Web Players Hope Real-World Firms Take Up 'Dot-Com' Advertising Slack

By GREG JOHNSON

Nov. 2, 2000 12 AM PT

TIMES STAFF WRITER

Advertising dependent online players are hoping that bricks-and-mortar companies will take up the slack being created as IPO cash hoards shrink and “dot-coms” rein in marketing spending.

Shares of many dot-coms, including AOL, DoubleClick and Yahoo, are hovering near 52-week lows as Wall Street ponders how quickly those traditional advertisers will move online and how much the big marketers will spend. One thing is certain: The heady days of a DrKoop.com dropping $80 million on AOL’s doorstep are over.

“Last year it was almost easy for any company to look good,” said DoubleClick Chief Executive Kevin Ryan. “In a strange way, this [online] consolidation needed to occur to clearly delineate the leaders.”

Online advertising is expected to grow to between $8 billion and $10 billion in 2000, up from $4.6 billion in 1999, according to the Internet Advertising Bureau, a trade group with more than 300 members. What’s at issue on Wall Street is the quality of that spending. “The days of $80-million AOL deals are over,” said Richie Glassberg, vice chairman of the IAB. “Now it’s all about putting the right message in front of the right consumers.”

Online players who rely heavily upon advertising revenue argue that investors now dumping their stocks are looking for trouble. “I don’t see it,” AOL Chief Operating Officer Bob Pittman said during a recent teleconference with Wall Street analysts. “And I don’t buy it. Business looks great to us.” That said, AOL is joining other advertising-dependent companies in the necessary business of damage control.

AOL boasts that its third-quarter advertising backlog increased slightly to more than $3 billion. The company that made headlines with its 1999 marketing deal with DrKoop.com is now spotlighting deals with such bricks-and-mortar partners as Federated Department Stores, NASCAR, Volvo, CitiGroup, Pizza Hut and Office Depot.

Yahoo doesn’t usually break out which sectors drive its advertising revenue. But in a bid to placate nervous investors, Yahoo reported that 40% of third-quarter ad revenue was generated by pure-play Internet companies, down from 47% in the second quarter. Yahoo also announced it would no longer enter “longer-term relationships with thinly capitalized companies.”

DoubleClick underscored that third-quarter revenue from bricks-and-mortar advertisers grew by 137%, well above the growth rate for the dot-com sector.

Part of the problem is that investors and dot-com executives can’t agree on whether the online advertising glass is half full or half empty. AOL’s $3-billion backlog at the end of the third quarter, for example, prompted frowns from industry analysts searching for evidence of stronger future growth.

And, when online players point to the growing online presence of bricks-and-mortar ad dollars, Wall Street remains skeptical. “Traditional advertisers are moving dollars online at a compelling rate but not fast enough to offset the loss of dot-com dollars,” according to Merrill Lynch Internet analyst Henry Blodget.

It’s clear that big advertisers are embracing the Internet. When the Assn. of National Advertisers held its annual meeting in Dana Point last month, the gathering was titled “Brand Building in the New E-conomy,” and speaker after speaker detailed corporate plans to merge the Internet into advertising and marketing budgets.

But such speakers as Procter & Gamble President and Chief Executive Alan G. Lafley cautioned against an overreliance on online advertising. “The Internet is a key piece of the plan for us,” Lafley said. “But you have to integrate it with traditional media, you have to integrate it with promotions, integrate it with public relations. It can’t just be a single element.”

No one expects the Internet advertising pool to shrink. “The one thing that everyone agrees upon is that advertising is the future online,” Glassberg said. “This is still going to be the most successful new advertising medium in history.”

But the water-glass argument surfaces when analysts parse the numbers.

Merrill Lynch agrees that online advertising will grow by 80% to $8 billion in 2000. But the brokerage firm believes that $1 billion in revenue was generated by the one-time dot-com rush. Without the Internet spending flurry, the rosy 30% to 40% annual growth rate forecast for online advertising in 2001 shrinks to a more-modest 15% to 20% range.

Investors began to worry about Internet advertising’s growth rate in the spring after Nasdaq began to slide and the IPO window slammed shut. Stock prices hit bottom in October after a handful of reports suggested that the Internet advertising growth rate was slowing.

AdZone Interactive, a New York-based advertising-research firm, reported that online ad spending was down 7.6% in August, the first monthly drop of the year. Internet Advertising Bureau Chairman Rich LeFurgy acknowledged that, based on third-quarter figures, Internet advertising “may be taking a breather from its explosive growth over the past several years.”

Investors aren’t sure how quickly the online-advertising-revenue growth rate will rebound. Ad-dependent companies aren’t expecting a holiday boost because industry analysts already have factored in typically strong fourth-quarter advertising spending.

Blodget predicts the growth slowdown will continue into the first quarter of 2001. He also sees single-digit revenue growth during the quarter--a stunning development in an industry that enjoyed a 180% growth rate during the first quarter of 1999. His long-term estimate is rosier, with a gradual acceleration of the growth rate during the remainder of 2001.

Despite Wall Street’s jitters, there is strong evidence that remaining dot-coms can’t afford to abandon Internet advertising. When AdRelevance analyzed 38 dot-com IPOs completed between July 1999 and April 2000, the Media Metrix division learned that Web sites that advertise online enjoy greater traffic than companies that aren’t advertising online.

And, there is evidence that traditional advertisers could move quickly as they refine online strategies. An AdRelevance survey in September of the top 200 online advertisers showed traditional companies accounted for 32%. By early October, real-world players accounted for 37% of the total.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Online Ad Slump

Advertising spending on the Internet fell by 7.6% to $1.41 billion in August, the first monthly drop of the year, according to AdZone Interactive.

‘Dot-coms’ are the top spenders on online advertising.

Advertising expenditures by 10 brands online in U.S. in August, in millions

AOL.com Shop: $28.6

Nextcard.com: 25.8

Amazon.com: 22.2

Barnesandnoble.com: 19.6

Fidelity.com: 19.3

Datek.com: 18.9

ESPN.com (Go.com): 18.8