Dr. Richard Hawkins doesn't buy online. In fact, his home computer is not even connected to the Internet. No Luddite, Hawkins, a fellow at the University of Sussex, is a specialist in information technology and electronic commerce. So why doesn't he get wired at home?

For Hawkins, who lives in Lewes, near Brighton, England, it comes down to cost. "If you look at why the bars on the graph [for e-commerce growth] are so long in the U.S. and why the bars in Europe are so short, all you have to do is look at the cost of telephony," explains Hawkins. "Locally metered calls mean that if you get on the Internet or you have kids that get on and stay on you are going to have whacking big phone bills." Europe may have liberalized its phone market but towns like Lewes still have only one provider of local service.

The new high-speed Internet access services--such as those offered over cable networks--aren't available here. The fastest option is an ISDN line from the phone company, but Hawkins says he has ruled that out because he doesn't want to be locked into a contract that includes expensive connection charges. And, since he pays for every second he stays on the line, he keeps calls short and boycotts home use of the Internet. Cost and infrastructure issues are just two reasons why Europe has fallen behind the U.S. in electronic commerce. Other hurdles include tariffs that penalize people for doing business online, the existence of 15 different value-added tax regimes, regulatory uncertainty, a huge IT skills gap, and cultural differences that hinder the development of new enterprises.

All is not bleak. Europe is gaining ground and projected growth rates for e-commerce are phenomenal. But the reality is that more people talk about online business than actually conduct it. Few are as yet basing their business on it and the effects of e-commerce are not yet touching the everyday lives of most people.

Total Internet commerce in Western Europe in 1998 accounted for a mere .1% of total domestic expenditure, according to a recent report from technology consultancy International Data Corp. (IDC).

INTERNET SHOPPING GAP Percentage of adults who bought products over the Web in 1998 U.S. Sweden Finland Netherlands U.K. Germany Ireland Italy Spain France 10.1% 3.8% 3.7% 2.5% 2.0% 2.0% 1.4% 0.7% 0.7% 0.7% Quarterly Web Buyers as Share of Adult Population by Country

In the U.S. the figure is .5%, and 10% of the population is buying online compared to an average of only 1.5% in Europe (see chart).

Like Hawkins, German Internet entrepreneur Wilfried Beeck sees telecommunication costs as the main culprit holding back e-commerce in Europe. Beeck, a board member of Intershop, a leading provider of online shopping solution software, notes that U.S. consumers spend three times as much as Europeans online. The reason for the gap is that even though increasing numbers of Europeans are going online, they are not buying online.

A new business model which provides free Internet access and makes money on the phone charges gained British consumer electronics retailer Dixons over a million customers in a matter of months. Similar services are now being launched all over Europe. But most new recruits limit their time online because as much as 81% of the cost of Internet access in Europe is due to telephone charges.

Beeck says he can't blame the phone companies for taking advantage of a regulatory climate that allows them to get away with charging people by the minute for Internet access. But consumers are starting to fight back by boycotting Internet services. The latest protest took place earlier this month when consumer groups across Europe called a 24-hour strike to pressure phone companies to move to a flat local rate. Some phone companies are starting to respond. For example, British Telecommunications recently launched a service that gives a grace period on local call charges, but only on weekends and only for customers who have signed up for a particular type of Internet access service it offers. Consumers may have to live with such limited offers for a while. If recent decisions by Europe's telecommunications regulators are anything to go by, it will probably take a few years for Europe to move to a flat rate.

Meanwhile, high phone line prices continue to hold back business-to-business e-commerce, according to the Paris-based Organization for Economic Cooperation and Development. "There are still significant barriers to electronic commerce where competitive network infrastructures have not been developed and there is still insufficient local access competition for infrastructure supporting e-commerce," according to a June 16 presentation at an O.E.C.D. meeting in Oslo, where European policymakers were urged to take action.

Alternatives to phone company-provided lines exist in major city centers, but it has been a hard fight to build them, says Yves Blondell, a consultant at consultancy T-Regs in Zellick, Belgium, who helps new market entrants gain rights-of-way. He points to Milan, where a city-controlled company began installing its own high-speed fiber network, then issued an edict that no one else had the right to dig up the same streets for two years. "They were very clearly protecting their own venture," says Blondell. It took two years and a complaint to the European Commission's competition directorate for the phone companies Blondell assisted to win the right to build competing networks.

As is the case in the U.S., the red tape involved in gaining rights-of-way adds to delays. For example, building a pan-European city-to-city backbone network requires one authorization or building permit per kilometer and potentially thousands of agreements with individual landowners. But at least these networks are being rolled out. Towns like Lewes may never get alternative networks, limiting competition in the local loop, the part of the network reaching the customer's doorstep.

