Commentary: Why Italy May Squander Its Net

Future (int'l edition)

With pricey phone lines, paltry R&D, and a rigid labor market,

e-business is lagging

Italy certainly looks poised to develop an Internet economy: Dot-com mania has gripped

the Milan stock exchange. And when it comes to the next big trend--the mobile

Internet--Italy seems to have a big advantage. Every other Italian owns a mobile phone.

Italy's market for cell-phone services, now Europe's largest, is growing at a 28% clip and

is expected to top $12.5 billion this year, according to International Data Corp. ''It's a gold

mine,'' declares Michele Boccaccio, director of the new research and development center

that Finland's mobile phone giant, Nokia, has set up in Sicily.

Look a little closer, though, and you'll discover that Italy's New Economy gloss is only a

thin veneer. In fact, the country is in danger of squandering an unparalleled opportunity to

play a leading role in Internet innovation. While the Net is already changing the way

companies around the world do business, Italy lags behind. Only 8% of Italy's population

has an Internet connection, vs. 15% in Germany and 23% in Britain. And just 14% of

Italian businesses use the Net to communicate with suppliers--way less than the European

average of 25%.

RIGHT NOISES. That's because Europe's fourth-largest economy suffers from an

outdated, expensive telecommunications infrastructure, inadequate spending on research

and education, and a rigid labor market. In short, Italy has failed to modernize its economy

as quickly as the rest of Europe. It's even trailing Spain, Portugal, and Ireland.

Government and industry leaders need to tackle these problems--quickly--to keep Italy

from falling even further behind.

It's a tall order. Italy ranked just 15th out of 17 European countries in attractiveness to

investors in a recent survey by Rome consultancy Business International. It lagged

Portugal and narrowly beat Greece and Turkey. One reason: The cost of a 34-megabit

leased phone line, at $5,929 per month, is 70% higher than the European average and four

times higher than in the U.S. R&D spending is just over 1% of gross domestic

product--half Europe's average and one-third of the U.S. level. In Italian elementary

schools, 51 students share each computer, vs. 31 in France, and 11 in Finland.

To be sure, the government of Prime Minister Massimo D'Alema is making the right

noises about the Internet. Stefano Passigli, vice-minister of technology innovation, says

the government plans to wield the Internet to modernize the economy. But he and other

officials fail to grasp the speed at which the Net economy is moving. Take the effort to get

schools wired: D'Alema's government hopes to spend $237 million over the next three

years to increase the number of computers in schools. In contrast, British Prime Minister

Tony Blair plans to spend $2.7 billion over the same period.

To give Italy a chance, D'Alema must speed liberalization and open the door to greater

competition--especially in telecoms. That's vital to lowering prices and creating a favorable

climate for Internet startups. Indeed, mobile-phone use has boomed in part because service

for fixed-line phones is poor and expensive. To support a Net revolution, Italy needs a

strong fixed network, too. ''The basic infrastructure will be put under severe stress over the

next few years,'' says Rodolfo De Benedetti, chief executive at CIR, a Milan holding

company with venture capital and incubator investments. ''We're starting late. It's a major

drawback.''

What's more, conditions for entrepreneurs remain unfavorable and need a radical overhaul.

Problems range from sky-high taxes to red tape. After social security and income taxes

are deducted, Italians take home only 49% of their gross pay. Political infighting has

slowed economic liberalization--a baseline condition for a Net economy.

The good news is that Internet use, while lagging behind other countries, is on the rise.

The country's online population tripled last year after telecom upstart Tiscali began

offering free Internet service in November, 1998. But it doesn't help to have Italians

surfing the Net if the country's entrepreneurs flee to more dynamic shores like Silicon

Valley.

D'Alema needs to benchmark his country against Finland and the Netherlands--countries

where competition is fierce--if he wants a bigger slice of the Internet pie. If Italy doesn't

start moving as fast as the competition up north, it's likely to remain stuck on the wrong

side of the Net divide--no matter how many cell phones you see on the street.

By Gail Edmondson