E-volution: Dot-coms face the bottom line

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It's spring, but a West Coast advertising executive felt an unsettling chill in the meeting when he gave his second dot-com credentials presentation of the week.

"The guy was a wacko," the adman said of his prospective dot-com client. "The business plan, unbelievable."

The potential client talked in machine gun bursts. "A rabid eagerness to make a killing" shone from the client's eyes, the adman said. "You just sense the desperation to get in on the gold rush before it's over."

Welcome to e-volution, Chapter 2 of the dot-com revolution.


While spending remains strong, the climate has changed. Many once-prized dot-com stocks--Buy.com, Drugstore.com, eToys--have been in a free-fall this year. Some dot-coms--such as CDnow--are pulling back on marketing to conserve cash. The flood of dot-com calls to agencies has slowed from the overheated fourth quarter, and agencies and clients are taking a little more time to consider options. Venture capitalists are demanding more accountability for the money they pump into dot-com advertising. The ads are getting more serious and focused, partly a result of the explosion in business-to-business dot-coms. But with the market in flux, there's good reason to wonder how long new capital will keep flowing to pay for all the consumer ads--and to wonder when the gold rush will end.

Gone is the frenetic fourth-quarter holiday pace, the need to be on the air tomorrow, and big dot-com bucks thrown at TV and the Super Bowl.


Flush with cash from VCs and initial public stock offerings, b-to-b companies are investing heavily in consumer media. Portal site Business.com, for example, last month hired Deutsch, Marina del Rey, Calif., for what could be a $50 million account. But b-to-b is unlikely to match the business-to-consumer spending that so far has accounted for most dot-com offline and online ad dollars. For example, b-to-b companies accounted for about 5% of online ad Splits: MyFamily.com dropped Deutsch as its agency less than 90 days after rolling a new campaign while Jobs.com left and returned to Rizutti.com to handle its advertising impressions in the fourth quarter, according to AdRelevance, part of measurement supplier Media Metrix. Meanwhile, VCs--though they have a ton of money to invest--are exercising some caution with advertising.

"The money's getting tighter," said Robert Hanley, co-founder of Creative Media, New York, media buyer for a number of dot-coms including Beyond.com, Della.com and MVP.com. "The [venture capital] people are reining these companies in," forcing them to quantify effectiveness of offline advertising and holding them more accountable, he said. VCs indeed appear to be shifting away from the hype and landgrab mentality of last year's fourth quarter, when being the first to market was paramount.

"We're beginning to see a shift to 'best to market' is the winner," said Joanna Rees Gallanter, managing partner and founder, Venture Strategy, a venture capitalist in San Francisco.


Drugstore.com exemplifies that change. Erik Moris, senior director of communications at Drug-store.com, admits the company bypassed a lengthy review and thorough market research in favor of getting a campaign out as fast as possible when it chose McCann-Erickson Worldwide, Seattle, for its '99 ad campaign. It wanted to reach customers and investors. "You've got to be first to market. If you are waiting for the best message, your competition will beat you to the punch," he said.

But when Drugstore.com partnered with Rite Aid last fall, advertising had to promote online and offline capabilities. In addition, Drugstore.com research showed a different message--that of a convenient resource--would be more effective. With new agency Fallon McElligott, Minneapolis, on its $30 million account, Drugstore.com launched fresh creative late last year.

"For us, it was smarter to be close to right [with our message] and then adjust midstream," Mr. Moris said.

Tim Haley, managing director, Redpoint Ventures, a Menlo Park, Calif., VC firm, prefers companies with an established infrastructure, "something with (the potential of) high-margin (returns) and a unique value proposition," he said.

Redpoint backs Reflect.com, a premium beauty-care product site owned primarily by Procter & Gamble Co., and OurHouse.com, a clicks-and-mortar alliance with Ace Hardware stores.

Even so, dot-coms will continue to spend large sums of money on brand advertising this year, said Jim Nail, senior analyst at Forrester Research.

"There's still more branding work to be done because there will be 11 million people this year making their first online purchases," Mr. Nail said. "You want to get people who are early in their online buying habits."

But he said that kind of advertising won't last forever. "It's not a profitable strategy. [Dot-coms] will have to switch to a more direct-marketing kind of strategy because it costs too much money to drive users to their sites. They have to convert those people into regular customers. The only way to become profitable is to get a series of repeat purchases over the next 12 to 15 months."

Stamps.com is an example of that shift. The postage site launched last year with ads from Wieden & Kennedy, Portland, Ore., featuring comedian Bob Newhart. But Stamps.

com this year moved to a harder-hitting direct approach with TV spots from direct agency Draft Worldwide, Chicago.

As long as venture capitalists understand dot-coms still need to make a significant investment in customer-acquisition advertising, they will continue to fund it, Mr. Nail said.


The dot-com category "is not necessarily drying up, but growing up," said Dan Pearlman, co-founder and managing partner, AAR/Bob Wolf Partners, a Los Angeles and New York consultancy, who added that dot-coms should be considering more direct marketing.

Dot-coms spent $3.1 billion on all measured media for 1999, up fivefold from the $649.3 million spent in 1998, according to Competitive Media Reporting. TV spending accounted for half of 1999's total, $1.6 billion, up more than fivefold from the $323.2 million spent in 1998.

While start-ups still abound, fewer have deep pockets.

"Those companies coming out of the woodwork and saying they have $25 million to spend have slowed down," said Julie Bauer, president-CEO, Saatchi & Saatchi, San Francisco.

"Many of the dot-coms are going away or priming themselves to be bought," added John Butler, creative director, Butler, Shine & Stern, Sausalito, Calif.


For dot-coms surviving the evolution, agency marriages are coming under pressure--putting both parties back in the dating game.

Take Jobs.com. Renamed and relaunched a year ago, the career site worked with Rizutti.com, a small Dallas agency. But Marketing Director Caryn Kboudi switched Jobs.com's $15 million to $20 million account to McKinney & Silver, Raleigh, N.C., in November, saying at the time the agency understood "the Internet environment and how to use offline ads to build brands."

Despite a $60 million media investment from CBS Corp., Jobs.com realized it had neither the time nor financial resources to produce the celebrity-driven ads McKinney proposed. So Jobs.com returned this month to the Dallas shop.

MyFamily.com, meanwhile, last week dropped Deutsch, Marina del Rey, less than 90 days after launching a $10 million offline campaign. It hasn't yet named a new agency.

Agencies are getting a little more cautious before jumping into bed. "We are, as an industry, being more careful with whom we partner moving forward," said Creative Media's Mr. Hanley. "We want to work with long-term, viable concepts as opposed to flashes in the pan. The industry is smarter than it has been in the last couple of years and more discriminating with whom we are doing our work."

Some agency principals hanker for the good old days of working with companies with real-world business propositions.

"I much prefer we wait for something that doesn't end with dot-com," said Saatchi's Ms. Bauer.

Fred Goldberg, CEO, Goldberg Moser O'Neill, San Francisco, said he's longing for accounts with ad budgets that don't disappear overnight. "I'm going to get me some real old-fashioned accounts pretty soon," he said.

Contributing: Tobi Elkin

Copyright March 2000, Crain Communications Inc.

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