              10         222 (MECU 187)    1994       319             55              20         394 (MECU 331)        Source: Economics of Multimedia Title Publishing, Simba, 1994    

Other than games titles, the best-selling consumer products seem to be encyclopaedias and general reference. Microsoft's Encarta encyclopaedia has been a best-seller in both the US and Europe. British sales of the title reached 100,000 in 1994. Microsoft expects that this will increase with Encarta 95, a UK version of which will contain up to 60 per cent British material. Film reference titles such as Cinemania have done well in Europe, as have Dorling Kindersley's The Human Body and The Way Things Work. Children's interactive story discs remain popular, with Broderbund one of Europe's most acclaimed producers. There is still a lack of reliable figures for multimedia title sales in Europe, however, probably the kind of critical mass achieved in the US had not yet been reached in Europe during 1994.

The home and schools markets for educational CD-ROMs are clearly linked in that many titles can be sold into both, although the two markets are not necessarily inter-dependent. In the US, sales of educational titles to schools is set to rise from around US$ 46m (ECU 39m) in 1993 to US$ 325m (ECU 273m) in 1998 according to Simba. Table 4 shows the educational titles which did best in 1993 as mass-market products.

Consumer CD-ROM sales in the US amounted to US $200m (ECU 168m) during 1993 (including multimedia and non-multimedia titles), according to the Software Publishers Association. `Content-based' products such as education and information products accounted for around 70 per cent of the total. During the first quarter of 1994, sales were US$ 135.8m (ECU 113m), up by 366 per cent since the same period in 1993. Around 4.44 million discs were sold during the quarter, and education and information titles accounted for 56 and 60 per cent respectively.

In terms of unit sales, Multimedia Marketing in California says that successful entertainment titles sold an average of 12,000 copies each in the US in 1993, whilst the top five best-selling titles (excluding games) sold over 100,000 units in the same year. Simba estimates the average retail price of CD-ROM titles is US$ 49.95 (ECU 42), although prices are falling rapidly. From a title at this price, gross revenue per unit would be around US$ 14.98 (ECU 12.59) and net revenue US$ 11.82 (ECU 9.93). Development costs vary widely, but Simba estimates that the average is around the US$ 300,000 (ECU 252,000) mark.

In both consumer and education markets, the best platforms for multimedia publishing are multimedia PCs (MPCs) and Mac computers, according to Simba. Opportunities for publishing on other platforms are much more risky, with proprietary, dedicated players having little impact in education and business markets. (See table 5.)

Although the assessments in table 5 were made with the North American market in mind, they can be applied fairly readily to the European market. The relative opportunities for educational titles on Mac and MPC vary from country to country, with PCs dominating in UK schools, for example and Mac in French schools.


Table 4: Top 10 Mass Market Educational CD-ROMs in the US, 1993

  Title                   Publisher                Format         Retail      Units                                                                    Sales    ----------------------------------------------------------------------------------    Encarta                 Microsoft                CD MPC         $7.5m       69,000        Compton Int             Compton's New Media      CD MPC         $4.8m       43,000    Encyclopaedia     Upgrade        Where in the World      Broderbund               CD MPC         $1.8m       26,000    Is Carmen Deluxe        Compton's Family        Compton's New Media      CD MPC         $1.3m        5,100    Encyclopaedia        Dinosaur Adventure      Knowledge Adventure      CD MPC         $1.3m       26,000        Just Grandma and Me     Broderbund               CD MPC         $1.28m      30,000        Arthur's Teacher        Broderbund               CD MPC         $1.1m       24,000    Trouble        The Animals             Software Toolworks       CD MPC         $1.1m       16,000        Dinosaurs               Microsoft                CD MPC         $0.88m      14,000        Global Explorer         DeLorme                  CD MS-DOS      $0.875m      7,765    ----------------------------------------------------------------------------------    Source: PC Data/The Bookseller    

