No Free Ride.

AOL Latin America battles for paid subscribers in Brazil.

YOU GET WHAT YOU PAY FOR. AT LEAST, that's how things played out after Brazil's free Internet craze. After an onslaught of free Internet service providers (ISPs), those left standing have turned to charging their customers. Universo Online, which ditched its free Internet option-NetGratuita--in late 2000, is aggressively going after new paid subscribers. Amid the scramble, the most successful paid ISP in the world, America Online, is throwing its weight behind its Latin American subsidiary to unseat No. 1 Universo.

"This is a marathon and we're just coming off the starting blocks," says Charles Herrington, AOL Latin America's president and CEO. Herrington, 40, says he's not focused on competition but on capturing what he calls the "intenders," people who have not yet logged on to the Internet but will do so in the next couple of years.

Nowhere is that battle fiercer than Brazil. Home to 170 million people, only 7% are online, says International Data Corp., and most of them pay for service. Part of the AOL strategy is an alliance with Brazil's Banco Itau, which owns 12% of AOL Latin America; the company hopes to capture the bank's 7 million clients. If it gets only a portion, AOL can glide by Universo's close to 1 million subscribers without breaking a sweat.

AOL Latin America's success is tied to its ability to capture paying subscribers, which today account for around 70% of its revenues. Losses last year prompted investors to throw US$150 million more at the venture, an investment of AOL Time Warner and Cisneros Group. That money will allow it to acquire exhausted and devalued Internet companies and to expand its subscriber base. "Our goal is to be No. 1 in each market we serve," says Herrington.

AOL suffered some setbacks soon after launching in Brazil in November 1999. First, there were problems with installation software. Then the head of its Brazilian unit, Francisco Loureiro, resigned. His replacement, Manoel Amorim, left the company after just 10 months to head Telefonica's Sao Paulo unit, Telesp. The company's Nasdaq initial public offering received a lukewarm response as investors questioned whether AOL could get people to pay for something that other companies at the time were giving away.

"About 10 months ago, everyone was asking me why AOL got in so late and now everyone is telling me they're in too early," says Salomon Smith Barney analyst Lanny Baker. "There is no better time than today to buy up market share and there's nobody that's been more successful on the Internet globally than AOL." With some 27 million paid subscribers worldwide, AOL Time Warner has emerged from the dot-com crash as king of Internet content and service, a model AOL Latin America would clearly love to duplicate in the region.

So far, AOL has captured 550,000 subscribers in Argentina, Brazil and Mexico, a number that includes trial users who pay nothing. Plus, AOL Latin America told investors in June 2000 that a "significant number" of their paying subscribers in Brazil have not made timely payment. Herrington promises discipline: "We've learned a lot about how to bill. If you fall out of that policy, we automatically terminate you," he says. The company reported $200 million in losses in the second half of 2000.

The current No. 1, Universo Online, could make life difficult for AOL in Brazil. It's backed by two of Brazil's most powerful media groups, FolhaPar, publisher of leading daily Folha de S.Paulo, and Editora Abril, the country's leading magazine publisher. In February, UOL merged its Internet properties with Portugal Telecom's ZipNet, one of Brazil's most popular Web sites, and received $200 million in cash from UOL parent companies FolhaPar and Portugal Telecom.

Universo's deals were "a very substantial setback" for AOL Latin America in Brazil, says Bear Sterns analyst Chris Recouso. "UOL has a very powerful corporate sugar daddy with a lot of money. I think the top spots in terms of subscriber growth, at least for the foreseeable future, are locked up." The question, says Recouso, is whether AOL can successfully migrate free trial subscribers to paying status. On that, the jury is still out.