Cyberw@rs.

Mexico's portals battle for users in a market crowded with pan-regional giants

Checking email in one of Mexico City's ubiquitous cybercafes, Leobardo Hernandez has Mexico's new crop of Internet portals worried. With no computer of his own, zero online buying experience and a monthly income of less than US$500, the 25-year-old telephone operator is an advertiser's anti-demographic. What's worse, Hernandez doesn't even use one of the country's home-grown portals to check email, read local news and chat with friends.

"They must not advertise very much," he says. "I didn't even know there were any."

This is the predicament for T1msn.com, just one in a slate of late-arriving Mexican portals battling it out for dominance in the country's burgeoning e-commerce market. Launched in March of this year, the much ballyhooed joint-venture between telecom and software giants Telefonos de Mexico (Telmex) and Microsoft Corp. quickly emerged as one of the leaders, thanks in large part to the some 6 million subscribers to Telmex's Spanish-language Prodigy connection service, the largest Internet provider in Mexico. But with several more experienced, pan-regional portals vying for a piece of Mexico's growing online userbase, the quasi-monopolistic Telmex finds itself in an unfamiliar position as a competitor. Now the company is embroiled in an uphill battle for traffic along with such established heavyweights as Terra Networks, the Internet-services division of Spain's Telefonica de Espana--StarMedia and Yahoo!, all of which already command a substantial presence throughout Latin America and the United States.

"To have only one portal in a country makes it very difficult to survive," says Arturo Elias Ayub, director of Strategic Alliances, Communication and Institutional Relations for Telmex. "If the regional portals are recording very small earnings, then surely the Mexican portals are recording even less, and therefore must work even harder to survive."

ROUGH ROAD

The case of Tlmsn.com is not unique. Barred entry by the crippling 1994-95 peso crisis, several Mexican portals are just now entering a marketplace previously dominated by a gaggle of more seasoned, pan-regional competitors. Analysts attribute the crowded field to a robust peso and an emerging entrepreneurial class, helping to fuel tremendous growth in the country's Internet use. According to research firm Jupiter Media Metrix, the number of Mexicans online is projected to rise from 2.2 million this year, to 12.7 million by 2005, a 40% increase. Online spending, too, is due to jump 80%, from US$75 million to US$1.54 billion over the same period. Staggering figures, but analysts say it may not be enough. The problem is that the portal marketplace has become so crowded with competitors that it threatens to outpace growth in advertising revenue--just US$19 million was spent in Mexico in 2000, compared to US$72 million in Brazil, according to Jupiter data. And with a dearth of third-party surveys to rate the onli ne traffic of home-grown portals, advertisers aren't even sure which they should invest in.

"The market is definitely too crowded," says William Landers, Latin American analyst for investment bank Credit Suisse First Boston (CSFB). "We're still in the very early stages with no clear leader, but the ad market in Mexico isn't large enough to sustain the pack."

Now, the survival of this fresh crop of local portals rests on their ability to deliver fickle consumers like Leobardo Hernandez to gun-shy advertisers unaccustomed to e-commerce. No easy task, warns George Monserrat, Media and Internet analyst for BBV Securities.

"You have to change the mentality of advertisers," he says. "If you don't have the traffic, that isn't going to translate into ad dollars. It's still very much in its infancy."

Several of Mexico's portals are already starting to feel the burn. Todito.com--half owned by Mexico's second-largest broadcaster TV Azteca--made a big splash with its September 1999 debut by focusing on the lucrative Spanish-speaking Internet userbase in Mexico and the United States. The portal boasted a wide array of "virtual shops" selling thousands of different products, in addition to the standard services of email, chat and news. Todito's bilateral strategy immediately found favor with investors and analysts alike who saw serious potential in the nearly 34-million strong U.S. Hispanic market, almost 70% of which are of Mexican origin, according to BBV Securities. This potential, however, was never realized as Todito.com overlooked a regional idiosyncrasy: Spanish speakers in the United States predominantly like to surf U.S. sites, and non-U.S.-based Spanish-language portals trying to tap that market have met with lukewarm results.

"The whole U.S. Hispanic market is a mystery," says Robert Hinchcliffe, Latin American Internet analyst for Banco Santander.

"The demographics are changing, and it's a bit too early to think that the average U.S. Hispanic online desires the same content as a person in Mexico. It's going to come down to marketing, who is out there raising awareness among U.S. Hispanics."

Serious adjustments within Todito are already underway. At the start of 2001, the portal had been asking for some US$14 million in advertising money. However, as it became clear that their Internet strategy would need thorough tweaking, the portal lowered the figure to US$4 million. Analysts say overestimations like this one are widespread throughout the market.

"There has been a huge downward revision in their expectations for Mexican ad revenue," says Monserrat. "The pan-regionals haven't had to do this."

