“Those who do not know history are condemned to repeat it.” Mindful of these words, Miguel Angel Patiño, editor of the newspaper Expansion, set out to write a book entitled Bubble.com: The Rise and Fall of Internet Enterprises in Spain. With the Spanish case as a backdrop, Patiño examines the excesses that were committed as well as the lessons that were learned. “No economic phenomenon ever created or destroyed, with such speed, so many management personalities and legends the way the Internet did,” the author writes.
Bubble.com is a constructive critique of the New Economy. “The Internet has been something more than just a cultural and economic phenomenon,” Patiño notes. “It is also a phenomenon that lends itself to the psycho-sociological analysis of human behavior.” One example is the various ways that markets behaved before and after the bursting of the bubble. Although NASDAQ, the technology index, reached a level above the 5,000 mark in 1999, it is now barely above 1000 because of the new sensitivity that destroys any hope of ever reaching those levels again, according to Patiño.
In place of the euphoria that led to investing in any sort of dot.com business at the beginning of the 1990s, “investors fled, like a bat out of hell, even the most credible business plans.” They began to talk about the death of the Internet, about the end of a dream. But the New Economy “has not disappeared, nor will it disappear,” says Patiño. On the contrary, the reality is that “another kind of Internet is being born – more mature, and more the way things really are – another channel of communication, with all the advantages and limitations of a channel, and in no way a business by itself.”
One of the keys to the technology debacle lies in the fact that so many people saw “the Internet as a business in itself and not as another means of support or another means of communication …” Patiño believes that this was the basis for many of the mistakes that were made. “In all sorts of countries, millions were invested in plans that weren’t worth a cent; dream rewards [were given] to executives who had no previous experience managing enterprises. These dreams of online development on a grand scale were preposterous.”
From the book’s perspective, “even those who are well versed in Internet topics have until now only been able to acquire a partial view of certain moments and events. When you put them all together, you acquire a more complete understanding, and then you perceive how far-reaching the economic impact of the Internet has been in Spain as well as the rest of the world.”
The motive that impelled Patiño to write this book was his “desire to reflect on what happened – the good and the bad. I believe that it is always good to reflect, and I believe that now is an opportune time, when you can say that the Internet has completed an entire cycle. It was born, it developed, it reproduced, it had its boom – and its decline.”
The Spanish Example
Miguel Angel Patiño had the opportunity to know first-hand the birth of the New Economy in its cradle in America. In 1993, he received a Fulbright grant and studied for a master’s degree in business journalism at the AmericanUniversity in Washington,D.C. There, he watched the Internet take its first steps and then learn how to run. But when he returned to Spain, he discovered the two years of distance that separated the development of technology in the two countries.
“It was 1995, and I can still see the faces of my bosses, to whom I had to explain several times what an Internet service provider was, so that they could understand the scope of the news.” Patiño is referring to the first exclusive story that he published in Expansion – about the sharp price cut that Servicom, the leading Spanish provider of Internet services used exclusively by businesses, was about to offer in order to acquire new customers.
Despite its slow start, Spain became an example of how fast the Internet developed. It took off two years behind [the U.S.] and yet it wanted to position itself at the level of more developed countries. “The Internet phenomenon in Spain looks a lot like what happened in other countries, but in reality it has been quite different, above all in comparison with the United States, which is the market of reference in this case,” notes Patiño.
“In Spain, the investments that were put into play were much smaller. Not only in absolute terms but also in relative terms. Moreover, business development [in Spain] was marked by the key role played by just a few people and a few companies.” Names such as Pep Vallés, creator of the search engine Olé; Martin Varsavsky, who started up Jazztel, the local phone carrier [and provider of broadband services]; and Juan Villalonga, president of Telefónica, are interspersed with a very select handful of large business groups such as Santander, BBVA, Telefónica and El Corte Inglés.
All of them tried to recover lost time. This acceleration, added to the buying fury of the bubble, led managers to make decisions “based on their sheer power as top leaders, without measuring properly the economic consequences that this meant for the companies.” Ultimately, Spain’s adventure with technology destroyed one to two billion euros in barely five years, according to Inova, one of the European risk capital funds that is heavily involved in the technology sector. Companies such as Viaplus, Ecuality and, above all, Terra are clear examples of the mess created by the Net.
Terra, the Internet subsidiary of Telefónica, and the most ambitious [Internet business] plan on a global level, is one of the many examples in this book. “Right now, the plan is dead,” the author declares. “At least, the plan that Terra originally drew up is dead. When Juan Villalonga, former president of Telefónica, launched the Terra plan, he conceived of this company as independent from Telefónica. So independent, in fact, that people wound up speculating that Villalonga’s hidden strategy – which was not put into practice because he was let go – was that Terra would eat up Telefónica’s business.”
But precisely the opposite occurred. As Patiño notes, “Telefónica outshone Terra, killing it by starvation. There is a joke now being told by people close to the portal that explains what happened. In it, one man says to the other: ‘The horse has died.’ To which the other man replies, ‘Too bad, now that we finally figured out how to keep him alive without feeding him.’”
In the author’s opinion, the mistake was that “for two years, Telefónica kept taking away power from Terra in the Internet access business, with regard to [service] offers such as ADSL [broadband] … The result has been a giant [enterprise] that lacks clear direction and whose shareholders find themselves trapped by share prices that are very much below what the company sold for when it came out on the stock exchange in November 1999. Moreover, the [recent] takeover bid launched by Telefónica to absorb its subsidiary comes at a price that is 55.5% lower than when the company first appeared on the stock market.
