AOL? It's no giant on foreign shores

Summary:America's favorite online service is meeting its Waterloo overseas, ambushed by home-grown competitors with strong financing and solid local content.

SÃO PAULO, Brazil -- When some people tried to load America Online Inc.'s new Brazilian Internet service last year, they were treated to the samba stylings of dance band Raca Negra.

Thanks to a factory mix-up, a batch of AOL's start-up CD-ROMs contained the Brazilian group's hit song "Lost Time" instead of software connecting them to the Web. The legitimate, less-tuneful disks also surprised users: by re-jiggering their Web browsers.

But before AOL (aol) even got to the Web, a small-town Internet firm had nabbed the U.S. giant's logical address, aol.com.br. Then free service providers mushroomed soon after AOL began offering its pay service. UOL, an entrenched local competitor, left some wondering who was who, and AOL's Brazilian president quit only weeks after the company went online; he ended up with a competitor.

Brazil isn't the only place where AOL has lost something in translation. In Web-hungry Japan, the Dulles, Va., company is in 10th place behind Nifty, Biglobe and other local competitors, according to International Data Corp. In Germany, AOL lags far behind T-Online, the Internet arm of Germany's Deutsche Telekom AG (DT). The top spot has eluded AOL in France and Canada. In Brazil, after launching its service with great fanfare last November, it's at best a distant fourth.

Foreign markets are critical to AOL's growth. Though it towers over United States competitors, with about 18 million subscribers to its flagship U.S. service, many observers doubt the company can maintain its torrid subscriber growth unless it wins converts abroad. About 4.4 million people are using AOL and its sister service, CompuServe, overseas. Ever-confident AOL predicts that non-U.S. subscribers could make up as much as half the total 10 years from now.

But at every port overseas, AOL has run into home-grown competitors backed by well-financed phone companies or media groups with strong local content. These companies claim the same head-start advantage that helped make AOL a wunderkind in the United States, and they're wiser for having watched the American Internet saga unfold.

Meanwhile, AOL's handpicked local partners haven't steered the American giant clear of cultural missteps. And though some other foreign players have built their customer bases by acquiring local Internet providers, AOL has tackled most markets from scratch and may have overestimated the draw of its blue-chip brand.

The constant consensus building between AOL and its partners doesn't lend itself to moving at Internet speed. Jan Buettner, who helped found AOL Europe and headed its German division in the mid-1990s, says European partner Bertelsmann AG resisted his calls to launch a mass-market campaign and opted for narrower direct marketing. "We could have caught up with T-Online much sooner," Mr. Buettner says.

Since its inception, AOL's battle plan overseas has been straightforward: identify promising new markets for online services and find a local partner with extensive contacts and fluency in local culture. While its joint-venture partners often front a good portion of the cash needed to get a service off the ground, AOL has chipped in its technology and established brand name. In some regions, such as Europe, the company has chosen to call its service AOL, rather than America Online, to avoid triggering nationalistic issues.

SÃO PAULO, Brazil -- When some people tried to load America Online Inc.'s new Brazilian Internet service last year, they were treated to the samba stylings of dance band Raca Negra.

Thanks to a factory mix-up, a batch of AOL's start-up CD-ROMs contained the Brazilian group's hit song "Lost Time" instead of software connecting them to the Web. The legitimate, less-tuneful disks also surprised users: by re-jiggering their Web browsers.

But before AOL (aol) even got to the Web, a small-town Internet firm had nabbed the U.S. giant's logical address, aol.com.br. Then free service providers mushroomed soon after AOL began offering its pay service. UOL, an entrenched local competitor, left some wondering who was who, and AOL's Brazilian president quit only weeks after the company went online; he ended up with a competitor.

Brazil isn't the only place where AOL has lost something in translation. In Web-hungry Japan, the Dulles, Va., company is in 10th place behind Nifty, Biglobe and other local competitors, according to International Data Corp. In Germany, AOL lags far behind T-Online, the Internet arm of Germany's Deutsche Telekom AG (DT). The top spot has eluded AOL in France and Canada. In Brazil, after launching its service with great fanfare last November, it's at best a distant fourth.

Foreign markets are critical to AOL's growth. Though it towers over United States competitors, with about 18 million subscribers to its flagship U.S. service, many observers doubt the company can maintain its torrid subscriber growth unless it wins converts abroad. About 4.4 million people are using AOL and its sister service, CompuServe, overseas. Ever-confident AOL predicts that non-U.S. subscribers could make up as much as half the total 10 years from now.

But at every port overseas, AOL has run into home-grown competitors backed by well-financed phone companies or media groups with strong local content. These companies claim the same head-start advantage that helped make AOL a wunderkind in the United States, and they're wiser for having watched the American Internet saga unfold.

Meanwhile, AOL's handpicked local partners haven't steered the American giant clear of cultural missteps. And though some other foreign players have built their customer bases by acquiring local Internet providers, AOL has tackled most markets from scratch and may have overestimated the draw of its blue-chip brand.

The constant consensus building between AOL and its partners doesn't lend itself to moving at Internet speed. Jan Buettner, who helped found AOL Europe and headed its German division in the mid-1990s, says European partner Bertelsmann AG resisted his calls to launch a mass-market campaign and opted for narrower direct marketing. "We could have caught up with T-Online much sooner," Mr. Buettner says.

Since its inception, AOL's battle plan overseas has been straightforward: identify promising new markets for online services and find a local partner with extensive contacts and fluency in local culture. While its joint-venture partners often front a good portion of the cash needed to get a service off the ground, AOL has chipped in its technology and established brand name. In some regions, such as Europe, the company has chosen to call its service AOL, rather than America Online, to avoid triggering nationalistic issues.

AOL landed in Brazil last year with the confidence and gusto of a conquering army. At a lavish launch party in a converted Sao Paulo railway station, about 2,000 guests walked through a giant replica of AOL's triangular logo to hear several of Brazil's top singers. Actor Michael Douglas hosted a live online chat from the party, while the city's budding Internet elite joined AOL President Bob Pittman in a VIP room upstairs.

Also on hand was Gustavo Cisneros, the 53-year-old Venezuelan billionaire whose family-owned conglomerate is AOL's 50-50 partner in Latin America. Earlier that day, Mr. Cisneros and Mr. Pittman, old friends from the New York media scene, made a guest appearance at a top Sao Paulo business school.

Francisco Loureiro, then president of America Online Latin America Inc.'s Brazilian unit, declared that AOL was "here to be the leader." Signs carried the company's logo in the colors of the Brazilian flag, emblazoned with a motto proclaiming, "We're the biggest because we're the best."

AOL created the joint venture in December 1998 with the Cisneros Group of Companies, based in Miami. Mr. Cisneros, a famed art collector and fixture on the New York society circuit, committed to investing $100 million in the venture and planned to smooth the path through Latin America with his legendary political and business connections. Visitors to the group's elegant New York offices are greeted by a giant oil painting of the patriarch in Napoleonic pose.

In Brazil -- first stop for the joint venture and home to nearly half the Internet users in Latin America -- the pairing struck some as an odd choice. The Cisneros Group's vast media holdings were concentrated mostly in the Spanish-speaking world, making most of those assets largely irrelevant in Portuguese-speaking Brazil.

There were also doubts about how Cisneros might function alongside a mighty public company like AOL. One investor who has partnered with the group says Mr. Cisneros personally cleared most decisions, often slowing down transactions, and had a tendency to micromanage and drop names.

Mr. Cisneros says that his group knows Brazil "backwards and forwards" and that his operating style gets results. Of past associates he says: "Even if they complain sometimes, they're happy, happy, happy partners in the end."

"They are terrific partners," says Michael Lynton, president of AOL's international operations. "They have moved with commitment, speed and intelligence."

But AOL Latin America quickly stumbled after its launch. About 500 of the five million CD-ROMs the company had begun distributing free in shopping malls, video rental stores and magazines were mistakenly loaded with music. Some users also discovered that on good disks, AOL's software upgraded their Web browsers without warning, changing the appearance and replacing their home pages.

AOL Latin America officials say that the disks functioned as intended and that the changes were merely cosmetic. But local newspapers -- including Folha de Sao Paulo, whose parent company is joint owner of Internet rival Universo Online SA, or UOL -- found users' complaints too delicious to ignore. One Folha article quoted an AOL user who said the disk had wiped out her e-mail address book and was difficult to uninstall. The newspaper quoted a user who accused AOL of taking the user's private e-mail addresses and sending out promotional material under the user's name. UOL says it has no editorial influence on the newspaper.

Three weeks after the Brazil launch, Mr. Loureiro left the company. He says he was frustrated by his inability "to influence change" at AOL Latin America. A person close to the firm says "management-style differences" led to the split.

Meanwhile, ads claiming AOL was the "biggest" rang hollow in insular Brazil, where UOL, Telefonica SA's Terra Networks SA (TRRA) and others had a head start and were expanding across Latin America. By mid-December, AOL Latin America had about 65,000 subscribers in Brazil, most of them within a 60-day free trial. The company was still in the planning stages for its Mexican and Argentine services.

"In Brazil, it's neither the biggest nor the best," says Greg Jenkins of Brazil advertising site Advertica.com Inc. "That campaign was all wrong." AOL executives say the slogan referred to AOL's global position, including its dominant position in the United States.

AOL landed in Brazil last year with the confidence and gusto of a conquering army. At a lavish launch party in a converted Sao Paulo railway station, about 2,000 guests walked through a giant replica of AOL's triangular logo to hear several of Brazil's top singers. Actor Michael Douglas hosted a live online chat from the party, while the city's budding Internet elite joined AOL President Bob Pittman in a VIP room upstairs.

Also on hand was Gustavo Cisneros, the 53-year-old Venezuelan billionaire whose family-owned conglomerate is AOL's 50-50 partner in Latin America. Earlier that day, Mr. Cisneros and Mr. Pittman, old friends from the New York media scene, made a guest appearance at a top Sao Paulo business school.

Francisco Loureiro, then president of America Online Latin America Inc.'s Brazilian unit, declared that AOL was "here to be the leader." Signs carried the company's logo in the colors of the Brazilian flag, emblazoned with a motto proclaiming, "We're the biggest because we're the best."

AOL created the joint venture in December 1998 with the Cisneros Group of Companies, based in Miami. Mr. Cisneros, a famed art collector and fixture on the New York society circuit, committed to investing $100 million in the venture and planned to smooth the path through Latin America with his legendary political and business connections. Visitors to the group's elegant New York offices are greeted by a giant oil painting of the patriarch in Napoleonic pose.

In Brazil -- first stop for the joint venture and home to nearly half the Internet users in Latin America -- the pairing struck some as an odd choice. The Cisneros Group's vast media holdings were concentrated mostly in the Spanish-speaking world, making most of those assets largely irrelevant in Portuguese-speaking Brazil.

There were also doubts about how Cisneros might function alongside a mighty public company like AOL. One investor who has partnered with the group says Mr. Cisneros personally cleared most decisions, often slowing down transactions, and had a tendency to micromanage and drop names.

Mr. Cisneros says that his group knows Brazil "backwards and forwards" and that his operating style gets results. Of past associates he says: "Even if they complain sometimes, they're happy, happy, happy partners in the end."

"They are terrific partners," says Michael Lynton, president of AOL's international operations. "They have moved with commitment, speed and intelligence."

But AOL Latin America quickly stumbled after its launch. About 500 of the five million CD-ROMs the company had begun distributing free in shopping malls, video rental stores and magazines were mistakenly loaded with music. Some users also discovered that on good disks, AOL's software upgraded their Web browsers without warning, changing the appearance and replacing their home pages.

