AOL Faces Challenge in Mexico

M E X I C O  C I T Y, July 7 -- After a slow start in Brazilfor America Online Inc., analysts said investors willwatch closely next Tuesday when the U.S. Internet giant launchesin Mexico, to gauge the outlook for the Latin American affiliateAOL plans to take public later this year.

AOL and Venezuelan media group Grupo Cisneros formed AOLLatin America as a joint venture in 1998, and launched servicesin Brazil last year. In an invitation to reporters, AOL Mexicosaid it would launch on Tuesday.

Tough Market

The leading U.S. Internet service provider faces toughcompetition in Mexico. Mexican telecommunications giantTelefonos de Mexico (Telmex) has a big head start and boastsnearly 60 percent of a national market that is long on Internetportals and access providers but short on Internet users.

According to a recent report by Credit Suisse First Boston,there are only five personal computers for every 100 Mexicans.That compares with 50 PCs per 100 people in the United States atthe end of 1999, according to figures compiled by ABN AMRO.

Internet users in Mexico are expected to rise to 2.2 millionthis year from 1.54 million last year, though only 1.7 millionof those users will hold their own Internet accounts.

Luciano Pascoe, co-director of information technologyresearch for Mund research and analysis firm in Mexico, said hedid not see AOL’s model — access and an array of easilyaccessible services — revolutionizing Internet access inMexico.

“They are going to launch. They will grow very well duringthe first three months and then growth will drop off to 3 or 4percent a month,” Pascoe said.

“They will start to encounter the difficulties of aThird-World country. They can’t go faster than the society, thepurchasing power, or the infrastructure of the country itself,”he said.

Failure in Brazil

Analysts said AOL had disappointed in Brazil, where itsbusiness strategy of “connectivity” — charging monthly feesand offering easy connections to a wide variety of Web sites —ran into computer users that have been lured by free Internetaccess from rivals. The Brazilian experience has placed pressureon AOL to do well in Mexico.