Net Loss

How LatinoNet -- the poster child for Washington's attempt to empower the poor with technology -- wasted money and networked almost no one

Dr. Armando Valdez leans from a stuffed hotel armchair and sweeps at the air jaggedly with both hands, punctuates his speech with glottal stops, and occasionally repeats and re-repeats his sentences. He's dissembling, which seems to make it harder to form thoughts.

"I think it'll succeed. I think it'll go through another evolution, maybe transformed, maybe something different, but I think the core program area will still be access to the community; to the technology; and to try to use this technology in a way that empowers."

Valdez crafts these less than straightforward phrases not because he's a dishonest man, but because he's nobly defending his life's most precious work. He's attempting to breathe rhetorical life into LatinoNet, the million-dollar Internet project he launched in San Francisco and then helped drive into oblivion.

Just three years ago, Valdez was heralded in newspaper articles coast to coast as the intellectual author of LatinoNet, an America Online site that was to serve as a centerpiece of U.S. government efforts to bring the benefits of the Information Superhighway to everyman. Now, he's sitting in the lobby of the Fisherman's Wharf Marriott, struggling to put an optimistic spin on what has become a fiasco largely of his own making.

Valdez came up with the idea of a nonprofit computer network in 1992. He obtained a grant to study the idea of linking Hispanic nonprofit organizations around the country, and soon, plans for a small local network had ballooned into designs on a great national organization that would bring Latinos closer together.

To found LatinoNet, Valdez garnered more than $1 million in support from the federal government, corporations, and other sources; assembled a prestigious board of directors; and hired a five-person staff. In a video press conference fed to five cities by satellite, Valdez and Federal Communications Commission Chairman Reed Hundt proclaimed a dream: LatinoNet would help Hispanic Americans "become full and equal partners in the coming technological society," Valdez was quoted in USA Today as saying.

By recruiting hundreds of Hispanic-oriented nonprofit agencies to provide information for an America Online site, then drawing thousands of subscribers to that site, LatinoNet would link, invigorate, and empower the growing Hispanic underclass.

But that was then. Now, Valdez gesticulates nervously as he tries to talk around the fact that within two years of inception, LatinoNet had burned through its money, alienated its allies, and created nothing more technologically empowering than a couple of dead-link Web sites and a defunct nonprofit page on AOL. LatinoNet is now slated to be turned over, gratis, to the Mexican Heritage Corp. of San Jose, a nonprofit organization that promotes mariachi festivals and like cultural events. When pressed about his specific plans for LatinoNet, Corporation President Pete Carillo says he might use the LatinoNet brand name on a Web site that would sell Mexican Heritage Corp. coffee mugs, T-shirts, and posters.

"This would give people an opportunity to go into the Web site and purchase gifts," Carillo explains.

In news articles in the Chicago Tribune, USA Today, the Los Angeles Times, the Washington Post, and dozens of other newspapers, the December 1994 launch of LatinoNet was said to symbolize the enfranchisement of the technologically excluded, the exploitation of network technology's potential role as a great leveler.

But within just two years, LatinoNet seemed to symbolize something else entirely: the haphazard nature of the federal government's attempts to capitalize on what it calls the Information Superhighway. LatinoNet was born amid a blizzard of Internet hyperbole. Everyone from Vice President Al Gore to House Speaker Newt Gingrich was extolling the virtues of computers, and touting the role of information technology in empowering the nation's less privileged.

But the experience of LatinoNet, and the Commerce Department agency that funded it, seems to indicate that the walk behind the talk was halfhearted and stumbling.

According to a report produced by the U.S. Commerce Department's Office of Inspector General, LatinoNet spent a lot of money and empowered almost no one. Another, more recent report blasts the department for giving away money to numerous technology empowerment projects, then not bothering to check up on how the money was spent.

The report discussing LatinoNet, issued in August 1997, lambastes LatinoNet for squandering much of the $450,000 it received from the department's National Telecommunications and Information Administration (NTIA). To get its federal grant, LatinoNet pledged it would attract about $675,000 in private-sector matching funds. The inspector general's report says the group did not meet that goal.

Finances aside, LatinoNet never came close to reaching its formally stated goal of networking the Hispanic community nationwide. In its grant application, LatinoNet said it would attract, in its first year, 1,200 subscribers, 50 nonprofit information providers, and 20 sponsoring institutions.

By 1996, it had attracted 168 subscribers, 85 nonprofit agencies, and no institutions. LatinoNet said it would establish five branch offices around the country. It sent one employee to Los Angeles and briefly set up an office there. In Chicago, a sponsor had agreed to pony up $220,000 for LatinoNet to set up a branch office. The sponsor withdrew the money when LatinoNet failed to find a local Latino group that would join in the endeavor, the report says.

