America Online Inc., which has stumbled recently in attempts to extend its dominance of the Internet beyond U.S. borders, yesterday moved to bolster its operations abroad by naming a prominent New York publishing executive to head its international unit.
Penguin Group chief executive Michael Lynton, who also briefly ran a Hollywood studio, will succeed Jack Davies, who founded the foreign division in 1994 and announced last fall that he would be stepping down for personal reasons.
Lynton, 40, who will be based in New York, said in an interview yesterday that although he was "very happy" in his current job, the allure of the Internet was too strong to resist.
"It is obviously the biggest revolution in my lifetime in media, and from that perspective it's fascinating," he said.
Lynton said he intends to make AOL the leading interactive service in the world. But the company so far has not been able to duplicate its success abroad. In places such as Canada, it has been forced to slash prices for its services. And in Hong Kong and Britain, it has had trouble delivering on the promises of its flashy marketing campaigns that tout a service as rich with content as its U.S. product.
AOL--by far the largest Internet service provider, with more than 20 million members--and its competitors have been scrambling to stake a claim in foreign markets for one key reason. While U.S. subscriber growth is slowing down, Internet usage abroad is exploding. Sometime in 1999, the number of users outside the United States overtook the number within the country.
"It was a symbolic moment," said Matei Mihalca, an international Internet analyst at Merrill Lynch & Co. "All of a sudden the weight of movement shifted overseas."
In the next four years, about 64 million new users are expected to log on in Asia and Latin America.
At stake in this new virtual land rush, analysts say, are billions of dollars and the question of whether American companies will continue to dominate the Internet of the 21st century.
As telecommunications laws in Asia and Latin America have begun to loosen, U.S. companies have pounced on the chance to grab those markets. AOL faces new and aggressive competition from arch rivals Yahoo Inc. and Microsoft Corp. as well as upstarts such as Freei Networks of Federal Way, Wash., which last week became the first U.S. company to offer a free service abroad when it announced it will expand to five Southeast Asian countries.
The U.S. firms, in turn, must compete for users with thousands of local companies, which have decades of experience maneuvering through the labyrinth of business regulations in their home countries and have the connections to be able to truly localize the news and other content of their services.
"We are continuously paranoid," said Douglas Feick, head of Yahoo's international division, who said competition outside the United States promises to be much more fierce than inside the country. "There are so many people out there vying for these emerging markets that we are always looking over our shoulder for the next move."
The American companies must also overcome several other touchy problems. Officials of many countries view the Internet "backbone"--the networks that carry computer data--as part of their national infrastructure, just like roads, waterways and electricity lines, which makes it difficult for outsiders to investment in such areas. The fact that AOL and some other service providers store the data for Web sites and e-mail--which could potentially contain sensitive material--on U.S. soil, at their data centers in Northern Virginia, raises a host of legal questions.
AOL, which now has services in nine countries and has been holding talks with Satyam Infoway, an Internet service provider in India, long ago stripped the "America" out of its brand name internationally, marketing itself simply as AOL.
Davies recently defended the company's overall strategy as sound, saying AOL leaders will "keep doing what we've done. We will focus on AOL's 'secret sauce' "--its proprietary content features, such as live chats with celebrities and bulletin boards dealing with everything from cooking to skateboarding.
But in several instances, the company has had trouble executing. In Brazil, for example, AOL teamed up with a Venezuelan media giant, leaving many in the country scratching their heads. Then, AOL's top executive in Brazil, Francisco Loureiro, quit just three weeks after the service was launched. The company was unable to get the rights to its signature portal domain name, www.aol.com.br, which was already registered by a local venture.
Worse, AOL Brazil software turned out to be incompatible with some popular computer settings, leading a popular newspaper columnist to slam the company and demand that the country's consumer protection office fine AOL the equivalent of about $1.5 million for the lost time and frustration of subscribers.
AOL spokeswoman Ann Brackbill said the company has found a way around the problem and that the next version of AOL Brazil will contain fixes. Still, that means the whopping 20 million disks AOL has dropped in homes and stores over the past few months have outdated software.
"AOL is not able at this point to generate the image that it is on the cutting edge of service provision for the Brazilian marketplace," said Annika Alford, International Data Corp.'s lead Internet analyst for Latin America.
The problems haven't been confined to non-English-speaking countries. In Britain, AOL was forced to begin a free service to match competitors. It had to slash its prices in response to cheaper services in Canada. In Australia, AOL tried to enter the market without a local partner and the service did poorly.
A bigger issue for AOL, however, is whether its whole approach in foreign markets will work: selling an all-in-one Internet service that provides news, chats and other content in addition to the access lines. "We are the only end-to-end, easy-to-use Internet option," said Charles Herrington, AOL's Latin America chief.
Microsoft and Yahoo, which hit the market in several countries a few months or even a year ahead of AOL, are betting on a different approach. They are counting on Web "portals," search and directory sites designed to be a user's first or most regular stop. The goal is to attract "eyeballs" and earn revenue from advertising or retail sales to this audience.
Microsoft, the fourth-largest service provider in the United States, has made a decision to stay out of the international ISP market. Instead, it is partnering with telecommunications companies such as Telefonos de Mexico in deals that make their services link directly to an Microsoft Network portals.
The portal approach, analysts say, may be more effective in the long run because the Internet service market in many countries is dominated by telecommunications giants, unlike the United States where many people purchase their phone and Internet services from different companies.
"When you get outside the U.S., access is a different kind of ballgame," said Steven Guggenheimer, a director for Microsoft's international online efforts. "You can't pretend the rules haven't changed."
AOL has recently began developing its own international Web portals, but analysts say they are empty shells with blinking advertisements for AOL's proprietary network. So while MSN and Yahoo have consistently ranked among the most popular sites in several countries, AOL.com doesn't even show up on the top-10 or even the top-20 list for most countries.
Yahoo, which launched its first foreign site in Japan in 1996, just a few months after going public, has 21 international portals. MSN, with 31 portals, in October announced a partnership with Telefonos de Mexico, which has an 18 percent stake in Prodigy, the dominant service provider in Mexico and the most popular Spanish language service in the world. The companies will develop a co-branded MSN-Prodigy portal for the Spanish-speaking community in the Americas.
Analysts say new AOL International president Lynton--who once served as president of Walt Disney Co.'s Hollywood Pictures and launched Hyperion, Disney's books and magazine unit--will bring experience in old-line media and a classy style to a company often maligned as "unsexy."
But some analysts suggested that Lynton's lack of experience in the high-tech world and in working with non-English markets could be a handicap in AOL's race against its competitors.
"Clearly, everyone's put beachheads in many markets," said Robertson Stephens analyst Michael Graham. "But it's still too early to tell what's going to happen, and in the crazy world of the Net, anything goes."
While the United States is still expected to have the largest share of Internet users by far in 2003 . . .
Number of Net users,
In millions (projected)
Latin America: 19.1
. . . the rate of growth in Net use is expected to be much faster for Asia and Latin America.
Percent change, number of Net users
Latin America: 169%
United States: 119%
SOURCE: International Data Corp.