Latinos and internet....?
Latin America's getting pounded like piñatas
By Hildy Medina
Redherring.com, December 21, 2000
Current comparison chart
Quote & Chart for: AOLA STRM
A year ago, Yupi Internet (Nasdaq: YUPI) -- Spanish for yippee -- had reason to cheer. Launched as a simple Spanish-language search engine, the Miami-based company had quickly grown into a portal offering entertainment and news, and boasting more than 5 million registered users in Latin America. In 1999, Yupi raised $101 million from investors like News Corporation (NYSE: NWS) and Sony (NYSE: SNE). The company envisioned striking IPO gold and staking a claim in the burgeoning Spanish-language online world. "I was overwhelmed by the investor interest," recalls Oscar Coen, Yupi's chief executive.
But financial backers have since cooled on Yupi. Its IPO was pulled in April, when the Nasdaq crashed, and the company is now scrambling to find new funding.
The Yupi experience is all too common in Latin America's fledgling Internet industry, which has gone through such a dramatic boom and bust that it makes Web enterprises in the United States look like models of stability. In just months, Latin America exploded as a hotbed for startups, then became a graveyard for failed ISPs, portals, and e-commerce sites. If Internet time seems fast in the United States, it is head-spinning to the south. "What you saw over a three-year period in the U.S. was compressed in six months in Latin America," says Brian Kim, director of Citicorp Venture Capital.
The Nasdaq downturn crippled a market that had only begun to gain momentum. Survivors face fierce competition for a tiny number of customers -- fewer than 2 percent of the 500 million Latin Americans used the Internet in 1999 -- and for paltry advertising dollars. Compared with the devastation in Latin America, the Internet shakeout in the United States is barely a tremor.
"Companies that have a combination of innovation, response to consumer needs, and a clear path to profitability, will be in the game. Those that don't, won't," says Charles Herington, president of America Online Latin America (Nasdaq: AOLA), a joint venture of America Online (NYSE: AOL) and Venezuelan media giant the Cisneros Group.
TONGUE-TIED
This, of course, is the same challenge facing U.S. companies. But for Web entrepreneurs to the south, the task is infinitely more complicated. Latin America has a poor telecom infrastructure and low bandwidth capacity -- a company can wait months for phone installation, let alone T-1 lines. The region suffers from widespread poverty and low levels of education. E-commerce is especially risky, given rampant credit card fraud and spotty postal service. Some observers remain enthusiastic about the region, because Web usage continues to grow rapidly. But many experts believe that only a handful of big players with established brands and distribution systems -- America Online, Terra Networks of Spain, and Brazil's Universo Online -- may be around when the Nasdaq recovers, and investors rediscover the Spanish-language online world.
In mid-1998, the region seemed rich with possibilities. Online usage was growing steadily, especially in Brazil, Argentina, and Mexico. U.S. Hispanics, 34 million strong and more affluent than most Latin markets, were becoming Internet users. From 1998 to 1999, the number of online users in Latin America increased 80 percent, from 5 million to 9 million. As demand swelled, so did the number of user-friendly sites with local content. "You started to see sites that were more friendly and easier to navigate. It made sense for consumers to get connected," says Alec Oxenford, founder and chief executive of DeRemate.com, which offers Spanish- and Portuguese-language auction sites.
Launched in August 1999, Miami-based DeRemate illustrates the short-lived success of the time. After securing $57 million from Citigroup Venture Capital and Terra Networks, DeRemate opened offices in eight Latin American countries. It registered 1.2 million users in less than a year -- so many more than projected that the company had to change hosts three times in less than six months to accommodate the onslaught. "We had expected 100,000 users in that time," Mr. Oxenford says.
Like DeRemate, StarMedia Network (Nasdaq: STRM) was riding high. One of the first Spanish- and Portuguese-language portals to go public, the company was based in New York and became a bellwether for the region. Its May 1999 IPO helped open the venture capital floodgates to Latin American enterprises and end a nearly two-year drought of Latin IPOs in the United States. Initially priced at $11, it was floated at $15 and by mid-1999, the share price shot to almost $70. The price then fell sharply -- to $40 by December -- but no one could have imagined the disaster ahead.
Since the Nasdaq's nosedive, StarMedia's stock price has fallen below its initial price. In October, its shares were at a 52-week low of $5. This followed news that the company planned to lay off 15 percent of its workforce.
But the stock market is only one reason why Latin American dot-coms are getting pounded like piñatas. Even the world's biggest online provider has discovered how difficult it can be to do business in Latin America.
In November 1998, America Online Latin America (AOLA) arrived in Brazil, the biggest Web market in the region. Two major access providers, homegrown Universo Online (UOL) and Spain's Terra Networks, were already well entrenched. Beyond the competitive landscape, AOLA suffered an embarrassing and widely publicized snafu: some 500 CDs sent to potential customers contained samba music instead of installation software. A local CD distributor had inadvertently slapped the AOLA labels on Raza Negra music discs.
As AOLA scrambles to catch up -- it has 250,000 registered users to UOL's 1.5 million -- its competitors have gained leadership positions in Argentina and Mexico. The company's Wall Street reception was no fiesta either. Its IPO this August, originally priced at $15 a share, was cut nearly in half. In October, it was still trading at its opening price of $8.
LOS DIAS DE LOS MUERTOS
For every struggling giant, like AOLA, hundreds of smaller Web companies are dying or barely staying alive. Unlike the U.S. industry, which followed distinct phases -- first came ISPs, then online retailers -- the Latin American industry burst forth in one phase. As a result, too many dot-coms are chasing too few customers, and overly ambitious entrepreneurs are trying to implement sophisticated B2B business models while online usage is still in its infancy.
