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AdForce is Working Overtime to Secure its Net Future Dependence on too few big clients has left it vulnerable for now There's no such thing as a five-year business plan on the Net. Just ask AdForce. The Web advertising services company went public on May 7 and saw its shares rocket 112% during its first day of trading. But what the Net gives, the Net can take away. Less than a month later, when portal giant Yahoo! completed its acquisition of GeoCities, it said it would take over the job of serving the community site's ads -- depriving AdForce of one of its biggest clients. AdForce's shares nosedived 30% to a low of $18.75 the day the news was announced, though they've since recovered, to just under $26. The market's fear was that the company, which handles the serving of banner ads for Web sites, would be hard-pressed to replace an account as lucrative as GeoCities, which represented 20% of its $3.2 million in first quarter revenues. Now, AdForce's dependence on a small group of other big client has more than a few analysts spooked. Together, GeoCities, Netscape, AdSmart, and 24/7 Media made up 77% of the company's first-quarter income. "The loss of the GeoCities account substantially reduces [AdForce's] prospects," says Steven Tuen, an equities analyst with IPO Value Monitor. "Over time, they might be able to replace the [lost] business, but they'll definitely feel it in the short term." As a site where visitors build their own home pages, GeoCities is prime real estate for advertisers seeking the "stickiness" of regular visitors. And the nearly 750 million ad impressions GeoCities gave AdForce to serve each month was instrumental in its early success. Now, AdForce has to figure out how to replace lost business, keep key accounts, and deal with what analysts say is impending consolidation in its industry. Net advertising is expected to total $4 billion in 2000 compared with $1.3 billion last year, but experts predict that fewer ad companies will be left standing a year from now. STRATEGY CHANGE AHEAD. "There are about seven or eight players in the industry now, including the software vendors such as NetGravity as well as the ad management and services firms such as AdForce, DoubleClick, and MatchLogic," says Drew Ianni, an analyst with Jupiter Communications. "This will be whittled down to about two to four companies in the next year," if only because there are too few plum customers to go around. "All these [Net advertising] companies have the same issues because it's such a nascent market," says Randall Roth, an analyst with Renaissance Capital. "They have to depend on certain core clients until more sites build up critical mass." Indeed, DoubleClick, AdForce's main rival, depends on portal site AltaVista for more than 40% of its income, a situation that analysts considered worrisome until the two companies signed a three-year contract at the end of January. According to AdForce Chairman and CEO Chuck Berger, the focus on big Web players was key to his company's market debut. "Our highest priority is to be the primary infrastructure for advertising and direct marketing on the Internet," he says. "So in addition to winning a lot of Web sites and ad sales organizations, we had to begin to win significant accounts. Although all four of our major accounts are in some form of transition [now], we expect to show continued revenue growth this quarter." Still, Berger concedes that the time is ripe for a strategy change. AdForce is doubling its sales force and has signed up more than 70 new accounts in the past two months, he says. And even though it plans to continue to go after large accounts, "the goal is that by the end of the year no single client will account for more than 10% of our revenue." A PROFITLESS AOL DEAL. As for AdForce's three remaining large clients, it's still too early to tell what will happen. 24/7 Media bought new technology last year that could supplant AdForce, but Berger says the two companies just signed a new five-year contract. AdSmart is owned by CMGI, which is also the parent company of AdForce competitor Accipiter. But AdSmart also just acquired 2CANMedia, and according to Berger, is in the process of moving its ad serving from Accipiter to AdForce because of the volume of ads it needs to serve. AdForce's most solid deal seems to be the Netscape account, which America Online confirms will remain in effect for the foreseeable future. As a major shareholder and strategic partner of AdForce, AOL holds a royalty-free license to use AdForce's services, including the right to demand an exclusive version of its technology, which it has not yet done. AdForce said in its prospectus, however, that such an arrangement will probably keep the relationship from being profitable. Jim Nail, an analyst with Forrester Research, says AdForce knew of the possible loss of some of its major clients and outlined the risk in its pre-IPO filing with the Securities & Exchange Commission. "AdForce has been working on a strategy of differentiation for awhile now," he says. "They've got some money in the bank, a good brand, and the kind of volume this business requires. If they can leverage that, the loss of GeoCities will be just a pothole in the road." Serving what Berger estimates to be about 9 billion ads per month and growing at a rate of 1 billion per month, AdForce has proven that it can handle the volume generated by a portal or a network of sites. The $67.5 million it raised in its public offering is also a nice nest egg -- which it may need as the share of its revenue accounted for by GeoCities drops to nil by the end of June. Perhaps as important as making sure a client's ads appear on the right sites is the ability of a company such as AdForce to track the online behavior of Web visitors -- where they go, what they do, what they buy -- a capability that AdForce now offers. Indeed, as the Net advertising industry matures, companies are racing to do data management rather than just serve ads. "We want to extend the two things advertisers want most -- the demographic data and the psychographic data -- to be able to help influence purchasing behavior," Berger says. As this data becomes more sensitive, Berger's also hoping that his company's neutral stance in the industry --unlike DoubleClick, AdForce doesn't sell ad space in addition to serving ads -- will bring more clients his way, especially those that worry about the competition being privy to their customer profiles.
Whatever the future of Net advertising, one thing's for sure: The path ahead is increasingly treacherous, and AdForce will have to tread carefully to stay out of trouble.
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