AOL Latin America officials say that the disks functioned as intended and that the changes were merely cosmetic. But local newspapers -- including Folha de Sao Paulo, whose parent company is joint owner of Internet rival Universo Online SA, or UOL -- found users' complaints too delicious to ignore. One Folha article quoted an AOL user who said the disk had wiped out her e-mail address book and was difficult to uninstall. The newspaper quoted a user who accused AOL of taking the user's private e-mail addresses and sending out promotional material under the user's name. UOL says it has no editorial influence on the newspaper.

Three weeks after the Brazil launch, Mr. Loureiro left the company. He says he was frustrated by his inability "to influence change" at AOL Latin America. A person close to the firm says "management-style differences" led to the split.

Meanwhile, ads claiming AOL was the "biggest" rang hollow in insular Brazil, where UOL, Telefonica SA's Terra Networks SA (TRRA) and others had a head start and were expanding across Latin America. By mid-December, AOL Latin America had about 65,000 subscribers in Brazil, most of them within a 60-day free trial. The company was still in the planning stages for its Mexican and Argentine services.

"In Brazil, it's neither the biggest nor the best," says Greg Jenkins of Brazil advertising site Advertica.com Inc. "That campaign was all wrong." AOL executives say the slogan referred to AOL's global position, including its dominant position in the United States.

The company was also locked in a court battle over the domain name (it uses the more cumbersome americaonline.com.br). The shorter address had been registered in 1997 by a Brazilian Internet-service provider called America Telecomunicacoes Ltda., which claims about 10,000 subscribers in the southern city of Curitiba.

AOL Latin America says the start-up grabbed AOL's well-known brand name to divert users. Wilson Maia, America Telecomunicacoes' commercial director, says AOL didn't have a recognizable brand in Brazil until it launched its marketing campaign late last year. Turned off by the team of lawyers who have been his only contact with AOL Latin America, Mr. Maia says that his firm's Web address is "not for sale" and that the matter is before a state judge.

But by the time AOL Latin America set up shop in Sao Paulo, the city's dreary urban sprawl was already awash in brightly colored signs announcing dozens of Web sites and Internet-access providers. TV ads for dotcom companies -- many knockoffs of U.S. booksellers or auction sites -- were dominating the commercial air waves.

The leading ISP was UOL, which already claimed more than 500,000 paid subscribers. UOL officials have been closely tracking AOL's growth since the mid-1990s. Its name was inspired by AOL, and its advertisements echo early AOL ads stressing ease of use. And UOL, a joint venture between two Brazilian publishing giants, was rich with content.

Although AOL Latin America publicly maintained its strategy of growing by acquiring new customers, it was studying ways to expand through acquisition. In the days after the November launch, AOL's Mr. Pittman met in Sao Paulo with Luis Frias, chief executive of UOL and president of Folha de Sao Paulo. The two opened talks on the possibility of AOL buying a stake in UOL, a person familiar with the discussions says.

They hashed out several big issues. If there was to be a stock deal, UOL wanted shares of parent company AOL and not in its lesser-known Latin American unit. And UOL didn't want to work alongside the Cisneros Group, which lacked the depth of operations in Brazil that it had in some other Latin markets. "If you're in Brazil, why do you want to bow to this guy in Venezuela?" says the person familiar with the discussions.

The talks fizzled out. AOL officials, including Mr. Pittman, became involved in the pending merger with Time Warner Inc. And AOL Latin America filed for a public offering on the Nasdaq Stock Market to raise up to $575 million. With Charles Herington, head of AOL Latin America, acting as temporary head of the Brazilian unit, the company soon faced the onset of free Internet access. Two local banks fired the first shot, and by early February, several Internet companies, including UOL and local start-up Internet Gratis, or iG, had launched free services.

The company was also locked in a court battle over the domain name (it uses the more cumbersome americaonline.com.br). The shorter address had been registered in 1997 by a Brazilian Internet-service provider called America Telecomunicacoes Ltda., which claims about 10,000 subscribers in the southern city of Curitiba.

AOL Latin America says the start-up grabbed AOL's well-known brand name to divert users. Wilson Maia, America Telecomunicacoes' commercial director, says AOL didn't have a recognizable brand in Brazil until it launched its marketing campaign late last year. Turned off by the team of lawyers who have been his only contact with AOL Latin America, Mr. Maia says that his firm's Web address is "not for sale" and that the matter is before a state judge.

