Leader of the pack

Latin CEO: Executive Strategies for the Americas, May-June, 2002 by J.P. Faber

A grueling two-and-a-half years after going public, AOL Latin America has exceeded the expectations of analysts. If it isn't already the No. 1 Internet service provider in the region, it will be, shortly. So then why is the stock in the dog house? And does it matter? Not to CEO Charles Herrington.

"I CAN OUTRUN ANYONE IN THIS PLACE," says Charles Herrington, speaking from the corner office of AOL Latin America's modern, glass-sheathed headquarters north of Miami. "I'm not kidding."

That boast from the CEO would be groundless in most corporations, but seems especially absurd here, where the staff is so obviously drafted from the dot.com generation. Virtually every one of the 60 employees in the corporate HQ [the company employs 1,700 hemisphere-wide] is twenty- or thirty-something, even senior officers. Herrington, at 43, is the old man.

But Herrington is actually not kidding. An avid marathon ranner, he could probably outdistance anyone who works for him. The question is whether, as a corporate leader, he is going to accomplish the same thing with the competition. Like a marathon ranner, AOL Latin America is determined to outlast everyone else.

The latest sign of the corporation's endurance came in March, when one of AOLAs owners, AOL Time Warner (41 percent), pumped US$160 million into the company's coffers. The year before, another US$150 million cash infusion came jointly from AOL Time Warner, the Cisneros Group (39 percent ownership) and Brazil's Banco Itau (12 percent ownership). With parents like that, it's hard for a child to go hungry.

Still, as Joseph Stalin once remarked, facts are stubborn things, and the fact of the matter is that Latin America--like the rest of the world--has not been hospitable to Internet ventures during the last 18 months. The region's landscape is littered with the corpses of failed dot-corn ventures. Big regional portals like Star Media and El Sitia (now part of Claxson) are hardly heard from anymore.

In fact, there are really only four major players--the monster sites that provide both connectivity and content--still standing. Besides AOLA, there are Terra-Lycos, Universo Online (UOL) and Tlmsn. Each has its own strength. Terra, the offspring of Spain's Telefonica, enjoys the advantages of being owned by a major telecom provider, as does Tlmsn, which is jointly owned by Microsoft and Mexico's near-monopoly phone company Telefonos de Mexico (Telmex). UOL, owned by Brazilian media giants Abril and Folba, offers unparalleled content in its home turf. For AOLA, there is the brand, the track record, the content from AOL Time Warner and the deep pockets of all three of its principal owners.

AOLA is now arguably the leader of the pack--although lack of accurate numbers makes a precise determination difficult. 11 current trends continue, however, its position as No. i will be hard to contest. According to market research firm IDC and company reports, AOLA estimates that it is garnering almost half--some 46 percent--of all new accounts signing up to go online in Latin America. As a latecomer to the game, Herrington has relied on this strategy: With most of tomorrow's users still to come, AOLA will claw its way to dominance by signing on more of those new customers than its opponents.

And the bodies will be there. Even Jupiter Communications, the most conservative of the market research companies that project Internet growth in Latin America, estimates that Internet penetration will double by 2005, from its present level of 6 percent (35 million users) to some 13 percent (77 million).

If there are any doubts about AOLAs model or its performance in the marketplace, Charles Herrington would be the last person to admit it, even to himself. He is an unabashed cheerleader for the company, fully convinced of its mission in Latin America. Though growth slowed in the fourth quarter of 2001, and will probably stay slow throughout 2002, "when you come back to the fundamentals, they're still there. We bring convenience to the lives of people and that trend is going to continue" he says. "More and more people are going to be hooked up." Coming from a mature consumer goods company (Herrington previously headed up Revlon Latin America), the growth rates are still far beyond what the CEO is used to.

First-quarter 2002 figures for AOLA are still not available, but the previous five quarters show a steady increase in revenues and a concomitant reduction in losses. In the fourth quarter of 2001, the company had US$18.7 million in revenue and a US$66 million loss. On the revenue side, that figure was equal to the US$18.7 million in the third quarter, up from US$16 million in the second, US$13 million in the first and $7.9 million in the fourth quarter of last year. On the losses side, that figure is down from US$69.8 million, US$72.3 million, US$86.8 million, and US$101.8 million, consecutively in the preceding four quarters.

To keep those two lines moving in the correct direction, AOLA needs more subscribers. Like any Internet business, profitability is all about scalability--delivering the same product, with its relatively fixed costs, to a larger and larger audience. Not only does cost come down per subscriber, advertising revenues also increase.