Table 5: Prospects for Multimedia Titles

                   Consumer         Education         Business    -------------------------------------------------------------    MPC              Excellent          Good            Excellent    Macintosh          Good           Excellent           Fair    OS/2               Poor             Fair              Fair    MMCD               Poor             Poor                *    Sega CD          Excellent          Poor              Poor    3DO                Fair             Poor              Poor    CD-i               Fair             Fair              Fair     -------------------------------------------------------------    Source: Simba Information               * Insufficient data    

In Europe, signs of a major take-off in consumer CD-ROM sales are now apparent, although not yet on a scale comparable with the US. If the European base of home CD-ROM drives does grow as Inteco predicts (see Table 2 above), it is excellent news for the CD-ROM and MCD title market in Europe, which currently lacks the mass potential offered by the US. Not surprisingly though, the European and US markets will remain fundamentally different, with language barriers and fragmented markets making it almost impossible to achieve the kind of per unit sales experienced in the US. Export markets are likely to offer considerable opportunities, although mainly for cultural and edutainment products rather than games. In the short term the best export opportunities will be for English-language products. Export markets will emerge slowly in Latin American, African and Middle Eastern countries, constrained by low levels of computer ownership in homes.

Europe is already an important import market for consumer CD-ROM, and this has been reflected in international alliances and joint ventures to exploit the opportunity. A recent example is Olivetti Telemedia, which has formed a joint venture with the Californian company StarPress Multimedia to develop and distribute CD-ROM titles in Europe.

5. CONSUMER ONLINE

Consumer online has a relatively brief history in Europe - unlike the US, where companies like CompuServe, Prodigy, America Online and Delphi are well established in the consumer sector. CompuServe was until recently Europe's only serious player, and even CompuServe had not made much headway outside the UK, France and Germany.

There were an estimated 250,000 consumer online subscribers in Europe in 1994, compared with around 5 million in the US in the same year. Three major players accounted for the majority of US subscribers: CompuServe (with an estimated worldwide subscriber base of 2.5 million), Prodigy (over 2 million) and America Online (between 1 and 1.25 million). America Online has recently achieved rapid growth, and together CompuServe, Prodigy and America Online are achieving growth rates of up to 10 per cent a month. The other two key players in the US market are GEnie and Delphi Internet, both of which have a rather smaller subscriber base (200,000 and 115,000 respectively). It is thought that consumer online users often subscribe to more than one service, although there are no figures to prove this.

1994 was an interesting year for consumer online in both the US and Europe. The European market became the focus of serious attention and there were several new service announcements. In November 1994 Microsoft made the dramatic announcement that it was to enter the consumer online market with the Microsoft Network. Consumer online has been the focus of considerable industry and press attention ever since, and there have already been major acquisition and investment announcements.

AT&T is buying Ziff-Davis' Interchange Network, whilst TCI has bought a 20 per cent stake in the Microsoft Online Services Partnership for US$ 125m (ECU 105m). TCI plans to offer the service via its cable network, hoping to attract some of the 11 million subscribers which it already has for its cable TV services. Meanwhile, Microsoft has taken a minority stake in UUnet, (one of the largest Internet access providers in the US) and Bertelsmann has bought a 5 per cent stake in America Online. Bertelsmann and Amercia Online have also set up a 50/50 joint venture company to market Amercia online and Bertelsmann products in Europe.

5.1 Players in the European Market

Of the eight consumer online services described in this section, only three are being developed exclusively for the European market (Europe Online, Italia Online and UK Online). The other players are either established in the US and expanding into Europe (such as CompuServe), or are launching new services for an international market (Microsoft Network and Apple eWorld, for example). Delphi Internet, although owned by the British company News International since 1993, has the vast majority of its subscribers in the US, and did not launch in Europe until September 1994.

In spite of their various origins and geographic reach, what is striking about the services described here is their similarities rather than their differences. They all emphasise the importance of local content, and many of the new services will offer information providers more flexibility and higher revenue shares than traditional hosts. The content range offered (or promised) by these players is also similar, with news and weather, sports and entertainment listings, special interest magazines and product catalogues amongst the most popular offerings.

Consumer online companies are trying to harness the Internet phenomenon rather than allowing it to erode their markets: Internet access has been promised by most of the major players. Providers have worked hard at creating friendly interfaces and search tools - with varying degrees of success. In this respect, it is probably easier for new players to break the mould with new and exciting graphical interfaces than it is for the older players to re-design existing software.

