It's a Shop-Eat-Shop World


Call it an industry consolidation on steroids. After floating to unprecedented heights on the late 1990s' Internet bubble, the online advertising industry suddenly can't retreat fast enough. Pink slips are flying, and once proud stand-alone agencies are seeking shelter via mergers and acquisitions. Others are simply declaring bankruptcy and ending it all.

Witness the last week of June and the first week of July. On June 29, online advertising company Avenue A (AVEA) announced that it would shut its London office to cut costs. On June 27, European ad giant Havas Advertising bought the remainder of Circle.com (CIRC), a Baltimore-based interactive agency that's bleeding red ink. On the same day, San Francisco interactive agency Organic (OGNC), a one-time high-flyer whose battered stock price is languishing at 32 cents, discovered that it could be delisted from the Nasdaq.

Then on July 1, independent Net ad outfit ValueClick (VCLK) of Westlake Village, Calif., acquired San Francisco-based Web ad shop Mediaplex (MPLX). On June 27, professional-services provider SBi acquired some assets of agency MarchFirst, which filed for bankruptcy in April.

LEAN TIMES. All this consolidation comes against the backdrop of a very tough year for online advertising. According to the Internet Advertising Bureau, online ad revenues reached $8.2 billion last year but will remain flat in 2001, after several years of double- and triple-digit growth. Other observers are far more pessimistic. On June 28, Merrill Lynch media analyst Lauren Rich Fine predicted that the online ad market will shrink 25% in 2001. Most analysts predict a rebound no later than mid-2002.

Meanwhile, Web ad shops are likely to suffer, including the giants. Heavyweight DoubleClick's second-quarter revenues, reported on July 10, exceeded analysts' consensus projections but fell 20%, to $109.1 million, as pro forma losses widened to $9.5 million, from $3.8 million a year earlier.

Courtships in the online ad biz aren't new, as illustrated by DoubleClick (DCLK). Even as CEO Kevin Ryan has eliminated more than 20% of the company's jobs since February, he has kept buying. In February, DoubleClick acquired Canadian e-mail marketer FloNetwork for an undisclosed sum. In May, it bought the assets of online ad-tracking agency Sabela Media. And on June 1, it picked up e-mail marketer MessageMedia for $41 million in stock.

A SURVIVOR. Ryan's hope has been that DoubleClick, which chalked up revenues of $506 million last year, will emerge standing tall when online ad spending recovers. That's also the thinking of Havas and other major ad agencies such as TBWA/Chiat/Day, which see the dot-com downturn as an opportunity to pick up cheap assets that could perform well in 2002 and beyond.

DoubleClick will likely be one of the handful of online ad players to survive the economic downturn as an independent company, analysts say. At many agencies, fee income has tumbled by up to 40% this year as traditional clients slashed their ad budgets and many dot-coms perished, says Michael Tchong, CEO of Internet marketing consultancy ICONOCAST.

As a result, the industry has been riddled with bankruptcy filings and layoffs. "We've probably seen at least one-quarter to one-half of the companies restructure in some way" -- cease operations, merge with a competitor, or refocus themselves, says ABN AMRO analyst David Doft. He expects the trend to continue at least until the end of the year. Aside from DoubleClick, only a handful of independent niche agencies are expected to survive -- companies such as San Francisco-based tech marketer Lot 21.

ADDING EXPERTISE. Ultimately, "the online space is going to look a lot like a traditional space," with established agencies providing interactive as well as other services, says Rudy Grahn, an analyst with tech consultancy Jupiter Research. Traditional ad shops lack the online marketing expertise, technical smarts, and the culture of interactive shops, he says, and they'll attempt to buy all that while valuations are cheap.

For an idea of just how cheap, look at Agency.com (ACOM), which is No. 8 on Advertising Age's list of the world's top online ad firms. The outfit was acquired on June 26 by a previous investor in the company, Seneca Investments, for $3.35 per share. That's $96.65 below Agency.com's high of $100 in 1999, during the Internet bubble, though well above the $2.60 or so at which the stock had traded recently.

The Web expertise that online shops can provide their new parents ranges from cutting deals for online product promotions to finding the right search-engine placement, says Martha M. Frey, an analyst with e-business consultancy Patricia Seybold Group. "A lot of traditional shops don't understand Internet advertising," explains Jupiter's Grahn. For instance, the banner-ad campaigns that accounted for 50% of all online ad dollars in recent years are now objects of ridicule in some quarters. "Banners are just a nuisance," declares Robert Coen, senior vice-president and forecasting director at ad agency Universal McCann.

COMPELLING FORMATS. So interactive ad agencies are experimenting with new tactics, such as e-mail direct marketing, which generate greater consumer response than banner ads, and exotic multimedia efforts. For instance, LifeSavers has created a popular game site called candystand.com. It offers online golf, tennis, and other games, all of which feature LifeSavers' and parent company Nabisco's logos. "This is probably the best time for us to evolve the industry" and experiment with different models and ideas, says Cory Treffiletti, media manager at San Francisco-based Freestyle Interactive, whose clients include Microsoft and CBS MarketWatch.

Indeed, finding compelling online ad formats could prove crucial for even traditional ad agencies over the next few years as the Internet becomes an even bigger medium. In January, Forrester Research estimated that global spending on online advertising will top $42 billion by 2005 as the Web audience grows.

If the market does actually grow that fast, big agencies will be in a far better position than stand-alone interactive shops to offer campaigns that integrate all media. For instance, Chiat/Day's $25 million Bluelight campaign for Kmart, which debuted this spring, is the largest in the retailer's history. It incorporates online, TV, billboards, and other media, all under one agency roof. "The days when you had marketers hire five or six different ad-services providers are over," says Jupiter's Grahn.

That's just one more reason to expect traditional agencies to scoop up their online competitors -- and why most online agencies will be glad to sell out. By Olga Kharif in New York


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