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OCTOBER 14, 2004
By Sarah Lacy Fighting for Rich Media's Riches These sophisticated online ads are a booming business, and powerful new entrants and a changing market could bring on consolidation In 1999, the Internet boom was in full swing, and Atlanta cinematographer Jonathan Mellinger wanted to build a Web site that played video clips of his work. Only he didn't want users to have to download something like a Windows Media player. He wanted clips to play as soon as the site came up. He called a couple of graphic-designer friends to ask if that was possible. They wondered why it wasn't, and about a year later the aptly named EyeWonder Inc. was born. Today the privately held Atlanta startup is profitable, doubling revenues annually, and it's smack in the middle of a banner year for rich-media advertising online. The category includes floating, animated, and video ads, as well as expandable banners and other techniques to engage -- or annoy -- users. And after several years of rough going, in 2004 rich media is about to generate $1 billion in revenues for the first time. EyeWonder is one of five startups that experts say are emerging as leaders in the field. The other top names are New York-based Unicast Communications, Klipmart, and Eyeblaster, as well as PointRoll in Fort Washington, Pa. SQUEEZE PLAY? The five businesses are all small, private, and won't disclose their financial results. But all say they're profitable -- and they all have booming sales. Klipmart and PointRoll expect their business to triple this year, while Eyeblaster is expanding by 85% annually. That's partly because their industry is booming: Rich-media ad revenues will nearly quadruple to $3.8 billion in 2009, figures Jupiter Research, a New York City market-research firm. But their survival is far from guaranteed as bigger and better-established players such as DoubleClick in New York (DCLK ) and Seattle's aQuantive (AQNT ) move into the market. These companies, notes Forrester Research analyst James Nail, have what the startups lack: Size, deep pockets, and the appeal of a one-stop shop that offers a range of services to advertising clients. "If I'm hiring DoubleClick to serve my ads, why do I have to go to another company and get them involved?" Nail asks. Klipmart, PointRoll and the other rich-media startups may soon get squeezed financially. According to Jupiter, the rates online advertisers pay, which are measured in CPMs, or cost per thousand impressions, have been soaring by about 20% annually at most sites and up to 40% for some ad formats on the premium portals. But with so many competitors vying for the business, some sites say they've been paring back the management fees they pay rich-media companies. KEY TIES TO PORTALS. Many industry watchers expect the same thing to happen to the rich-media business that has happened to ad serving over the last two years: Even as ad volume has soared, management revenues for the companies serving the ads have remained more or less flat. The rich-media leaders aim to prosper despite such pressures. They have two major advantages. The first is a strong track record with all the major gatekeepers in online advertising. They have close links with the agencies, who use their tools to make ads in new creative formats. All the outfits have key relationships with major Web sites, including the three big portals, which handle nearly half of all online ads: Yahoo! (YHOO ), Microsoft's MSN (MSFT ), and Time Warner's AOL (TWX ). Just as important, they number among their customers such powerhouse advertisers as FedEx (FDX ), Adidas, Honda (HMC ), General Motors (GM ), and all the major Hollywood movie studios. The rich-media outfits say they've perfected the hand-holding necessary to guide these finicky customers into the unfamiliar new market.
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