Todito's difficulty in locking up ad dollars despite a significant home-field advantage is puzzling. With locally-geared content, an existing relationship with consumers and the experienced sales force of TV Azteca to leverage with advertisers, analysts agree that Todito.com should be far more competitive with its pan-regional counterparts. Recent third-quarter earnings tell the tale of the portal's frustration: Despite a 60% increase in advertising sales, Todito.com still recorded a net loss of US$9.7 million. For long-term staying power, analysts argue that Todito must achieve some level of regional scale by establishing a presence outside of Mexico.

"Even if Todito.com accomplishes sustainable leadership in Mexico, it's still at a disadvantage (to regionals) because it focuses on a single market, making it less sustainable in the leaner years," says Lucas Graves, Latin American analyst for Jupiter Media Metrix.

Similar problems hindered early success for Todito's chief domestic rival, Esmas.com, the Web vehicle for Mexico's largest broadcaster, Grupo Televisa. Launched in April, many tagged Esmas.com as a shoe-in for success with Televisa's dominant audience share and enormous cache of media content. But a series of missteps with the media giant's Internet strategy weakened its initial impact. Unlike local competitors Telmex and TV Azteca, who enlisted seasoned Internet companies to develop their portals, Televisa went at it alone and sunk US$80 million into a website plagued by poor navigation ability and technical glitches. Sluggish decision-making and overspending gave way to a series of management shake-ups and ultimately led Esmas to re-launch the site Dec. 1, 2000. The portal is currently in the process of decentralizing its operations in an effort to react quicker in the rapidly changing e-commerce marketplace.

"In a nutshell they've tried to address their technical difficulties; they've re-launched and they've reorganized structurally," says Monserrat. "They're kind of at the stage of rediscovering their Internet strategy in the Mexican market."

Most agree that the strategy for both Esmas and Todito may involve some kind of strategic alliance with another player. Dominant brand identification gives both portals temporary staying power, but as the trend of bringing together' content and distribution grows, analysts predict that consolidation among Mexico's local and larger regional players is certain.

"A natural outcome for portals like Starmedia, which has distribution and a strong userbase, is to hook up with a major media company like Televisa or TV Azteca," says Monserrat. "That could become a very synergistic evolution."

CONSOLIDATION CRUNCH

In fact, consolidation of Mexican portals may not just be the smart move, but the only move. Early indicators suggest that as the industry becomes stronger, a lack of diversity throughout Latin America could prove fatal. In a recent Web traffic survey by Paris-based NetValue of the 10 most visited domains in Mexico, only one national portal--T1msn.com--made the cut, with regional portals Yahoo!, Terra and StarMedia rounding out the list.

"It's definitely true that in order to succeed in the region, you have to succeed in the individual markets," says Graves. "But because none of the individual markets is that big, it's important to have scale across the region."

Infosel--one of the original Mexican portals--was among the first to experience the consolidation crunch. Wracked with losses and trying to keep pace with the flurry of new competitors, the Grupo Reforma-owned company began talks with Terra Networks. Seeing Infosel as the ideal content provider to buoy their position in the Mexican consumer market, Terra owner Telefonica de Espana acquired the portal in October 1999 for US$500 million in cash and stock. The deal provided staying power to Infosel and solidified Terra's Internet expansion strategy throughout Latin America. Analysts say consolidation of this kind will continue and warn smaller local portals without substantial cash-backing to beware.

"With tighter capital markets continuing, the niche portals are definitely going to have to align themselves with either ISPs (Internet Service Providers) or pan-regionals such as a Terra or Starmedia," says Hinchcliffe.

That's because pan-regionals have scale. Terra, for example, can spread its product development costs across Mexican, Brazilian and Argentine users, while the homegrowns' more insular model limits them to just the Mexican market.

New York-based StarMedia is another out-of-towner that has Mexico's national portals worried. Leveraged by a four-year head start, the portal has enjoyed staggering growth and earnings, with US$17.1 million in third quarter revenue and 3.3 billion page views over the same period--the largest online audience in the Spanish- and Portuguese-speaking world. Just last February, StarMedia became one of the latest entries in the Mexican portal sweep-stakes by acquiring AdNet, the country's largest web-search engine. Analysts lauded the deal and credited StarMedia's pan-regional approach as the most effective in blending the scope of the Internet with the local idiosyncrasies of domestic markets.

"What StarMedia brings to the table is eyeballs," says Hinchcliffe. "When they form an alliance with another portal, they get paid while not having to pay for content. So it helps StarMedia and generates traffic for these smaller portals."

PATH TO PROFIT

Analysts say those portals hoping to remain independent must establish a clear path to profitability. For Mexican portals, this means cutting costs, attracting users and delivering enough of an audience to advertisers. Early advantage goes to T1msn.com with its automatic traffic generated by Prodigy and Microsoft's Hotmail accounts. In August alone the portal received almost 300,000 exclusive users--more than any other local portal--according to NetValue data.

"They're in the driver's seat," says Michael Simpson, media and Internet analyst for Lehman Brothers. "They have a deep-pocketed parent with access to cash and phone-lines. They will definitely be a long-term player in the Mexican market."

