The Dot-Com El Dorado

This past Christmas in Belize, Ann Rose, a New York filmmaker, was trying to reach her mother in Florida. International phone connections were few and poor, so she turned to Mike's Email, Internet and Book Swap on Caye Caulker Island where the Internet connection was quick and clear.

This is just one example of how the Internet in Latin America is leapfrogging the established telecom infrastructure, and why for many investors, the region holds the allure of dot-com El Dorado.

"This is the right time to come in" to the Latin American Internet game, says Julio Marquez, managing director of Global Emerging Markets. "The time was even a few months ago when El Sitio(LCTO) launched."

Currently, there are only two pure Internet equity plays in Latin America: Argentina-based content provider El Sitio and StarMedia Network(STRM), which claims leadership in the region. But several companies are gearing up for IPOs in the U.S. markets this quarter. Led by AOL Latin America, IPOs from other sites such as Yupi.com, Investshop.com and UOL may be just the thing for investors who feel they missed out on the Yahoos!(YHOO) of the U.S. boom.

The bare facts are compelling enough. Internet penetration rates are at a low 4% for the region, but are expected to rise to 26% by 2004. The U.S. by comparison had a 37% Internet penetration rate in 1999. Compounded Internet usage in Latin America is expected to grow by 25%, compared with 20% in the U.S., according to International Data Corporation -- a figure some analysts believe is conservative.

Of the half-billion people in Latin America, 34% are under 15 years old, and 80% are located in four countries: Argentina, Brazil, Chile and Mexico. Concentrated, young and underpenetrated markets -- the stuff of Wall Street wishes and Internet dreams.

Even the depressing inequities of Latin American economies can be twisted into good news for e-commerce companies. While the average per-capita earnings in the region come to less than $4,500, some 40% of the wealth is owned by 10% of the population. Thus, even if e-tailers reach a mere sliver of the population, they're accessing a large proportion of the available cash.

Brazil has been at the forefront of the Latin American Internet revolution (over 6 million Brazilians filed their 1998 taxes online), in part because of its more sophisticated banking system, which utilizes a wide range of debit measures and quick check-clearing techniques. Banking leader Bradesco(BBQCY) offers 20 hours of free Internet access for its online banking users. Competitor Unibanco(UBB) offers unlimited Internet surfing, but neither provides e-mail services.

As they bring more and more users online, these banks are at once challenging the value-added services of providers like UOL and AOL Latin America and bringing more eyes and dollars to the Web. Right now, Web culture is a privilege of the educated and wealthy.

However, as Julio Zamora, head Latin American Internet and media analyst at Morgan Stanley Dean Witter notes, Latinos have been very good at adopting the latest technology in a brief period of time. Zamora and others expect a trickle down effect, much the way cell phones started as a status toy of the elite and are now on the ears of every cabbie in Rio.

Local issues of cross-country trading regulations, cost and infrastructure persist, but are being tackled by more free-market friendly governments, established companies such as FedEx(FDX) entering the region and multiple access points like public kiosks becoming more common. Moreover, payment problems due to low incomes and a lack of widespread credit card usage are being addressed through C.O.D. payments, e-debits direct from checking accounts and even billing through local phone bills -- the same method Prodigy (PRGY) uses to attract the Latino market in the U.S. through its Southwestern Bell (SBC) partnership.

While there are few companies of any size now, each day dozens of new ventures begin south of the border -- in the last six months, more than 400 new Internet companies started in Argentina alone. The winners will rise to the top by their own right, or get swallowed by foreign companies (portended by the recent buying spree of Spain's Telefonica(TEF)).

The stakes are huge -- companies that move beyond the one-country model can expect to reach an audience including not just Latin America, but Spain, Portugal and the large Latino population in the U.S. It's not without reason that in the Latin American Internet sector, some investors envision a city of gold.

>To order reprints of this article, click here: Reprints