CompuServe

At the end of 1994, CompuServe had 2.4 million customers worldwide, 200,000 of which were in Europe and 70,000 in the UK. In February 1995, Infotecture Europe reported that the number of subscribers had grown to 85,000 in the UK and 90,000 in Germany. The next year or so is expected to be a major growth period, and CompuServe hopes to reach a user base of 200,000 in the UK alone during 1995. An aggressive marketing and advertising campaign is to be launched, with software bundled with hardware and modems. CompuServe also cut connect charges significantly in February 1995 from US$ 9.60 (ECU 8.06) to US$ 4.80 (ECU 4.03) per hour for a 14.4 kb connection. At the same time, the monthly subscription was increased from US$1 (ECU 0.84) to US$ 9.95 (ECU 8.36).

Limited access to the Internet is already available and full access will be provided during 1995. One of CompuServe's key aims is to provide the easiest interface to the Internet.

Interfaces are available in English, French, German and Spanish, and CompuServe is continuing to develop its base of local content for Europe. During 1994, for example, an additional 32 UK information products were introduced, although there are still no UK stock quotes. A UK shopping service will be launched in 1995. An accompanying CD-ROM magazine is produced every couple of months and may become the most important entry point for customers. Machine translation is already offered on some forums, and this facility will eventually be extended to e-mail. Work is also taking place on higher communications speeds, and trials with US cable companies are running on speeds of 56kbits.

Europe Online

Europe Online was founded on June 1 1994 by a consortium of publishers (Matra Hachette, Burda and Pearson), telecoms experts, banks and government credit organisations (Dr Schwartz-Schilling GmbH, Meigher Communications, SNCI, BCEE and several investment companies). The service will offer European, national and local content, down to the level of city information services. There will be free and open access to all information providers and gateways to the Internet, videotex services and other online hosts. The main service areas will be communications (including bulletin boards and chat services), information, transactions and entertainment. Europe Online is encouraging information providers to take an active role in business development on the platform and to negotiate on pricing and revenue shares. The service is still in a development phase, although having licensed the Ziff Davis Interchange platform, Europe Online hope to launch during the second half of 1995.

Delphi Internet

The US company Delphi Internet was purchased by News International in 1993, and made clear its intention of moving into the European market early in 1994. A UK service was launched in September and Delphi claimed to have signed up around 4,000 customers within a couple of months of launch. Co-operation will take place within the News International group to bring local information products to the consumer online market. The Times and Sunday Times are obvious examples, but Harper Collins' Book World will also enable users to read about forthcoming titles, chat with authors, download snippets and order books. Off-line reading tools, browsers and a Windows interface will all be important elements of the service. Like many of the other players, Internet access has formed an important part of Delphi's strategy and local World Wide Web pages will be offered to subscribers.

Italia Online / UK Online 

Olivetti Telemedia is involved in both of these ventures, and set up the Italian company with the newspaper publisher and business information provider, Il Sole 24 Ore. The UK company has Hermann Hauser, one of Acorn Computer's co-founders, as chairman. Italia Online was launched in September 1994, and one of its most important aims is to provide access to Italian-language sources and exclusive content, especially content which is not available on the Internet. The service will be marketed through a print magazine, which will be distributed with access software via news stands. Business and financial services will be offered as well as consumer information and entertainment, although Italia Online is not seeking to compete with existing business information hosts. There will be a strong emphasis on catalogues and online product ordering.

UK Online, due to be launched in mid-1995, is aimed at the home MPC owner and is intended to have mass consumer appeal. The service will apparently act more as an electronic publisher than an online host, and UK content providers are currently being sought. In particular, UK Online is looking for news, weather, cinema information and TV listings.

Apple eWorld

Apple eWorld was launched in the US in October 1994 and is due for release in all major European countries during 1995. The service will initially be offered to Apple Mac and Newton users, although a Windows version will be launched in 1995. eWorld's friendly graphical interface (based on the concept of an electronic community space, with a news stand, library and so on) has attracted considerable attention and the service is expected to appeal to both business and home users. Reuters and Individual Inc. have already been signed as information providers, and e-mail access to the Internet is provided. Telnet and file transfer protocol (ftp) capabilities will be introduced in 1995.

