COMPANIES & FINANCE the AMERICAS - UOL Makes Capital out of Steve Jobs' Business Model

COMPANIES & FINANCE THE AMERICAS - UOL makes capital out of Steve Jobs' business model.
By RAYMOND COLITT.
08/31/2001
Financial Times
(c) 2001 Financial Times Limited . All Rights Reserved

COMPANIES & FINANCE THE AMERICAS - UOL makes capital out of Steve Jobs' business model - By emulating AOL, Universo Online has gained a strong foothold in the Brazilian internet market, writes Raymond Colitt.

In 1992 Steve Case gave a presentation on America

Online during an internet conference sponsored by a big investment bank. Sitting in the audience was Luis Frias, who, fascinated by AOL, later approached the internet service provider's chairman to learn more about the business.

Learn he did. Universo Online (UOL), the ISP Mr Frias helped create and now heads, has become the largest in Latin America and the biggest headache for AOL in its efforts to tap the fast-growing Brazilian market. "Much of our strategy was inspired by AOL," Mr Frias admits.

Bucking the trend of global dotcom gloom, UOL this week announced a net revenue increase of 70 per cent and a reduction of its net loss by 35 per cent for the first two quarters year-on-year.

The Brazilian ISP expects to reach cash break-even in the first or second quarter of next year, possibly becoming the first main Latin American dotcom to do so.

According to Jupiter Media Metrix, the consultancy, UOL's sites had more than 4.6m unique visitors in July, reaching 79.3 per cent of the Brazilian online audience - the highest penetration level of any portal in a main market.

That is far ahead of Starmedia with a 46 per cent market reach in Brazil , Terra Lycos with 45 per cent, and AOL with 15 per cent.

UOL has 1.1m paying subscribers, which it says equals roughly 40 per cent of the subscriber market in Brazil and makes it one of the 20 largest ISPs in the world.

One of UOL's advantages in its battle to reach the top was its early approach. When it launched its service in April 1996, the internet in Brazil was still in its infancy and the market wide open.

More important, it benefited from the market reach of Folha de Sao Paulo and the Abril group, its principal shareholders and two of the country's leading media groups.

"UOL efficiently used their media channels to capture a share of mind in the market," says Marcos Wettreich, whose iBest company has prized UOL as the best ISP in Brazil .

AOL's Brazilian debut, by contrast, came only in November 1999 and was dogged by technical difficulties with its software.

UOL insists it has better knowledge of the home market than its competitors. "We know Brazil and Latin America better than the US or Spanish players," says Mr Frias, in reference to AOL and Terra.

In June General Motors chose UOL over AOL to form a strategic online marketing alliance in Latin America.

Beyond its market penetration, "the functionality of UOL's sites and the quality of their content is a force that will leverage GM 's internet strategies in the entire region", says Fritz Henderson, GM vice-president for Latin America, Africa and the Middle East.

Even though UOL generates 90 per cent of its content in-house, it has benefited from partnerships with leading media groups not only in Brazil but in Venezuela, Colombia, and Argentina as well.

"It has more quantity and variety of content than its competitors," says Mr Wettreich.

Last year's Nasdaq crash led UOL to postpone its plans for an initial public offering, forcing it instead to seek additional private equity.

UOL sold an initial 17.9 per cent equity stake to Portugal Telecom in exchange for both a $200m cash injection and for Zip.net, Portugal Telecom's online unit.

Next it sold Accessnet, its traffic management subsidiary, to Embratel, the long-distance phone carrier, for $100m. In six months UOL had raised $300m - effectively ensuring its financial survival.

Akey advantage of UOL is that "it was quick to move out of the free ISP model and focus on strengthening its subscriber base", says Lucas Graves, senior analyst for Latin America with Jupiter Matrix. Subscriber fees make up 77 per cent of its total revenue.

The biggest challenge now is for UOL to repeat its success in markets outside of Brazil .

"Mexico is a tough market for us," says Mr Frias. Yet he insists that UOL will reinforce - not retreat - from its international foray. "It is harder for us to increase our market share in Brazil ."

However, even holding its market share in Brazil could be tough, analysts say.

Terra has a strong customer base and AOL has deep financial pockets and a technological edge, says Will Landers, internet and media analyst with CSFB, the investment bank. "It is going to be a tough battle between the three of them."