“The only thing left for Terra is to achieve the least traumatic possible way of being integrated into the structure of Telefónica,” says Patiño. “That won’t be easy. There are a lot of duplicate costs in Terra with respect to personnel, and there are unsustainable professional salaries that they don’t have room for in Telefónica. In the end, too many things will have to change.”
The Impact on Latin America
The development of the Internet in Spain is related intimately to its progress in Latin America. The high point of the Net occurred during the peakofSpanish expansion through the [American] subcontinent. “Latin America was the first place where Spanish Internet companies looked. In fact, firms such as Recol and Ecuality put into operation overambitious growth plans for that market.” Patiño explains that it was precisely those megalomaniacal ambitions that caused these companies to derail.
However, the knots that united the Spanish-speaking world on both sides of the Atlantic usually originated on the Latin American shore. “On other occasions, Latin American companies converted themselves into the stars of the online world in Spain.” The most extraordinary such case involved Patagón, the online bank of Argentine origin that was acquired by Banco Santander Central Hispano for 720 million euros. This move will pass into history as one of the largest and most important in the history of the Spanish Net – but also one of the best examples of technological excess.
During the bubble, Spanish companies appeared disposed to play as much of a leading role in the Internet in their own country as in Latin America. That desire, says Patiño, “led [them] to make more mistakes than right moves in their attempts to connect the two markets. Above all, the Net was surrounded by many myths. People thought that the New Economy would bring with it identical ways for managing companies, whether they were Spanish or Latin America. But that wasn’t true.”
Terra can also serve as an example of these types of mistakes. “When the company was taking over the online assets of Telefónica in Latin America, it immediately realized that each of these assets was very different from each other – in Chile, Argentina and Brazil. Terra managed them in different ways because the markets were quite different, and it was very hard to implement a global brand.”
The peculiar style of development that the Internet lived through in Spain, and in some respects in Latin America, has much to do with Spanish culture, which has little inclination to take entrepreneurial risks – as well as with the capital structure of Spain, which is concentrated in a few hands. “As attractive as it was to get started in the world of the Internet a few years ago, a certain sense of adventure was needed,” Patiño recalls. In comparison with other countries, he believes that not many people in Spain made up their minds to step in. “There were a few people who left their well-paid jobs in the traditional economy to throw themselves headlong into a swimming pool that could have water, or might not. But, in general, not many people dared, if you look at what happened in other countries.”
This conservative character, as well as the Spanish business world’s concentration [of wealth], explains why a mere handful of companies took control of the Internet in Spain. Those companies, moreover, were the same ones that had – and still have – a large part of their [commercial] interests in Latin America. “It was the great financial firms and the big companies – not the midsize firms – who, after a few months of the technology boom, began to put together great technology plans and to invest in all kinds of projects,” says Patiño.
Fear of a New Bubble
All the markets acted alike in this respect: They were all absorbed by a desire for continuous innovation. “This crazy race to create new models for online business” meant in some cases that new models were “declared dead and failed even before they really got a chance to be born.” Spain has a handful of such examples. “One of the clearest examples took place in the summer of 1999, when Spain launched free access to the Net [even though] there was only one precedent of a company doing this – Freeserve, which did it in the United Kingdom.”
The hullabaloo that radiated through the business world in the 1990s seems like a mirage now, barely three years later. Despite the weakness of the economy, corporate scandals, the stock market debacle and the billions that were lost, Patiño is not ready to celebrate a recovery. He warns that “a bubble is always possible.” In his opinion, despite the mistakes made and the lessons learned, it is almost impossible to say that there will never again be excesses. “In economic theory, there have been a lot of studies about the phenomenon of cycles, and I believe that bubbles – whether they are technological or of another sort – have a fundamentally cyclical component.” Nevertheless, its roller-coaster character, which shakes up markets with upswings and declines, is one of the great question marks in the world of business.
“Despite the fact that cycles have been studied a great deal, we still don’t understand everything about them, and we understand even a lot less about bubbles. It is enough to give the example of the real estate sector. I believe that what’s happening in this market is something similar to what happened in the Internet at the beginning. There were people who said that there was a bubble and that conditions were unsustainable. Others said that there was no bubble. In the end, it was shown no only that there was a bubble, but also that it was super-inflated. It wound up exploding. In real estate terms, there are now people who say that there is no bubble. Others say there is one. While they discuss if there is or isn’t a bubble, it grows and grows. What do you think is going to happen in the end? It’s amazing how little is learned from the past.”
The goal of Bubble.com is precisely to understand the past in order to try to avoid committing the same mistakes. But this requires an important exercise of humility that, in many cases, Patiño does not see around him. “These days, no one admits that in the Internet we all make mistakes – from newspaper reporters to sage bankers, business people and those young entrepreneurs who throw themselves into the void.”
The author directs a large part of his criticism at the gurus who multiplied in number during the prodigious decade of New Technologies. “The Internet phenomenon has been filled with great gurus who, a few years ago, were forecasting things that had not been achieved but who, when they saw their mistakes, retreated and changed their rhetoric with complete shamelessness. Instead of saying that the Internet would change the planet, they changed their line to say that things are not all that bad. ‘I already said that,’ they now say. The problem is, practically the whole world was that type of guru.”
