Advertising Growth on Internet Is a Good Sign for Ad Banner Firm ValueClick

Yahoo could merge with a media conglomerate, Amazon.com might never make a profit, and a wave of consolidation could put countless other online retailers out of business. But in the uncertain world of electronic commerce, this much seems clear: Companies will continue to advertise on the Internet.

And they seem sure to do so with increasing gusto. Spending on Internet ads in the U.S. topped $4 billion last year, according to preliminary figures compiled by the New York-based Internet Advertising Bureau and accounting firm PricewaterhouseCoopers. Market researcher Jupiter Communications expects to see that figure hit $4.7 billion this year and $11.5 billion in 2003.

The trend bodes well for ValueClick, a Carpinteria, Calif., firm that places its clients’ ads on more than 10,600 Web sites based in the U.S. and overseas. ValueClick plans to raise about $48 million in an upcoming initial public offering.

Traditionally, companies that advertise on the Net pay a set amount for every thousand times their ad is displayed. Basic banner ads, which are usually 1 inch high and several inches wide, cost less than $10 per thousand impressions. Targeted banner ads, which are tailored to appeal to the user or appear with specific content, cost at least twice as much, said Marissa Gluck, an analyst with Jupiter Communications in New York.

But some advertisers, especially e-commerce sites such as E-Trade and CDNow, would rather pay rates based on how many times customers click on their ad so that they’re not wasting money on ads that users could well be ignoring. (Besides, customers who make the effort to click on an ad are potentially more valuable.) That’s the service ValueClick offers on its network of small and medium-sized Web sites.

ValueClick charges 55 cents per click-through for ads that are displayed across its entire network of Web pages, which reach about 28% of Internet users. Ads targeted at specific categories such as travel, health and business cost 60 to 65 cents per click-through, said ValueClick spokeswoman Sydney Shaw. In January, ValueClick placed more than 2 billion ads, of which 7.7 million--or 0.4%--received clicks.

Industrywide, advertisers who pay per click typically pay rates between 50 cents and $2, Gluck said. That puts ValueClick’s prices on the low end of the spectrum.

Still, they’re high enough to cover the payments the company makes to the Web sites that agree to host the ads. Those payments range between 12 and 25 cents per click, and the more ads a site is willing to accept, the more it gets paid per click.

But ValueClick’s revenue hasn’t been high enough for the company to earn a profit. ValueClick broke even during the 10 months it operated as a unit of Web-Ignite Corp., a Buellton, Calif., concern that helps Web sites draw traffic by registering them with search engines. Since ValueClick became an independent company in May 1998, it has lost more than $2.7 million.

Revenue has grown steadily each quarter, to $9.7 million in the last three months of 1999. That was a 69% increase over the previous three months and more than seven times higher than the last three months of 1998.

ValueClick’s operating expenses have ballooned as well, particularly the costs for sales and marketing, general and administrative operations, and stock-based compensation. The cost of buying the ad space from Web sites is also on the rise and has hovered around 50% of revenue for the last year. In the last three months of 1999, ValueClick recorded a net loss of $1.5 million, up from $742,000 in the previous quarter and a loss of $70,000 in the last three months of 1998.

Despite the losses, analysts are attracted to ValueClick. One reason is that the sort of cost-per-click ads that ValueClick sells are becoming increasingly popular. The proportion of online ads sold solely on a performance basis, including cost-per-click, jumped one-third, from 6% in the first quarter of 1999 to 8% in the third quarter, according to the Internet Advertising Bureau and PricewaterhouseCoopers. More than half of all Net ads are priced in part based on how many clicks they elicit, according to the same study.

“Pay for performance minimizes the risk for the advertiser, but it’s high-risk for the [Web site] publisher” because there’s no revenue guarantee, Gluck said. “Right now, it’s a buyers’ market, and with so much unsold inventory, publishers are forced to accept some pay-for-performance metrics.”

Another ValueClick advantage is its alliance with New York-based DoubleClick, the largest firm placing ads on the Internet. Last month, DoubleClick paid $85 million in cash and stock for a 30% stake in ValueClick, plus a warrant to buy an additional 15% of the firm before April 2001. That deal valued the company at about $280 million.

DoubleClick sets its ad prices based exclusively on how many times an ad appears online. By taking a stake in ValueClick, DoubleClick can diversify into the pay-per-click business.

“They’ve got a different business model, and it was very interesting to us, which is why we decided to take a stake in them,” said Jennifer Blum, a spokeswoman for DoubleClick. “They’re a great, great company.”

One result of the deal, analysts say, is that ValueClick’s shares should at least roughly track DoubleClick’s shares, which have increased more than fivefold since the company went public in February 1998. DoubleClick’s shares rose steadily since last summer until early this year, reaching a high of $134 on Jan. 3. Then investors became nervous about the company’s plans to match customers’ Web-surfing habits with their names and addresses. Privacy advocates assailed the proposal, which attracted the attention of government regulators and sent the stock diving as low as $80.56.

But the stock began to recover last week after DoubleClick Chief Executive Kevin O’Connor said his firm would abandon its plan, at least until the government and industry agree on privacy standards. DoubleClick’s stock closed Friday at $97.13.

Gluck said she expects consolidation in the online advertising industry to result in three major players: DoubleClick, 24/7 Media of New York and CMGI, the Andover, Mass.-based Internet conglomerate that owns big stakes in several industry players, including Engage, AdForce and Flycast Communications. ValueClick’s affiliation with DoubleClick will ensure it has a place in that three-player future. In fact, she said, “the odds are pretty good” that DoubleClick will eventually acquire ValueClick.

Analysts also say they are sure that companies such as ValueClick will continue to have a role connecting advertisers with Web sites.

“There will always be a role for the middleman,” said Marc Ryan, director of media research for Seattle-based AdRelevance, a unit of Web audience tracker Media Metrix. “Some people don’t want to deal with the hassles. Some sites sell all their ads through an ad-serving company.”

ValueClick plans to sell 4 million shares for between $11 and $13 each. Goldman Sachs & Co. is the lead underwriter, with Salomon Smith Barney and Wit Soundview also working on the deal. After the offering, which is expected as early as next week, the stock will trade on Nasdaq under the symbol VCLK.

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Karen Kaplan can be reached at Karen.Kaplan@latimes.com.

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Rising Revenue Source

Total U.S. spending on online advertising has grown explosively since the Web became a commercial medium, and forecasters predict it will continue to rise. Online ad dollars in billions:

Note: 1999 and subsequent figures are estimates.

Sources: Internet Advertising Bureau, PricewaterhouseCoopers and Jupiter Communications