E-business falls back to earth

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For those looking for signs that e-business is simply becoming business, a peak at the recent marketing expenditures of once free-spending dot-coms offers an indication that-yes-it's finally happening.

In the latest study for Advertising Age by Pegasus Research International of the marketing efficiency of publicly held dot-coms (true, that phrase may seem an oxymoron), the percent of revenue that companies in the sector devote to marketing and sales continued to drop.

In last year's third quarter, the mean was 61cents for every dollar, a dramatic drop from the market's peak in the fourth quarter of 1999, when online companies spent a blissfully unsustainable 95 cents for every dollar of revenue they generated (AA, Nov. 6).

Now that percentage is showing more signs it is starting to fall in line with what bricks-and-mortar companies spend. By last year's fourth quarter-when the Internet bubble had certainly burst-online companies spent a mean 53 cents per dollar of revenue. That puts dot-coms within striking range of the 25 cents to 40 cents per dollar that bricks-and-mortar companies spend, said Greg Kyle, president-CEO of the New York-based research concern. "I think, in aggregate, we're pretty much there," he said.

Surprising? Maybe not. But like everything else associated with the Internet, the drop-off happened more quickly than even experts had predicted. Mr. Kyle notes he had originally pointed to the first or second quarter of 2002 for when such expenditures would level off (AA, Aug. 7). It's happening a year early.


It is remarkably easy to point to the declining economy and bursting of the Internet bubble as the reason for the dramatic drop-off. But those who wish for the return of network TV schedules peppered with wacky dot-com ads may be in for an especially long wait. It's not just the economy, stupid, that caused the decline; it's also the evolution of business models and wisdom that comes from attending marketing's School of Hard Knocks. "Advertisers are really starting to be much more cognizant of trying to measure effectiveness," Mr. Kyle said.

As long as the money doesn't run out first, that seems like a good plan.

Take the case of ImproveNet, a Redwood City, Calif., provider of home improvement solutions, which had the second highest ratio of marketing spending to revenue in the study. The company still spends an enormous amount of money on marketing, contributing $3.72 for each dollar of revenue in the fourth quarter of 2000 and $3.34 in the first quarter of 2001, but the company has still reduced its marketing expenditures dramatically. In the third quarter of 1999, the company spent $15.29 for each dollar of revenue, and $14.64 in that year's fourth quarter, which, according to Pegasus figures, was the height of the dot-com marketing spending boom.

In the last year, according to ImproveNet Chairman-CEO Ron Cooper, the company has reduced marketing expenditures by almost half, while revenue has increased 25%. While those metrics don't yet have Wall Street cheering-the stock trades for well under a $1.00-it does demonstrate the slow progress of dot-coms still in existence toward a more measured approach to marketing.

In fact, according to Mr. Cooper, ImproveNet long ago abandoned the consumer-brand-at-all-costs mentality that sent the marketing budgets of many dot-com advertisers into the stratosphere. Though never a big TV spender, ImproveNet has still shifted its efforts radically away from anything that resembles mass marketing. "What you see is the impact of a shift in how we reach the market," he explained.

What ImproveNet discovered along the way was that partnering with other companies with better name recognition has ultimately been more important than building a powerhouse consumer brand. Home improvement "is one of those unique categories," Mr. Cooper said, where the potential market doesn't have an ongoing interest in the category. Thus, it has made more sense for the company to take second billing in its partnerships with sites such as Microsoft Corp.'s MSN HomeAdvisor site. ImproveNet appears in the remodeling section, where visitors can search its database of contractors. ImproveNet collects fees from the relationships that the company builds with HomeAdvisor visitors who use its affiliated contractors.


Mr. Cooper feels that with continued aggressive containment of costs, ImproveNet will complete the long march to profitability. He said he plans to get the rate of marketing costs below one dollar of revenue within the next year.