The Microsoft Network

This service was announced in November 1994 and was initially to be launched at the end of 1994. A later announcement said that Windows 95, which will incorporate the Microsoft Network software, would be shipped during the first half of 1995. Commentators are now suggesting that it may be August before the software is released, but no official launch date has been announced.

Microsoft is actively seeking content providers, and it has been suggested that up to 70 per cent of information service revenues will be offered back to providers. Microsoft is also trying to attract content providers with promises of a flexible approach to pricing, and has engaged the UK consultancy Electronic Publishing Services to help identify suitable candidates.

In spite of bullish comments made by other online providers and Internet software companies, the consumer online community is somewhat shaken by the prospect of Microsoft Network software being incorporated into Windows 95. America Online has already suggested that the move might represent unfair advantage. Bearing in mind that Windows 3.1 has been installed on some 50-60 million PCs since its launch in 1992, these fears are unsurprising. Microsoft hopes to sell around 20 million copies of Window 95 within the first year of launch. This should provide Microsoft with the immediate potential to claim a major stake in the consumer online market, even if only a relatively small proportion of Microsoft 95 users actually subscribe to the online service.

Ziff Interactive

Another US player likely to enter the European market in 1995 is Ziff Interactive, (now owned by AT&T), with its Interchange Online Network. The service has apparently been built as a publishing platform rather than an online service and will identify strongly with its user groups. Whilst Interchange will provide access to generalist news, sports and entertainment, the main focus of the service will be on computer interests, reflecting Ziff's magazine publishing strengths. Interchange will be launched in the US early in 1995 and in Europe after that.

5.2 The Future of the Market

As part of their market calculations, Europe Online estimates that the potential penetration of consumer online into homes will be 4 per cent of the installed PCs in 1995, growing to 10 per cent or more in 1996. Microsoft's Bill Gates has said that 40 per cent of Windows users have modems, but fewer than a quarter of these modem owners currently use online services -leaving a huge unexploited market.

As yet there are few reliable pointers as to the potential size of the consumer online market in Europe. But it is already possible to perceive the factors which will affect the success of players in this market. It will not be long before the level of competition in the European market resembles that in the US. And European consumers are likely to accept new online services less readily than their US counterparts. Value for money, quality and relevance will all be key deciding factors in the choice of service.

Table 6 below indicates some of those features which will be essential for providers of consumer online services and those which are desirable. It also suggests some of those features which are likely to come onto the market in the future. The table is not intended to provide an exhaustive list, but reflects some of the key concerns of users and producers.

6. CONCLUSIONS

Opportunities in the European home market are only just emerging, but there are now real signs of a boom in consumer CD-ROM. Penetration of information technology into European homes, although lagging behind the US, is strengthening rapidly and the retail sector is taking its cue from the US in promoting multimedia hardware and software.

The outlook for consumer online in Europe is rather less certain: there appears to be a great deal of market potential, but few solid indicators as yet. Many of the European services dealt with in this paper are yet to be launched, and widespread acceptance amongst consumers should not be taken for granted. Nevertheless, if the European market develops as strongly as that in the US - and industry commentators suggest that this will be the case - then there will be a huge, currently untapped potential to be exploited.

Competition in the emergent consumer online market is already strong, and operators will need to work hard to differentiate their services from others. Once Windows 95 has been shipped, the Microsoft Network will have a heavy impact. As the market gets more crowded, exclusive content will be less important than editorial control and the ability to customise. Major national and international sources are likely to become available across a range of online services, with specialist and regional sources offered to niche markets. The prospects for information providers are good; service operators have realised the importance of quality content and promise to offer more flexible deals and higher revenue shares as a result.