But by the time AOL Latin America set up shop in Sao Paulo, the city's dreary urban sprawl was already awash in brightly colored signs announcing dozens of Web sites and Internet-access providers. TV ads for dotcom companies -- many knockoffs of U.S. booksellers or auction sites -- were dominating the commercial air waves.

The leading ISP was UOL, which already claimed more than 500,000 paid subscribers. UOL officials have been closely tracking AOL's growth since the mid-1990s. Its name was inspired by AOL, and its advertisements echo early AOL ads stressing ease of use. And UOL, a joint venture between two Brazilian publishing giants, was rich with content.

Although AOL Latin America publicly maintained its strategy of growing by acquiring new customers, it was studying ways to expand through acquisition. In the days after the November launch, AOL's Mr. Pittman met in Sao Paulo with Luis Frias, chief executive of UOL and president of Folha de Sao Paulo. The two opened talks on the possibility of AOL buying a stake in UOL, a person familiar with the discussions says.

They hashed out several big issues. If there was to be a stock deal, UOL wanted shares of parent company AOL and not in its lesser-known Latin American unit. And UOL didn't want to work alongside the Cisneros Group, which lacked the depth of operations in Brazil that it had in some other Latin markets. "If you're in Brazil, why do you want to bow to this guy in Venezuela?" says the person familiar with the discussions.

The talks fizzled out. AOL officials, including Mr. Pittman, became involved in the pending merger with Time Warner Inc. And AOL Latin America filed for a public offering on the Nasdaq Stock Market to raise up to $575 million. With Charles Herington, head of AOL Latin America, acting as temporary head of the Brazilian unit, the company soon faced the onset of free Internet access. Two local banks fired the first shot, and by early February, several Internet companies, including UOL and local start-up Internet Gratis, or iG, had launched free services.

AOL tried to hold firm. Even as its competitors signed up hundreds of thousands of users in just a few weeks, its major concession was to slash the fees of its "premium" service by 29%. Someone familiar with AOL Latin America's strategy says the company plans to launch free service under a different brand name.

AOL officials won't comment on most aspects of AOL Latin America, citing "quiet period" restrictions that limit statements by companies hoping to sell shares to the public. Mr. Herington denies that AOL Latin America had a rough start in Brazil, pointing out that it was AOL's fastest international launch. "I don't call this a difficult start. We're very happy with how we're doing here," he says.

AOL executives dismiss the threat from free ISPs, saying revenue from advertising and e-commerce won't be enough to support them. "The economics don't work long term," says Michael Kelly, AOL's chief financial officer.

Some people familiar with AOL's international strategy say joint ventures such as the one with the Cisneros Group aren't worth the trouble. "I think the time for these kinds of joint ventures is over," says Mr. Buettner, now a partner at Bertelsmann Ventures, a venture-capital firm that counts both Bertelsmann and AOL as investors. Bertelsmann, which competes with Time Warner, has agreed to sell its stake in AOL Europe to AOL. AOL also dissolved its Australian venture with Bertelsmann.

Mr. Lynton says he's "very happy with the way business is going generally" for the company outside the United States. He praises AOL's former European partner, Bertelsmann, and says, "By any measure, you have to judge AOL in Europe as a success." In part, that's because AOL's European users stay online longer than the subscribers at competing services. AOL is equally optimistic about Latin America, where the online community is expected to triple to more than 35 million in four years, about twice the U.S. growth rate.

There are some unqualified successes in AOL's international expansion. Two-thirds of the 65 million registered users of ICQ, a wildly popular free service for conducting private online chats, are outside the United States. AOL acquired ICQ from an Israeli company in 1998. And after being caught off guard by free ISPs like Freeserve PLC in the United Kingdom, AOL responded with a free Internet-access service of its own called Netscape Online. The company also says a recent regulatory ruling in that country will give its main AOL service a boost by allowing it to charge customers a flat rate for online access.