Even those few dot-coms that still pay for advertising on network TV are paying close attention to the bottom line. NetZero, a free ISP that recently launched a "Platinum" service for which subscribers will have to pay, is running ads on NBC's airing of the NBA playoffs, according to a company spokesman. (NetZero has a multi-year sponsorship deal with NBC, including a half-time show NetZero @ the Half.) But it has cut nearly all other expenses related to its TV spots. Instead of using the agency that it announced a partnership with in February 2001-Robert Chandler & Partners in Marina del Rey, Calif.-it did its latest ads in-house using the cheap, but serviceable Flash production tool from Macromedia. The campaign is a far cry from the high-cost extravaganzas that were de rigueur during the dot-com marketing peak.

Content site Salon.com also has been steadily winnowing its marketing costs down by pursuing more viral opportunities such as a co-branding effort with Intel Corp.-including providing Salon audio content to the chipmaker's new MP3 player. But Senior VP-Business Operations Patrick Hurley is quick to point out Salon's TV ads, featuring people wearing masks of personalities such as Bill Gates and Janet Reno, are essentially cable freebies generated by its content and equity deal with Rainbow Media Holdings, which is jointly owned by Cablevision Systems Corp. and General Electric Co.'s NBC.


But such examples of marketing cost containment may not be enough for many dot-coms; the stakes are alarmingly high for most of the companies that Pegasus studied. The metrics are very basic: Use marketing strategically enough to generate profits before the cash runs out. Indeed, the ranks of companies that spent prodigiously on marketing in the fourth quarter only to see time, and money, run out is growing.

E-Stamp, which made huge expenditures-even by its own exalted standards-in the fourth quarter, now exists only as a name. Its $19.16 for every dollar of revenue in the fourth quarter of 2000 reflects both a stunning drop in revenue, from $1.8 million in the third quarter of 2000 to only $400,000 in the fourth quarter, and an inability to totally pull in the marketing reins once the company decided to change its business model part way through the quarter.

E-Stamp last year plowed $54.2 million into sales-and marketing expenses, including $10.5 million in advertising-all to generate $5.3 million in revenue. After changing its focus to back-office shipping and logistics in November, it sold the E-Stamp name, patents and intellectual property rights to rival Stamps.com last month-for just $7.5 million.

Women.com, which is being bought by rival iVillage and spent $1.57 for each dollar of revenue, stated in its most recent quarterly report that its future was highly dependent on the approval of the iVillage deal. Quokka Sports, which had been dropping its marketing costs from a high of $2.83 in spending per dollar of revenue to 74 cents in the fourth quarter, filed for Chapter 11 bankruptcy protection last month.

The list goes on. Failed portal NBCi, which had the benefit of huge, free, media exposure from its network partner, died a quiet death by being bought, for the sole purpose of shutting down, by NBC early last month.

Indeed, the Pegasus Research amply illustrates that in advertising, as in life, things don't always play out fairly. The most frugal advertisers, on a percentage basis, are often those with the biggest brand names. FTD.com, no doubt trading on its bricks-and-flowers heritage, spent only 13 cents per dollar of revenue on marketing in the fourth quarter of 2001; Charles Schwab, which spent only 7 cents per dollar of revenue (but $88.9 million in actual cash) in the fourth quarter, generated more than $1.3 billion in revenue.


In fact, it seems as though only the dot-com companies with the strongest business models have marketing costs that compare favorably to bricks-and-mortar players. And even those that do aren't yet considered out of the woods as successful businesses.

Amazon.com generated almost $1 billion in fourth-quarter revenue on marketing spending of $186.2 million. Priceline.com, which has experienced something of a resurrection of late, has never spent more than 35 cents on the dollar. In the fourth quarter of 2000, its $34.5 million in marketing expenditures on $228.2 million in revenue meant it only spent 15 cents on marketing per dollar of revenue.

The branding abilities of such advertisers also are a function, said Pegasus Research's Mr. Kyle, of their ability to ride the now-crashed Internet publicity wave. "They had a lot of free publicity in the media in terms of growing the brand," he said.

But the days of free, unquestioning publicity, as with high-priced ads, are definitively over. Dot-coms have fully settled into an Old Economy mentality, complete with tight purse strings. Said Mr. Kyle: "We don't see it really going higher than that again."

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