Table 6: Competing in European Consumer Online: Key Factors for Success

  • Essential strong local and regional content
  • local language interfaces and content
  • flexible relationships with a variety of information providers
  • active editorial control by the online host
  • strong consumer-oriented content
  • graphical, intuitive interface and search software
  • access to Internet for e-mail and Usenet groups
  • special interest forums and discussion groups
  • -------------------------------------------------------------------------------------
  • Desirable access software bundled with hardware or mainstream applications software
  • interconnection with other proprietary communications and information networks
  • full Internet access
  • multimedia-capable network and multimedia content
  • cross-file searching
  • popular administrative functions (banking, bill payment, reservations/bookings, etc.)
  • local information and listings
  • computer-interest services with downloadable sample files
  • accompanying media resources (printed magazine, CD-ROM, etc) 
  • -------------------------------------------------------------------------------------
  • For the Future filtering software, intelligent information management agents
  • hypertext links between related documents and files
  • single system for product and service ordering, billing and payment
  • real-time machine translation for conferencing and communications
  • Source: Information Group, Policy Studies Institute


    It is too early to tell what effect the Internet will have on the demand for consumer information and entertainment services. Home Internet access is certainly growing rapidly (Demon estimates that around 40 to 50 per cent of its UK dial-up customers are home users), but this may not have a negative impact on the take-up of consumer online. Much of the content available via online services is not yet available on the Internet, whilst locating relevant information on the Internet is still a considerable challenge for the average home computer user.

    By offering Internet access as part of their package, consumer online vendors hope to sell their services as a painless route to the Internet. Again, it may be difficult to fulfil the promise. Meanwhile, encyclopaedias and general reference titles are becoming more common on the Internet. As yet this does not appear to be having a serious effect on disc sales. Much will depend on the development of broadband Internet infrastructure and the establishment of commercial functions aimed at the consumer market.

    National market size and language are important issues for both online and CD-ROM companies in Europe. Even if the penetration of technology into European homes catches up with the US, European companies are unlikely to achieve the same subscriber numbers or unit sale volumes as their American counterparts. As discussed in section 4.2 of this paper, exports can help make up the numbers, but short-term opportunities tend to lie mainly with English-language products. Having said that, European players in non-English speaking countries are less likely to suffer competition from international companies and can therefore expect to achieve greater national market share.

    The relatively small scale of national European markets inevitably affects production investment and pricing. The European information and multimedia industries are characterised by a large number of small companies, which are often badly equipped to take the risks associated with new markets. Nevertheless, there are opportunities for European companies to offer language and culture-specific services, products based on national heritage and purchasing services for goods available in the national market. As the consumer market strengthens, new opportunities are also likely to emerge for regional and city-based online services and for multimedia kiosks.

    Recent media coverage and enthusiasm has certainly helped to sell home PCs, consumer CD-ROM titles and the concept of online computer communications. However, it has also encouraged high expectations amongst consumers which, at present, cannot always be met. Anecdotal evidence suggests disappointment amongst consumers in many of the early CD-ROM reference, edutainment and children's products. Many consumer online services appear mundane in both functionality and content, and for many home PC owners, signing up and connecting up to an online service is still a complex process.

    KEY SOURCES

    The Bookseller, J. Whitaker & Sons (tel +44 171 836 8911, fax +44 71 836 2909)

    Demand for Interactive Multimedia in the Home, Dataquest 1994 (tel +44 1494 422722, fax +44 1494 422742)

    The Economics of Multimedia Title Publishing, SIMBA Information 1994 (tel +1 203 834 0033, fax +1 203 834 1771)

    EPJournal, EPS Publications Ltd (tel +44 171 490 1185, fax +44 171 490 3706)

    Information World Review, Learned Information (tel +44 1865 730275, fax +44 1865 736354)

    The Interactive Home, Inteco 1994 (tel +44 1483 751777, fax +44 1483 751496)

    Interactive Media International, Interactive Media Publications (tel +44 171 490 1185, fax +44 171 490 3706)

    Multimedia Yearbook 1995, Interactive Media Publications (tel +44 171 490 1185, fax +44 171 490 3706)

    Online Information, proceedings of the 18th International Online Meeting, Learned Information 1994 (tel +44 1865 730275, fax +44 1865 736354)

    NOTE:

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