AOL LEAVES BRAZIL, STARBUCKS ARRIVES

UNCLAS SECTION 01 OF 02 SAO PAULO 000216

SIPDIS

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SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON ECPS ETRD ASEC BR
SUBJECT: AOL LEAVES BRAZIL, STARBUCKS ARRIVES

SAO PAULO 00000216 001.2 OF 002



1. SUMMARY. After six years in Brazil, bankruptcy crises at parent
company America Online Latin America have forced America Online
Brazil to cease operations. Meanwhile, American retailer Starbucks
will soon set up (coffee) shop in Brazil, with the first store
scheduled to open in Rio de Janeiro, April 2006. END SUMMARY.

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AOL LEAVES BRAZIL
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2. After six years in Brazil, U.S.-based Internet giant America
Online (AOL) has decided to shut down its operations in the country.
The company plans to cease operations in Brazil next month and
shift its subscribers to Terra Networks, a subsidiary of Spain's
Telefonica. AOL-Brazil placed ads February 7 in major Brazilian
newspapers to announce plans for a March 17 shutdown.


3. AOL entered Brazil in late 1999 when the dot-com boom was still
going strong, hoping to make South America's biggest and most
populous nation the cornerstone of its operations in the region.
Unfortunately, AOL-Brazil never became a major competitor in the
country's ISP market, and the broader financial crisis at America
Online Latin America (AOLA) spelled the end for the Brazilian
venture. In May 2005, AOL-Brazil laid off 80 employees at its Sao
Paulo headquarters, and moved in November to dissolve its
partnership with Brazil's second-biggest bank, Itau, which held 12
percent of AOLA. At that time, AOLA ended its marketing alliance
with Banco Itau, with the bank agreeing to pay USD 3.7 million to
AOLA and AOL-Brazil to escape potential liabilities under the
marketing agreements. More recently, AOLA agreed to a severance
package with CEO Charles Herington, who will receive a USD 538,000
severance payment, as well as USD 461,000 as a bonus for 2005.


4. The decision to pull out of Brazil comes as AOLA struggles to
emerge from bankruptcy, and was made possible after a U.S.
bankruptcy court ruled in January that AOLA could transfer its
subscribers to Spanish ISP group Terra. AOLA first sought
bankruptcy protection in June 2005, and in December asked the court
to allow it to transfer its clients in Brazil to Terra. The main
shareholders in AOLA are AOL, the Venezuelan group Cisneros, and
Banco Itau.


5. While AOL-Brazil's recent ads did not mention Terra, a statement
on the AOL-Brazil Web site urged subscribers to open an account with
the Spanish internet service provider (ISP). "In fact, an accord
exists whereby subscribers who pass from AOL to Terra have access to
a series of benefits," said Terra Brasil spokeswoman Luciana Lima.
A document filed with the U.S. Securities and Exchange Commission
certifies that Terra is prepared to pay between $760,000 and $1.9
million to acquire AOL-Brazil's client base of roughly 150,000. The
final amount of the payment will depend on how many AOL-Brazil
customers actually sign up with Terra. Terra Brasil currently has
more than 2 million subscribers.

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STARBUCKS IN BRAZIL
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6. After five years of rumors, the U.S. coffee shop Starbucks
arrives in Brazil and is confronted with its first dilemma even
before acquiring the site where it will install its first shop - how
to charge USD 4.50 for an espresso as it does in the U.S. without
reducing its target clientele. Starbucks plans to open 100 shops
across the country over a two-year period. Half the initial USD 20
million investment will be provided by the Brazilian couple Maria
Luisa and Peter Rodenbeck. The Rodenbecks were responsible for
bringing Outback Steakhouse to Brazil in the 1990s and McDonalds in
the 1980s. The first Brazilian Starbucks is expected to open in Rio
de Janeiro by
April.


7. Founded in Seattle in 1971, Starbucks was named after Starbuck,
a character in Herman Melville's novel Moby-Dick. According to the

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company's fact sheet, in 2005 Starbucks had 5,715 company-operated
outlets worldwide: 4,666 of them in the U.S. and 1,049 in other
countries. In addition, the company has 3,956 joint-venture and
licensed outlets: 2,222 of them in the U.S. and 1,734 in other
countries.


8. COMMENT. Starbucks has pursued an ambitious campaign of
expansion in international markets, establishing coffee shops in 32
countries beyond its U.S. base. As such it has come to be regarded,
particularly by the anti-globalization movement, as a flagship of
globalization and a prime example of the ills some feel
globalization promotes. Several groups maintain websites decrying
the company, criticizing its labor relations, environmental impact,
and holding it as a paragon of what some see as U.S. cultural and
economic imperialism. Branches of Starbucks have been attacked
during protests, including those against the WTO meeting in Seattle.
While no public outcry has risen up against Starbucks' plans in
Brazil, Brazilian demonstrators have attacked symbolic U.S.
businesses in the past. For example, shortly after the commencement
of Operation Iraqi Freedom in March 2003, anti-war protestors
stormed a McDonald's franchise (twice) on Paulista Avenue (Sao
Paulo's financial district) causing serious damage to the
restaurant, and threatening workers' safety. END COMMENT.


9. This cable was coordinated with Consulate Rio de Janeiro and
Embassy Brasilia.

McMullen