Free Internet access sputters in Latin America despite promise

SAO PAULO, Brazil (AP) -- What's in a name? A lot, when you're iG, Brazil's leading free Internet service provider.

At its glitzy launch in January, iG had a brand that said it all -- Internet Gratis, or Internet for free. Brazil's free ISPs were seen as trailblazers in a poor region desperately in need of affordable access, sparking similar services in Mexico, Argentina, Chile, Colombia, Venezuela and Central America.

But today, free online access is in retreat in Latin America and iG is reinventing itself. Its name, iG executives insist, now stands for Internet Group.

So what happened to "gratis"?

Just like in the United States and Europe where AltaVista, Freeserve and other free access providers have stumbled, Latin American proponents are finding it hard to make ends meet.

They sought to offer free Internet service in return for bombarding users with advertisements, collecting ad revenues instead of access fees of $20 or more a month. But advertising and online shopping in Latin America, even more limited than in richer countries, simply aren't generating enough revenue to cover costs, analysts say.

Free access had seemed ideal for Latin America, where millions of poor can't afford online fees or even phone connections, let alone personal computers.

The Net remains the domain of the rich. In Brazil, the region's most connected country, less than 6 percent of the population, or 9.4 million people, have Net access. Just 4.9 million users surf the Net in a given 24-hour period, says Sao Paulo-based ratings agency Ibope.

But after a slew of launches early this year, three free access providers are closed or swallowed up. Others, like iG, are changing tack: customers still get free basic access but are encouraged to pay for tasty extras such as access through mobile phones, high-speed access via home PCs or specially tailored content.

"The pure, free ISP model hasn't really taken off in the United States, so obviously in Latin America, where advertising revenues are much smaller, people are more skeptical," said Fred Searby, senior Internet analyst at Chase H&Q in New York.

So, is this the beginning of the end for free ISPs?

"This model is condemned," said Luis Frias, chairman of top access provider Universo Online, announcing the recent closure of UOL's free service NetGratuita.

Aleksandar Mandic, iG's vice president, disagrees. "Free access is still how we earn our daily bread," he said. But iG is pushing users to try to pay for new products, which include premium content such as celebrity news, reviews and gossip, and a business-to-business portal.

Making money off Internet ads is tricky anywhere, but particularly tough in Latin America.

Ads in Brazil often have tiny budgets and don't reach the right target, according to an Ibope study. And Brazilian online users rarely click on ads.

Michael Simpson of Lehman Brothers Inc. in New York, say advertisers prefer fee-charging ISPs because "users of free ISPs have the image of being fickle."

Typical is university student Rogerio Jelmayer, 20, who signed up with iG and Terra, a for-fee rival -- but uses Terra a lot more because of its online content and service.

"It offers more and it's much faster. And that's worth paying 29 reals ($15) a month," he said.

In some European countries, free ISPs survive by getting a cut of per-minute fees charged by telecom companies for phone use. But in Latin America, telecom regulators either don't allow this, as in Brazil, or local calls are charged on a flat-fee basis, as in Mexico.

E-commerce in the region is embryonic. According to Ibope, 1.4 million Brazilians bought something online in the last six months. The most popular shopping site, auctioneer ibazar.com.br, gets just 313,000 visits a month.

Yet the growth in iG's customer base is impressive. At launch, Mandic pledged to have 1 million users by year-end. Ten months later, iG already counts 3.1 million e-mail accounts.

In Mexico, which counts 570,000 home Internet users, free ISPs are slow to take off. The largest, run by Spain's Terra Networks, counted only 240,000 free-access accounts by June, three months after launch.

In Argentina, with 1 million online users, some larger ISPs -- El Sitio, Ciudad, and Arnet -- briefly tinkered with the idea, but chose to keep charging. Others offering free access have since stopped.

In Colombia, a hybrid called 007.com has emerged, offering free access weekdays from 7 p.m. to 7 a.m. and on weekends. The state telephone company has put a planned free access service on ice for six months.

Across the region, fee-charging ISPs seem better at getting and keeping audiences.

"Given the weaknesses of the model we're talking about here, I'd say very few, if any, free service providers will survive," said Ricardo Florence, director of UOL Inc., Brazil's leading ISP.

For whoever finds the right recipe, the future is far from bleak. Everybody agrees that Latin America has huge dot-com potential. Usage should more than quadruple from 9 million users in 1999 to nearly 38 million in 2003, according to Ibope.

Direct foreign investment in Internet-related projects in Brazil totaled nearly $1.2 billion between January and July, with investors sinking $436 million in July alone, according to government data.

But as tech stocks lose their shine on international markets, investors are growing more reluctant to sink money into ventures with uncertain futures. And the concept of free ISPs may be ahead of its time.

"Free ISPs ... believe the media must be free of charge, like commercial TV," said Sergio Romani, head of e-business strategy for Ernst & Young in Sao Paulo.

"That is an interesting, but a long-term view. It only works when you have truly mass media, and here we still can't call the Internet a mass medium," he said.

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On the Net:

iG's home page: www.ig.com.br