INDUSTRY ANALYSIS

Internet users everywhere are thirsty for more bandwidth. Even in the developed countries, such services are only now becoming widely available. Analog modems, limited as they are to something less than 5,000 bytes per second, are gradually giving way to digital technologies. Cable modems and various flavors of the Digital Subscriber Line (DSL) are the leading contenders for the next generation of Internet connections. Even newer technologies, such as ground-based wireless systems and two-way satellite links are still in the early development phase.

Pent-up Demand

In Latin America, where Internet use lags behind the developed markets by 2-4 years, new digital broadband connections are set to leapfrog earlier technologies and level the playing field at least for businesses and affluent consumers.

Cable and DSL have been launched in larger Latin American cities only very recently. In Mexico City, for example, cable Internet access will not arrive until December, and DSL is only six months old. Likewise, Brazilian and Argentinean users who live in the right areas gained access to cable and DSL only this year. Users are well aware of the bandwidth available in developed countries and are clamoring to get on the bandwagon. There is a huge backlog of pent-up demand, at least for those providers that can offer competitive pricing.

There is much speculation about which technology will eventually dominate. The most likely outcome is that DSL will prevail in business markets, while cable will at least initially claim a larger share of the residential market. Both technologies will get a boost from the fact that the region's poor quality telephone systems presently limit the availability and functionality of dial-up connections over analog modems. This makes digital broadband even more appealing in relative terms. Another consideration is that local phone tolls, (in Mexico after an initial 100 free calls per month) add significantly to the cost of dial-up Internet access. In Argentina, for example, it costs US$ 0.80 per hour to use a local dial-up connection during prime time hours, in addition to ISP charges.

Price is Still an Obstacle

Consumers and businesses alike have a strong desire to plug into broader bandwidth. But for consumers, wants do not translate into demand in the absence of adequate disposable incomes. The typical monthly cost of between US$ 50 and $70 for DSL or cable is substantial relative to average incomes. In Brazil, for Example, 80 percent of households have spending power of less than US$ 500 per month. The situation is comparable in Mexico and even in Argentina - which has a relatively large middle class - half the population is in households with less than about $1,000 per month in spending power. For now, therefore, residential broadband Internet is a luxury item aimed mainly at the affluent. The good news is that even though the wealthy and professional classes are small in proportionate terms, they include at least 13 million households in the three big markets (Brazil, Mexico and Argentina) alone.

Competitors Scramble to Fill the Bandwidth Gap

Entrenched telecom firms are vying with cable providers and broadband start-ups to grab market share in this nascent industry. While competition is driving prices down, explosive volume growth among businesses and affluent consumers is likely to more than compensate, generating huge revenues for suppliers that move quickly to move into key markets.

Established national telephone service providers like Telmex in Mexico, Embratel in Brazil and Telecom and Telefónica in Argentina have already made their moves. Telmex began offering DSL service to residential customers in 19 cities in March 2000. While business broadband communications-only services had previously been offered at much higher prices, the new residential service, in partnership with Prodigy, incorporates ISP services, with a total cost of about US$ 63 per month, after a $100 installation fee.

In Brazil, DSL service is available in the main cities at a cost of US$ 55 per month. The Mexican and Brazilian services are both relatively low speed versions of DSL technology, with the Brazilian service offering a downstream of 256k bits per second. Higher speed services are available at much higher prices. In Argentina, high speed DSL service has recently been offered at prices in excess of $500 per month. Consumer-oriented services are anticipated in the near future.

DSL services are most attractive to business customers, particularly since they are offered in faster versions at higher prices. While DSL uses ordinary copper telephone lines, it suffers from the disadvantage that it requires expensive equipment at exchanges and is effective only within limited distances of DSL equipped central facilities. Cable Internet access is more suited to residential customers, since it operates over the existing cable television network, which is more likely to pass by residences than businesses.