PIPE DREAMS.

Broadband believers see a gold mine--if only Latin America Inc. will buy in.

FEDERICO BRANI HAS A PROBLEM. LIKE INFORMATION TECHNOLOGY bosses across Latin America, he's got salespeople on the move in Argentina, vendors who need inventory updates in Chile and managers everywhere who want to see it all, from their desks, in real time.

"Years ago, we had to deal with one region or one country at a time," says Brani, Johnson & Johnson's information systems manager for the Southern Cone. "Now, it's one region with sub-regions and, inside that, countries. When managers wanted to know market share, or sales, or whatever in those countries, they had to have reports sent to them. Now they can have it all in one database."

Unfortunately, most users are peering into Brani's sprawling fiefdom of information through telephone lines strung 50 years ago or more, the technological equivalent of drinking the ocean through a cocktail straw. Dial-up Internet was the best even top-flight firms could do--until now.

Problem, meet solution: Latin America is facing a flood of Internet capacity. A half-dozen companies in and out of the region are finishing off undersea fiber-optic cables coming ashore in places like Fortaleza, Rio de Janeiro, Punta del Este, Santiago and Lima. Industry watchers estimate that if fully developed, Latin broadband capacity will reach just more than 10 terabits, a blistering 10 trillion bits per second.

A fair amount of the undersea cable space will lie fallow, a redundancy designed to ensure that bursts of timely financial data, for example, are not held up. By 2002, transmission capacity from the United States to Latin America alone will soar to a projected 4,165.6 gigabits per second, up from just 15.2 gbps completed in 1999. The wholesale market for data-moving capacity is expected to hit US$3 billion by the end of 2001, says The Yankee Group, and could zoom up to $21 billion by the finish of 2006.

That's not counting the retail market, a battlefield of giant local telecoms and upstart telephone and data service providers. E-commerce and business-to-business Net firms will be big buyers of space on new local networks scrambling to resell incoming capacity, as will financial houses, banks, governments and traditional firms like Brani's Johnson & Johnson.

Plugging in. Once business plugs into the local fiber-optic networks, a Tier 1 connection--the capacity to move data at 1.5 million bits per second, or 1.5 megabits, commonly called a T1--will become the standard, as it has become in the United States over the past few years. Companies are flocking to rent portions of T1s to thousands of small and medium-sized Latin firms. Finally, the home market will demand video over Internet, digital TV and telephone and other interactive goodies.

Before all this can happen, there will be mighty struggles to carve up the key markets, say top broadband execs. Eventually, they say, bandwidth will become a commodity, traded back and forth on a global, Web-driven spot market, but that stage is still pretty far off. "I've seen it," says Patrick Joggerst, South America president of undersea cable builder Global Crossing. "People have told us, 'Carriers will never be able to consume that much capacity.' All of them have come back for more. It's been true over and over again."

Gregory Maffei, president and CEO of 360networks, an undersea cable competitor, echoes Joggerst's view that demand will grow faster than capacity. "The reality is, as stuff gets cheaper, people consume more," argues Maffei.

Maffei also believes that the coming boom in the data market--supplanting traditional voice traffic--has the potential to redraw the Latin American telecom map. The losers, Maffei says, will be slow-moving former state monopolies that cannot afford to simultaneously invest in new, Internet-based networks and continue to service traditional customers, "It's very hard for them to say 'I'll chuck it all and make a bet on the next generation," Maffei says.

The race gets hotter once you leave the beach and head inland. Internet data centers and fiber optic networks are springing up in Latin America's business centers, all bent on the same mission: to be the first name in Internet Protocol (IP) services, the catchall phrase for voice, data and video communication via the Web. A big part of the struggle will be how to set prices between the undersea cables and the "last mile" operations that will connect most Latin Americans to the fast Internet.

Power shift. The big undersea cable installers will be heavily dependent on the last mile providers--builders of networks from shore to door, like AT&T Latin America, Diveo Broadband Networks, GlobalOne, Embratel and Optiglobe--to reach customers.

Local voice and data traffic won't even touch the undersea cables, since it begins and ends in-country. That's where local giants will have the upper hand, and where new firms will become the force that drives down cost to consumers. "I don't think Patrick [Joggerst] or Greg [Maffeil or anybody can say with a straight face that prices aren't going to go down," says David Rutchik, president of IP business at Diveo.

A T1 hookup in the United States costs a company about $1,500 a month. In the short term, however, Latin American firms will pay about double that, says Steve Collins, vice president of operations for Web hosting company Innerhost. The key to driving down price will be finishing off the last mile by changing over outdated copper phone systems to fiber optic lines, which offer much more capacity and flexibility.

Local phone companies like Embratel in Brazil and Telefonica in Chile and Argentina are racing to update business accounts, while a pack of big-time outsiders, including AT&T Latin America, are champing at the bit to displace them.

Slow going. Eduardo Caride, CEO of Telefonica's undersea cable arm, Emergia, says there's plenty of market share for broadband players big and small; he predicts his company will control about one-third of it.

The main problem, Caride fears, is that not everyone is convinced that broadband is on the way. "It's like a wave. It has reached certain markets, it has reached certain customers, but there are still some others who don't really believe that this is going to happen," he says. "It's a matter of everyone getting convinced that this is useful and that you need it."

The only laggard, say industry watchers, could be Mexico, where telecom reform has been slower. Telefonos de Mexico has 30,000 broadband users, says Hector Cortes, of KPMG Consulting in Mexico City, in a market with a potential of 1.5 million over the next two years. The problem, not surprisingly, is the last mile. "In Brazil and Argentina they are practically ready," says Cortes.

The most wired city in Latin America today is Santiago, Chile, says Mike Shalom, CEO of Miami-based IFX Networks, which provides high-speed Internet services to regional clients like Sanyo, 7-11, Cisco Systems and Lufthansa's cargo division. "And it's the cheapest," Shalom says. "It's 30% less than in Brazil, which is right in the middle of the pack."

He figures a company with 30 to 50 employees in Latin America will pay between $1,000 and $2,000 monthly for a T1 connection, compared to the $1,000 it pays now for much slower ISDN connections, which run at 256 kbps. "In Latin America, they're spending the same, but getting less," he says. For now, at least.

Sink or swim. One incumbent, Embratel, is gearing up for battle--by focusing abroad first, particularly in broadband, says Embratel International Director Edson Soffiati. Embratel's plan is to invest in cheaper IP technology in markets outside the country while converting domestic systems over time. "All of these markets are growing. Competition is growing, price is going down," says Soffiati. "We have to be there. We have no option."

Once business broadband makes the great leap forward, consumer interest will rise, says Martin Hecker, CEO of Neoris, the Internet business consultancy part of Cemex's Internet arm, Cx Networks. "But, first, the big demand will be business-to-business. Companies will connect with each other," says Hecker. "We see a lot of demand for that [in 2001]."

Quite a few investors are betting the same. All Latin American business has to do now is get onboard. Easier said, perhaps, than done.

                                 FAT PIPES
                   Major undersea fiber-optic cables in
                          Latin America 2000-2001
OWNERS                     CAPACITY(gbps) [*]
New World Network (85%)                 2,560
Private investors                       2,560
Global Crossing (100%)                  1,680
360networks (100%)                      1,280
Emergia (85%), TyCom (15%)              1,920
SOURCE: TeleGeography Inc.
Chart Includes only cabls over 80 gbps capacity.
(*.)Projected full capacity.