AOL Struggles in Latin America

FORT LAUDERDALE, FLORIDA (07/10/2000) - As America Online Inc. prepares to take its Latin America joint venture public, documents filed with the U.S. government detail a rather bumpy ride so far for America Online Latin America Inc.

AOL Latin America has over US$50 million in losses, faces a lawsuit from a Brazilian consumer group, is struggling to collect payment from subscribers, is in court to protect its brand name in several countries, and has been forced by providers of free Internet access to slash its prices.

AOL Latin America, a joint venture between AOL and Venezuela's Cisneros Group of Companies, was founded in December 1998 and launched its first and so far only operations in Latin America late last year with a portal and a proprietary online service for Brazil.

The widespread adoption of free Internet access has affected AOL Latin America, which is counting on generating most of its revenue by charging a monthly fee for its proprietary online service, according to a prospectus and subsequent amendments filed recently with the U.S. Securities and Exchange Commission (SEC).

"We are experiencing higher than expected subscriber cancellations in Brazil, presumably because of the availability of free service," the company's prospectus reads.

AOL Latin America is also feeling pressure from fee-based access plans, such as the ones offered by UOL Inc., which are beating the company's subscription prices.

"In reaction to these developments, we reduced our price by 29 percent for our unlimited Internet access plan. Our price is still higher than those of our competitors, and we may need to make further reductions to our subscription fees to be more competitive," according to AOL Latin America.

In all, it seems like AOL Latin America has been so far unable to convince Brazilians that they should shell out money to get access to the company's proprietary online service, which features content and services tailored to Brazil. To that end, the company has hiked up its marketing and advertising spending.

"The availability of lower priced or free Internet services in Latin America may, however, adversely impact our ability to attract and retain paying subscribers, generate revenues and achieve profitability," the SEC filing reads.

Part of the problem might be the availability of free content from a number of sophisticated Web portals, such as the ones from StarMedia Network Inc.; from the joint venture between Microsoft Corp. and Teléfonos de México SA de CV (Telmex); from Terra Networks SA; from El Sitio Inc.; and from UOL -- all of which AOL Latin America mentions as tough competitors in its filing.

"Competition (in Latin America's Internet market) is intense and may increase, which could adversely affect our ability to generate revenues and acquire market share," the SEC filing reads.

As of June 25, 2000, the company had signed up 129,000 subscribers in Brazil, where 5.8 million users had access to the Internet last year, according to New York-based market research firm Jupiter Communications Inc. But most of AOL Latin America subscribers have yet to pay the company a penny because they are still in a free trial period.

In fact, for the nine-month period ending March 31, 2000, 56 percent of the company's revenue -- $2.9 million -- came from the CompuServe Classic subscribers the company acquired from CompuServe in December 1998 for $4 million. However, that revenue stream is steadily drying up -- there were 18,000 CompuServe Classic subscribers in December 1998 but only 6,700 remain in March 2000.

"We believe that our CompuServe Classic subscription base has declined because we have not been marketing the service to retain and increase members," the company wrote in its SEC filing.

AOL Latin America had racked up $53.1 million in losses between December 1998 and March 31, 2000, a figure expected to climb as the company continues investing to expand its operations.

AOL Latin America's revenue stream difficulties have been compounded by a reluctance to pay from the subscribers whose free trial period has ended. About 80 percent of the company's subscribers in Brazil have opted to receive a bill and pay it at a local bank -- an option called "boletos" -- instead of having the fee charged automatically to a credit card.

"A significant number of the subscribers using boletos who have received an invoice have not made timely payment," according to the filing. " We are enhancing our systems to validate billing information for all subscribers, new and existing, that choose to use boletos as a form of payment."

AOL is also waging its battle for Latin American Internet users in the courts, where it is both suing and being sued.

In Brazil, a consumer protection group called ADEC is seeking about $5.5 million in damages on behalf of consumers, related to alleged problems they had with the installation of the AOL Latin America software on their PCs.

AOL Latin America itself is either taking legal action or considering doing so in Brazil, Chile, México, Argentina, Colombia and Venezuela to combat instances of what the company claims are domain name and trademark infringements. For example, the URL http://www.aol.com.br is being used by another company, forcing AOL Latin America to use the longer and more cumbersome http://www.americaonline.com.br/.

AOL Latin America also reports being concerned about the capacity and reliability of the region's telecommunications networks, which could hinder its ability to transmit data between the U.S. and Brazil. The company is also worried about the low penetration of phone service -- both local and long-distance -- in the region, which prevents many potential subscribers from logging on to the Internet. AOL Latin America additionally notes in its filing that barriers such as low credit card usage, faulty postal services and high import tariffs continue to affect electronic commerce, another source of revenue the company has been counting on.

Still, AOL Latin America plans to raise about $374 million by selling 25 million shares of class A common stock at $16 per share, and to launch its proprietary online service as well as accompanying portals in Argentina and México in the third quarter of this year. It also intends to launch a regional portal.

AOL Latin America, in Fort Lauderdale, can be reached at +1-954-229-2100. Its Brazilian portal is at http://www.americaonline.com.br/.

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