Q&A: StarMedia's Fernando Espuelas
In a week that saw generally disappointing first-day performances from initial public offerings, StarMedia Networks Inc. (Nasdaq: STRM) emerged as the sole winner. The operator of a Web portal for Latin Americans saw its shares shoot up 74 percent in their public trading debut.
Not a bad way for Latin America to get its first tech-related company onto the Nasdaq, although it should be noted that StarMedia, for all its focus on Latin America, actually has its corporate headquarters in New York. And the company's top line remains thin: just $1.5 million in revenue in the first quarter.
But investors pay no mind to such things: the stock has continued to do thrive in the immediate days after the IPO, closing the week at 43, a 28 point gain from the IPO price of 15.
That probably accounted for much of the good mood of StarMedia founder Fernando Espuelas when he spoke with ZDII on the telephone, on the day after the IPO. Espuelas, a former marketing executive with AT&T, created StarMedia in 1996 and has been chairman and CEO of the company ever since.
ZDII: Of all the IPOs that went out the other day, yours is the only one that did well from the start. Why do you think that is?
Espuelas: I think we present a unique story, where maybe the other companies were versions of companies that already existed. We also have market leadership, we have a big brand, we're the first mover into a really big market with a lot of growth potential, and I think the market recognized that and sort of differentiated us from just another Internet IPO.
ZDII: In your press materials, you describe chat as the core of your network, whereas in a lot of portals that's more of a side thing. Why the difference in emphasis there?
Espuelas: Our big driver is not so much chat, but what we more broadly call community, which includes of course chat, but we also group in that home pages and e-mail and bulletin boards and classifieds and personals and so forth.
We think that the opportunity for Latin America on the Internet is to bring people back together again. Latin America was unified for over 300 years, it's been divided for less than 200. And the Internet represents for the first time an opportunity to bring people back together again, to share ideas, to communicate, to do commerce with each other. And so I think that has been a big driver in our success, and I think that looking forward to the next five years, those aspects of Internet use will be really, really powerful in Latin America.
ZDII: That brings up a point noted in your IPO prospectus: although you're seen as the "Latin American" portal, it seems a little broad, certainly there a lot of different groups within Latin America. Considering that Yahoo and others have Spanish-language versions of their own sites, how are you different from them? After all, you're also trying to cover a pretty broad area.
Espuelas: I think that's exactly right, (but) our strategy is really pan-local, as opposed to pan-regional.
We're not just simply in Spanish and obviously, in Portuguese. We're really about Mexico in Mexico, and about Argentina in Argentina, and about Uruguay in Uruguay. And that gives us really the power of being both a pan-regional community, where we connect people and allow them to communicate, but a pan-local content and services offering. And that, I think, has given us a lot of strength.
Now we can execute on that, because in fact, we are in all the major markets in Latin America, with local presences, companies, local management and local product.
So we're a totally different company from the U.S. companies that are now doing Spanish language versions of their product.
ZDII: One of the things you mention also in the prospectus is that in March you had 60 million page views. How many unique users did you see, and what kind of growth trend should we expect in that area?
Espuelas: As much as I would love to be able to talk about the future, the SEC is very specific on that, so I can't really talk about what's going to happen next. We are investing in marketing, we are investing in our infrastructure to make sure we can scale up, and you can make your own conclusions from that.
In terms of unique users, there is no Media Metrix in Latin America, so it's very difficult to know that number with precision. We have certain internal estimates, of course, but really not something that we can comment on.
ZDII: Last year you lost $46 million on revenue of about $5.3 million, you lost about $16 million in the last quarter, on revenue of about $1.5 million. How far are you from making a profit?
Espuelas: Once again, I can't really comment about the future. But what is part of our strategy is to continue to invest very heavily in building out this market. We are literally creating an industry, we have built, but will continue to construct, the biggest brand in Latin America. We have the most complete product offering in Spanish and Portugese on the Web, and we will continue to build that out as well. So we're very much in the investment mode.
ZDII: At least for now, you're pretty heavily reliant on advertising; in fact, five advertisers provide more than half your revenue. How much of a role is e-commerce going to play?
Espuelas: E-commerce is going to be a big opportunity into the future. We think that Latin America will receive e-commerce very, very well, (because of) the convenience factor, the product availability, and more importantly, I think -- something that may be overlooked in the U.S., where the consumer is already the most empowered consumer in the world -- is that e-commerce is a fundamentally empowering technology, because it unifies, if it's done correctly, enormous product choice, enormous consumer-friendly information, and attractive pricing and delivery options.
So going forward, we see the development of e-commerce as a key part of our strategy. We don't think, however, that it's going to be anything short-term. We think this is something that has to be built. It will take some time, but we intend to be leaders in that process.
ZDII: But it sounds like, at least for the foreseeable future, you're going to be mainly an advertising-reliant company.
Espuelas: That's correct, that's correct.
