This party's just started

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The stalled economy may have spoiled the New Year's celebrations of many marketers, who were forced to curtail last year's indulgences and tighten their belts for 2001. However, e-mail marketing companies are actually seeing some benefits from the economic slowdown.

"For e-mail, the party is well under way, and I think we're going to see it get bigger," said Jupiter Re-search Analyst Christopher Todd. Broader economic woes are "actually helping e-mail marketing right now because e-mail is, by and large, a free communication," he said. "Because e-mail is cheaper, and it's easier to produce on a mass scale, it just makes it much more attractive to incorporate that into [marketers'] strategies at this point."

Jupiter forecasts steady growth for the category, predicting that e-mail marketing will be a $7.3 billion business by 2005, a boost from $164 million in 1999. The volume of messages will also swell to 268 billion promotional e-mail messages by 2005, according to a Jupiter study released last month. Con-sumers will be left to wrestle with in-boxes 22 times as massive as those they contend with today.

The challenge for marketers and their e-mail partners will be to deliver more relevant communications, which, Jupiter claims, will lead to the metamorphosis of e-mail from an acquisition-based vehicle to a retention tool at the forefront of the trend toward customer-relationship management. "Where we're really bullish on e-mail is in the sponsored [newsletter] and retention modes," Mr. Todd said. This means using companies' house lists to reach consumers.

"We have not seen any cutback, or even a whisper from any of our customers that they're going to do less e-mail marketing. If anything, they're going to do more," said John Rizzi, president-CEO of e-Dialog, a small, private player. The company said it had 323% revenue growth for 2000 over the previous year and secured a second round of $10.5 million in funding last month.

Some e-mail companies, however, particularly those that relied heavily on dot-com clients, have felt the market strain, answering it with layoffs to cut costs and better position themselves for profitable futures. The downturn has even affected those such as MessageMedia, which are following the retention model, but still couldn't make up the revenue lost from dot-coms.

The publicly held company, in which Softbank has a majority stake, laid off 125 of its 500 employees globally in order to stay on plan for mid-2001 profitability.

"The dot-coms, which were pouring lots of money into e-mail marketing, got a wake-up call and pulled back," said company President-CEO Larry Jones. The company said in December it expected fourth-quarter top-line revenue to drop to about $7.5 million, from $10.2 million the previous quarter. However, its bricks-and-mortar clients, such as Dell Computer Corp., IBM Corp. and Pepsi-Cola Co. continued to grow in the fourth quarter. Others that compete with MessageMedia include Bigfoot Interactive, Digital Impact and FloNetwork.

Bigfoot last month also laid off 37 people, 30% of its work force, for the sake of 2001 profitability. "I definitely gave away significant [top-line] revenue by making those cuts, but it wasn't revenue for the bottom line," said Bigfoot co-founder and CEO Jim Hoffman. The cutbacks mean Bigfoot will focus on maintaining deeper relationships with fewer, key clients, instead of doing project work for a laundry list of customers.

Still, those in the industry say that their focus on customer-relationship management isn't entirely related to the fallout in the Internet sector.

"Our restructuring doesn't have to do with having a bunch of dot-com customers," said Mr. Hoffman, adding that dot-coms account for only 10% of Bigfoot's client roster. "What it has to do with is [an] overall shift that we see in the e-marketing business from acquisition budgets to retention budgets."

CMGI-owned, which last month cut 14% of its staff - 24 positions - and recently lost its senior VP-marketing, also recognizes that expanding its offerings to include more customer-relationship management services is the key to remaining competitive. The company currently acts like a list broker, renting e-mail names to marketers - compiled from lists of its 160 network partners - primarily for customer-acquisition purposes. "What you'll see at Yesmail is an expansion of our business model," explained CEO David Menzel. The evolution of the business model will include marketing directly to partners' house lists as well as possibly selling ads within e-newsletters.

Although the majority opinion points to total category growth, the consensus is that consolidation is inevitable. Many believe the e-mail list companies that house and rent names to others will be gobbled up.

Witness the recent acquisition of e-mail list broker NetCreations, purchased in December by Italian ISP SEAT Pagine Gialle for $7 a share, valuing NetCreations at about $111 million. The deal gives SEAT access to NetCreations' 22 million e-mail names, and its offer led to the dissolution of a planned stock-swap acquisition by DoubleClick.

The DoubleClick deal had valued NetCreations at about $191 million when it was announced in October, but that figure dropped to $59 million by year end due to DoubleClick's fallen stock price. But the online ad network and ad management behemoth remains bullish on possible acquisitions, hinting that it will look to accomplish deals that will build upon the suite of e-mail marketing products it launched last year under the DARTmail umbrella.

"We are continually looking for companies to acquire to build our share on both the media and technology side," said Court Cun-ningham, DoubleClick's VP-general manager of DARTmail tech-nology solutions. He also sees e-mail's future as being in retention marketing. "I think what we thought was going to happen has happened. List services CPMs [or cost per thousand names] are coming down, but response rates are remaining about the same," he said. "The story of e-mail basically is it's replacing direct marketing or house lists."

If that is in fact the story, then other list companies like Net-Creations could potentially be folded into broader companies that manage and execute e-mail campaigns. "A lot of companies that went public a year ago are going to seek stronger partners, just as we have, for merger and acquisition," said NetCreations Chairman and CEO Rosalind Resnick.

"It's very likely that the market will consolidate," said Dana Serman, a research analyst at La-zard Freres & Co, adding that today's private companies will merge instead of going public. "The stock market doesn't have an appetite for Internet-related IPOs and will likely not for the coming months, if not years." The E-marketing Index of the 19 major public players in the space that Mr. Serman monitors will most likely thin to 10 or 12 in the next year, he predicted.

"By the end of this year, there'll be dramatically fewer players in the e-mail marketing space," said Mr. Cunningham of DoubleClick, which Messrs. Serman and Todd agree might be one of the last companies standing, using its strong ad serving network and scalability as a foundation.

As for the party, the invitations are still going out. Although the line outside the door will most likely be populated by major bricks-and-mortar players desiring to maintain relationships via e-mail, instead of dot-coms looking to acquire new eyeballs, the hosts are still optimistic.

"The party is by no means over," said e-Dialog's Mr. Rizzi. "I think the party's getting a new theme. The warm-up band was here and now the headliners have shown up." M

Copyright February 2001, Crain Communications Inc.

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