Battle For The Net

The rush is on to cash in on Latin America's fast-growing market

The landscape in Sao Paulo, Brazil's largest city, is cluttered with billboards advertising discount rates for Internet services. In Argentina, a brokerage set up by a couple of college buddies is luring thousands of first-time stock buyers into online trading. In Peru, indigenous Ashaninkas line up at public Internet booths to peddle their crafts on the World Wide Web.

Latin America is getting wired. The number of Internet users in the region will grow from 4.8 million in 1998 to 7.5 million this year and 19 million by 2003, according to U.S.-based International Data Corp. E-commerce sales are expected to soar from a mere $167 million in 1998 to $8 billion within five years. "The market is less well developed than Europe, Japan, or Canada," says Jack Davies, president of America Online International, "but there's a bigger upside potential."

To be sure, the Internet faces several structural hurdles in Latin America. Only 1 in 10 people in the region has a phone line, compared with 7 in 10 in the U.S. And with an average gross domestic product per capita of less than $4,000, PCs remain beyond the reach of much of the population. Moreover, few Latin Americans use credit cards--a factor that inhibits online shopping. Import duties and customs delays also discourage e-commerce.

NET FEVER. Even so, the Internet has the potential to transform the way millions of Latins work, communicate, and shop. Consumers will benefit from a wider selection of products, and better prices, as e-commerce spurs greater competition among retailers. Linking factories and suppliers through the Net may slash costs and boost productivity for multinationals with operations in the region. The Internet is also helping to level the playing field for companies by reducing corruption in the granting of public- and private-sector contracts. And governments and universities are only just beginning to tap its potential for information and education.

Those who know the region well are not surprised to see Latin America in the grip of Internet fever. The middle and upper classes have always been starved for the latest technology. Planeloads of Brazilians, Argentines, and Venezuelans descend on Miami and New York to stock up on electronic gadgets from palmtop computers to video cameras. Latin American Net users average 8.2 hours of online time a week, compared with 7.1 hours in the U.S. In Brazil, 31% of cybernauts say they have made an online purchase in the past year, nearly the same proportion as in the U.S.

PORTAL WARS. The battle for what is still a small--but affluent--market is on. "Everyone saw the success of the companies in the U.S. and is trying to repeat the gold rush south of the border," says Moyses Pluciennik, CEO of Globo Cabo, Brazil's largest cable-TV operator. In August, Microsoft Corp. plunked down $126 million for an 11.5% stake in Globo Cabo, and the two plan to introduce cable-modem Internet access and a joint portal in the coming months. A few weeks earlier, AT&T shelled out $300 million for Brazil's Netstream, which provides high-speed Internet hookups to businesses. A $200 million joint venture between AOL and Venezuela's Cisneros Group will launch an online service in Brazil by the end of this year and in Mexico and Argentina in 2000. Spain's Telefonica, which owns phone companies in several Latin American countries, has rapidly become a regional Internet power, picking up ISPs in Brazil, Mexico, Chile, and Peru. The company's Internet arm, Terra Networks, is expected to be spun off in an initial public offering in the next few weeks.

And then there's the war of the portals: Companies, including Yahoo!, Microsoft, New York-based StarMedia, Brazil's Universo Online, and upstarts such as Miami Beach (Fla.)-based and Argentina's El Sitio, are spending hundreds of millions of dollars to become the Internet gateway of choice for Latin users.

The Net is also changing the way companies in the region do business. Both German carmaker Volkswagen, which has plants in Argentina, Brazil, and Mexico, and Argentine oil company YPF are using the Internet to link up with suppliers. And according to Heather Killen, vice-president for international operations at Yahoo!, Brazil's online banking services put "U.S. banks to shame." For example, Bradesco, the country's largest private commercial bank, has more than 750,000 customers banking over the Net and is adding 1,000 per day.

One Latin company using the Internet to compete globally is Chile's state-owned Codelco, the world's largest copper producer. At the company's Web site, a Tokyo client can track a copper shipment as it moves from port to port. An explosives manufacturer can bid on an upcoming project, or a vendor can check the status of an invoice. According to sources at Codelco, traffic on the site is growing by 70% each month. Analysts estimate that this type of business-to-business activity accounts for between 70% and 80% of e-commerce in the region.

POWER SHIFT. Governments, too, are getting caught up in the Web. In Mexico, companies will soon be able to bid for some $25 billion in government contracts awarded each year over an online service called Compranet. The service will also provide information on competing bids, enabling companies to contest decisions that seem unfair. Compranet makes the tender process "more transparent, more egalitarian," says Ignacio Mendivil, director general of Mexico City-based Seguridata, which supplied the cryptography for the system.

The free flow of information may also help to strengthen Latin America's often fragile democracies. Fernando Espuelas, chairman and CEO of StarMedia Networks Inc., a Spanish- and Portuguese-language portal, points out that the Argentine military dictatorship's manipulation of local media during the 1982 Falkland Islands war against Britain would be impossible today. "With the Internet, we're talking about a fundamental shift in the power structure from the institution to the individual," he says.

