Latin America's Credibility Gap

SAN FRANCISCO (08/31/2000) - When investors in Latin America merrily threw money at startups earlier this year, they didn't mind the dearth of information on Net usage in the region.

These days, however, weary fund managers and venture capitalists have a newfound love for statistical data. "There is money going around but investors are more focused, more realistic and want to stand on more solid ground," says Daniel Baranowski, an associate at consulting firm Bain & Co.

Finding solid ground, however, is difficult because reliable data on Internet traffic is nearly impossible to obtain. An estimated 12 million people in Latin America use the Web, a figure that is expected to quadruple by 2003. But no one is sure what these people are doing online because there is no independent third-party measurement here like that provided by Media Metrix and Nielsen NetRatings in the United States.

That is particularly troublesome in an area where Net companies made especially exaggerated claims when the good times were rolling.

"Investors are obviously turned off by a region where they feel everybody is lying," says Fernando Espuelas, chairman of New York-based StarMedia Networks. The former poster boy for the Latin American Internet is frustrated because stock in his company, one of the first Internet success stories in the region, is down 80 percent from its high earlier this year. He blames the lack of Internet traffic data for StarMedia's fall from grace and is on a campaign to improve the measuring tools in the region.

Espuelas, however, didn't complain about poor data when times were good, so some consider his comments whiny. Nonetheless, some of StarMedia's competitors such as El Sitio, AOL Latin America and Terra Networks agree on the need to measure traffic to Web sites from listening posts out on the Internet rather than inside individual companies.

Until external measuring is possible, dot-coms are using the internal approach and hiring auditing firms to verify their measurements of Web traffic to their sites. Espuelas, for example, uses U.S.-based ABC Interactive and says he will pay for his competitors to have that same company audit their sites. El Sitio and the others scoff at his challenge, saying they've hired other reputable auditing firms to verify traffic to their sites.

All this is confusing to investors and advertisers who are trying to make sense of the market in Latin America, so they, too, are joining the call for better measurement of Internet traffic in the region.

"There really is a bit of a void of information," says Chris Hussey, Latin American Internet analyst at Goldman Sachs in New York. "The region would really benefit from a reliable independent third-party participant."

Audit firms such as ABC Interactive and Engage I/Pro do not fully solve the credibility gap because there are many ways that Internet firms can tinker with internal traffic figures. Even if auditors pore over the log files of a company's Web servers, people will always be suspicious of data that comes from inside Internet firms.

Ratings firms such as Media Metrix track performance outside company walls using software installed on the computers of select consumers, a method similar to measuring television audiences.

Even though figures from Media Metrix and other ratings firms are often criticized as unreliable, investors and entrepreneurs in Latin America say that flawed ratings data would be better than none at all.

Through a partnership with French market research group Ipsos, Media Metrix is setting up operations in Brazil, where it expects to be up to speed by the end of the year. The rest of Latin America is still a couple of years away from having those measurements. Nielsen has not brought its Internet ratings to the region.

While Media Metrix gears up, business is brisk for auditing companies even though dot-coms realize they are only a partial solution. Engage I/Pro says its business in Latin America has tripled since the beginning of the year. The company attributes its growth to startups that need to make a stronger case to investors if they hope to go public.

Convincing analysts of their true market position has also become more important for companies that are already publicly traded. Given the recent volatility in securities markets, a negative comment from a Wall Street bank can devastate fragile Internet companies. StarMedia recently lost $1 billion in market capitalization in one day after Merrill Lynch downgraded the stock because its analyst estimated traffic figures to be lower than previously thought. El Sitio is down 75 percent from its IPO on the Nasdaq in December, in part because of concerns over how much traffic it really generates.

Increased concern about traffic figures is causing Internet CEOs to snipe at each other. Over the past few weeks, Espuelas has openly suggested that El Sitio, which is audited by Engage I/Pro, has inflated its figures.

El Sitio CEO Roberto Cibrian Campoy shrugs off Espuelas' attacks. "When you have to talk about yourself all the time it's because you're not that sure of where you stand," he says.

Espuelas sums up his position: "All I'm saying is that if I'm a midget, fine. But if I'm a giant, like a think I am, I want to stick out."

But with sagging stocks and scarce numbers to back up their claims, it's extremely difficult to tell the midgets from the giants right now.

Join the newsletter!

Error: Please check your email address.

More about ABC NetworksAOLEl SitioGoldmanMedia MetrixNetRatingsNielsenNielsen NetratingsStarMediaStarMedia NetworksTerra NetworksWall Street

Show Comments