For the other two portals lacking T1msn.com's connectivity, the key is converting their offline media presence into online success. Televisa's enormous wealth of media content gives Esmas the edge over Todito. With nearly 1 million subscribers to its satellite and cable service, a host of television and radio stations, publishing houses, record companies and two sports franchises, the media giant should have little trouble leveraging its existing client base into online consumers. But analysts say the challenge over time will be conversion: Portals must not only create spikes of traffic through media blitzes, but turn those visitors into repeat customers.

"Grupo Televisa's content is the key competitive advantage for Esmas," Simpson says. "However, it doesn't yet have that critical mass in terms of userbase. Televisa has serious advertising muscle, but attracting users will be tough without an acquisition."

So far, neither Televisa nor TV Azteca has been very successful in capitalizing on the brand recognition of their portals. The good news for Televisa and Esmas.com is that with an 80% share of the Mexican television audience, they can afford to experiment.

Analysts say that despite steep competition, Mexico is still in the very early stages of its e-commerce development and that those portals with a broad consumer presence will be well-placed for the future.

"There are so many new users who are going to be coming on-board in the next four years, they dwarf the size of the existing userbase," says Jupiter's Graves. To compensate for its small television marketshare, Todito has engaged in a number of brick-and-mortar alliances both to strengthen its offline presence and boost connectivity. Earlier this year, they signed a five-year strategic alliance with Elektra, Mexico's largest specialty retail store and consumer finance company. Both Elektra and Todito are owned by Mexican media mogul Ricardo Salinas Pliego, who is known for mixing and matching his business interests. The deal will put Todito Internet kiosks in Elektra stores where they will sell inexpensive computers bundled with Todito Internet software. Todito and Elektra will also provide online promotion for one another with clickable banner ads and direct links to their respective home pages.

"It's a smart dual play," says Simpson. "They have the advantage of not having to take inventory risks like the Amazon.coms of the world because all the distribution and logistics is handled by Elektra."

DIGITAL DIVIDE

But before Mexico's portals can build a widespread userbase, they must first address Mexico's myriad e-commerce woes. Low computer penetration remains the largest obstacle for success with roughly five computers for every 100 people, according to Mexico's 2000 census. Making matters worse, the country has one of the lowest telephone density rates in Latin America at about 10%, making dial-up Internet access available only to a very few.

"As the Mexican phone market opens up to competition, phone-line connectivity should improve," says Simpson. "But without some type of subsidy from the government or current players, computer penetration won't increase."

All three Mexican portals are taking measures to combat the problem. Televisa will soon begin offering Internet access to its subscribers through its cable TV subsidiary, Cablevision. The service will allow subscribers to access the Internet through their cable boxes and televisions with fast connection speeds. Telmex also plans to introduce broadband technology sometime next year, allowing users a much faster and more efficient online experience. But analysts are not convinced that broadband will weigh heavily in future success. Expensive access fees and equipment put technology beyond the reach of many.

"Broadband is more of a long-term initiative geared toward the upper segments of the population," says Simpson. "I don't see your average Mexican having broadband."

Simpson and others point to wireless technology as a better avenue to bring the lower- and middle-class population online. That's because wireless is far cheaper than broadband and operates on an established infrastructure such as cell phones, PDAs (Personal Digital Assistants) and other handheld devices. Capitalizing on this potential, Todito.com recently announced the launch of "Todito Anywhere," a service that will allow users access to the portal through all WAP (Wireless Application Protocol)-enabled devices. As with Elektra, Todito.com will leverage relationships with wireless providers such as Unefon and Movilaccess to strengthen their bid in the nascent wireless market. With more than 12 million cell-phone users in Mexico alone--according to TV Azteca--analysts say Mexico is an ideal market for the wireless integration of the masses.

"It should ramp up penetration and will probably be more successful than in the U.S. because the first Internet experience for a lot of Mexicans will be on a wireless platform," says Simpson.

But beyond solving connectivity issues, Mexico's portals must also address several logistical barriers to increased e-commerce. Low credit card ownership--standing at about 10% of the population, according to Visa International--still bars thousands of potential consumers from purchasing online. To curtail the problem, analysts say the portals must broaden their target market to include lower-income segments of society and offer them alternative payment methods.

"Companies are going to have to deliver a mechanism whereby the average consumer can pay without credit card by using c.o.d. or smart card technology," says Simpson.

But even once portals have found a way to bring more Mexicans online, to be successful, "people must have a longer experience on the Internet," says Chris Hussey, Latin American Internet Analyst for global investment banking firm Goldman Sachs. A recent NetValue study found that Mexicans surf an average of 7.6 hours a month, considerably less than their U.S. counterparts at roughly 11.2 hours a month.

No one expects these problems to be resolved anytime soon. Analysts say only time will define a clear leader with users and advertisers, and portals which are on top today won't necessarily be there five years from now. For the immediate future, however, most believe current trends will continue.

"Portals with access to capital will stay. Portals associated with a phone company will stay. Stand alone homegrown portals with neither won't stand a chance," says Simpson.

Stevenson Jacobs is Mexico City-based freelance reporter.