ZDII: It seems like more companies are going back to the stock market pretty soon after their IPOs, to raise more money. Will StarMedia be considering that?
This funding that we've just completed will take us through the end of 2000. However, there are always strategic opportunities that we'll look at, and there are always strategic funding opportunities that might be interesting.
But right now, especially the day after the IPO ... (laughs)
ZDII: Well, I think someone just went back to the market a month or two after their IPO.
Espuelas: That's not in our plan.
ZDII: One of the concerns, especially recently, that frequently surrounds businesses that deal in Latin America is currency problems. Why shouldn't U.S. investors worry about this in your case?
Espuelas: The primary reason is that most of our contracts are dollar-denominated, so we that in fact we don't run huge currency risk. And really, I guess that's the main reason.
ZDII: So you don't get paid in anything but dollars?
Espuelas: No, I'm (not saying that). Many of our contracts are pegged to the dollar, so that fluctuations in currency would not impact the value of those contracts.
But I think the bigger answer to the question is that Latin America is a new place. There will be moments of economic dislocation, like there are in any part of the world, but the days of roiling from one crisis to another are pretty much over.
You can see that in Brazil, where, if you believe what was being written in Brazil itself three months ago, the country was over. I mean, it was the end, the abyss. And now they're reporting positive growth, inflation is under control, interest rates have been halved. And the reason for that is really fundamental. It's not simply an accident.
At the beginning of the decade, most of the economic activity, for example, in a country like Argentina, if I remember the number correctly, it was something like 70 percent of GNP was generated by the government, government-owned entities. And what that meant is that they had absolutely no market discipline, no transparency, no efficiency, and sort of behaved in a kind of economic bubble.
In the process of privatizing these economies, what you introduced is market discipline, and also stakeholders that are more numerous than the government. So you have a lot of interests pulling towards efficiency, towards rationalization of government expenditure, towards the lowering of taxes, and so forth and so on.
So will there be economic tumult? Yes, as there is in almost every place except the United States. But that is the opportunity in Latin America. The risk is, in some ways, the inverse of the return of the investment.
ZDII: Speaking of Latin American stakeholders, are you publicly traded right now in any of the exchanges down there?
Espuelas: No, we're not. In fact, we're the only Latin American technology company listed in Nasdaq, which is an enormous source of pride in Latin America.
ZDII: Any plans to list on some of the Latin American exchanges?
Espuelas: Not right now, because it would be symbolic, more than anything. The liquidity that's available in Nasdaq or the U.S. capital markets is unequaled anywhere else in the world.
And so it would be, I think, more of a gimmick, (rather) than anything that would add value either to Latin America, our users or our shareholders.
ZDII: Moving onto one of the other broad regional trends in Latin America, the telephone network is a little bit further behind than in Japan, Europe or the U.S. You're going into the ISP business later on this year. Explain how you overcome some of the infrastructure problems that you're going to have to deal with, that ISPs in the U.S. or Europe don't have to deal with.
Espuelas: First on the market, and then on the ISP part of it.
Although I agree with you in some cases the telephone systems are behind Europe and the U.S., in some cases they're ahead, like in the cases of Chile and Uruguay, which have a higher penetration of digital phone lines and digital equipment than the U.S. does. So there's been a leap-frogging over the last 10 years to new technologies, new networks, that has given Latin America in most countries, in fact, or at least the major countries, really advanced infrastructure.
However, there are obviously issues, because that's still being built out. But literally billions of dollars have been invested in improving the network, and billions of dollars are being invested to continue that improvement, so we feel very, very positive about the infrastructure.
Now to the ISP part. Our partnership with AT&T means that they actually manage the network. And frankly, I can't think of a better company in the world to manage our ISP network than AT&T.
ZDII: So will you essentially be a reseller of AT&T's service?
Espuelas: No, the way the partnership works is that it's a StarMedia-branded offering. The customer is ours, the revenue is ours. We split a margin with them (AT&T), so it's our customer.
ZDII: So how much of your revenue would you expect to come from that segment of the business eventually?
Espuelas: We're not really looking that far out, we're going to be testing it, we're going to test the value proposition in Brazil, which is the most competitive market, and we'll see what comes out of that.
ZDII: Are you worried that someone else could spring up and say "We're a better Latin American portal"? How worried are you that someone could try and do that before you fully establish your brand?
Espuelas: In that particular scenario, not that worried frankly, because we've established our brand. We've had two and a half years in the market by ourselves. We used television advertising over two years ago when 99 percent of the current Internet population was not online. And we are the Latin American Internet. We generate somewhere between 100 and 200 press articles a month in Latin America.
So I'm not that worried about that particular scenario. However, I am very healthily paranoid about competition. I understand how perishable the lead can be in this fast-moving business. And the way I think about our business is, we're leaders every 24 hours. And every 24 hours we have to prove it again, we have to extend our lead, and win it all over again.
And that is, I think a good philosophy for this industry, so that we will always run faster than anybody else.