The High Cost Of Free Internet Access

In the battle for Brazil's Netizens, small providers will lose out

In Brazil's Internet landscape, the floor's the limit. When Bradesco, the country's largest private bank, introduced free access to the World Wide Web for its customers in December, rival Unibanco matched the offer. Meanwhile, Universo Online (UOL), the leading Internet service provider, has slashed monthly fees to $10. And signing up for UOL's service is now as easy as pouring a bowl of cereal, since every box of Kellogg's Corn Flakes sold in Brazil carries the company's CD-ROM.

Brazil, Latin America's largest Internet market with 8 million active users, is quickly becoming a fierce battleground. The winners will be consumers, who can now log on to the Web for just the price of a local phone call, or about 2 cents U.S. per minute. The losers will be the small Internet service providers (ISPs) that will be wiped out by larger competitors. And then there will be the survivors: the handful of ISPs who manage to wean themselves off user fees by boosting revenue from online advertising and e-commerce. "A year from now, there will only be three or four real players left," says Bob Wollheim, president of Brazil operations for StarMedia Networks Inc., a Spanish- and Portuguese-language Web portal based in New York.

It is Brazilian banks' relentless courtship of online customers that has raised the stakes in the Internet wars. The most aggressive pair has been investment bank Opportunity and Garantia Partners, a private-equity fund. On Jan. 10, they launched free access for all Net users in Sao Paulo through their joint ISP, They plan to invest $120 million to roll out service to 80 cities by March.

Free access could wipe out all but a handful of Brazil's 280 ISPs, which derive 70% of their revenues from user fees. The trend appears irreversible. Despite protests by an ISP industry association, Brazil's telecoms regulator ruled on Jan. 11 that banks may offer free access. Brazilians are thrilled. "The only thing the Brazilian consumer loves more than a good deal is a free product," says Walter Stoeppelwerth, Latin American strategist for Robert Fleming Inc. in Rio de Janeiro.

Survivors will need deep pockets and access to "killer" content. Prospects are good for partnerships between ISPs and media groups, such as the new marriage between America Online Inc. and Time Warner Inc. UOL is owned by magazine publisher Abril and newspaper Folha de Sao Paulo. Microsoft Corp. has teamed up with TV network Globo to offer high-speed cable access.

DEFLATED DREAMS. But perhaps no one will gain more from free access, and the expected boost in traffic, than Brazil's phone companies, which bill their customers by the minute. Eventually, operators might follow the example set in Britain, where phone companies pay ISPs a fee in exchange for the increased phone usage.

Amidst all this competitive fever, there is a risk that Internet companies might be overestimating the market's potential. They wouldn't be the first. Foreign firms from auto makers to home-appliance manufacturers piled into Brazil following the introduction of the inflation-taming Real Plan in 1994. But their dreams have been deflated by the economy's uneven performance. Similarly, projections that Internet usage in Brazil will grow at an annual rate of 50% over the next few years could prove overly optimistic.

Don't tell that to the banks, ISPs, and content providers fighting for a piece of Brazil's Internet action. When it's all over, only a few will be on their feet. But until then, it promises to be an interesting brawl.

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