Lessons from StarMedia

Despite serious concerns about whether and when it will become profitable one fact is clear: StarMedia can charge advertisers a large premium compared to its rivals. While this is not the only measure of performance to which we should pay attention, this is a noteworthy accomplishment for a firm in an industry where business models are heavily, if not solely, reliant upon ad revenues. There are several factors that might be responsible for this:

• They achieved a first-mover advantage: As the first mass market horizontal portal to target Spanish- and Portuguese-language speakers, StarMedia was effectively leveraged lessons from U.S. Internet companies to accelerate its growth.

• They have a physical presence: There’s a saying that all politics are local. The same appears to hold true for ad buying decisions, or at least about 90% of them. StarMedia was smart to recognize that having a physical presence in the market they wanted to serve would help them both gain knowledge that they could not have otherwise and increase their chances of being in or near the room where key decisions are being made.

• They understand the medium. StarMedia provides high quality content. (1.2 billion pages views per month does not happen by accident.) Central to the site’s successful debut was the development of a pan-regional strategy that knit together affluent Internet users across Latin America, an appealing audience for international marketers. They also understand the importance of creating a "buzz" around the firm, using press releases and traditional media outlets to keep the name of the firm and its founders before the public eye, both in the US and in Latin America.

• They understand the importance of time: We see this in several respects. StarMedia's "Get Big Fast" strategy helped propel it from a “pure web company” to an “integrated media company" in only two years. (Compare this to how long it has taken other firms to achieve a similar level of diversification.) StarMedia was also able to raise a great deal of capital in a very short period of time. The momentum of a growing reputation and the compelling nature of their vision may have played a large role in that.

Despite being able to charge such a high premium to advertisers, the company is failing along other important dimensions:

• Their revenue model is in trouble: StarMedia has an unacceptably high burn-rate. When they recently announced plans to increase promotional spending they lost 33% of the stock value in one afternoon. Overall, the stock price dropped 75% in 2000 , due in large part to satisfy investor concerns about its strategy.

• The firm is rapidly being hemmed in by both its "old economy" and its virtual competitors. On one side are the big, well-funded, American, Latin American, & European telcos who are not only establishing or buying content and horizontal portals properties at a rapid rate, but who are also backward integrating into ISP/Access and forward integrating into e-commerce. On the other side are an increasing number of smaller, more-focused, Latin-American based, vertical channels providing more focused content of comparable quality.

• They are spread too thin: Although the formation of so many high-profile partnerships across almost the whole the e-commerce value chain helped boost the company's stock price and reputation, it is not clear whether they can manage the growing number and complexity of the relationships required by its pan-regional strategy. It is questionable how well fewer than 1000 people based in New York can manage a pan-Latin American internet media company. They may need more people in more places.

• They over-looked a crucial choke-point in the value chain: StarMedia's failure to "lock-in" their site's visitors with some kind of ISP/Access offer may prove to be fatal. Without some way to drive the ever-growing number of "newbies" directly to its site, StarMedia runs the risk that they will be captured by other content providers who are rapidly forging relationships with ISP's or are preparing to offer free access.

• The bloom is off the rose: Since April (2000) we have learned to view the unending stream of glowingly positive press about and from internet firms with great skepticism. And despite their efforts to portray themselves as leaders of an internet "revolution" in Latin America, Fernando and Jack are anything but the “dot-communists” that their rhetoric would suggest. Their aspirations are more in keeping with Gates than Guevara. Their methods resemble far more those of Rupert Murdoch than Chairman Mao. The source of their inspiration is more likely mid-town Manhattan than a Himalayan mountaintop.

***In the coming weeks I will posting another dozen or so summaries of HBS cases that I no longer intend to teach. I will not, however, be posting the cases themselves or the case notes provided to instructors by HBS. Stay tuned.

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