Dot-com doubt

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With three well-known dot-coms already on official deathwatch, a long-expected shakeout among Internet companies may be under way. And hundreds of millions of marketing dollars are at risk.

Auditors have expressed "substantial doubt" whether CDnow, Value America and will remain in business. The three sites last year collectively spent $144 million on advertising and promotion. In all, they spent an astounding 70% of the their combined revenue on marketing -- money that will evaporate if they fail or, at best, shrink dramatically if turnarounds succeed.

But any cuts would be only the beginning.

With many dot-com stocks in the tank and investors concerned about growing losses, companies face tough odds selling new stock or raising venture capital to pay the bills. Even stronger dot-coms are paying attention to the bottom line, putting pressure on marketing spending.

Barron's oft-quoted March 20 report on dot-coms' cash crunch showed 26 companies on track to run out of money within six months, barring cash infusions. Those 26 -- including CDnow and, CBS HealthWatch/Medscape, CBS,, Peapod and -- collectively ran more than $180 million in media advertising last year, according to Competitive Media Reporting data. Throw in other marketing initiatives, such as direct marketing and promotion, and substantially more money is at risk.

Some spending already has been pulled. Last year, CDnow spent $57 million on advertising, contributing to a loss of $119.2 million on revenue of $147.2 million, according to Securities & Exchange Commission filings. Last month, the ailing e-tailer said it would slash expenses by nearly one-third, with plans to cut ad spending and coupons "as quickly and efficiently as possible." CDnow's agency is Hampel/Stefanides, New York.


VitaminShoppe spent $19.9 million on advertising last year, a year in which it had $13.6 million in sales and a $31 million loss. VitaminShoppe parted last month with Cohn & Wells, New York, and expects to name a new agency this week. VitaminShoppe, in a recent SEC filing, said, "if necessary, we could reduce our discretionary advertising expenditures to mitigate the impact on our available cash."

Software seller last year spent $41.8 million on ads, promotions and marketing deals with Web sites, yielding $117.3 million in revenue and a $124.8 million loss. Beyond, restaging itself as a business-to-business play, paid $5.8 million in termination fees in the first quarter to end marketing deals with America Online, Yahoo! and others. Beyond, which parted recently with Leagas Delaney, San Francisco, has halted advertising.

Drkoop, meanwhile, pumped $17.6 million into ads and promotion; it lost $56.1 million last year on revenue of just $9.4 million. The site generated a huge loss even without running a big offline campaign. Drkoop launched a review last May before it went public, settled on Lowe Lintas & Partners Worldwide, New York, but has delayed a campaign several times. An executive close to the marketer said the campaign has not reached the media-buying stage yet. Drkoop has big overhead, including $24.3 million due this year to AOL. The medical site's auditors question its chances for survival.

Value America, also saddled with a "substantial doubt" report, forged into the market last year with slick direct-response ads and $69.6 million in spending. But its loss -- $170.6 million -- nearly matched revenue of $182.6 million. It has scaled back after a management change.

Industry analysts anticipate the demise of more dot-coms -- particularly Internet pure-plays -- as online companies "with brick-and-mortar [components] will squeeze them out," one analyst said.

Bulk-buying sites and those for toys, beauty, pets, groceries, chat and content are on deathwatch; too many sites have the same business model, analysts contend.

"Even if these companies don't go out of business, they won't have the funding to support the kind of marketing" seen in the fourth quarter, said Michele Slack, analyst at Jupiter Communications. "If they don't have the money to market themselves, it will be harder for them to be a top player. If they are not a top player, they will have a hard time getting the funding they need to be a top player. It's a downward spiral."

That spells shakeout.


"If you're not No. 1 or 2 in your category, you've got a problem," said Barry Parr, director-consumer e-commerce research for International Data Corp. "A lot of these laggards will wind up merged with larger rivals, merged into a larger portal, and I think we'll see some brick-and-mortar companies acquiring some of the troubled dot-coms. None will shut their doors unless they're real dogs."

Ad dollars will disappear as dot-coms merge. Computer products site Onsale in November bought and took the name of The company last year spent $51.4 million on advertising. But in a recent SEC filing, Egghead noted: "We expect sales and marketing expenses to decrease as we combine advertising spending for a single combined company." Egghead's own cash position improved last week with a $23 million infusion by an investor group. The e-tailer this month moved its account to Grey Advertising, San Francisco, from the former USWeb/CKS, Cupertino, Calif.

Even the strongest dot-coms may be eyeing ad cuts. E-Trade Securities more than doubled sales and marketing expenditures to $301.7 million for its fiscal year ended Sept. 30. It then more than doubled marketing spending in the first fiscal quarter of the new year vs. the earlier year, with increases attributed to stepped up advertising, via Goodby, Silverstein & Partners and Direct Partners, both San Francisco. But people familiar with E-Trade said it is considering pulling back ad spending since its ads are attracting a lot of unprofitable customers. E-Trade couldn't be reached at press time.

Even the crowded business-to-business space is encountering skepticism about earnings.

For media and agencies, all the shifts mean uncertainty about how much of the dot-com windfall they can take to the bank.

The advice from Mr. Parr: "Cash the check [immediately]."

Contributing: Amanda Beeler, Mercedes M. Cardona, Alice Z. Cuneo, Tobi Elkin, David Goetzl, Richard Linnett, Patricia Riedman

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