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Terra Nova.

Telefonica de Espana hopes to unleash billions of dollars with a stock offering from Terra Networks, its newly formed interactive division.

FOR MOST OF THE 1990s, SPAIN'S Telefonica bought big, state-run phone companies in Latin America and made piles of profits operating these monopolies. Now, the Spaniards are racing to establish dominance in the region's emerging Internet market. "We want to increase our operating speed," says Alfredo Villalobos, president for Latin America of Terra Networks, Telefonica's newly named interactive unit. What's the rush? The telco is facing ferocious competition.

The Internet market is tiny in Latin America, some 8 million users in total at last guess, but it's growing gangbusters--50%-plus per annum. Slow-moving, long-established telephone companies are not leading the charge. Instead, feisty firms like Brazil's Universo Online (UOL), New York-based StarMedia, and Miami's IFX Corp. are snatching market share as fast as they can before the big boys stomp all over them.

Telefonica is putting its boots on. Over the last 12 months, the Spaniards have been buying online companies, siding with service providers and slicing Internet operations away from their dominant local phone companies in such countries as Chile. By year-end, Terra Networks plans to launch what would be Latin America's largest Internet stock offering yet.

"Telefonica has money, it's directing its own operations, and it has a sensible strategy that focuses on dominating specific regions instead of the entire world," says Michael Armitage, a telecommunications analyst with Morgan Stanley Dean Witter & Company.

Teleportaling. Terra Networks, which claims 550,000 users, is seeking to build dominance on two major fronts: online presence and its own infrastructure across the Americas. "The particular characteristics of Latin America pretty much predict that the Internet market will be dominated by service providers rather than content providers, contrary to what happens in the U.S.," says Jose Garces, an Internet analyst with Select-International Data Corp. in Mexico City.

The purchase of Madrid-based portal Ole! last March provided the platform for localized sites in Argentina, Chile, Colombia, Peru, Uruguay and Venezuela. Hard on the heels of those deals, Telefonica took a stake in Zaz, the No. 2 Brazilian portal, and formed an alliance with Mexican media conglomerate Grupo Reforma to add another 70,000 Mexican subscribers.

According to estimates by New York-based investment bank Lehman Brothers, the Ole! spin-off could reap US$1 billion on its own, based on similar public offerings. Alejandro Junco, president of Mexico's Grupo Reforma, says that Telefonica's online assets' initial value could easily surpass $2 billion.

The Spaniards will need all the money they can get. Marketing the portal promises to consume huge sums of cash, but buying and building infrastructure for Internet access units will take mega-bucks. In early September, for example, Telefonica bought the Internet division of its Chilean subsidiary Compania de Telecomunicaciones de Chile (CTC) for $40 million and took on $8 million more of its debt.

Terra Networks' plans call for far more than a presence in Chile. Rumors are rampant about taking over operations in Argentina and Peru, but the truly bodacious project is the information highway to link major cities in South and Central America, the Caribbean and the United States. The company is building a gigantic 14,375-mile fiber-optic network and plans to have it up and running by mid-2000. "All of today's hot concepts--information portals, data services and Internet voice networks--wouldn't work without a project like this one," says Higinio Sanchez, Telefonica's vice president of infrastructure in Latin America.

To bankroll this sort of adventure, the Latin American division will need lots of cash from headquarters, a partner with broad shoulders or the support of Wall Street to raise major dot-com dollars.

With the share price already being buffeted for large exposure to Latin America, Telefonica CEO Juan Villalonga has made clear that "the company will not increase its stake in Latin America right now."

Big money wanted. Like all of the global telecom players, Telefonica has proven unable to form any sort lasting relationship with any other important firm. AT&T, British Telecom, MCI Worldwide and even a small partnership with

Microsoft in Peru have not withstood the test of time and competition. After implicitly dumping MCI WorldCom, Telefonica is partnering with the comparatively tiny International Discount Telecommunications Corp. (IDT) to attack the market of 18 million U.S.-based Spanish-language speakers.

While these deals help extend geographic coverage of service, IDT and other secondary players don't have the big money to play for keeps or withstand a battle over the long haul of losses. Hence, Telefonica is looking to the market for the funds to deliver a knock-out blow to would-be competitors.

During the last few months, nowhere has the pressure to get big fast been greater than in Brazil, Latin America's largest Internet market. Telefonica and Zaz are now facing a very broadband attack from local media powerhouse Globo teamed with Microsoft. Star Media and AT&T are joining the battle. AOL and Cisneros are on their way and local Internet service provider UOL is racing to raise money to defend its top spot.

Still more competition lies in other market segments, such as lucrative corporate networks. PSI Net, one of the biggest Internet access providers in the United States, has acquired Domain, a Brazilian service provider with 12,000 business clients in Rio de Janeiro. This makes the fourth company that PSI Net has snapped up in Brazil, following two acquisitions in Mexico, and one each in Argentina, Chile and Panama.

"Since most providers have been focusing on the consumer side, not on corporate business, there's a huge, repressed demand," says Phillippe Kuperman, president of PSI Net Latin America. "We don't think that companies like Telefonica have the experience. They're facing an expensive learning curve to reach our level."

Telefonica and Terra Networks officials pooh-pooh any suggestion that the firm is somehow lacking in corporate know-how or know-who. They promise that their big digital highways and Mega Via family of high-speed data services for multinationals will roll over upstarts like PSI Net.

Bold talk, perhaps, but without a doubt, Terra Networks' push into the region promises to mark the beginning of major companies' march on small start-ups. What these companies lack in agility, they will account for with brute dollar force. To that end, the Spaniards' stock offering will undoubtedly raise the bar for staying in the big race for Internet dominance in Latin America.
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Publication:Latin Trade
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Dec 1, 1999
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