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AOL struggles to claim territory in Latin America

The delay of AOL Latin America's public offering splashes cold water on the region's emerging Internet market and raises questions about the Internet leader's efforts abroad.

The delay of AOL Latin America's public offering yesterday has splashed cold water on the region's emerging Internet market and has raised questions about the Internet leader's efforts abroad.

The Fort Lauderdale, Fla.-based AOL Latin America, a joint venture between Venezuelan media giant Cisneros Group and America Online, yesterday slashed its IPO price to $8 to $10 from its previous $15 to $17 range. The company also delayed its IPO until later this week or next week to persuade skeptical investors to buy its stock.

The company originally filed in January to raise $575 million in its IPO. Yesterday, the share cut pushed the value down to $250 million.

One major issue behind investor caution lies in AOL Latin America's competitive position in the region, where it lags behind more entrenched players, analysts say. In Mexico and Brazil, AOL Latin America faces local services including Universo Online (UOL), Telefonica de Espana's Terra Networks and Telefonos de Mexico.

The combination of a risky market and the challenges of starting behind entrenched leaders may present a difficult climb for AOL Latin America, not unlike the struggles the Internet service provider (ISP) faces in Europe and Japan.

"Companies (in Latin America) have taken to heart what AOL did in the U.S. and said, 'That's not going to happen here,'" said David Simons, managing director of Digital Video Investments, an institutional money management researcher. "What's happening in Latin America is happening in Europe."

AOL's samba
The Latin American Internet market remains in its infancy. PC, and even telephone, penetration remain low among the general populace. Regional economies are often volatile, as the rifts between the wealthy and the poor increasingly expand.

At the end of 1999, only 2 percent of Latin Americans were online, with numbers expected to hit 12 percent by 2005, according to a study conducted by Net research company Jupiter Communications. Only 4 percent of Latin American households own computers; that figure is expected to reach 13 percent by 2005, the study said.

"Most residents can't even get the Internet, let alone a phone," said Abhishek Gami, an equity analyst at William Blair. "It's not what we expected in terms of an Internet market."

Nevertheless, Latin America remains a nascent market that could potentially explode. A rapidly developing region such as Latin America could offer many opportunities for U.S. Internet companies trying to get in on the ground floor. And capitalizing off a small percentage in this highly populated region could help the company reap considerable revenues.

"It's the leading edge of the last frontiers in the development of telecommunications," Simons said. "It's a huge population, which means relatively small percentages translate into big numbers."

Despite the potential, AOL Latin America has gotten off to slow, late start. The company had 129,000 subscribers in Brazil as of June 25.

A familiar story
Part of AOL's headaches come from the recent entry of free ISPs into the region. UOL, the market leader in Brazil, launched a free ISP shortly before AOL Latin America launched its service in Brazil. UOL's subscriber numbers demonstrate the difficulty in dethroning a leader. It has reported having roughly 1 million paid subscribers and 2 million free ISP subscribers.

Despite these figures, AOL Latin America continues to pursue "slow, organic growth, which could prove to be more healthy," said Lucas Graves, an analyst at Jupiter Communications. "A lot of these enterprises may fall by the wayside while AOL chugs along."

AOL's battles against entrenched, regional Internet services are not new. The company has had its share of headaches in Europe and Japan, two regions where it has faced stiff competition and regulatory barriers that favor local services.

In Europe, for instance, Net users have to incur potentially expensive fees each time they go online. That's because people must pay metered phone rates for local calls, whereas local phone calls are billed as a flat fee in the United States.

This telecommunications structure has sparked the launch of numerous free ISPs and has favored the local phone monopoly. Many of these local differences have been problems for AOL.

"The competitive landscape is very different, particularly in Europe, which is a very heterogeneous marketplace, full of regions as opposed to broad national distribution," said Jordan Rohan, an equity analyst at Wit SoundView.

Many of AOL's U.S. competitors are also aggressively competing in the same regions. Web giant Yahoo, for example, has made significant inroads in Japan and Europe. The portal has developed a model of creating local versions of its site and then marketing them heavily in specific areas.

An IPO still means cash
In contrast to AOL, Web portals do not need to invest resources in building an Internet access service, which requires modems, network expenses, billing and customer service management, Rohan added.

"Yahoo was the first mover in many of the Asian and European territories," he said. "And it does not rely on an ISP service, which takes longer to build."

Regardless of region, international expansion remains crucial for Internet companies to continue growing aggressively.

Despite skepticism over AOL Latin America's market position, an initial public offering could give the company the boost it needs to compete with local rivals.

"The IPO is not for just cash or capital," William Blair's Gami said. "It's to give themselves currency to acquire homegrown talent and build their own business to compete side-by-side with local players."