Special Report: Dot-coms apply more scrutiny to online buys

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Dot-coms' financial beating on Wall Street sent shock waves through their marketing departments, shrinking budgets and prompting many Internet pure-plays to pare all aspects of advertising, including online.

Recent analyst reports confirm that dot-coms are rethinking their online ad strategies and cutting spending as part of total marketing expenses now that money is tight and investors are demanding more than just site traffic. Traditional marketers may make up the difference as they begin to hike online ad budgets.

The bottom line: Web spending is in line for another record year, with continued if somewhat slower growth in coming years as the category matures.

"The good news is the kind of empty-your-pockets-type spending is gone and a lot of the windfall we saw in traditional media will not be there the way it was last year," says Rich LeFurgy, chairman of the Internet Advertising Bureau and managing partner of venture capital firm WaldenVC. "A lot of the budgets that were going into traditional media and not into online, ironically, are now being deployed in online advertising. So online is a beneficiary of this more traditional media approach."


Dot-coms are spending less on banners and are seeking more cost-efficient online media buys. That means e-mail marketing is becoming more prevalent along with advertising on a handful of portals and more niche sites rather than on several smaller sites.

"The big are getting bigger," Mr. LeFurgy says. "Buyers are flying to quality; they are flying to names they know and where they know they can get significant reach and impact."

According to AdRelevance, a division of Media Metrix, online telephony company Net2Phone was the top dot-com advertiser in the first quarter, spending $27 million. The number results from estimating the cost of placing ads based on standard rate-card prices. The number, while useful in comparing companies' online ad spending, is inflated; Net2Phone financial reports show it spent $11.1 million on sales and marketing expense, including advertising, for the quarter ended April 30.

Morris Berger, Net2Phone's chief marketing officer, says online advertising is only one component of the company's overall marketing effort.

"We view the effectiveness of online advertising in conjunction with both direct-response as well as offline branding campaigns," he says. "Online needs offline to support it. The two together bring a really cohesive effort. Online advertising without any effort of any type offline has not succeeded to date."


Net2Phone has worked with Great Response, a direct-response division of Grey Global Group, New York, and with Grey Direct's London office to develop online and offline direct-marketing projects. It's looking for an agency to handle an estimated $50 million multimedia branding campaign set to launch later this year.

Dot-coms are just now realizing that online advertising must meld with offline advertising, Mr. Berger adds.

"The shakeout hasn't been completed yet," he says. "But people might be coming to the realization that online's not the end-all, but part of a total cohesive marketing plan."

That's not to say online advertising is no longer effective for dot-coms. An important part of the media mix, online can still be a cost-effective alternative to expensive offline advertising if planned carefully.

"There's absolutely going to be a shakeout," says Marissa Gluck, a Jupiter Communications analyst. "We're seeing it right now. We've seen a year-and-a-half of overheated ad spending in TV, outdoor and print. We'll start to see a shift back to the Internet, to direct marketing and toward media that have more accountability. In a sense, it's online advertising's renaissance."


Other analysts agree that dot-com advertisers will continue to spend money on online advertising, but will make more educated buys. E-commerce dot-coms, for example, will make a priority of "contextual selling," says Dan Janal, author of a guide to marketing on the Internet. Contextual selling is using demographic and psychographic data to match ads with content that fits, he says.

"There's really no value in putting an ad for a Visa credit card on a search engine site," Mr. Janal says. "That's an example of an ad that's totally out of context."

Another major trend Mr. Janal expects to see in the latter half of 2000 is more so-called advertainment, or advertising that looks like entertainment. "It's a very sticky proposition," he says. It's more expensive, but more effective, he adds. "Because of the stickiness, it's a great opportunity for branding." One example of this is Procter & Gamble Co.'s recently launched Real Families, Real Fun, sponsored content offering ideas for family activities found at bountyfamily.com . and other sites.

$6.1 BILLION IN 2000

Dot-coms' fickle approach to advertising and their dire financial health make them less appealing now to ad-supported sites.

"From the publishers' perspective, those (sites) who've been able to attract offline advertisers will succeed," says Mr. Janal. "The ones that will be in trouble are those that have relied on dot-com advertisers."

Gay.com, for example, recently told Jupiter analysts it was experiencing significantly higher churn among dot-com advertisers, while traditional advertisers were holding steady or increasing their online ad spending, Ms. Gluck says.

Overall estimated online ad spending in the U.S. is still growing strongly. It more than doubled in 1999 to $3.6 billion, up from $1.7 billion in 1998, according to Internet data aggregator eMarketer in its latest "eAdvertising Report" (AA, June 5). While the growth rate will slow as the industry stabilizes and matures, the report estimates U.S. online ad spending should hit $6.1 billion this year and $21 billion in 2004.


Despite recent cuts in online ad spending among dot-coms, some research projects there will be healthy growth for online advertising among traditional advertisers.

"We believe that online ad spending has bifurcated, with spending by traditional offline advertisers accelerating and demand from pure-play Internet companies softening," reports a Banc of America Securities' research brief released last month. The report contends demand for online media moderated slightly in the second quarter because of a drop in spending among pure-play dot-coms.

"However, while dot-com spending on both online and offline advertising has clearly slowed, we believe traditional advertisers . . . continue to embrace the Internet with a vengeance and view the medium as an increasingly attractive advertising vehicle. . . . Thus while the slowdown in online spending attributable to dot-coms is no doubt affecting the market . . . we would remind investors that large offline corporations already rank as the leading online advertisers.


"While it is extremely difficult to accurately divide total Internet advertising spending into dot-com and traditional segments," the report explains, "we believe the breakdown is about 50/50, with traditional advertisers accounting for a higher percentage of the premium inventory and growing at an accelerating rate, and dot-coms accounting for a higher percentage of the lower-end ad inventory and their total spending moderating."

"The future of Internet advertising is going to be driven by traditional advertisers and direct marketers because their budgets dwarf dot-coms'," says Chris Hansen, research analyst at Banc of America Securities and author of the report.

"Offline companies will start to spend a higher percentage of their budgets online. Meanwhile, dot-coms' online spending is slowing dramatically because . . . their online advertising was kind of divided into two camps," he says: portal deals and advertising on smaller, less-expensive sites "to drive traffic to their sites because that's how they were being judged by capital markets."

It's clear to many dot-coms that this type of online media buy did not yield the return on investment expected; rather, it just generated site traffic. Now, traffic's not enough.

Dot-coms will get "more disciplined in their spending," Mr. Hansen says, and will spend more on bigger portal sites and high-affinity vertical (niche) content sites.


In addition, dot-coms will put more money into e-mail marketing campaigns, says Jim Nail, a Forrester Research analyst.

"The other stuff is being cut to the bone," Mr. Nail says, "because it's all now about profitability."

Copyright August 2000, Crain Communications Inc.

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