Ad slowdown sends cold wind through 'New Economy'

Online advertising has generally stagnated. But analysts agree that it is not dead, just moving into a different phase. The long term outlook is good.

Online advertising company DoubleClick Inc.'s break-even financial performance for the fourth quarter, announced late Thursday, underscores the difficult time businesses built on Internet ads are having.

"If [the softening advertising market] worsens, it will become urgent to look for new economic models and ways to profit on the Internet."

Nicholas Weinstock

The New York-based company reported net income for the quarter of $216,000; total revenues were $132.3 million, down slightly from the previous quarter. For the entire year 2000, DoubleClick lost $13 million, or 11 cents per share.

While putting the best face they could on the potential of the business, DoubleClick officials called the current climate a "difficult market" and projected a loss of between 7 and 9 cents per share in the current quarter.

The cooler market for online advertising is being felt elsewhere. Layoffs at New York Times Co.'s Internet division this week and the closure of News Corp.'s digital subsidiary late last week dramatize the need for an advertising revenue model that can sustain an online news business.

New York Times Digital, which operates NYTimes.com, Boston.com and newyorktoday.com, will cut 69 employees, or 17 percent of its staff, to become cash-flow profitable for the year 2002, officials said.

News Digital Media, News Corp.'s online division, will eliminate 200 jobs by consolidating its news, sports and entertainment operations on the Web.

"If [the softening advertising market] worsens, it will become urgent to look for new economic models and ways to profit on the Internet," said Nicholas Weinstock, a spokesman at News Digital Media. "We need to find new revenue sources or maximize what advertising funds there are."

CNN News Group is also expected to reorganize its TV and Internet operations, resulting in the layoffs of 500 to 1,000 employees, mostly from the Internet side.

Matter of evolution?

The cost-cutting moves of the news behemoths are expected to save them millions of dollars, and analysts say the pullback from the Internet will continue as a natural evolution during the year.

"Layoffs are just an unfortunate aspect of combining operations," said David Marks, an analyst at Dataquest Inc., in San Jose, Calif. "The Internet is still a sound concept for distributing media, it's just that expectations will have to be reduced regarding audience and revenue growth rates."

Marks said that all online news sites, especially the startups and independent operators, will struggle this year simply because creating and distributing content is expensive and difficult to do.

"Media is like retail, where people looked at the Internet and mistook a channel for a standalone business," said Malcolm Maclachlan, a media e-commerce analyst at International Data Corp., in Mountain View, Calif.

"Traditional media outlets see the Web as part of what they do, [and] offline profit ... can be used to support this business," he said. "It will be tougher for [online news] startups because they have to build a brand, and it may be too late to do it from scratch."

The media sites aren't the only ones taking a hit. As free-spending dot-coms have ceased operations or slashed their marketing budgets in the hopes of attaining profit-ability, online advertising revenues in general have stagnated.

Merrill Lynch Internet analyst Henry Blodget this week predicted that 2001 online advertising revenues will hold steady at $8 billion rather than rise to $9 billion, as he had previously forecast. J.P. Morgan & Co. likewise revised its projection downward from $10.9 billion to $8.8 billion.

Engage Inc., one of the largest online advertising networks, announced plans earlier this month to eliminate 550 jobs, or 50 percent of its workforce, and put more emphasis on its marketing software offerings. Advertising.com, 24/7 Media Inc. and Mediaplex have also announced layoffs recently.

While Engage Vice President of Worldwide Marketing Betsy Zikakis downplayed the layoffs there as "right-sizing" after the company made several acquisitions last year, she conceded that the fall-off in online advertising is real.

"The online marketing people had to spend a lot of money to generate noise about their companies; traditional marketers have a lot more discipline."

Betsy Zikakis

"We've clearly seen a slowdown. I can't imagine anyone in this space who hasn't," she said. "The dot-coms are retrenching and spending less, and some of them are going out of business."

Zikakis said offline marketers are beginning to spend money on online marketing, but at a slower pace than the dot-coms did.

"The online marketing people had to spend a lot of money to generate noise about their companies," she said. "The traditional marketers have a lot more discipline."

Zikakis said Engage still believes in the long-term viability of online advertising, it's just preparing for a lower rate of growth. Other analysts agreed that online advertising isn't dead, just moving into a different phase.

Long term outlook - Good

Kathleen Heaney, e-commerce and retail analyst at New York-based BlueStone Capital Group, pointed out that the top 100 advertisers still spend just a fraction -- only about 1 percent -- of their advertising budgets on online advertising.

"The traditional marketers are coming online, they're just not coming online fast enough," she said. "But the outlook is good long term, because the metrics are there [on the Internet ], the audience is there. So the traditional advertisers will need to be there too."

Roger Sant, chief strategy officer at Carat Interactive, a Boston agency that helps develop online advertising campaigns for companies like Pfizer, Radio Shack and Symantec Corp., said that dot-coms created a "false economy," pumping billions into online advertising campaigns.

"The dot-com companies had no fear, they spent on advertising without being prudent or smart," Sant said.

But online advertising still holds a lot of promise, given the kind of money that big companies from the offline world have to spend on advertising, he added.

"If large companies like General Motors were to increase their interactive advertising budget by just 1 percent, that would represent a huge influx of cash to the Web," Sant said.

But not everyone is convinced that the "old economy" companies can save online advertising.

"Bricks-and-clicks money [for advertising] is increasing, but it can't possibly make up for the collapse of the dot-coms," said Martin Nisenholtz, CEO of New York Times Digital. "We've gone from a realm of just pure, undifferentiated click-through to much more intelligent, more strategic uses of the Internet for marketing, and that's the trend that will continue."

The layoffs at New York Times Digital won't change the company's advertising strategy, Nisenholtz said, noting it will de-emphasize dot-com advertising and work more closely with the parent newspaper to leverage its large client base. For example, in addition to their display advertising in the newspaper, retailers could use the Web sites to provide additional information to consumers, such as store locators and interactive promotions.

Even if non-Internet companies embrace the Web as an advertising medium, they won't blindly throw money at banner ads like the dot-coms did, Sant pointed out. They won't increase their investment in online advertising until they're convinced it will work for them.

"The industry is learning about what technologies and what sites are most effective," he said. "Banners and buttons are in decline, and advertisers are looking for more innovative ways to get their message across, like streaming media and pay-for-performance models."

Sant said Carat Interactive is studying the effectiveness of online advertising to build brand awareness for established brands, rather than just direct response.

"Everybody's pushed click-through rates and direct response for online ads, but not branding," he said. "Companies are spending hundreds of millions of dollars on TV advertising to test their brands. Why can't they do the same for online?"

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