Things Could Get Nasty On The Net

So many are struggling over the still small Latin market that a shakeout can't be ruled out

Fernando J. Espuelas is doing a lot of talking these days. No wonder. The chief executive of Latin America Internet portal StarMedia Network Inc. is explaining why the market wiped away a third of his company's value in a single day. Investors balked at StarMedia's admission that it will have to spend millions more than projected to stay ahead of the competition. But Espuelas is emphasizing StarMedia's traffic and revenue statistics. "It has to come down to results," argues the 33-year-old CEO. "This isn't some theoretical analysis about how many angels can dance on the head of a pin."

Perhaps. But many are worried about how many Internet companies can keep step in Latin America. Over just the past nine months, startups and big corporations alike have swamped the region, looking for a piece of the fast-growing--but still small--market. Latin Web surfers now face a bewildering array of Internet service providers, Web portals, and e-commerce offerings.

Competition is heating up so quickly that there's already talk of consolidation. In the best of circumstances, that would be a gradual process of friendly mergers and alliances--something already beginning to take place. But in a financially volatile region, the chance of a fast and furious shakeout can't be ruled out. "There is definitely too much supply in the market," says Marcos de Moraes, chairman of, a Brazilian portal that sold out to Portugal Telecom last month for $365 million.

Experts say a little winnowing would do the Latin Internet industry some good. Most analysts believe that Net traffic in the region can't support more than three or four regional portals such as StarMedia. The same goes for specialized sites like health, sports, and personal finance, where there's probably room for only one or two top players plus a limited number of niche sites. Meanwhile, the trend toward free Internet access could wipe out scores of ISPs in Brazil and other countries.

WHIPLASH. Of course, almost everyone is spending money faster than they're making it. All have their hopes pinned on the region's burgeoning Internet use: International Data Corp. estimates that some 30 million Latin Americans will be online by 2003, up from close to 14 million or so at present. And Jupiter Communications Inc., a New York consulting firm, projects that online sales will soar to $8.3 billion by 2005, from $500 million this year.

The increased level of competition is what whiplashed StarMedia in mid-March. After the company made it known that operating expenses would rise $32.5 million more than planned this year--in part to boost its presence in Mexico and the U.S. market--Merrill Lynch & Co. and Salomon Smith Barney analysts downgraded the stock from "buy" to "neutral." The move knocked StarMedia stock down to 32 3/4 on the Nasdaq on Mar. 13, and it has yet to recover.

Still, nobody believes StarMedia is in any danger. "We are trying to signal a near-term concern about a more frenetic pace of competition," says Lanny Baker, online media analyst for Salomon Smith Barney in San Francisco, who downgraded the stock. He still considers the company the "odds-on favorite" to become the leader among Latin portals. StarMedia has a four-year marketplace head start: Advertising revenues hit $20 million in 1999 and should more than double this year, to $47 million. By such measures, the New York-based company is far ahead of existing rivals. Terra Networks, the Internet arm of Spain's Telefonica, and StarMedia's closest competitor, reported ad and e-commerce revenues of $9.3 million last year.

CROWDING IN. Still, StarMedia can't afford to relax. Mexico's leading telephone company, Telefonos de Mexico, and Microsoft Corp. jointly launched a regional portal, T1MSN, on Mar. 21. America Online Inc. and Venezuela's Cisneros Group plan to raise $575 million to expand their service from Brazil to the rest of the region this year. Others, including media giants Televisa in Mexico and Globo in Brazil, will soon join the race. "Every Internet company with global aspirations is going to want a presence in Latin America," predicts Gordon Hodge, an analyst at Thomas Weisel Partners LLC in San Francisco.

Those that can't stand the competitive heat may be tempted to cash out while there's a chance. International Ltd., Latin America's first financial-services site, announced on Mar. 9 that it was selling a 75% stake to Spain's Banco Santander Central Hispano in a transaction valuing the company at $705 million. The deal should help Patagon fend off challenges from rivals big and small. That includes financial-services Internet startups and, as well as banks with important online operations such as Brazil's Bradesco and Spain's Banco Bilbao Vizcaya Argentaria.

Patagon's founder Wenceslao Casares had no trouble finding a buyer because he had already built a name and track record for his company. Others may not be so lucky. "If you're the seventh women's portal, you're not an attractive takeover target," says Espuelas. Investors are beginning to take note.