Brazil Propels Fotolog

By: Antonio Regalado

Aug. 28, 2007

Executives at Fotolog Inc. cheered in 2002 when they saw a surge in the number of people using their photo-sharing and social-networking Web site. Then they scratched their heads: The explosive growth was in Brazil.

Yesterday, New York-based Fotolog was acquired by Hi-Media Group, an Internet advertising firm based in Paris, for about $90 million, making it the latest acquisition of a social-networking Web site and the first one with a user base largely outside the U.S.

Social-networking sites, where users post profiles, chat or join communities, have become some of the hottest properties on the Internet, making up nearly half of the world's top 10 most-visited sites.

In the U.S., Facebook.com and Myspace.com are the best-known sites, drawing tens of millions of daily visitors. Now, with the U.S. market getting crowded, attention is turning overseas, particularly to emerging markets such as Latin America, where Internet use is increasing rapidly and competition is less intense.

The deal for Fotolog also is shedding light on Brazil's role as an arbiter of Internet success. With some of the world's most enthusiastic Internet users, the South American country is acting "as a leading indicator of future trends," said John Borthwick, Fotolog's chief executive officer and a former top technology executive at Time Warner Inc. and AOL.

Though little known in the U.S., Fotolog first took off in Brazil and has since become a hit in countries such as Chile and Argentina, where it ranks as the No. 1 or No. 2 Internet site, depending on the week. Users typically post only one picture a day but may spend several hours a month adding poems or commentary and leaving messages for friends.

Hi-Media yesterday said it would pay about $90 million, 75% of it in stock, to acquire Fotolog, which had previously raised $11 million from investors that included BV Capital and 3i Group PLC.

Other companies also are looking at Latin Internet users. This month, News Corp.'s Myspace launched Myspace Mexico, saying it was chasing the country's youth market. Two weeks ago, investors poured $30 million into Batanga, a social network for U.S. Latinos that centers on popular bands.

Interest in Latin America is being driven by favorable demographic trends. Only about 18% of the population has regular Internet access, but that figure is increasing quickly, spurred by the region's expanding middle class.

Surveys indicate that Brazil may have the world's most intensive Internet users. According to Neilsen/NetRatings, Brazilians with a home Internet connection use it 23.5 hours a month, more than any of the 10 countries in its survey, including the U.S. and Japan.

Many Internet services take off quickly in Brazil, giving the country an outsized influence. For instance, Microsoft Corp. recently said Brazilians account for 12% of the users of its MSN Messenger -- more than any other single country, including the U.S.

Yet Brazil also can present challenges. Google Inc.'s Orkut community is the top-rated site in Brazil, but it is hardly ever used in the U.S. Too many Brazilians may be part of the problem. "POSTS IN ENGLISH ONLY!!!" pleads one Orkut community for a niche Asian group.

Brazil's reputation as an Internet hotbed is beginning to draw an influx of capital. Venture-capital fund Draper Fisher Jurvetson recently started a satellite fund in Brazil, raising $40 million with a local group, FIR Capital Partners. Simon Olson, a manager at FIR, said the idea is to put Brazilian engineers to work with U.S. capital. The fund is backing a new social-network company, which it plans to unveil this fall, as well as biotechnology ventures.

Entrepreneurs interested in the region were encouraged this month by the initial public offering of shares of MercadoLibre Inc., a Buenos Aires company, which raised $333 million in an offering on the Nasdaq Stock Market and saw its stock almost double. The eBay-style company, founded by a graduate of Stanford's business school, is the top rated online auction site in Chile, Argentina and Brazil, where it generates most of its sales.

Still, it is difficult to make money from Web traffic in emerging markets. Not only is per-capita income low, but local advertisers still view the Web skeptically and prefer to advertise on television or billboards. Advertisers who do choose the Internet pay a fraction of the rates charged on U.S. sites.

The Fotolog site was launched in May 2002 by entrepreneurs Adam Seifer and Scott Heiferman and initially attracted a few users in New York and on the West Coast. But soon it caught the attention of Cora Rónai, a Brazilian journalist and blogger. Before long, the number of Brazilian users "just completely flooded" the site, said Mr. Seifer. At the time, Fotolog had only four employees in New York; the company didn't launch a Portuguese language version until this year.

Interest in Fotolog, which says it has spent nearly no money on marketing, continued to spread by word of mouth. In late 2003, it began taking off in Chile and later started expanding exponentially in Argentina and Mexico.

By early this year, the 25-person company's service had made the jump across the Atlantic to Spain and Portugal, where it has been expanding as much as 20% a month. Users also have been joining rapidly from Italy and Germany. That is when Hi-Media made an offer to buy the photo-sharing company.