Net Loss

By Published on .

Most Popular
The internet is taking a breather.

The pell-mell pace of ad and Web-development spending is easing, and traditional marketers and dot-coms that might have rushed to take a site live eight months ago are taking time to re-evaluate their business plans and examine accountability. I-shops are also feeling the pinch, with many cutting staff and reporting losses amid slowing revenue.

IXL Enterprises, Atlanta, laid off 350 employees this month shortly after its president quit. IXL and Viant, Boston, also reported a third-quarter loss; both had been profitable.

Meanwhile, Organic, San Francisco, said quarterly revenue growth would be lower than projected and expected to report a third-quarter loss. Analysts downgraded other Web developers' stocks as some of their dot-com clients filed for bankruptcy.

An indicator of the slowdown came last week when researcher AdZone Interactive reported U.S. ad spending on the Internet totaled $1.41 billion in August, down 7.6% from July -- the first month-to-month drop in this year. While AdZone only has data back to January, many industry trackers suspect it's the first drop in Internet ad spending to date.

Even so, AdZone President John Cardona noted spending still is up significantly since January, when it stood at $818.5 million. But he said the drop is significant because spending has been growing at such a fast clip till now.


Peter Petrusky agrees that there's been a slowdown. He's director of new media at PricewaterhouseCoopers, which compiles the quarterly Internet ad spending report on behalf of the Internet Advertising Bureau. The accounting firm is in the process of finalizing the IAB's second-quarter report.

"The feeling out there is that the second quarter will be a slowing of growth," Mr. Petrusky said. "That's entirely possible. There has to be some leveling off. You just can't continue to see 150% growth every year. It's just the law of large numbers."

The IAB reported $267 million was spent for online advertising in 1996; more than $4.6 billion was spent in 1999; and $1.95 billion was spent just in the first quarter of 2000 alone.

IAB's data come from reports supplied to PricewaterhouseCoopers from Web sites, while AdZone tracks advertising on more than 1,300 sites that it says make up more than 95% of all Internet ad revenue.

Mr. Petrusky said he doesn't think the dot-com shakeout will have serious ramifications on the Internet economy because dot-coms' online ads account for just about 10% to 15% of all online advertising.

"I don't think there's anything to worry about in terms of the long-term prospects of Internet advertising," Mr. Petrusky said.

He said the litmus test will be the rate of online ad spending in the fourth quarter, which he said is historically when about one-third of all online ad spending takes place.

Many analysts and industry players are betting that a strong fourth quarter will resuscitate the industry.


"While the marketplace may be taking a deep breath right now with relatively flat growth for the second and third quarters, the long-term health of the business has never been in doubt," said Rich LeFurgy, IAB chairman and general partner at WaldenVC.

"Online media draws revenue from advertising, direct marketing and promotional budgets, and that breadth and depth will continue to fuel growth for years," said Mr. LeFurgy. "Combined with the historical strength of the fourth quarter as a function of seasonality and retail spending, we do expect to see a very strong fourth quarter and full year."

At the same time, some marketers are using this period of lessened pressure to take their time introducing Web services.

For instance, Orbitz, a travel site founded by American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Airlines, recently delayed its formal launch from late this year to June 2001, when it plans a $100 million marketing campaign, including advertising created by TBWA/Chiat/Day, New York, to celebrate its launch. An Orbitz spokeswoman said Chairman, President and CEO Jeffrey Katz made the decision when he joined the company in July. The site will begin a beta test in February.

"It's more important to do the site right from day one" than to meet a preliminary deadline, the Orbitz spokeswoman said, noting that Orbitz had to overcome reliability and scalability issues in creating a site that searches the Web for airline, hotel and rental car rates from 450 companies.


Many dot-coms, such as the online discussion group portal, are taking a break from costly offline ad campaigns to focus on less expensive barter banner ads and online contests. A Deja rival in the free discussion group space also recently disappeared taking pressure off of the site.

"The cost of (customer) acquisition is astronomical" with offline advertising, said Lisa Lahde, senior director of marketing at Deja, noting that several months ago it parted ways with

offline agency DiNoto/Lee, New York, and online agency Organic. Deja had been running a $10 million offline effort. "Everyone had a TV campaign. It made more sense to do an integrated campaign where all the pieces fit together," Ms. Lahde said.

John Burshek, chief research officer at NetRaker Corp., said he's seen a change in the attitude of clients, which include Adobe Systems;, New York; and photo site Snapfish.

NetRaker sells a service and software that lets companies survey users about a site's navigation and customer service.

"They're feeling far less pressure to make a splash on the Web," he said of his clients. "If they are on the Web, they feel less pressure to improve what they're doing."

He said the shakeout has been a boom for his business because, unlike dot-coms that were throwing money into media, established, mainstream companies have always demanded much more accountability.


"We're riding this wave of prove it. Sites have to care about performance," Mr. Burshek said.

What seems like a hiatus might merely be the absence of clamorous dot-com ads that choked the airwaves late year.

Numerous dot-coms have shut their doors, and others are conserving cash -- in part because they're more focused on fiscal prudence than on fending off new rivals. For example, e-tail ratings site -- which late last year had envisioned a $60 million budget -- now plans to spend just $10 million, mostly online (AA, Sept. 4). VP-Marketing Gene Cameron said BizRate feels it can cut spending in part because it's not overly concerned about new players invading its turf given the tough environment for fresh Internet companies.

Charlene Li, senior analyst at Forrester Research, also agreed the spending pace has slowed. "It feels like a breather because there's not as much activity out there," she said.


Before the March stock market crash in technology stocks, dot-com and bricks-and-clicks advertisers were buying TV spots because they had to, she said. Now that many dot-com rivals have been banished, Ms. Li said she doubts traditional marketers will dismiss Internet spending.

"I don't think they're saying `I don't need to advertise because the dot-coms aren't out there,' " she said.

Instead, Ms. Li said, Forrester's research indicates that traditional marketers plodding along are the ones that are expected to eventually be the backbone of Internet spending.

"The dot-coms were the hare. Traditional companies have been the tortoise," she said. "They're plodding along. They will get there, and possibly ahead of everyone else."

In this article: