Hosts with the most

IBM, Diveo Broadband link in Latin American Web initiative According to many analyst predictions, the Latin American market is poised to be one of the next great gold mines for advanced broadband data services. To get a jump on the inevitable stampede, two companies with complementary skills and their eyes on the action in the region have opted to pursue the Web hosting market together.

Diveo Broadband, a network operator and Internet infrastructure provider in Latin America, has formed a $120 million, five-year initiative with IBM Global Services under which the two companies will develop and deliver Web hosting services together in several countries. The deal calls for IBM to become an anchor tenant in Diveo's Internet data centers in Sao Paulo, Brazil; Mexico City; and Buenos Aires, Argentina, supporting the e-business initiatives of the customers Diveo serves and managing the data centers' operations.

For U.S.-based Diveo, the deal serves as an extension of a Latin American pursuit that has been under way for some time. The company built networks across several parts of Latin America using its broadband fixed wireless spectrum and landline fiber optic facilities (Telephony, July 24, page 54). Diveo principals believe that bandwidth capability, combined with its Internet data center efforts and its IP Business portfolio, which includes co-location, hosting, caching and storage services, made it an appealing partner to IBM.

"Rather than building its own data centers, IBM has decided to take co-location space and bandwidth services from us and use them to provide hosting services to the market," said David Rutchik, president of Diveo's IP Business unit and executive vice president of corporate development. "They look at our network and our IP capabilities and see it's something they don't have. In markets that are bandwidth-constrained, facilities-based broadband access is a very important capability."

Indeed, Diveo has been busy developing its network presence across Latin America, even if it has not been allowed to talk about it until just recently. In October, the company withdrew an IPO filing it submitted in April, ending the Securities and Exchange Commission-mandated quiet period that goes along with IPO preparation. Diveo decided that private equity markets would offer more opportunity, especially given current market conditions.

"We jumped at the public market opportunity - it was too tempting not to," said David Schmieg, chairman and CEO of Diveo. "But after sitting on it for five months and watching the tech and telecom sectors go so far south, we weren't going to wait any longer."

Although Latin America is experiencing rapid growth, Schmieg said the overall downturn in financial markets for telecom-related companies in the U.S. still has a tendency to drag down performance in other geographic areas. Therefore, Diveo is gunning for its U.S.focused telecom service provider counterparts to return to more prosperous times.

"The drops in the public sector have an impact in Latin America, even if the region itself is doing well, so we'd like to see the companies [in the U.S.] come back," Schmieg said.

Despite some of the setbacks companies with similar strategies have experienced lately, Diveo considers itself well-capitalized and - given its regional targets and commitment to private equity for the time being - relatively well-protected from market conditions. Between June 1998 and July 2000, the company secured a total of $873 million in funding.

The deal with IBM is further proof of Diveo's fortitude, Rutchik said, because in addition to the initial terms, there is the possibility of joint customer approaches and service contracts.

"The $120 million is committed revenue, but there's a substantial potential upside beyond that," he said.

Latin America's potential is attributable to both the phase of operation most of the region's businesses are currently in - the transition to a more Web-centric mode - and the fact that facilities such as power and bandwidth have been relatively scarce to this point.

"Until companies like ours came along, their only option was to host their efforts in the U.S.," Rutchik said."We have the ability to be the first mover."

"We looked at all parts of the market and saw opportunities in all sectors," said Todd Kirtley, vice president of strategic outsourcing for IBM Global Services Latin America. "You have the emerging companies born on the Web looking for Web hosting capabilities, and you have large enterprises making strategic decisions to either build their own Web hosting operations in-house or work with a third party. Some of the things we take for granted in other parts of the world are not necessarily existent today in Latin America."

IBM decided to team with Diveo because the company's capabilities matched well with IBM's and because the service provider committed to equipping its Internet data centers with available bandwidth and reliable supporting infrastructure, Kirtley said.

"When they're acquiring and building Internet data center facilities, they're doing an exhaustive amount of work verifying the facilities to make sure the infrastructure is stable and redundant," he said. "We have the information technology capabilities they don't have today, and they would have to make a significant investment to get them themselves."

That said, Kirtley acknowledged that competition for the businesses IBM and Diveo are pursuing is heating up fast.

"The market is changing rapidly in Latin America," he said."All the telecom companies are putting millions of dollars into the infrastructure, and over the next 18 months, you'll see significant improvements."

For Diveo, the challenge in maintaining its advantage of being among the first competitive service providers to penetrate the Latin American region isn't limited to putting the infrastructure for advanced data networking in place. The carrier also must demonstrate to businesses there how the facilities can be best put to use. Having a partner such as IBM is a beginning, but the company recognizes the ongoing challenges in developing a market presence.

"The biggest competition for us is in educating the market," Rutchik said. "The sell is showing the business decision-makers how we bring value."