Making matters worse is the dearth of online advertising. According to Forrester Research, Web advertising south of the U.S. border was $51 million in 1999, only 15 percent of that in the United States. Even in the United States, analysts are questioning the viability of dot-coms that rely strictly on ad revenue. In Latin America, most access providers offer their services for free and try to sustain themselves on advertising -- a strategy that could prove suicidal.
If advertisers were his only worry, Rami Schwartz would consider himself lucky. Mr. Schwartz has a more basic problem: he can't get the phones working at his Mexico City-based Internet portal, Mexico.com. In July, the company ordered half a dozen phone lines from Telmex (NYSE: TMX), Mexico's telecom giant. As of October, the company was still waiting. "They even demanded that we pay in advance," says an exasperated Mr. Schwartz.
Inadequate phone service is only one headache for a Latin American Web entrepreneur. Imagine trying to persuade people to order Christmas presents online, when many are wary of giving credit card numbers to strangers because of widespread fraud. Imagine trying to convince a mom in Managua or Tecate that the toys she orders in mid-November will be delivered before the holidays. "All you have to do is visit the post office and realize they don't even have computers. Letters get lost, they have no bar codes, and they still use the old system to classify letters," Mr. Schwartz says.
In 1999 only 2 percent of Latin America's online users shopped on the Internet, compared with 40 percent in the United States. "The biggest problem with e-commerce is logistics, that's going to be the biggest impediment to its growth," says Mr. Kim of Citicorp Venture Capital. "If Amazon couldn't deliver, it wouldn't be in business. It's the same thing in Latin America."
Submarino, which bills itself as the "Brazilian Amazon," had a rude awakening shortly after its November 1999 launch. According to an article in Punto-Com, a Spanish- and Portuguese-language technology magazine, Submarino had the capacity to process only 400 orders daily -- and it received 900. Even worse, several distributors were closed for the holidays. The company was forced to get inventory from brick-and-mortar stores. Some 70 Submarino employees spent the weekend before Christmas at a warehouse, packing and checking orders.
Submarino, backed by Warburg Pincus Funds and TH Lee.Putnam Internet Partners, had high hopes for a promising IPO. But like Yupi, Submarino has put its public offering on hold. It ended 1999 with losses of $11.2 million.
LATIN MASS
According to Jupiter Media Metrix (Nasdaq: JMXI), 37 million Latin Americans will have Internet access by 2003, up from 9 million today, making them one of the fastest-growing groups of Internet users worldwide. Latin Web companies are in a curious position: while the market is expected to soar, their prospects for survival have never been worse. "Investors are asking that these companies show a viable path to profitability. That's the reality now," Mr. Kim says.
Some investors remain enthusiastic about Spanish-language startups, largely because of the 34 million U.S. Hispanics. The Latin market in the United States is generally divided into three big groups -- Mexicans, Cubans, and Central Americans -- but that's only a fraction of Latin Americans. Moreover, the full population is far more diverse than this simple division suggests. For instance, soccer is considered to be a huge sport among Latin Americans, but Venezuelans don't care much for it; they prefer baseball. Latin American Internet entrepreneurs argue that country-specific content will attract these different groups.
Although analysts agree that it would be crazy to ignore the U.S. Hispanic market, they point out that Latin American dot-coms face tough U.S.-based competition. "Attempts to get the U.S. Hispanic market have not been successful," says Mr. Kim. Entrepreneurs who hoped this group would drive up advertising and subscription revenues for Latin American firms have discovered that many Hispanic online users in the United States are bilingual, college educated, and comfortable using popular English-language sites, like eBay (Nasdaq: EBAY) and Amazon.com (Nasdaq: AMZN).
The biggest Latin American Web companies are banking on strategic alliances and acquisitions to keep them afloat. DeRemate.com has signed partnerships with Terra and with T1MSN, the Microsoft (Nasdaq: MSFT) and Telmex joint venture, as its exclusive online auction site. Meanwhile, Terra, which is owned by Telefónica (NYSE: TEF), Europe's fourth-largest telecom, has very quickly increased its reach in the past 18 months through acquisitions of third-tier competitors in Peru, Argentina, and Chile.
This doesn't bode well for smaller upstarts, like Yupi, which was launched by Carlos Cardona, a 26-year-old Colombian who wanted to build a Spanish-language search engine for his father. Yupi grew like crazy, but its offering of news and entertainment is all too familiar. "When you have 50 different portals in a market that is 8 percent of the U.S. Internet industry, it doesn't make sense to be one," says one Latin Web entrepreneur, who requested anonymity. "How can Yupi compete? They don't stand a chance."
Yupi's Mr. Coen, a former investment banker, insists the company has a solid future. The shakeout, he says, "doesn't apply to us." But most observers say the company is likely to wind up being sold to an Internet giant or a traditional media conglomerate eager to enter the Latin Web market. "Yupi will eventually be folded," Mr. Kim says.
That would make Yupi's backers luckier than most Web investors in Latin America. "The vast majority of the small companies that got funding six to nine months ago will go out of business," Mr. Kim says.
Write to hildy.medina@redherring.com.
ADDITIONAL RESOURCES
AOL struggles to claim territory in Latin America.
The absence of Internet ratings data poses a credibility gap in Latin America.
Discuss this story in the International discussion forum, or check out forums, video, and events at the Discussions home page.
redherring.com |
