Net Advertising May Slow, but it Ain't Over Yet

SAN FRANCISCO (04/24/2000) - Even though the market recovered somewhat from last week's market slide, advertising agencies had to wonder how the stock market would affect their bottom line in months to come. Traditional media advertising has grown more dependent on high-tech advertisers graced with either VC-funded wallets or Wall Street's favor. "There are a lot of agencies that have gotten fat on dot-com money, and it was relatively easy," says Mike Massaro, COO of ad agency Goldberg Moser O'Neil. "Those days are ending because there won't be $40 million dollar accounts with no sales anymore." Even before last week's so-called crash, Internet companies were rethinking their business models. Many didn't see the fourth-quarter revenues they had hoped for, and others like Drkoop.com Inc. and CDnow.com Inc., were running out of money. But last week's events make consolidation even more likely, which will result in fewer client accounts for agencies. Those companies left standing aren't likely to spend as extravagantly on outrageous advertising schemes. "I'm not saying they were spending like drunken sailors, but the dot-com ad spending has been an unexpected bonanza for the ad industry," says Rich LeFurgy, a former ad exec who's now a partner at Walden VC. "Venture capitalists won't urge boards to let them spend, spend, spend on TV and radio in unbridled ways like before."

During the past year, there's been a staggering increase in the number of dot-com ads. Just as the Internet has been the driving force behind the current economic boom in the U.S., it's also fueled the ad industry's revenue engine.

According to Competitive Media Reporting - a firm that tracks dollars spent on TV, radio, newspapers, magazines and outdoor ads - Internet companies spent a whopping $3.6 billion on advertising in 1999, up from $642.9 million in 1998.

Financial services, portals and e-commerce sites in particular spent heavily to jump-start their businesses. ETrade Group Inc. increased its spending of $41 million in 1998, to $129 million in 1999, pumping $96.9 million into TV and cable alone. But when the market took a beating last week, public companies listed on the Nasdaq and startups nearing the end of their burn cycles were forced to re-examine their ad-spending habits. The market dive came on the heels of a Forrester Research report claiming that few dot-com e-retailers would survive the coming months. All signs pointed to a sobering future in which Internet companies would have to think long and hard - and then think again - before spending dough. Experts say networks and agencies will continue to demand cash-in-advance or escrow deals. And everything from media plans to creative campaigns will be considered more thoughtfully while ad budgets undergo serious scrutiny. All this means that dot-coms could miss out on prime ad space.

In mid-May, the networks announce their fall lineups, and it's unlikely that dot-coms will be buying early. So 2000 might not see a repeat in the ad boom brought on by dot-coms in 1999. "Every nickel, dime and quarter that these companies have has gone into the marketing of their Web sites, but the stock market will affect that trend," says Bill Croasdale, executive VP at Initiative Media, a Los Angeles-based media-buying company. "The dot-coms could have turned 2000 into a banner year, but I doubt ad spending will skyrocket above last year's point. But I hope I'm wrong and it all goes through the roof."

Although ad execs aren't predicting another boom, dot-coms themselves are reacting in a range of ways. MotherNature.com has re-signed Ogilvy & Mather, the agency it hired last year to handle $30 million in ads. MotherNature's stock has been in a steady downward spiral since going public in December. "We aren't doing any more offline branding," says CEO Michael Barach. Instead, the company will spend money on online advertising.

By contrast, some dot-coms are forging ahead with brand-building efforts.

AltaVista Co. was the No. 9 advertiser among Internet companies in 1999, according to CMR. The S-1 document the company filed with the SEC on April 10 states that it planned to use approximately $90 million to $115 million of the money they hoped to raise in their IPO for sales and marketing expenses in the next 12 months. However, AltaVista says it won't scale back on advertising - even though it has yet to raise capital in the public markets at all. "We're on a great track, and we plan to continue building our brand," says Charles Rashall, VP of marketing. "We have a disciplined approach to marketing and strong support from CMGI." Similarly, Webvan.com will charge ahead and launch a new TV campaign, reported to be in the range of $10 million to $15 million.

"We plan to do what we need to do to build our brand," said a Webvan Group Inc. spokeswoman, adding that the company hopes to be in 15 markets by 2001. Webvan lost 50 cents, to $5.75, in Nasdaq trading today. Despite the brave few, most dot-coms will face problems when it comes to paying for traditional media because the out-of-pocket rates are so significant. Those that can afford it will be more cautious about wacky ploys to grab consumers' attention. "You'll see better advertising out of the dot-coms because they don't have the money to burn," says Massaro. And many companies may turn to response-oriented media like online banners, sponsorships and direct e-mail. Rich LeFurgy, who serves as chairman of the Internet Advertising Bureau, sees this as a good thing for the Internet as an ad medium. "The Internet will probably be the only beneficiary of recent Nasdaq gyrations," he says. But traditional media types warn that offline ads are still the way to go for raising brand awareness.

Chris Lindau, VP at Citron Haligman Bedecarre, an ad agency with many dot-com clients, thinks that Internet companies who want to survive will still use offline advertising as the core of their marketing plans. "Of course banners drive traffic, but they just don't build brand," he says.

Bernhard Warner contributed to this story.

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