The other audit report, issued by the Commerce Department's Office of Inspector General last January, suggests that LatinoNet may have been part of a wider pattern of waste at the agency.

The Commerce Department grant program that made LatinoNet a founding recipient was intended to link charities and government agencies to a computer network -- community empowerment through technology, in the lingo of the day. During the program's first three years, it awarded $78.6 million in grants.

According to the inspector general's report, the grant program's 230 staff members allowed it to spin out of control. They rarely followed up on the progress of grant recipients. Even when they did, staffers did little more than place a phone call, the report complains.

As a result, groups like LatinoNet were left on their own to use, or misuse, funds as they saw fit.

And, as one might expect, money was squandered. In one case, a grant recipient boasted that it had distributed computer equipment to boys clubs and YMCAs, where it could be used by the poor. When inspector general auditors finally checked up on these claims, they found equipment locked away, unused.

LatinoNet eventually managed to get out of trouble with Commerce Department auditors. The group fulfilled its matching-funds requirement by counting the time volunteers worked as in-kind contributions, and by obtaining some donated Apple computers, which it applied toward the match.

The Commerce Department says it has added staffers in order to correct systemic problems in its grant program. The Inspector General's Office, as a matter of policy, will not comment on the matter. But the Commerce Department has made plenty of public pronouncements about its technology empowerment programs.

Indeed, as the Office of Inspector General was documenting the Commerce Department's see-no-evil practices in its audit report, department bureaucrats seemed to demonstrate those practices at a June 1996 conference in Washington to honor technology empowerment grant recipients. The conference was heavy on celebration.

According to the summary report drawn from the conference, department grants such as the one received by LatinoNet were described as "a catalyst for economic, educational and social development in communities through information infrastructure."

Oddly, LatinoNet, which by then had burned through the better part of $1 million with nothing to show for it, was absent from the proceedings.

"We were their flagship project, but we weren't invited," Dr. Armando Valdez complains. "I don't know what they were thinking."

In hindsight, LatinoNet would seem to have been doomed to fail from the moment it was conceived. LatinoNet was set up as a paid-subscription site on America Online just as World Wide Web search engines and cheap Web-page-hosting services made the same sort of information available for free.

The price tag for LatinoNet's service was absurdly steep: an $80, one-time fee for nonprofit agencies and $60 for individuals, plus a monthly fee of $8.95 to access the America Online service where LatinoNet was housed.

While this seemed like a reasonable price to pay in early 1994, by mid-1995 it was a ridiculous fee schedule. And now there are dozens of free, Latino-specific Web sites offering services that range from culture to academia to news to immigration information. A quick Web search will turn up organizations called Latino Web, Hispanic Link -- and even Latinonet, a Web site run out of UCLA.

"In retrospect, it's very easy to see that the technology's changing, but at the time that it was changing, we had no idea. We could have used -- we needed someone who could give us a sense of how the hell technology was changing. We thought we had a grasp of it, and it turns out -- hell, nobody in this country anticipated the Web, nobody," Valdez says.

This statement is true, as far as it goes. But former LatinoNet staff members, former members of its board, and people who came in contact with the organization say LatinoNet wasn't necessarily doomed to fail. According to these sources, Valdez drove it to failure.

Former staff members say Valdez stubbornly refused to heed recommendations that he abandon the original, paid-subscription LatinoNet model. Modern Web accouterments such as free access, corporate Web site sponsorship, banner advertising, and the like were, in Valdez's view, profanely capitalist. And, staff members say, he used his influence with the board of directors, which he had personally recruited, to block such changes.

After a year of operation, LatinoNet had earned $10,960 in subscriptions. During the next nine months it attracted only $1,468. The plummet corresponded, of course, with the explosion of the World Wide Web.

But this should not have come as a surprise to Latino-Net. The America Online engineer who worked with LatinoNet warned staff members that they needed to obtain an AOL public -- or free -- site in order to survive.

"Armando sat on it for months. He would not allow us to do it," one staff member recalls. "By the time we said we wanted to get a public site, AOL said, 'No, we don't want to do it now.' "

By that time, AOL had already signed on Hispanic Magazine as its Latino public site sponsor.

Jose Montes de Oca, LatinoNet's executive director, acknowledges that he, too, saw the writing on the wall. Montes de Oca says he drafted, redrafted, and drafted again business plans that might allow LatinoNet to continue, only to be rebuffed by Valdez. The new business plans included free access, corporate sponsorship, and banner advertising -- now standard for any Internet business plan.