The trend in Latin America is clearly toward a trickle-down of Net usage. "Right now, the Internet is for middle- to high-income earners, but as PC prices and phone rates fall, that will change," says Juan Perea, CEO of Terra Networks. Martha Bejar, an executive vice-president for Latin America and the Caribbean at Nortel Networks Corp., predicts that the number of phone lines in the region will double, to 2 per 10 people, in five to seven years. Meanwhile, PC prices have already fallen to as low as $700 in Mexico City and Buenos Aires. Indeed, despite a nearly regionwide recession, PC sales in Latin America are up 12% so far this year.

Other economic and cultural factors should spur Internet usage. In Latin America, "shopping in person is a less pleasurable experience than it is in the U.S., so many people would rather stay at home and shop," says Raul Rivera, vice-president in the Buenos Aires office of Boston Consulting Group. Not surprisingly, penetration of e-commerce is highest in Brazil, the country that is home to nearly half of Latin America's Net users.

Brazil also boasts the largest number of virtual retailers in the region. According to a survey carried out by Rivera's outfit, 88% of all online sales from Latin American Web sites originate in Brazil. For example, Pao de Acucar, one of the country's largest supermarkets, has been selling via the Internet since 1996. It now claims to have 50,000 cybercustomers. Meanwhile, in southern Brazil, the country's answer to Silicon Valley, Luciano Timm Bergmann, a 26-year-old entrepreneur, is at work on an online-only grocery store. This will allow shoppers to buy anything from soap to oatmeal using a catalogue and a bar-code scanner the size of a TV remote control. One of the partners in Bergmann's venture, Easy Shop, is Unisys Corp., which is supplying some of the necessary technology.

But Latin American e-commerce is still beset with a bevy of problems. An estimated 75% of all e-sales go to businesses outside the region, primarily in the U.S. Yet customs regulations and import duties, which vary from country to country, often delay the arrival of goods or make them prohibitively expensive.

SMART CARDS. Take the PC business. In April, Dell Computer Corp. launched an online store for Latin America that will compete with that of rival Compaq Computer Corp. But Dell's customers in Brazil and Argentina must travel to the main international airport to clear their purchases through customs. The company hopes to resolve that problem when it opens a plant in the southern Brazilian state of Rio Grande do Sul in November.

Other Net companies are seeking partners to help work out distribution glitches. To speed delivery of merchandise purchased off its portal, StarMedia signed an agreement in June with SkyBox Services Corp., a Miami-based express delivery service. Shoppers are also informed at the time of purchase how much they will owe for duties and other taxes. And those tariffs are likely to fall, Espuelas says, as countries integrate into regional trading blocs such as Mercosur, the customs union that includes Brazil, Argentina, Uruguay, and Paraguay.

Other barriers to e-commerce may be overcome through technological innovation. Most Latins don't even have credit cards, for instance. Those who do are often reluctant to give out their credit-card numbers online. Smart cards may be the solution. In Mexico and Argentina, people are already accustomed to using them for both public and cellular phones.

One smart-card fan is Neissan Monadjem of Sao Paulo. Two years ago, the CEO of Prosisa Informatica was a small-scale distributor for the Iridium satellite-phone project and a reseller of cellular phones. Then he hooked up with U.S.-based Fischer International Systems Corp. to distribute its Smarty card reader. The device fits into a PC's floppy-disk drive and is used to make purchases online or access personal bank accounts.

Among Monadjem's clients in Brazil are Visa International, Banco Bradesco, BankBoston, and Sun Microsystems. His company is also a distributor for Passfaces, an innovative security program designed by British-based ID Arts. Monadjem expects Prosisa's sales to double this year, from $2.5 million in 1998. And "all because of the Internet," he says.

Latin America is full of young Internet millionaires-in-waiting. Constancio Larguia and Wenceslao Casares, the founders of online brokerage, are in their mid-20s. Espuelas, of StarMedia, is 33. They owe much of their good fortune to a pair of U.S. venture-capital funds, New-York based Chase Capital Partners and its affiliate Flatiron Partners. They have helped fill a financing gap for Latin Netrepreneurs: Banks in Latin America are leery of startups, and in any case, interest rates on such loans are prohibitively high in most countries. Yet Susan Segal, general partner for Latin America at Chase Capital Partners, notes that local investors are beginning to realize that they may be missing out on the gold rush. "I think we are watching a local venture-capital community being built up in front of our eyes," she says. "But it's going to take time."

Industry experts agree that only those with the deepest pockets will survive Latin America's Internet wars. The field is already growing crowded: Brazil, for example, has an astonishing 500 ISPs. A shakeout of ISPs and portals is inevitable, Internet executives say. The betting is that big local players such as Universo Online stand a chance on their own turf, but foreign heavyweights such as Yahoo!, AOL, and Telefonica will eventually dominate the regional market.

While UOL and other local players have their minds on their own future, others have begun to fret over Latin America's looming digital divide. The Internet threatens to deepen the region's social inequalities by giving the wealthy more access to information and products, while shutting out the poor. "In the short term, the difference between the haves and the have-nots will increase," predicts Pluciennik. However, his and others' companies, including Telefonica, are hooking up public schools in the region at no charge. Such a pro bono effort could pay off over time by helping many more Latins pick up skills on the Internet--and perhaps even boost their living standards.