News Column

Online Advertising in Turmoil, But the Future Looks Bright

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By Derek Reveron

December 2000 - Spanish-language Web sites are among the dot-coms hit hard by depressed stock prices, scarcer venture capital, and a shakeout in online advertising.

The Internet industry has struggled mightily since the Nasdaq nosedived in April. Some businesses will merge or be acquired, others will fail, and a handful will become profitable, analysts say. "What you are seeing is a shakedown of the second- and third-tier portals that, in the past, were getting advertising. Now the ad dollars are shifting to the premium names," says IDC analyst Mark Alexander.

Other analysts say the Spanish-speaking online market is overrun with companies -- New York-based StarMedia Network, Miami Beach-based Yupi Internet and, Spain's Terra Networks, Fort Lauderdale-based AOL Latin America, Argentina's El Sitio, and Universo Online, the biggest Internet access and content provider in Latin America. The survivors are likely to be those companies with the deepest pockets, such as Terra, a division of the Spanish phone conglomerate Telefonica.

William Landers, director of Latin America for Credit Suisse Boston, recently told a gathering of Latin American Internet entrepreneurs and executives in Miami: "Latin America's biggest Internet companies, like StarMedia, El Sitio, and Terra, have performed worse than the Nasdaq average since April. Still, these companies are young and still developing their business models, and are all very solid and have tremendous upside potential."

Hardly a week goes by without news of another dot-com's stock hitting an all-time low. Spanish-language Web companies are responding to the market turmoil by cutting costs and redoubling efforts to become profitable. For example:

-- In September, StarMedia Network laid off 125 people, or 15 percent of the company's staff (see Interactive, page XX). The move came after the company acquired 10 online businesses during the prior 12 months. StarMedia said the layoffs would save $15 million to $20 million in 2001 and help the company become profitable by the fourth quarter of 2001, a year earlier than previous projections.

-- SportsYA! announced in October that it raised $10 million in additional financing and would lay off 25 percent of its approximately 200 employees. "The cost reductions we have undertaken show how committed we are to getting to a point of profitability," says Emilio Romano, president and CEO of SportsYA!

-- In May, Arizona-based announced a cost-reduction program aimed at cutting the company's 90-person work force by about one-third.

-- postponed its $172.5 million IPO after the Nasdaq crashed just a few days before the scheduled offering. As part of what Yupi called a restructuring, the company laid off 12 of its 260 employees and later hired 24 staffers. Yupi still hopes to go public, says CEO Oscar Coen, but he isn't sure when.

-- America Online Latin America postponed its IPO and cut its offering price nearly in half before finally going public in August.

An upheaval in online advertising has ravaged dot-comland. Before the April Nasdaq crash, Web companies accounted for most online ad buys. Afterward, venture capital dried up and sites cut their advertising budgets, thereby depriving other dot-coms of revenue. In August, for the first time all year, ad spending on the Internet dropped from the previous month, according to AdZone Interactive, which tracks Web advertising. The value of online ads in August was $1.4 billion, down from a yearly high of $1.5 billion in July, AdZone reported.

In October, analysts voiced concern about the prospects for continued online advertising growth after Yahoo reported that the number of its advertisers dropped from 3,675 in the second quarter to 3,450 in the third quarter. Yahoo beat Wall Street revenue and earnings estimates, but the portal also announced that the percentage of total revenue from pure-play Internet companies dropped from 47 percent to 40 percent. Meanwhile, shares of top online ad companies DoubleClick and 24/7 Media Inc. hovered around record low prices.

In an effort to maintain market share, many Web companies cut their advertising rates, which have dropped more than 8 percent since January, analysts say. "Rates started at too high a price, when dot-coms were taking off. Prices will continue to fall until a realistic pricing equilibrium is reached," and nobody knows what that will be, says Ignacio Kleiman, U.S. general manager for I-network, which specializes in placing online ads for Spanish-language Web companies.

Online firms also are working hard to replace lost ad revenue from other dot-coms with advertising from traditional companies. The shift is reflected in I-network's business. A year ago, 90 percent of the company's clients were dot-coms. Now, half are Web companies and half are traditional businesses, Mr. Kleiman says.

Unlike many Web advertisers, however, traditional companies prefer proven players. Seventy-one percent all online ad spending goes to the top 15 sites, according to Jupiter Communications, an Internet research and consulting firm. Giants such as Coca-Cola, Ford, and Procter & Gamble are signing marketing deals mostly with dominant companies such as America Online, Yahoo, and Microsoft. However, the top Spanish-language portals also are cutting some deals. For example, StarMedia teamed with Pepsi-Cola to launch, a co-branded community Web site targeting Latin America.

Another problem: Brick-and-mortar firms are pushing dot-coms to lower ad rates further and prove that online advertising yields results. Industry studies show that users click on just one in hundreds of ads they come across, and they are clicking on fewer ads all the time. Some advertisers are pushing Web sites to replace their current rate systems with a pay-per-click structure.

Meanwhile, dot-coms also have cut spending on offline advertising. For example, 19 dot-coms bought ads for the 2000 Super Bowl, but most of the companies don't plan to do so again for the 2001 game, according to, an online news service. As of mid-October, only two Web companies had purchased ads for the game, TheStandard reported. Yupi bought an ad during last year's Super Bowl that aired only in South Florida. Although Yupi declined to comment on ad buys, analysts say that such purchases by second-tier portals like Yupi are unlikely.

As portals cut ad spending, they are trying to make their own sites more attractive to advertisers by extending the amount of time people spend online. To do that, Web companies are packing their sites with features, including games, chat, shopping, classified ads, astrology, romance, entertainment, news, education, tourism, health, business, and sports.

They also are adding more narrowly targeted sites. For instance, Yupi has expanded beyond its flagship site by adding Web community Ciudad Futura, female-oriented, and business-to-business site "We believe that we provide the greatest ad effectiveness to our clients thanks to our ability to provide targeted audiences with relevant content," says Mr. Coen.

Despite problems in online advertising, the overall long-term picture remains bright, according to many analysts. In Latin America, the number of Internet users in the region will rise from 14.1 million currently to 37.6 million by 2003, according to Jupiter Communications. Analysts expect the pace of consolidation and shakeout in the region to pick up over the next few years. In the United States, Hispanics are buying PCs twice as fast at the general population, analysts say. Forty-three percent of Hispanics have Web access at work, school, or a library, according to Forrester Research.

In the next few years, Internet ad spending will more than double, from around $8 billion this year to more than $16 billion by 2005, surpassing the amount spent in magazines or on cable television, according to Jupiter Communications. Indeed, the clutter of online ads is likely to worsen. Web sites are adding larger ads that flash on and off and do more than ever to attract attention even when users don't click on them. Jupiter predicts that by 2005, each online user will view 950 online ad impressions per usage day, more than double the 440 impressions in 1999.

Spending on online advertising in Latin America will grow from $121 million in 2000 to $1.6 billion in 2004, according to Forrester Research. Major players are forming advertising alliances to solidify their dominance. For example, Miami Beach-based, one of the biggest Spanish-language financial sites, signed an $8 million advertising and e-commerce agreement with Universo Online.

Mr. Kleiman cites I-network's growth as another bit of evidence that online advertising remains healthy for Spanish-language Web sites. The company has grown to 11 worldwide offices and 110 employees since it was founded three years ago, he says. Earlier this year, I-network and its dominant competitors -- Engage Media's NetFuerza division and 24/7 Media -- all set up offices in Miami to target U.S. Hispanic and Latin American sites. Also, DoubleClick created a new position -- director of U.S. Hispanic sales for DoubleClick Las Americas.

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