Virtual LatAm Hits Roadblocks

Although analysts predict dramatic increases in e-commerce and Internet advertising in Latin America, American investors are not yet ready to jump into the fray.

For one, the region's weak infra structure is not strong enough to support freewheeling, American-style Internet businesses. And, investors caution they are more likely to favor infrastructure plays before diving into Internet investments.

Projections call for an 140% increase over the next six years in Latin American e-business, according to Julio Marquez, managing director of Global Emerging Markets, North America.

"I'm hyper-bullish on the need for infrastructure... they don't even have cable penetration. I'm very cautious on the retail side," said Mark Hudoff, a high yield investor with PIMCO. "What drives Internet economics is [personal computer] penetration. PC penetration in Latin America is still pretty meager. At the business level it's something, but not at the consumer level."

Personal computer penetration in the region currently hovers between five and seven percent.

Some analysts, however, are a bit more optimistic.

"There's a question over the region's infrastructure. But the telecoms are going in; problems are being solved," said Marquez.

Although a few cable systems have been announced in recent months, wireless Internet access is a more likely option for many of the region's consumers. Wireless access could circumvent a costly and time-intensive network build-out, said Hudoff.

Still, access may not be the only necessary component to fuel an explosion in e-commerce.

"We identified a number of key factors in building a network of sites," said Horatio Milberg, chief financial officer of El Sitio, a network of Websites in Argentina, Brazil, Mexico, the U.S., and Uruguay.

"These are in-country operations, original proprietary country-specific content, a strong community of loyal users, regional connectivity capabilities and broadband access."

The anti-bricks and mortar' strategy that has come to define the success of U.S. online companies like and Ebay may not translate well into the Latin American market, said Julio Zamora, principal head analyst for Internet and media in Latin America at Morgan Stanley Dean Witter.

"In terms of e-commerce, the established players will have great significance," he said.

"They'll need a bricks and mortar strategy to leverage their distribution networks and supplier base because industry structures are more concentrated."

Large brick-and-mortar players will be able to leverage their existing brand names. As hardware becomes cheaper and the build-out of broadband networks brings more people to the Internet, Zamora said, a well-recognized brand name will appeal to already-loyal customers and older shoppers.

And, Zamora said, major bricks-and-mortar players will have the technical capabilities and the capital to make accommodations for on-line shoppers. They can allow for CODs or e-wallets to substitute for credit cards, for example, and may be able to circumvent unreliable mail delivery systems.

Still, American investors are doubtful.

"It's all about basic services down there - wireline penetration is only 20%, but with the luxury goods of the Internet, I'm skeptical," Hudoff said.