RECIFE, Brazil -- Thanks to last year's boom of Internet service providers that offered free access, Brazil became the South American country with the highest number of users, analysts say.
But the free ISP honeymoon, which was responsible for making the Internet accessible to Brazilians, is over. These ISPs have failed to turn a profit and are either changing their business plans or closing their doors -- just as many U.S. ISPs have done in the dot-com shakeout.
This comes despite the fact that the number of Brazilian Internet users –- considered to be the fastest growing group online –- increased 67 percent from 1999, according to researcher Chase H&Q. There are currently 14.5 million Brazilian users, and 33 million more are expected to go online by 2003, Chase H&Q said.
"The free ISP business is a pretty tough business to make work in any market," Jupiter Communications analyst Lucas Graves said. "They're still having trouble turning it into a profitable business. The especially difficult thing about Latin America is there has been the same ISPs competing for a limited pool of users."
The free ISP boom began in December 1999 when Brazil's largest private bank Bradesco began offering free Internet access to its clients, said Alvaro de Castro, associate director of online music resource kviar.com.
Two days later, iG entered the market and signed up 1.3 million users, de Castro said.
IG is still open for business and is the largest free ISP in Brazil, but it's plagued by debts and difficulty retaining users who are inundated with spam.
Grave's description of the problem is illustrated in the number of ISPs that have closed their doors. Super11, which began in January 2000 with a $10 million investment and soared to become the No. 2 free ISP, went out of business in September.
Tutopia fired employees from its content division in July when it couldn't afford to pay them.
CidadeInternet, which also has a presence in Mexico and Argentina, replaced its free Internet access last month with a paid service called "CidadeFlash."
"We've seen free ISPs launched by banks and retail outlets," Graves said. "Some of those businesses make sense on a small scale because companies making money off them are making money off them in some other fashion.
"Clearly UOL (the largest pay-for ISP in Brazil) has a certain advantage over other ISPs in the market because of content. It was the first and biggest ISP in the market since it was able to strike content relationships with a lot of small sites in Brazil."
Few analysts believe that free ISPs other than iG will survive this year, and even iG seems to be reconsidering its market strategy.
IG launched a pay-for service last month, in which customers pay $10 to access content through an ISDN connection.
Customers with ISDN chips and local phone service could sign up for iG3, which means "three times faster" as advertised on billboards in Brazil.
"They bet that enough traffic could create revenues and publicity, but then they fail," said Inter.Net CEO Clovis Lacerda, who also predicted free ISPs will cease to exist this year.