Online Media Companies Hope to Survive Holiday Season Advertising Shortfall

It’s beginning to look a lot like Internet companies, from giant Yahoo Inc. to legal site Loislaw.com Inc., will find more lumps of coal than revenue this holiday season.

A few months ago, analysts and executives expected revenue would pick up in the fourth quarter as more companies paid for online holiday advertising. Instead, demand is dwindling as more “dot-coms” close every week--by one count at least 130 this year through mid-November--and other companies aren’t making up the shortfall.

“It’s not pretty out there,” said IVillage Chief Executive Doug McCormick, lowering his fourth-quarter sales forecast to flat to negative 10%. “If we get through [the fourth quarter], we’ll have weathered this storm.”

Not every Internet company will survive unscathed. Online companies that get most of their revenue from advertising, and are unprofitable, probably will follow Web-based retailers that have shut down for lack of cash, analysts say.

With some Web stocks down as much as 90% this year, and the Bloomberg Internet Index falling 61% through Nov. 30, many online businesses have reduced spending by cutting advertising. IVillage, which runs a Web site aimed at women, is feeling the pinch as about 30% of sales come from other Internet companies, McCormick said. A few of its advertisers, which McCormick declined to name, have vanished.

“It’s very difficult for a small player to exist in this environment,” said Jordan Rohan, who covers online media companies for Wit SoundView. “The first quarter will be a cathartic one in online media.”

Internet advertising will hit its lowest levels in the first quarter, said Merrill Lynch analyst Henry Blodget. Revenue in the period will increase 8% to 10% from the prior year, after several quarters when Web ad revenue more than doubled over the previous year.

Yahoo, the most popular Internet search site, said fourth-quarter 1999 sales more than doubled from the year-earlier period. IVillage revenue more than tripled in the period.

The sudden slowdown means any increase in first-quarter sales “must come from market-share gains,” Blodget said.

He said companies with enough cash to survive until they break even include real estate site Homestore.com Inc., Web search service Looksmart Ltd., online marketer LifeMinders Inc. and online advertising company DoubleClick Inc. Blodget covers other Internet companies including IVillage, 24/7 Media Inc. and Quokka Sports Inc.

“Online advertising [isn’t] seeing as much of a seasonal pick-up in the fourth quarter as some had expected,” Blodget said.

Yahoo, for example, is expected to report a 6.6% increase in fourth-quarter sales, to $315 million, according to First Call/Thomson Financial. TheStreet.com Inc., an online financial news site, may see an 8.7% decline in fourth-quarter revenue, to $5.7 million.

Recent statistics support the experiences of IVillage and others. AdZone Interactive, a research company, said Internet advertising sales fell 7.6% to $1.41 billion in August from July, then rose to $1.7 billion in October.

Dot-com sales and marketing expenses, as a percentage of revenue, fell to 65% in the third quarter from 92% a year earlier, according to Pegasus Research International, an independent Internet research firm. The percentage may fall to 25% to 40% by mid-2002, Pegasus said.

As advertising from dot-coms slows, traditional advertisers have narrowed their spending on big sites such as Yahoo and America Online Inc., said Pegasus President Greg Kyle.

That means smaller Web media sites such as Theglobe.com Inc. and Loislaw.com Inc. are at risk, especially as cash dwindles, he said.

“We’ve seen most of the pain right now has been concentrated within e-tailing,” he said. “We’ll see that happening in e-content as well.”

Company officials at Loislaw and Theglobe.com weren’t available for comment.

Loislaw, which runs a site for legal information, had cash and other liquid holdings of $3.85 million at the end of September, down from $19.3 million Dec. 31. It lost $3.66 million in the third quarter. Shares have plummeted 97% this year.

“For many of them, it’s a race to reach profitability before their cash runs out,” said Kyle.

For companies such as IVillage, which was the 28th most-visited site in October as measured by Internet research firm Media Metrix, part of surviving is convincing advertisers that the site won’t fold during the tough holiday months.

IVillage tells advertisers that it has $67 million in cash, enough to fuel its operations until it becomes cash-flow profitable, McCormick said.

“The fear used to be, ‘Oh my god, if I don’t do this deal, a competitor will come in and lock in the space,’ ” said IVillage’s McCormick. “Now, [advertisers] want to make sure the site will be around for the long haul and they’re getting the best use” of their dollars.