Espuelas: StarMedia Leads LatAm Portal Market

FORT LAUDERDALE, FLA. (03/24/2000) - Back in 1996, when most people considered the Internet market in Latin America a wasteland, Fernando Espuelas instead saw a huge opportunity to make money and effect social change. Espuelas, then in his late 20s, quit his job as AT&T Corp.'s marketing general manager for Latin America and co-founded, with Jack Chen, StarMedia Network Inc., a portal modeled after the likes of Yahoo Inc. and Lycos Inc. but focused on Latin America.

After months of struggle to keep the company afloat, Espuelas, whose last name means "spurs" in English, goaded investors to inject cash into StarMedia, and, after several rounds of financing, the company had a successful IPO (initial public offering) in May 1999.

StarMedia's success is credited with igniting the vibrant enthusiasm that the Latin America Internet market currently enjoys, and which has led a number of companies to follow in StarMedia's footsteps, including big guns like Spain's Telefonica SA, America Online Inc. (AOL), Yahoo, Lycos, Brazil's UOL Inc. and Microsoft Corp., as well as cocky startups like Patagon.com International Ltd., Zona Financiera Inc. and Yupi Internet Inc.

Today, New York City-based StarMedia is widely seen as a market pioneer and, so far, as the player to beat in the Latin America portal market. The company has about 700 employees, operations in 9 countries and partnerships with companies such as AT&T, Visa International Inc. and Hewlett-Packard Co.

StarMedia registered 3.6 billion page views in 1999, and its loss for the year -- $90.7 million, or $1.36 per share -- was smaller than analysts had expected.

However, this month, the company's honeymoon with Wall Street soured when downgrades from Salomon Smith Barney Inc. and Merrill Lynch & Co. sent the company's stock on a one-day 34-percent slide, from $50 to $33.06. [See "UPDATE - StarMedia's Shares Plunge on Analyst Downgrades," March 13.]Espuelas, chairman and chief executive officer of StarMedia, who has attained celebrity status in Latin American Internet circles, spoke this week with the IDG News Service (IDGNS) about a variety of topics, including the plunge in the company's stock this month, the growing competition in the market and the future of the Internet in Latin America.

IDGNS: In its downgrade report for StarMedia, financial analyst Salomon Smith Barney Inc. stated, "We prefer to sit on the sidelines, watching StarMedia with a Neutral investment rating, through the current spate of industry-wide free-spending in Latin America." What's your reaction to this statement?

Espuelas: Each analyst has their own point of view. There are also eight other analysts from J.P. Morgan (& Co.), Goldman Sachs (Group Inc.), HQ (Hambrecht & Quist LLC) and many other important banks with the opposite point of view, which is that they don't want to sit on the sidelines. But what we're going to be judged on short term and long term is on our business results: Do our sales grow fast enough so that we'll be profitable? Does our audience continue to grow quickly in order to maintain our leadership position? Analysts kind of guessing or letting some of their fears bubble up really doesn't impact our business.

IDGNS: Many of the second-generation Internet companies in Latin America are focusing on providing specific services, such as travel services, financial services, online retail shopping, or specific content, like sports or entertainment. In that light, what role does a broader-scope portal like StarMedia play now?

Espuelas: There are many roles we play. First off, we have the audience. For example, our finance channel is bigger (in terms of audience and page views generated) than all of the stand-alone financial portals. Our sports channel is bigger than all of the verticals (in that space) together. We have the opportunity to leverage our audience both for other products that StarMedia might develop or in partnerships. ...Additionally, we are a very strong vertical ourselves. ...So we think that there's an opportunity for us to, both by ourselves and with partners, develop more verticals as time goes by.

IDGNS: If you had a chance to do this all over again, would you choose to build a broad-scope portal again, or one with a narrower service focus?

Espuelas: The answer to that question depends on the timing. If I were making this decision again four years ago, I would definitely do exactly what we did to capture the biggest audience possible. If I were making the decision today, it would be crazy to launch a horizontal portal, because of the inability to get a critical mass of audience today. ...In Latin America, at this next stage, we'll have maybe one, maybe two, perhaps three companies in each vertical space. ...I don't think there will be room for anybody else.

IDGNS: What's your take on the Spanish-language portal which Teléfonos de México SA de CV (Telmex) and Microsoft launched this week?

Espuelas: It's one more portal. They'll have to figure out a way to differentiate it, to make it relevant. They'll have to build a brand around it.

They just launched it, so we'll see if it's successful or not.

IDGNS: How is StarMedia adapting, if at all, to face the growing number of competitors in the Latin America portal space, such as Yahoo, AOL, Todito.com Inc., UOL, Lycos, Terra Networks SA, Yupi and El Sitio Inc.?

Espuelas: If you add up the audiences of most of those companies, we're bigger than they are. We're also bigger in terms of revenues. It's not that we don't care about the competition. Obviously, we care very much. But what we're focused on is in moving forward. They're following us; we're not following them.

What we have to do is remain absolutely focused on giving our users the best possible experience, and giving our partners and advertisers a mutually profitable relationship. We're really looking forward, not backwards. All of this competition has stimulated the market in a very dramatic fashion, in terms of marketing, in terms of growing the market, in terms of the attention of advertisers, partners and Wall Street. So we see it very positively. We just need to make sure we're never satisfied with ourselves, and we're not. We can always be better and faster and more efficient.