Lack of competition in the local loop is a major issue in Europe because it limits consumer choice and keeps prices high. That was at the heart of the European Commission competition directorate's June 15 decision to investigate further the proposed merger between Swedish phone company Telia and Norwegian phone company Telenor. "There is a real risk that they will create barriers for new entrants to get access to the customers," says Gitte Forsberg, general counsel for Tele Danmark, which is fighting the proposed merger. Denmark, which has opened its local loop to competition, is one of the lowest priced countries for Internet access during off-peak hours, according to an O.E.C.D. study.

Other charges in Europe also make going online more expensive. Consider a recent action taken by Danish banks. National debit cards, which most Danish people use for purchases in the real world, have always been free, but banks decided to charge people who want to use the card for online purchases. Consumer unions loudly protested but after a two-month struggle, the banks decided to slap on the fee anyway. "There is no question this is holding back e-commerce in Denmark," says Stephane Elmer, an IDC consultant specializing in e-commerce and the Internet.

Europe's value added tax system also holds back e-commerce. CDNow, one of the largest Web music retailers, decided to set up operations in Europe so that customers would get faster delivery of CDs. Their warehouse is in the Netherlands so they are expected to pay Dutch value added tax on sales, but once they pass $100,000 a year in European sales the company is expected to start paying VAT to individual European countries, each of which uses a different rate. The company is supposed to anticipate when they will hit the threshold and fill out local language paperwork three or four months ahead of time. Then there is the whole question of how to calculate VAT for digitally downloadable products since it is not possible for the company to be sure where the customer is located. "If we are having trouble with this imagine how it is for small Internet companies," says Naomi Lefkovitz, deputy general counsel for CDNow.

Regulatory uncertainty is also hindering companies operating in cyberspace, says Chris Kuner, a lawyer specializing in Internet issues in the Brussels office of Morrison & Foerster LLP. The European Commission has drafted a directive on e-commerce but key issues remain unresolved: data privacy, content liability, copyright issues, and whether consumer protection laws should apply based on the place where the virtual buyer lives or where the virtual seller is located.
And change will take more than just new legislation. It will require a major overhaul of the education system in Europe and in the way people think and the way they run their businesses. Take the IT skills gap. "The skills problem is higher in Europe than in the U.S. because of the historical lack of educational institutions that spearhead technology such as MIT and Stanford," says Richard Lindh, director of marketing services at Microsoft Europe. By the year 2001 there will be 1.2 million unfilled IT jobs in Europe. This in an economy with an average unemployment rate of 10%. Says Lindh, "The output of the education system is not mapping to market demand in terms of skills profile."

Another drawback is that European businesses are steeped in cultures that stigmatize failure and frown on the kinds of risks necessary for success in the fast-paced Internet sector. Many European companies such as Wolford, the Austrian maker of upscale lingerie, don't sell their products directly over the Internet for fear of upsetting their traditional retail channels. IDC's Elmer says he sees that reluctance as a potential drawback for European companies. "Sometimes the channel no longer adds value," says Elmer. "Companies have to be willing to change along with the new technology. You need an open spirit and the willingness to take risks, and that attitude doesn't exist in Europe."

Along with a reluctance to take risks there has--until recently, at least--been a major lack of risk capital to fund Internet upstarts, a factor which has prevented European companies from growing at the same rate as their American counterparts, says Anthony Daniel, CEO of Italy's Direct S.p.A., which sells computers online. Last year, before the company got an injection of venture capital, it was turned down by Italian banks for a $70,000 loan to purchase new computers even though it had a healthy balance sheet. The reason? Direct S.p.A. rents rather than owns its office space.

But even with adequate funding European companies don't always put their best foot forward on the Web. Consider the example of European sites listed in a recent London School of Economics study which ranked the top 100 corporate websites in the world. Even some of the winners have major flaws. Safeway, a U.K. supermarket chain in the top 100 sites, is described as having "clumsy graphics and poor design." The survey notes that with the exception of a facility which allows online ordering of flowers and cheesecake, interactivity on the Safeway site appears to be limited to creating a shopping list, printing it and taking it to the store. Other top sites listed by the LSE offer no facilities to pay for goods or services online.

Still, IDC forecasts that over the next four years European consumers will shop on the Web more frequently and for a wider range of products and services. Many consumers will increasingly use the Internet to buy expensive goods such as airline tickets and insurance. And a growing number of businesses are expected to be lured by the promise of economies that can be gained by switching from paper, fax or other traditional means of ordering to Web-based transactions. The IDC predicts that total Internet commerce in Europe will roughly triple in each of the next three to four years, leading to market worth about a quarter of a trillion dollars in 2002.

But even at that point, online ordering will account for less than 3% of the total amount of products and services sold on the Continent. And Europe will have to shed a lot of baggage to get even that far.