America Online Latin America's public offering was met with a yawn yesterday. The new company carries the name of its illustrious parent, but the risks it faces explains why it won't be carried on the books of the elder America Online, who instead decided to spin it out as a separate concern, hoping the marketplace will help fund the heavy investments needed to make its first public baby dance to a Latin beat.
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The Fort Lauderdale-based America Online Latin America provides online services in Latin America, with three currently in operation: AOL Brazil, a Portuguese-language version launched last November; AOL Mexico, launched in July; and AOL Argentina, launched on Tuesday. Other local versions are planned.
The Latin American market for Internet services is both huge and untapped. Jupiter Communications recently found that 4% of the area's households own a PC, and only 2% of the population is currently online. These numbers are expected to increase several fold over the next few years. Nevertheless, the downsides are substantial, especially in the nearer term. Family incomes are much lower in Latin America than in the U.S. and Europe, and local phone calls are charged by the minute. All this adds to the difficulty AOL faces as it exports its monthly subscription model south of the border.
In the prospectus for its public offering, AOL-LA said AOL Brazil, which serves the largest single market for Net services in Latin America, had only 129,000 subscribers in June, a substantial portion of whom are on a free trial period. The service also is experiencing higher-than-expected rates of subscriber cancellations, "presumably because of the availability of free service."
La Competición
America Online faces a relatively unusual challenge in the Latin American market. The company brings many powerful resources to the game -- perhaps most importantly, the experience of operating interactive services in other parts of the world. At the same time, it lacks the local scale, and the market leverage that comes with scale, and which takes years to build. As a result, some of the so-called early mover advantages AOL enjoys in the U.S. will be less pronounced in a market at such an early stage of development, so the game will be played on a more level playing field.
But then, we're not really talking about good ol' AOL here, but about a new company: America Online Latin America, with a different management team, balance sheet, and ticker symbol. And though the new company carries the name of its illustrious parent, the risks it will face explain why it will not be carried on the books of the elder America Online, who instead decided to spin it out as a separate concern in hope that the marketplace will help fund the heavy investments needed to make its first public baby dance to a Latin beat.
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Subscription prices have been lowered in response, and spending on advertising and on content to attract more customers has been "substantially increased." And though free ad-supported services are rapidly proving to be attractive to Latin American consumers, the online advertising market is far less developed in that region than elsewhere, further highlighting the risks and complexities faced by consumer Internet ventures in that part of the world.
Competitors to AOL-LA include StarMedia Network (Nasdaq: STRM) and Terra Networks (Nasdaq: TRRA), who are all bobbing near their 52-week as well as their all-time lows. As in the U.S. and the rest of the world, AOL's Latin American services will compete with local offerings from familiar rivals Yahoo! (Nasdaq: YHOO) and Lycos (Nasdaq: LCOS), the latter in the process of merging with Terra, a unit of Spain's Telefonica (NYSE: TEF), the largest provider of telecom services to the Spanish- and Portuguese-speaking world.
Will America Online Latin America duplicate the success of the original AOL? Or are market conditions too different for the AOL business model to be successfully transplanted? Share your thoughts on the AOL discussion board.
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