StarMedia tumbles to earth

Spanish and Portuguese-language Internet portal StarMedia Network Inc., once considered the child prodigy of Latin American Internet, has recently seen its bright and shiny star tumble down to earth, leaving analysts and industry watchers speculating over the future of the once-plucky company.

Already suffering from the dot-com blowup and a regional slowdown in Latin America, the five-year-old company sent up a red flag earlier this month when it announced that it would not reach break-even status by the fourth quarter of this year, as previously stated, and that its high-profile founder, chairman and CEO, Fernando Espuelas, would be stepping down as CEO.

The news, released August 7 along with ho-hum second-quarter financial results, sent the company’s already slumping stock plummeting 24 per cent the next morning to 0.62 cents a share, 95 per cent lower than it traded a year ago.

The stock has been trading under a dollar since July 27, bringing it perilously closer to being delisted from the Nasdaq. Generally, after a stock has been trading below US$1 for 30 days, the Nasdaq allows a company 90 days to bring the stock price back up before it faces delisting.

With a sliding stock, a new CEO, and profitability stretching farther away, industry watchers have begun to ponder over the future of StarMedia.

Lars Schonander, a Latin America media and Internet analyst for ING Groep N.V.-owned investment bank ING Barings, recently set StarMedia’s year-ahead target stock price at $0.20 cents a share. His forecast was the lowest price target ever given on a U.S. stock since Thomson Financial/First Call began tracking analyst price predictions in 1998, according to the company’s research director Chuck Hill.

When asked what prompted him to make such a grim prediction for the company, Schonander said that StarMedia’s second-quarter report contained three elements that did not bode well for the company: that it would not break even in the fourth quarter, that it had taken some restructuring charges, and that Espuelas was stepping down as CEO.

However, these recent developments are indicative of an even larger problem centered around StarMedia’s business model, Schonander said.

“A business model based on advertising in Latin America is particularly tough,” he said, noting that Internet penetration in the region is dismally low.

Latin American Internet penetration is projected to be 4.1 per cent at year-end 2001, according to International Data Corp. (IDC) Latin America. By comparison, the researcher forecasts U.S. Internet penetration to stand at 57 per cent for the end of this year. (IDC is a subsidiary of International Data Group Inc., the parent company of IDG News Service.)

Although the region’s penetration level got a boost from a number of free Internet access providers that cropped up last year, many of these players are now dead in the water, Schonander said.

Grant Smith, a Latin American Internet marketing strategy analyst for Yankee Group Inc., noted that most companies that have created real value in the Latin American Internet market have done so with hardware and telecom infrastructure.

Working on an advertising-based strategy in the region, without looking at whether or not there is infrastructure to support Internet growth, is a fatal flaw, he said.

“In that sense, we haven’t been optimistic (about StarMedia) from the start,” Smith added.

However, IDC Latin America analyst Anna Giraldo Kerr did not see the company’s strategy as a particular hindrance.

“The portal environment is changing from childhood to early adulthood,” Giraldo Kerr said. And having learned the hard way, many companies are discovering that they need to explore options like targeting brick-and-mortar advertisers, but this does not mean that the business model itself is an error, she added.

And although subscription-based services have been the answer for some other Internet companies facing advertising doldrums, Schonander said that he didn’t believe this was a viable option for StarMedia.

“The weakness of this company is that it doesn’t have any proprietary content,” Schonander said. “I can’t think of anything on the StarMedia services anyone would pay for.”

But beyond the Internet portal’s possible strategy problems, it was Espuelas’ exit as CEO that raised more questions about the company’s future.

In what some considered a perplexing move, Espuelas handed his mantle to Enrique Narciso, who up until that time was president of the company and previously had been general manager of StarMedia Mobile.

Espuelas stated that he would continue on as chairman “as well as pursuing new ideas and new opportunities,” noting that Narciso was an obvious choice as his successor, given the new CEO’s background and the fact that wireless Internet was going to play a growing role in the company’s strategy.

StarMedia wireless strategy took shape when the company received a cash injection of $36 million from BellSouth Corp. last May. Under the five-year strategic agreement, StarMedia agreed to create co-branded portals that will allow BellSouth’s 12 million Latin American cellular subscribers to access personalized information by either computer or mobile phone.

Although the company’s new wireless focus made Narciso’s appointment a logical step, the appointment marked a dramatic change in how the company has been operated thus far.

When Espuelas co-founded the company in 1996 with childhood friend Jack Chen, the young Uruguay-native was clearly determined to do more than just lead the company: he strove to spearhead an Internet revolution in Latin America. Espuelas’ personality was seen as the driving force behind StarMedia as the company quickly gained recognition and audience share across the region, making it the darling of Latin American Internet players before its star began to dim amid the dotcom downturn.

The executive change is “tough to read,” said Schonander. “This company is so closely tied to the founder, there’s been no convincing explanation of why he’d stand back from the company,” he added.

Smith was more pessimistic about the change.

“It clearly affects the brand that Fernando left,” he said. “He was the personality that drove the company, and (his departure) leaves a fairly heavy burden on his successor.”

However, Giraldo Kerr said that the fact that the company changed leadership could be seen as a positive step, indicating that StarMedia is acknowledging that it needs to rehash its strategy.

“There’s not a feeling of complacency,” she said. “This is good news.”

At this time, it is still unclear what direction the new CEO will take. During a conference call on the company’s second-quarter results, Narciso said that StarMedia needed to “reassess its current business path” given Latin America’s current economic volatility and the fact that the company would not reach break-even any time soon.

Narciso stated that he would examine the company’s operations in the face of current market conditions before giving any further guidance on the direction he would take.

“My goal is to develop a strategy and operation that provides a successful and self-sustaining company given the realities of the market and our resources,” he said.

According to analysts like Smith, however, the reality may be that StarMedia as it stands today will not exist in the near future.

“Whatever they have of value will be burned off (before they reach break-even),” he said. “I don’t see (StarMedia) surviving without another company buying it … and they are waiting to get it cheap.”

While the company may be in trouble, it still reported that it had 23.2 million unique users at the end of June, giving it an attractive audience base that it can use to draw upon to build up its business.

Despite this, Smith was lukewarm on the company’s future, saying that he was “somewhat pessimistic about a turnaround.”

Giraldo Kerr, however, took a wait-and-see attitude, noting that many Internet companies are just learning how to play the game.

Meanwhile, a representative for StarMedia insisted this week that the company is working on a new course of action, which is soon due to be unveiled.

While industry watchers await the company’s next move, StarMedia stock (STRM) continued its slide this week, dropping from a close of $0.34 cents a share last Friday to $0.31 a share this afternoon – skirting yet a little closer to Schonander’s bottom-out forecast.

StarMedia, in New York City, can be reached at