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Monetizing those Golden Eyeballs
by J.K. Riggin
Mainstream content is flooding the Web and it's not even news anymore. The Web was the first choice for those seeking early Super Tuesday results. Registering a unique domain name is now a factor in conjuring titles of Hollywood movies. And old media sluggers from Stephen King to the Sports Illustrated swimsuit issue are now premiering their latest releases on the Web.
Yes, e-commerce and instant electronic distribution have added delectable twists to the smorgasbord of content. But with all but the most valuable content providers (like the Wall Street Journal and our very own, soon-to-be-released 247Profits.com), for-pay content is a risky proposition. More than ever before, advertising is paying the way for all of these distractions.
Yet lost among the bleating lambs of privacy is the cold, hard truth that advertising on the Internet actually is a profitable business. If you throw together marketing and advertising solutions and services, you end up with an industry that is projected to be worth more than US$50 billion by 2002. And Internet advertising all fits nicely into the B2B space, which has been blessed for the foreseeable future. But the most important and attractive feature here is that effective marketing and advertising is rapidly becoming absolutely critical to doing business on the Internet.
As far as new Internet users are concerned, we're still in the hyper-growth cycle. The ever-increasing hordes of new users (or eyeballs) means more impressions of banner and email ads to be viewed, which means growing revenues for Internet advertisers. At the same time, improved technology is enabling Internet advertisers to reach more targeted audiences, which in turn increases the quality of Internet advertising and enables Internet advertisers to charge more. And with 2.2 million new pages of content being added to the Internet every day, we also have an ever-expanding inventory for advertising.
The only fly in the ointment is with privacy advocates, but not in the way you might think. Yes there are lawsuits, and there will continue to be lawsuits. Despite the fact that there are nearly 18,000 various laws on the books restricting how and where you can and can't use a fire arm, there are precious few laws lighting the path of how advertisers can monitor and use information about how people use the Internet.
Obviously, this will get hammered out over time, but not to the detriment of Internet advertisers. The most quantifiable impact to date on behalf of privacy has been from hackers who feel that the public Internet has been tainted by commerce. Denial of service attacks are costly to Web site operators; every hour of down time for a Yahoo! or Amazon or eBay means millions in lost revenue. Watch for companies with a stake in Internet advertising take the lead in addressing perceptions.
So what's for sale?
With print media, advertisers purchase space. With broadcast media, they purchase airtime. With the Internet, the product is a hybrid of space and airtime (a 468 by 60 pixel banner that is viewed by X number of users). Because of the interactive nature of the electronic medium, however, this product can be delivered, quantified and paid for in a variety of forms, such as impressions, clicks, leads, or purchases.
This breakdown of products is where Internet advertising offers real advantages to its old media ancestors. Advertisers can now target and measure the performance of their campaigns with more precision. A large, consumer oriented company might focus on making as many impressions as possible, targeted to their demographics audience. A company focusing on pushing a unique product may focus on generating as many clicks as possible, to bring customers to a Web page with a specific product pitch and immediate opportunity to buy. Service companies may focus primarily on leads, driving those users who are most likely to buy one of a range of related services. Retailers might focus on paying per purchase, in many cases paying referring sites only a percentage of purchases originated by those sites.
Pulling the strings
One of the biggest players pulling the strings on various drivers of the Internet advertising engine is CMGI (CMGI-NASDAQ). CMGI is majority owner of several Internet marketing and marketing technology firms. The company further extends its reach with two venture funds, @Ventures I and II. Beyond the cash CMGI brings to the table, these companies benefit from their strategic alliance with a nearly complete supply chain, from traffic and community (Alta Vista, Lycos, Blaxxun, eGroups, Reel.com, etc.) to services (Critical Path, Silknet, NaviSite, etc.) to advertising networks (Engage, FlyCast and AdForce).
The best way to ride CMGI is through its own stock or by getting CMGI shares on the cheap through an acquiree (one can still hears the cheers from Flycast shareholders in San Francisco). And compared to Yahoo! (YHOO:Nasdaq), CMGI might be one of the last affordable Internet juggernaut issues on the table. CMGI's earnings per share is at US$1.57 compared to Yahoo's US$.10, yet Yahoo!'s market cap is triple that of CMGI. Amazing when you consider that CMGI-tentacled companies account for more traffic than Yahoo!, and CMGI ultimately has a bigger say in driving the price and availability of Internet ad inventory (among other things).