IDGNS: UOL claims its portal is the one that receives the most visitors in Brazil, which is where about half of Latin America's Internet users are located. What's StarMedia's take on this matter?

Espuelas: I don't know what their traffic is, because they aren't audited. They claim to be audited by Ernst & Young (LLP), which isn't a Web-auditing company.

Therefore, they could have a trillion users or just two (users), and to me it's exactly the same, because there's no third-party validation of their traffic.

...

This is a bigger issue, which is that, unfortunately, the Latin America Internet industry hasn't yet transitioned into a professional industry. You still have people talking about hits and talking about visits instead of visitors. ...What we've been saying over and over again is: audit your traffic with ABC Interactive, like Yahoo, AOL and StarMedia do. That way we can compare (apples to apples). One of the things we had to stop doing because of UOL in Brazil is to stop disclosing our traffic there. Each time we said a number, magically they were 20 percent above it. ...

We've been working with (AC Nielsen and Media Metrix) over the last nine months or so (to help them enter the Latin America market). ...If they'll let us, we'll be their very first client, or, at the very least, among the first group of companies that will buy their service. But beyond that, we don't have to wait for that. If everyone is audited by ABC Interactive, we can compare today and we don't have to wait until tomorrow. We're very eager to have everyone measured in the same way.

IDGNS: Some people say that StarMedia is a good regional portal, but that its content falls short at the local country-specific level. Do you agree?

Espuelas: That's a criticism that comes from some of our competitors that would like to position themselves as more local than StarMedia. But there are two huge inconsistencies in that point of view. One is that it wouldn't explain why we have more traffic than anyone else combined. And, secondly, if those competitors that say this have the right formula, they would be bigger than we are on a market-by-market basis, and they are not. That's a little slogan that's used against us. I don't think our users would agree with it.

Can we do it better? Absolutely. Can we be more relevant in every single market? Sure, when can you not? But the issue is that we do what we do well, and we capture a huge chunk of Internet users in Latin America.

IDGNS: Currently, 5 percent of StarMedia's revenue comes from electronic commerce activities, while the rest comes mostly from advertising sales. Were you expecting the e-commerce percentage to be higher at this stage in the game?

Espuelas: No. We've always thought that e-commerce would be slower to develop in Latin America than in the U.S. because of the infrastructure issues. ...I'm still very bullish on e-commerce. I believe that this year a lot of interesting new projects and companies that were created will take off. But e-commerce probably will not be very big business in Latin America until next year. But it's important that we differentiate our strategy. We're not an e-commerce company. ...It's not the core of what we do.

IDGNS: Can a company like StarMedia survive by mostly selling advertising?

Espuelas: Absolutely. We're growing our advertising sales very quickly.

Advertising spending itself is growing very quickly in Latin America. ...By having not only the largest audience but a methodology... we're able to offer a lot of value and marketing power to our customers. So we don't really see a horizon on the advertising business. We're closing more deals all the time, bigger deals all the time. The number of million dollar-plus advertising deals that we close has zoomed in the past three months.

Advertising on the Internet in Latin America has mutated from simply being something you experiment with to now being a central part of how you think about marketing. ...Today, most of the clients that we talk to already have Internet budgets and, in some cases, whole Internet marketing groups. ...Our ability to capture more than our fair share of the revenue pie is driven by our experience in selling it. ...We're very bullish on it. Our business is doing very well and the opportunities are only going to get better in a couple of years.

IDGNS: StarMedia has acquired in the past nine months a number of companies with a wide range of expertise areas -- search engines, content-driven portals, broadband specialists -- and from different countries, including the U.S., Spain, Brazil and Chile. What is the key to a successful integration of these disparate services and corporate cultures into a coherent strategy?

Espuelas: The first part is to know why you're acquiring the company and have every acquisition be part of a much bigger strategy. We want to operate in three very specific areas: horizontal portals, vertical portals and local portals. So we acquire companies in all three areas ...There's a very clear coherence to the companies we've acquired. ...Also, we're successful acquiring companies because we don't take a position that we're conquering or invading.

Quite the opposite. ...

IDGNS: Could you comment on the importance of wireless access to the Internet in Latin America and at what stage broadband access is at now in the region?

Espuelas: Broadband is really in its very beginnings, primarily because cable operators unfortunately haven't been aggressive about upgrading their technology. There's a lot of investment that will have to be made in infrastructure in order for true broadband to be available. Having said that, we already have a working broadband portal, which is really an amazing product.

Now, we're essentially talking to different cable carriers and waiting for them to upgrade their systems. Long term, we're very bullish on it, because the broadband experience is so rich and so powerful. ...

In terms of cellular access, it's a totally different picture. It is a blooming, booming area of our business. We have been very successful in partnering with about 15 cellular carriers throughout Latin America. Our platform is being used by hundreds of thousands of people right now, and the potential is to reach many more people in the coming years. It's also a very good revenue source. Growth potential is almost unlimited. Today, it's calculated that there are about 60 million cell phones in Latin America, and that's expected to grow to 100 million in a couple of years. It's very impressive growth rate, and it represents a very big opportunity for us.

StarMedia, in New York City, can be reached at http://www.starmedia.com/.

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