- The Washington Times - Thursday, March 31, 2005

BUENOS AIRES — America Online Latin America is limping toward bankruptcy after failing to understand the cultural differences between the United States and its southern neighbors, analysts say.

Officials at the Fort Lauderdale, Fla., company have not announced whether the company will file for bankruptcy, but they say in recent regulatory filings that available cash will extend to the third quarter of this year and no additional financing is expected.

The beleaguered company, which provides dial-up and some broadband service primarily in Argentina, Brazil and Mexico, watched its membership decline by 18,000 members between June and September, when it reported 400,000 members, a figure that includes members with free trials and members of an affiliated Banco Itau service.

Membership reached a high of 1.41 million users in the first quarter of 2002.

In Securities and Exchange Commission documents, the company blamed its failure to recruit new users on “strong price competition” from providers of free and paid services in Brazil and Mexico. It also blamed a banking strike in Brazil for restricting sign-ups through Banco Itau.

Osvaldo Banos, AOL Latin America’s executive vice president and chief financial officer, said in an interview that the business planned to file its 2004 annual report with the SEC in a few days. He declined further comment.

But experts say the company’s deep resources and business models that worked in North America failed to ensure success.

“Latin America is a very different market from the U.S.,” said Marcelo Coutinho, a business analyst with IBOPE NetRatings, a market analysis firm in Brazil. “Around 80 percent of people in upper income brackets have Internet access but only 15 percent on the lowest income level have access. You can’t grow in this market using the same 800-pound guerrilla strategy that AOL used in the United States.”

Mr. Coutinho, who in 2003 helped write a major technology report for the World Economic Forum, said one misstep was the company’s early failure to provide culturally relevant content, losing any early advantage to a handful of large, well-financed and deeply entrenched Latin American media companies.

“Local players control most of the content in this region, and it is very hard to generate it if you are not in some way related to those more traditional media groups,” Mr. Coutinho said.

AOL eventually improved its content but, “by that time, the market was taken by local players and it was too late. They were always a medium player despite throwing tons of money into the market,” he said.

Another early mistake occurred when a factory error caused the company to send out millions of faulty startup disks to Brazilian consumers.

The company faces many competitors, both free and paid.

In Brazil, one major competitor is IG Brazil, a provider that offers free and some paid services. It has 1.7 million subscribers.

Terra Lycos, a Spanish company with 16 Latin American affiliates, also is fighting for Latin American subscribers as are companies such as T1msn, a union of Microsoft’s MSN and Telmex, a Mexican corporation.

In Argentina, 27 percent growth in the number of free services between the end of 2001 and 2004 helped residential access rise to a still-low 17 percent of the population, according to government statistics.

Despite signing deals with a number of local content providers, AOL never made it into the top five positions in Brazil, the largest market, according to rankings of Internet portals by IBOPE NetRatings.

“It is not about anything that is anti-American,” said Esteban Brenta, a business analyst in Buenos Aires. “There are just cultural things that the company does not seem to understand.”

For example, AOL’s use of automated customer service was a problem.

“People here want to call and talk to a person when they have a problem,” he said. “They don’t want to talk to computerized voice. They are small things, but they make a difference.”

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