Telefonica has eye on Yahoo! and AOL

When Telefonica launched Terra U.S.A. in Miami in June, it threw a bash that cost a cool $1.5 million. The Spanish telecommunications giant was keen to present itself as a serious player in the American Internet service provider market.

It worked.

Of all of Europe’s telecom companies, Telefonica was first to recognize the importance of new media and act upon it. The company has its hands in everything from broadband Internet to digital TV to 3G mobiles to content creation at Endemol, the producer behind Web-friendly TV format “Big Brother.”

The biggest move so far, completed Oct. 27, was the creation of Terra Lycos, the marriage of Terra Networks, Telefonica’s Spanish-language ISP, with Lycos.

The company is the No. 1 ISP-cum-portal in Spain and Latin America — No. 3 in the world after America Online and Yahoo! — and boasts a $3 billion war chest, when a promised $1 billion from Germany’s Bertelsmann is included. (The terms of the merger partnered Telefonica and Bertelsmann in Lycos Europe.)

Being the leader in the Latin market is hugely significant. The Internet may be an American invention but the assumption that English is the online Esperanto is false. People want to access content in their mother tongue and there are 550 million Spanish speakers to play for. (Telefonica is also a major force in Portuguese-speaking Brazil.)

Terra Lycos represents a cross-cultural approach to the Internet headed up by president Joaquim Agut and Lycos founder Bob David, now the company’s chief exec. Sales are forecast to hit $500 million in 2000 and $900 million in ’01.

Profitability, however, is on hold. Telefonica is just getting started in new media, and going head to head with the likes of AOL and Yahoo! will not be easy.

Just days after the merger closed, Lycos Europe completed the buy-up of Northern European ISP Spray Networks through a share swap. In November, Terra Lycos incorporated search engine GoTo.com into its platform in a $10 million deal.

But the big plays are yet to come.

“The strategy is clear,” says Eduardo Alonso, general manager of Telefonica Media, Telefonica’s media division. “You’ve got to be the top dog. In this business, either you’re ahead in new media or you’re no longer a global leader.”

“The challenge for Terra Lycos today is that they’re still mostly an ISP,” adds Lucas Graves, Jupiter Research’s senior analyst for Latin America. “Telefonica in the long run wants to be a media company, not just a keeper of the pipes.”

Despite its ownership of Endemol, the merger with Lycos, and its loosely defined relationship with Bertelsmann, Telefonica is comparatively low on content. It is also an open question as to how well the existing alliances mesh.

“I don’t think you can judge the potential of these marriages based on their uptake today,” Graves says. “It’s an investment in the future. It’s a bet on convergence. All of that said, I think you do have to judge Telefonica on how well their properties jibe.”

“Telefonica’s content strategy to date has been basically to buy established offline companies,” observes Jose Cervera, an analyst with Internet consultancy Baquia.com. “It’s also bought distribution presence in online companies. But the fact that a company has broadband know-how doesn’t necessarily mean that it knows about content. They’re two completely different considerations. It’s like Kodak attempting to become a top film producer.”

Telefonica’s strategy is one of building synergy between old and new media properties, the idea being that the two naturally will evolve into one.

Music is fluid at the moment. Bertelsmann, of course, is the parent of BMG and has a stated interest in EMI. How this will play out remains to be seen.

But it is likely Argentina will set the overall tone of what is to come.

Juan Jose Nieto, president of Telefonica Media — who took over from Jose Antonio Rios in August — is taking stock of existing interests in Latin America at the same time he is in talks toward acquiring stakes in a number of established broadcasters.

In Argentina, Telefonica owns two of the three main broadcasters, Telefe and Azul TV. Over the last year, Endemol has provided the duo with no less than 43 formats — and the goal is that these formats be multiplatformed.

In Spain, “Big Brother” was accessible across the distribution spectrum, including two 24-hour digital TV channels on Via Digital, Telefonica’s satellite platform. That might sound akin to watching paint dry, but the point is that the experiment was made.

Still, if the brave new world of broadband in the U.S. and Europe is encountering a minefield of problems, then how much more difficult is it in Latin America? The payoff is probably further down the road than most are willing to admit.

Nevertheless, Terra Lycos, at least in immediate terms, brings savings, eliminating Lycos’ planned $400 million marketing push into Latin America and similarly smoothing Terra’s entry into the U.S.

And while the core business remains Spanish-speaking markets, Terra Lycos, geographically, is in some ways more of an international force than its larger rivals.

“What sets Terra Lycos apart as an Internet operator is that it’s the only one in the world which has a real presence in 40 countries,” says Manuel Torres, an analyst at Ibersecurities in Spain. “It’s strong in Asia, it’s the No. 2 portal in Japan, and No. 1 in Korea.

“It’s still got a long way to go,” he adds. “But it’s well positioned as a global operator.”

(John Hopewell in Madrid contributed to this story.)

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