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CNET's $100 Million Marketing Bet: Scant Payoff Yet It has spent $25 million already. But according to some numbers, the ads haven't delivered enough new visitors When CNET Inc. announced plans in July to spend $60 million on ads and marketing through the rest of 1999 and $40 million more in 2000, its stock dropped 10%. At the time, $100 million was an unprecedented amount for a news and information Web site to spend on promotion, and it was guaranteed to push a profitable Net company far into the red. To CNET, however, the risk seemed warranted. After spending $3.3 million on ads in 1998 -- mostly on the Web and in trade publications -- the popular network of Web sites and an accompanying weekly cable-TV show still appealed mainly just to nerds. To achieve its goal of getting big fast it had to tell the mass market that "CNET is the first place to go online for information about computers and technology," says Annie Williams, the company's marketing vice-president. To deliver the word, CNET spent $25 million of its new promotion budget in the third quarter -- mostly on TV, radio, and print advertising. So, what has CNET gotten for its money? Not enough, when you consider that its cost of acquiring new customers nearly doubled in the third quarter, to around twice what each visitor will generate in annual revenue. Add to this the fact that the company's ballyhooed TV ads also confused its target audience, and it's easy to see why CNET decided in just weeks to retool its new campaign. It's true that CNET's third-quarter revenues rose 93%, to $28.4 million, $26 million of which came from its online properties. Yet the new ad campaign saddled CNET with a $23.1 million loss for the quarter, vs. a $1.7 million profit for the same period last year. The loss was about $4 million less than some analysts had forecast. Even so, CNET's stock has since dropped 13% or so, to 47 3/16 on Oct. 29. Apparently undeterred, the company intends to spend $30 million on marketing in the fourth quarter. LIFE-AND-DEATH RACE. Whether this strategy is ultimately successful will tell a lot about the future of dot.com companies. This year, sites such as eToys, iVillage, E*Trade, and AltaVista have decided that startup-style guerrilla marketing is insufficient to deliver the market share and brand recognition they need to prosper, or perhaps to survive. Even obscure sites with short histories are commissioning ad campaigns in the double-digit millions, in hopes that they can catch fire faster than they burn up their funding. For the newest and smallest Net players, it's a life-and-death race. For the largest Web competitors, it could also be a bet-the-farm gamble. On Oct. 27, for instance, Amazon.com warned that its fourth-quarter loss will be much larger than previously anticipated as it triples spending on marketing to what analysts estimate will be well in excess of $100 million over the next few months -- in part to hold off competitors that are nipping at its heels. "It continues to cost Amazon more than we ever imagined to generate revenue," Merrill Lynch analyst Henry Blodget wrote on Oct. 28. "Although management has now committed to demonstrating that the basic business model works, we are simply exhausted by the endless postponement of financial gratification." Amazon's stock subsequently fell 6.5%, to $71. Indeed, an analysis of how CNET has done so far shows how tricky an aggressive ad strategy can be. According to Nielsen's NetRatings, CNET attracted some 627,000 new visitors in the third quarter at a cost of at least $40 a head. That number is based on CNET's $25 million advertising expenditure, and it assumes that the new campaign attracted every one of those new visitors, which of course it probably didn't. At the same time, CNET's revenue for each of the 5.1 million total visitors Nielsen says showed up during the quarter was about $5.50 -- equal to about $22 per year, or at least $18 less than it cost to attract each of the third quarter's new visitors. CNET's Williams says it usually costs the company $20 to $25 to get a new visitor. OFFENSIVE ADS. MediaMetrix, another firm that tracks Web traffic, shows even less impressive results from the ad campaign. It calculates that CNET has 8.4 million regular visitors, in which case it would be collecting about $14 a year in revenue from each one. But MediaMetrix also figures that the number of unique visitors to CNET declined in September by 176,000, after an increase of 287,000 unique visitors from July to August. So, the MediaMetrix numbers seem to show that CNET spent a lot in the third quarter to learn what doesn't work. No matter which set of numbers you believe, the implications are the same: CNET's ad campaign has to deliver more bodies, or CNET has to find a way to increase its revenue per visitor -- or both -- all within the next five quarters. Otherwise, the company will be hard-pressed to justify its $100 million campaign to investors. No one realizes this more than CNET: The new campaign had just begun when the company dumped both the ads and its agency. Like many Net ads, CNET's were brash and, to some, offensive. They featured "experts" such as doctors and scientists, who were nonetheless technology neophytes. In one spot, a proctologist snaps on a rubber glove and prepares his patient for an exam when asked a question about computer memory. In another, a lab researcher suggests dissecting a pig when asked about modem speeds. "We wanted viewers to associate us with everything technology-related and realize that traditional sources of information don't have the answers to tech questions," adds Williams. She says CNET's brand awareness rose 61% in the ads' broadcast markets from June to September. The ads did get good reviews from tech-savvy viewers. However, Williams says, "we also heard from people who didn't know what CNET did or said they weren't sure [the ads] explained how easy [CNET] is to use." That led -- literally -- to an overnight switch to new ads focused on "straight talk." For instance, one of the five new spots features four men in an empty room. One wearing a T-shirt that reads "CNET" leads another to a man wearing a T-shirt that reads "The Right Digital Camera" -- meaning, of course, that CNET gives advice on the best digital camera to buy. "VACANT DOOR." Even though CNET's campaign has yet to pay off, some analysts are heartened by it. Lanny Baker, an online analyst with Salomon Smith Barney, concedes that CNET's change in campaigns indicates poor creative decisions initially. But he says "it's better to see them shift agencies and messages early on than watch them keep knocking on a vacant door." CNET also may have a better chance of success than many other high-spending Web sites do. "It has already shown that it can be profitable with its existing customer base," says Salomon's Baker. "Now, it's smart enough to not be timid about spending a large chunk on marketing to expand its business. It's just not possible to build a brand by advertising only on the Internet -- the penetration is too small." The key to making CNET a huge media company, Baker adds, is to expand its audience. And "the ad campaign is where they're going to get the most bang for their buck. CNET's return over the next four years on this spending will be higher than Amazon will see on its [$300 million] investment in its new distribution centers." The other thing that has changed since July is that CNET's marketing budget no longer looks particularly excessive. Hundreds of Net companies have joined the spending frenzy, ponying up from $5 million to $50 million for TV campaigns. In fact, Williams says she had to postpone CNET's blitz for two months until the Labor Day weekend because she couldn't find placement for her ads. SPEND NOW, CUT LATER. Online brokerages such as E*Trade, which is expected to spend $300 million on marketing this year -- plus Ameritrade and Schwab, which are expected to spend about $200 million each -- are setting the pace for marketing firepower. Through May, in fact, Net companies had spent $755 million on TV, radio, and print ads, up from $230 million for the same period a year earlier, according to analysts at Competitive Media Reporting (CMR). Analysts at Forrester Research expect Net companies to spend $1.7 billion on traditional advertising this year and $6.3 billion annually by 2004. Dot.com ad spending for network TV alone rose to $200 million in the first half of this year, vs. $44 million for the same period last year, says CMR. Companies rationalize such spending by saying that once they've built their brand, they'll be able to cut back. Indeed, says Baker, "you won't see [CNET] setting aside this kind of money [for advertising] in the future." Which means that it has $75 million and 15 months left with which to make its mark. The only question is, will the mark it makes be worth the cost? By Stefani Eads in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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