AOL Latin America's new Brazil chief, Manuel Amorim, says a new campaign plays down the "biggest" and "best" claims and focuses on AOL's ease of use. Brochures with a fresh batch of CD-ROMs explain the software upgrade and say the disks are "tested." The firm has boosted its Brazilian membership to about 129,000, though some of those are in the free trial.

AOL's Brazilian unit last month teamed up with Brazil's Banco Itau to offer a joint Internet product to the bank's customers. Mr. Amorim says the alliance will give AOL a "more Brazilian face." The company is scheduled to launch Tuesday in Mexico, which has fewer entrenched competitors and a closer affinity to the United States.

But there is clearly more work to be done. During a recent gathering of Brazilian journalists in Sao Paulo, Mr. Herington informally surveyed the room and discovered that none of the 20 or so reporters present used AOL to access the Web. Only half-joking, he told a subordinate to close the door and start handing out CD-ROMs.

AOL tried to hold firm. Even as its competitors signed up hundreds of thousands of users in just a few weeks, its major concession was to slash the fees of its "premium" service by 29%. Someone familiar with AOL Latin America's strategy says the company plans to launch free service under a different brand name.

AOL officials won't comment on most aspects of AOL Latin America, citing "quiet period" restrictions that limit statements by companies hoping to sell shares to the public. Mr. Herington denies that AOL Latin America had a rough start in Brazil, pointing out that it was AOL's fastest international launch. "I don't call this a difficult start. We're very happy with how we're doing here," he says.

AOL executives dismiss the threat from free ISPs, saying revenue from advertising and e-commerce won't be enough to support them. "The economics don't work long term," says Michael Kelly, AOL's chief financial officer.

Some people familiar with AOL's international strategy say joint ventures such as the one with the Cisneros Group aren't worth the trouble. "I think the time for these kinds of joint ventures is over," says Mr. Buettner, now a partner at Bertelsmann Ventures, a venture-capital firm that counts both Bertelsmann and AOL as investors. Bertelsmann, which competes with Time Warner, has agreed to sell its stake in AOL Europe to AOL. AOL also dissolved its Australian venture with Bertelsmann.

Mr. Lynton says he's "very happy with the way business is going generally" for the company outside the United States. He praises AOL's former European partner, Bertelsmann, and says, "By any measure, you have to judge AOL in Europe as a success." In part, that's because AOL's European users stay online longer than the subscribers at competing services. AOL is equally optimistic about Latin America, where the online community is expected to triple to more than 35 million in four years, about twice the U.S. growth rate.

There are some unqualified successes in AOL's international expansion. Two-thirds of the 65 million registered users of ICQ, a wildly popular free service for conducting private online chats, are outside the United States. AOL acquired ICQ from an Israeli company in 1998. And after being caught off guard by free ISPs like Freeserve PLC in the United Kingdom, AOL responded with a free Internet-access service of its own called Netscape Online. The company also says a recent regulatory ruling in that country will give its main AOL service a boost by allowing it to charge customers a flat rate for online access.

AOL Latin America's new Brazil chief, Manuel Amorim, says a new campaign plays down the "biggest" and "best" claims and focuses on AOL's ease of use. Brochures with a fresh batch of CD-ROMs explain the software upgrade and say the disks are "tested." The firm has boosted its Brazilian membership to about 129,000, though some of those are in the free trial.

AOL's Brazilian unit last month teamed up with Brazil's Banco Itau to offer a joint Internet product to the bank's customers. Mr. Amorim says the alliance will give AOL a "more Brazilian face." The company is scheduled to launch Tuesday in Mexico, which has fewer entrenched competitors and a closer affinity to the United States.

But there is clearly more work to be done. During a recent gathering of Brazilian journalists in Sao Paulo, Mr. Herington informally surveyed the room and discovered that none of the 20 or so reporters present used AOL to access the Web. Only half-joking, he told a subordinate to close the door and start handing out CD-ROMs.

Topics: Start-Ups, Banking, Hardware, Telcos

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