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Shakeout continues for e-mail firms

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Full-service e-mail marketing companies, struggling to survive after the burst of the dot-com bubble, are merging or being acquired at a brisk pace. The phenomenon is narrowing the field to a handful of players, a reprise of the way independent direct marketing and public relations shops were absorbed into large agencies in the 1970s and 1980s.

At least eight full-service e-mail marketers cut deals in the last year, not counting pacts made by pure-play e-mail list services, technology or turnkey e-mail service providers .

Last May, 24/7 Real Media sold its e-mail marketing unit, Exactis, to database giant Experian. In November, Naviant and eDirect, two e-mail marketers, announced plans to merge. And in December, CMGI Inc.’s Chicago-based YesMail bought Netcentives’ e-mail subsidiary Post Communications for less than $2 million, after Netcentives filed for Chapter 11 bankruptcy protection.

Then there’s DoubleClick Inc. Along with a number of other acquisitions, the New York-based company has snatched up two e-mail marketing companies within the past year.

The first was Toronto-based FloNetwork, acquired for $47 million last April. In January of this year, DoubleClick completed its acquisition of Louisville, Colo.-based Message Media at a steep discount. (When the companies initiated the agreement, the stock transaction was worth $41 million; by the time it was completed, it was worth only $8 million.)

It’s a badly kept secret that DoubleClick, which has been vocal about making e-mail marketing its priority, is still shopping, according to many in the industry. "DoubleClick has been out talking to everybody and his brother," said Regina Brady, president of Reggie Brady Marketing Solutions, a Norwalk, Conn., e-mail marketing consultancy.

But DoubleClick is paying a lot of attention to one company in particular. BtoB has learned that DoubleClick has all but signed the paperwork to acquire Digital Impact, a $40 million full-service e-mail marketer in San Mateo, Calif. The two companies have been talking for the last few months, and "they’ve been in really aggressive discussions in the past month or so," said an e-mail marketing executive who wished to remain anonymous.

Some observers say Digital Impact, the biggest of the full-service e-mail agencies, is burning through cash, making it more receptive to DoubleClick’s overtures.

Although Digital Impact would not comment on acquisition discussions, it denied having financial problems. "Digital Impact projects reaching operating cash flow breakeven by June 2002," said David Oppenheimer, CFO and senior VP-finance. "We are not a company that needs to sell."

A case for consolidation

Forrester Research predicts spending for U.S. e-mail marketing will jump dramatically by 2003, almost tripling the $1.3 billion outlay in 2001. Most major ad agencies and marketing services providers want a piece of that in the never-ending quest to meet clients’ every need. Thus, many agencies already dabble in the space through alliances and investments with full-service providers that manage e-mail strategy, creative execution, message distribution and back-end analysis.

E-mail companies, which watched their valuations plummet and business disappear after the dot-com crash, may prefer direct relationships with marketers, but they know their agency relationships pay the bills.

Take E-Dialog, a midsize provider. It has alliances with Interpublic Group of Cos.’ FCB Worldwide and McCann-Erickson, among other agencies, and counts IPG as an investor. About 40% of its business comes from agencies.

But the company could be a takeover candidate, too, according to at least one analyst. "E-Dialog has been floundering for about a year," said analyst Shar VanBoskirk at Forrester, who predicts a takeover by September.

E-Dialog President-CEO John Rizzi vehemently denied there would be a September surprise. "We don’t have a ‘for sale’ sign out front," Rizzi said. E-Dialog will be profitable by September, he said.

Meanwhile, Grey Global Group is hedging its bets. Grey Ventures invests in Bigfoot Interactive, a New York-based e-mail agency, while Grey’s direct marketing division has its own in-house e-mail group. Bigfoot is another provider that denies business is bad. According to CEO Al DiGuido, the company will be profitable this year.

The one-two punch of the Internet free-fall and the advertising recession only intensified the consolidation pace. E-mail services companies had a rough year in 2001. Digital Impact lost 50 dot-com clients last year; the firm, which at its largest had 120 clients, claims 100 today.

While most of these providers will not admit to lost business, layoffs were rampant in 2001. DoubleClick laid off 25% of its employees; YesMail closed two offices and laid off employees; Bigfoot Interactive said it cut 10% of its staff; E-Dialog let 30 employees go.

Natural evolution

Industry observers say consolidation is a natural evolution. "It goes back to the old days, when there were small boutique direct marketing companies, and then the big agencies realized they needed expertise in direct marketing," Brady said.

Plus, client demands are a strong motivator. Many marketers prefer giving their e-mail campaigns to agencies that already handle their advertising, to ensure consistent branding.

"You get continuity," said Dan Polito, VP-marketing communications at Reuters. He prefers his exclusive relationship with Omnicom Group’s Rapp Collins because it handles Reuters’ global business, including interactive marketing, e-mail marketing and direct marketing.

Other clients say they prefer a small shop. "I get the service I need," said Darryl Walter, circulation marketing manager at Gannett Co.’s USA Today, who has used In-Box Interactive for online circulation efforts.

But Kim MacPherson, president of In-Box, said her company’s small size can be a disadvantage, one that recently cost her a prospective client. "They were a big fish, and they wanted to deal with other big fish," she said.

"Marketers are finally starting to realize e-mail is part of the communications mix," said Jim Nail, senior analyst at Forrester. "That pulls it out of a specialist boutique and into the full-service agency [category].

"Look at history from the big agency holding company standpoint," Nail said. "In the 1970s, they bought all the direct marketing shops. In the late ’80s and early ‘90s they bought all the PR shops. They’ll soon buy all the interactive and e-mail shops. It’s what they do."

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