More Than A Network
When it comes to serving banner ads across the Internet, DoubleClick (DCLK-NASDAQ) is the leader. Despite — or because of — the recent negative ink surround the company and its disregard for namby-pamby privacy zealots, DoubleClick is at the core of virtually all Internet advertising activity.
But scratch beneath the network and you'll see that DoubleClick has built up some very attractive fixed assets along the way. Yes, the ad sales account for the bucks today, but the company's platform is now serving over a billion banner ads per day, viewed by 80 million people around the globe. Add to that the nearly 2,000 Web site operators managing their ads with the company's DART ad management system and you have a technology infrastructure that isn't going anywhere anytime soon.
DoubleClick has executed well, meeting its numbers every quarter, with 150% annual revenue growth. The growth in Internet users and content publishers directly feeds DoubleClick. As the company continues to execute and Internet investment dollars continue to seek refuge from the Amazons and iVillages, DoubleClick will continue to be a popular destination.
DoubleClick competitor 24/7 Media (TFSM:Nasdaq) also is a worthy more-than-just-a-network advertising play in that it has built perhaps the largest permission email marketing business. The company now has more than 15 million email addresses for individuals who have agreed to receive relevant marketing pitches via email. Direct marketers will pay as much as US$.40 per name because email has proven to generate much higher response rates than banner ads.
CMGI recently acquired email marketer YesMail, which manages about five million email addresses, for approximately US$100 per address. If you valued the 24/7 Media email business in the same way, the asset would be worth about US$1.5 billion, which doesn't include its existing ad business. The company's current market cap is just under US$1.4 billion. Watch this stock, now at US$60, approach US$100 by the fall.
Counting the eyeballs
As quantifiable as you might expect digital media to be, the quest for the holy grail of Internet ratings is still a raging battle. As valuable as Internet advertising may be, that value is driven by who goes where. Following are five companies that each measure Web traffic in a slightly different way. Accrue (ACRU-NASDAQ) and WebTrends (WEBT-NASDAQ) each provide software and systems to report Web traffic to Web site operators. Financially, the companies are very similar: both have market caps at between US$1 and 2 billion, both have annual revenues in the US$10 to 20 million range, though WebTrends is profitable and Accrue is still getting there. Accrues is more focused on providing traffic data pointed toward decisions related to marketing and merchandising. WebTrends software is broader in focus, and is actually the industry standard in terms of basic Web site traffic reporting. Most Internet service providers license WebTrends to their hosting clients — from Mom and Pop Web sites to high-end e-commerce sites. Look to either of these companies, especially Accrue, to be acquired within the next 18 months.
Like Accrue, net.Genesis (NTGX-NASDAQ) also provides Web site operators with data about how their customers are using their Web sites. Unlike Accrue, however, net.Genesis goes beyond the data to also provide more analysis and consulting services to those Web site operators to help them better attract and retain customers. Though it just went public in late February, the company has quickly achieve a US$1 billion market cap. Give it six to nine months to grow into that valuation.
Media Matrix (MMXI-NASDAQ) sets out to measure traffic and audience throughout the Internet, much like the Nielson ratings for television. The company recently has expanded its coverage and reporting internationally, to include Australia, Canada, France, Germany and the U.K. In addition, Media Matrix has bolstered it sales force to focus more on advertising agencies. Again, with Internet usage continuing to climb and more mainstream content providers coming to the Web, demand for accurate audience measurement will grow. At the moment, Media Matrix is well-positioned to best serve that need. And with a market cap of just over US$800 million, now is a good time to jump on board.
AtPlan (APLN-NASDAQ) provides target market research planning systems to help Web site operators optimize Internet advertising and merchandising strategies. The company has doubled its year-to-year revenue while whittling its net loss down to US$.48 per share versus US$2.07 a share a year ago. Clients include AOL.com, Eddie Bauer, eBay.com, E*TRADE, Excite@Home, iVillage, Microsoft, Ogilvy & Mather, TBWA Chiat/Day, Time Inc. New Media and Yahoo!. In addition to recently upgrading its sales talent, the Connecticut-based firm just opened an office in San Francisco, which should help increase their profile with the Silicon Valley dot-com set. With a market cap of only US$115 million and a star-studded client list, watch for AtPlan to catch up to the competition or get acquired.
Bigger, better, faster
More Internet users and more content spells a winning market space for Internet advertising. But what really makes this part of the Web compelling is the number of companies opening for business on the Internet, because it is these companies that ultimate need the products, services and expertise that Internet marketing companies have to offer. Though these dot-com companies may think they're purchasing banner ads or email sponsorships to gain a marketing edge, they will ultimately need these resources to survive.
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