"You were hoping that you'd get some sort of phone call that said, 'We are going to go this way!' and that we could keep going," recalls Javier Ruiz, who worked as a LatinoNet staff member in 1995 and 1996. "All I know is that, when we presented different options, when Jose presented different options, there were schisms in the board that didn't allow them to go ahead, there wasn't enough support for any plan to go through."

The confrontations between Valdez, who refused to relinquish his founding vision, and Montes de Oca, who saw the organization he ran collapsing around him, became increasingly bitter. "I saw the grandfather syndrome occur," Montes de Oca recalls. "The person that develops the idea can't let go of the original idea."

Rather than blame changes in communications technology for LatinoNet's plummeting subscriptions, Valdez blamed staff.

Valdez now says in his own defense that he resisted moving to the World Wide Web because he believed LatinoNet didn't have sufficient staff to maintain information sites in more than one format. He says his community-activist board members weren't prepared to understand Internet technology.

But during conversation Valdez still blames others for Latino-Net's failure.
"The membership charges for nonprofits was quite nominal. It was 80, 120 bucks, but it was really quite nominal. The value of the training, the technical support, and the modems was easily worth from $4,000 to $6,000. We asked them to pay a $60 to $80 membership fee," Valdez says. "We thought, in terms of our own financial model, that this was a reasonable trade-off, and would generate revenues for LatinoNet, and we could use monies to help support LatinoNet."

By 1996, Jose Montes de Oca could no longer bear fighting with Valdez, and he resigned. So did four of Valdez's board members. Valdez moved LatinoNet's offices from San Francisco to San Jose, and Valdez met with the board to discuss scaling LatinoNet down to a more modest organization dedicated to teaching Latinos how to use computers. But there are many organizations -- especially in San Jose, a city run by Hispanics and computer engineers -- that teach Hispanic people how to use computers. Nobody would donate money to LatinoNet's revised cause.

Valdez and his board let the last of LatinoNet's dwindled staff go last fall. The Mexican Heritage Corp. will likely decide this month to take over what's left.

"That's sad," says former board member Luis Alvarez when told of LatinoNet's current status. "It's very, very sad."

Despite LatinoNet's failure, Valdez seems to have landed on his feet. A former Stanford University and UC Santa Cruz educator, and a much-sought-after panel speaker on the issue of "community empowerment through technology," he makes his living as the principal of Valdez Associates, a consulting firm that deals with issues of community empowerment.

Empowerment comes in a variety of forms. Earlier this year, Valdez and a group of co-researchers wrote a white paper recommending that Pacific Telesis and Southwestern Bell Corp. should rebate $1 billion to consumers as part of their merger plans.

He was at the Fisherman's Wharf Marriott last month, meeting with government officials in preparation for work as a consultant to a National Institutes of Health minority wellness program.

"It's not so much health care, but finding ways to empower communities," Valdez explains. "Work I've done with the National Cancer Institute, telecommunications policy, LatinoNet, this -- the common denominator is to empower communities. Since what I know best is community empowerment, that's a key element."

Indeed, a quick -- free -- Internet search engine probe produces the name of Dr. Armando Valdez, chairman and founder of LatinoNet, as a panelist at dozens of seminars, conferences, workshops, and round tables.

Valdez has found himself a handy niche, somewhere between the government's and academia's infatuation with technology and their urge to disguise the growing gap between the underclasses and the rest of America. It's the urge that drove Newt Gingrich to suggest placing a laptop computer in every poor child's lap. It's the infatuation that keeps the useless metaphor "Information Superhighway" on a thousand bureaucrats' lips.

It remains true that computer networks enjoy promise as a democratic leveler, even an instrument for social change. With the advent of the Web, anyone with a $1,000 computer and a Web account can, at least theoretically, have the publishing reach of a Conde Nast. Disjointed interest groups can share information through e-mail and bulletin boards, and better advocate their causes.

Armando Valdez dreamed of harnessing this promise when he launched LatinoNet.

"Experiments like LatinoNet, whether they fail or succeed, leave the question of access to technology in the air. It's unresolved, it's left unaddressed. What we now have in this country are public networks. What about the wiring of schools? What we have is technology islands. Some groups that succeed and others down the road that don't. What we're doing is getting further inequity. If indeed we're moving toward an information society, an information economy, this all becomes very suspicious to me. It undermines democracy. It's creating a lot of things this technology can very easily resolve. This is the kind of tech that can unify, that can empower communities -- that's the power of this technology."

It's a power that LatinoNet might have helped harness. But ego -- and the advance of technology itself -- got in the way.

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