In August, Telefónica, the Spanish provider of telecom services to 176 million customers in Latin America, completed its acquisition of Tuenti, the Spanish operator of an online social network that has become a real phenomenon among 14-to-25-year-olds, and a direct competitor of Facebook in Spain. Telefónica paid €70 million for an 85% share of Tuenti. But what is Telefónica getting?

This much is clear: Tuenti, which operates by invitation only, is a solid leader in Spain, especially among young users. According to Google Trends, Tuenti has four million unique users around the world. In Spain, both Google Trends and Nielsen say, Tuenti has 2.5 million unique users, a figure exceeded among online social networks only by Facebook, with double that number. Tuenti is also an efficient mechanism for setting up new online services. The site’s mobile version has been improved significantly since it was created three years ago. It has one space for local business, called Tuenti Sitios, where users share opinions on such things as restaurants, social venues and entertainment, and another for brands or businesses, called Tuenti Páginas. Managers of more than 40,000 companies and services have an address on Tuenti. Its service enables any Internet user — registered with Tuenti or not — to explore more than 40,000 verified Tuenti sites.
In September, Tuenti and MTV, the music network, reached an agreement to offer TV series and music over the social network. Videos, exclusive programs and news will be available for users of Tuenti, who view more than six million videos a day. In addition, Tuenti has launched a search service that enables users to look for any sort of product within the network. Although until recently it was only possible to find other users, the system now enables users to search pages, sites and even some games. But perhaps the best example that Tuenti has achieved success: its sponsorship of a team in MotoGP 2010, the world motorcycling tournament.
An Aggressive yet Defensive Operation
According to Ricardo Pérez, professor of information systems and technologies at the IE Business School in Madrid, the deal creates a platform from which Telefónica can broaden its revenue sources, “since, in the business of search engines, there is very little to do because Google is the absolute owner of the market,” he says. “Starting with the birth of Facebook, the networks have learned who you really are, and they really know about your tastes and relationships. They have this raw information and, as a result, they can turn it into big sources of income.”
Pérez believes that the deal is an aggressive one since, broadly speaking, it will strengthen Telefónica’s presence in the mobile Internet market. With its acquisition of Tuenti, Telefónica brings itself to the forefront of a business sector fed by a younger public destined to lead the consumption of mobile Internet services. “Tuenti is going to be a perfect testing ground from which they can launch new initiatives,” he says. The numbers speak for themselves: In the first quarter of 2010 alone, Tuenti had 1 billion mobile page views. More important, each month more than 100,000 users download Tuenti’s application for mobile devices.
Esteban García-Canal, professor of organizational management at the University of Oviedo, says the deal also has a major defensive component for Telefónica: It eliminates, with one stroke of the pen, the possibility that its biggest competitors will move ahead in a business with great potential in Spain. Analysts say Tuenti was a tempting morsel for any direct competitor, such as Orange or Vodafone, or for Google or Facebook. Telefónica couldn’t risk that its dominance in mobile and data wouldn’t be threatened by the integration of Tuenti with one of its rivals.
“When you take into account that the shareholders of Tuenti wanted to sell their shares, the Telefónica deal assures them that no other telecom company can use this platform for growth in Spain,” García-Canal says. In addition, “the purchase of Tuenti means that Telefónica can become established in the social network segment. That’s something that it could not get from Keteké, the social network created by Telefónica. Oriented largely toward mobile phone users, Keteké wound up being a total failure.”
For García-Canal, Keteké’s failure is the key to understanding the difficulties involved in this business, which is still in its infancy. It also helps us foresee the kinds of mistakes Telefónica won’t repeat with its purchase of Tuenti. In November 2008, Telefónica launched Keteké at a cost of €10 million, using Paris Hilton as a promoter. It made a serious bet to compete against Tuenti, Facebook and MySpace to take advantage of Telefónica’s potential in the mobile sector, and its own ability to compete in terms of pricing. But Telefónica launched the project from scratch — without a team with social networking success — and it didn’t win customers from its competitors. Today, Keteké has a nominal market share and will co-exist with Tuenti, Telefónica managers anticipate.
Preserving the Brand
“The keys to success in this deal,” Pérez notes, “are to provide confidence to the team; keep it totally independent when it comes to management; make decisions as rapidly as possible; and provide support when mistakes are made.”
Those lessons appear to have been learned, judging from Telefónica’s first pronouncements after the purchase. Managing director Julio Linares assured the public that Tuenti’s management would continue to operate with considerable autonomy, and that Tuenti would be operated independently of Keteké. “If the Tuenti operation doesn’t enjoy independence, it will be finished,” Pérez says. “If you change the spirit of the project, you’ll be ruined. You have to preserve the brand.”
Iñigo Herguera, professor of technology at the Complutense University in Madrid, says, “Telefónica is not an expert in social networks, so you have to let those who know the business be the ones who manage and develop it. Telefónica has already hinted that they are going to let that happen. It seems that they are going to have a very passive role.” A key to the success of the marriage between a huge multinational and a company that began as a start-up is whether the multinational can overcome a temptation to change something that works well. Herguera says Telefónica must be more prepared to learn than to intervene. “Social networks continue to acquire an ever more extraordinary importance. With the purchase of Tuenti, Telefónica wants to learn, and to see what interactions they produce. This world is very new and very interactive, a totally different world. For Telefónica and its business, it is going to be very useful to learn about the behavior of the network.”
García-Canal does not believe that Telefónica must completely reject the idea of contributing ideas to the project. “The success of Tuenti is based on having learned how to position itself for the youngest public, whose needs it knew how to detect and serve. The first priority of Telefónica should be to preserve that cumulative know-how, so that it does not kill the goose that laid the golden egg.” However, this doesn’t mean either “abandoning any role as an active shareholder in a company whose managers are now much richer, or failing to contribute any resources and/or know-how from Telefónica that could help facilitate Tuenti’s international expansion.”
Tuenti took a tangible step toward retaining is independent brand early in September, when it applied to Spain’s Telecommunications Market Commission to be registered as a virtual mobile operator. That is to say, as an operator without its own network, but with authorization to use the network of an operator — in this case, the network of its owner, Telefónica. Tuenti’s goal, the experts say, is to start providing virtual mobile telephony services before year’s end, in the process converting itself into Telefónica’s low-cost brand for the public’s youngest segment.
Targeting Latin America
Will Tuenti’s management truly be able to move as nimbly now under Telefónica? Will Telefónica be anxious for a return on its investment? The €70 million price tag enriched Tuenti shareholders. But the sum is modest for large and cash-rich Telefónica, which killed three birds with one stone in the deal: It eliminated potential competitors, it got into a business it barely knows, and it opened the door to new revenue sources.
“First of all,” notes García-Canal, “the amount that Telefónica paid for 85% of Tuenti is slightly less than 1% of what Telefónica paid [€7.5 billion] for Portugal Telecom’s shares in Brasilcel,” the company that owned 60% of Vivo, the leader in Brazil’s mobile telecom sector. For this reason, “You have to understand this deal as a bet or — better said — as the desire to maintain its bet on an Internet business model in which the company has an interest in positioning itself, in which the synergies have come above all from the development of that business model in Latin America. That is where Telefónica could have found value in this deal, beyond assuring itself that none of its rivals might take over Tuenti.”
Herguera and Pérez agree. For Herguera, “Latin America is a natural, very attractive market. It is growing much faster and much more clearly than Europe is.” Pérez says, “In Latin America, Tuenti has a symbolic presence, so it has to use its creativity and imagination to take advantage of Telefónica’s market there. In Latin America, Telefónica has set the standard; it is the benchmark against which all other telecom operators measure themselves.”
Although Tuenti provides the biggest database of Spain’s youth, it had peaked before it was acquired. “There is one global winner, which is Facebook, and then there are champions in various national markets. In Spain, that champion is Tuenti, but it was facing a problem of growth,” Pérez says. Tuenti could not deal with its most immediate financial and strategic challenges all by itself. García-Canal adds, “For Tuenti, the arrival of Telefónica meant the possibility of undertaking a more aggressive expansion plan, especially toward Latin America, at a time when the company’s growth had reached its upper limit, especially because of Facebook’s expansion in Spain and around the world.”
So Tuenti also wins from the deal. It gets the financial muscle to develop new products and services, and watches the doors open, one by one, in Latin America, a natural market. Tuenti also can develop more tools tied to its mobile services. That’s how Tuenti founder and managing director Zaryn Dentzel explained the situation after Telefónica’s arrival, writing in his blog, “Our bet is on a network that is more and more rooted in local experiences and services, along with social tools that are more and more targeted toward mobile devices. This fits perfectly into the cogs and gears of Telefónica.”

An Unpredictable Business
The experts say Tuenti faces challenges such as competition from Facebook — which could target Tuenti users as they grow older — and keeping many of Tuenti’s users from feeling uncomfortable as their social network is integrated into a multinational with a monopolistic image. “The question is this: To what degree do you overlap the two images of two different brands that have two very different reputations?” says Herguera. “We’ll have to wait and see, since this is a case of two very different companies with few synergies.”
Nevertheless, Pérez explains, “This is a good deal for everyone. In this deal, Telefónica buys a market and a team that knows how to run this business. For Tuenti, the deal means a chance to transform itself into a media company. Now it wants — and can — grow with investments in media. The question is whether they will be dominant.”
In effect, the business of social networks is plagued by questions. First is the very nature of its users. As Pérez asserts, “One of the big problems is that the youngest consumers don’t value anything but price. And to avoid that, you have to provide them with service.” As a result, he adds, the great challenge of Telefónica and the managers of Tuenti will be “to convert Tuenti into the site where you are going to satisfy every sort of need.”
“Anyone who tells you that he knows just what steps to take in order to win in this business is not telling you the truth,” Pérez says. “The future is unpredictable. In this world, there is a lot that remains to be discovered, so you cannot make five-year plans. You have to be very quick and very agile, and know how to accept your mistakes.”