Analysts aren't campaigning for Internet media companies, but they are quietly becoming a little more upbeat. At this point, defining Wall Street's view as cautiously optimistic might be a stretch, but there's a consensus that online ad spending isn't getting any worse.
For now, that counts as good news. Companies that get most of their revenue from online advertising have been throttled amid profit warnings. Yahoo, DoubleClick, Terra Lycos and a host of other companies have either cut their 2001 estimates or neglected to provide an outlook.
On Thursday, CIBC World Markets analyst John Corcoran said there are "no quick fixes" for Yahoo and estimated it will take four to six quarters for the company's advertising business to recover.
Nevertheless, online media companies say they are making strides by courting conventional advertisers, even though analysts disagree with what they define as traditional brick-and-mortar advertisers.
SG Cowen Securities analyst Scott Reamer recently voiced the consensus view of Yahoo and its online advertising peers. Reamer upgraded Yahoo to "neutral" from "sell" on Monday. That's the equivalent of upgrading from a "bail on this stock" rating to a "still avoid the stock" rating, but it counts for something.
SG Cowen interviewed 39 media companies to gauge their spending plans for online advertising and found that business has stabilized.
"We were somewhat surprised by the level of optimism out there, particularly from ad agencies who feel that clients are finally ready to pull the trigger on Internet advertising budgets," Reamer said. "We did not hear any instances of Internet budgets being expanded, but certainly the free fall they were in since last summer is over."
Sticking to tradition
Sure, the free fall is over, but the key for online media companies will be boosting their roster of traditional advertisers. And there's a lot of work left to do on that front.
When online media companies have reported earnings, they've been touting their percentage of traditional advertisers compared with pure dot-com advertisers. For instance, Yahoo on its first-quarter conference call touted its falling percentage of pure dot-com advertisers.
Source: ABN AMRO and AdRelevance
Making an impression
Dot-coms still dominate the list of the top five advertisers in terms of ad impressions for three of the Web's major portals.
Yahoo Advertisers Ad impressions Barnes&Noble.com 3.95 billion+ Columbia House 2.14 billion+ Astrocenter.com 1.42 billion+ Classmates Online 1 billion+ JobsOnline 834.8 million+ Lycos Advertisers Ad impressions eBay 106 million+ WebMD 85.1 million+ Barnes&Noble.com 81.6 million+ Classmates Online 80.1 million+ Matchmaker.com 57.9 million+ Excite@Home Advertisers Ad impressions Classmates.com 1.18 billion+ Wal-Mart 1.07 billion+ Amazon.com 832 million+ Sparks.com 415 million+ eBay 322 million+
Source: ABN AMRO and AdRelevance
That sounds impressive, but ABN AMRO analyst Arthur Newman is skeptical. In a 70-page report on the advertising industry, Newman said companies dependent on online advertising--notably Yahoo, Excite@Home and Terra Lycos--have been using a lax definition of what a dot-com is.
"Listening to conference calls, one would believe that reliance on dot-com advertisers is plummeting," he said. "We believe the industry is far more dependent on dot-com spending, with the apparently favorable metrics largely the result of beneficial definitions of dot-coms."
Newman said his definition of a traditional advertiser is a company that's purely bricks and mortar. Advertisers such as General Motors and Procter & Gamble fit Newman's definition.
However, Yahoo in its last quarter counted Barnes&Noble.com as a traditional advertiser although its future clearly rides with the Internet. A Yahoo spokeswoman confirmed that the company doesn't consider Barnes&Noble.com a dot-com advertiser.
According to Yahoo, a "pure play" dot-com is a company that is "born and bred" on the Internet. Barnes&Noble.com is the offspring of Barnes & Noble.
Newman begs to differ.
"In our view, Barnes&Noble.com is clearly a dot-com; the company and its board will likely continue advertising online only so long as the online channel appears to be working," said Newman, who also counts dot-com arms of traditional companies as dot-coms.
"If our definitions appear to be on the strict side, it seems appropriate given that we are trying to quantify both the risk of these advertisers pulling back further, as well as the online migration of traditional advertisers," he said.
Newman said his definition fits because the heritage of a dot-com means little if the business model doesn't work. Disney was the well-heeled parent of Go.com but folded the portal anyway, and its marketing dollars disappeared. He said two-thirds to three-quarters of all online ad impressions are from dot-coms or dot-com businesses of traditional brick-and-mortar companies. In the context of the Internet, an ad impression is a Web page that delivers an advertisement.
Newman's analysis of Yahoo's top five advertisers puts Barnes&Noble.com, Columbia House, AstroCenter.com, Classmates.com and JobsOnline as the company's top accounts in the first quarter. The latter three are clearly dot-coms, but one could argue that Barnes&Noble.com and Columbia House shouldn't be counted as traditional advertisers, Newman said.
"Columbia House's business has changed," he said. "It's mostly advertising its online DVD club."
At least Yahoo isn't alone with its dot-com dependence. Privately held Classmates.com and JobsOnline were among the top advertisers on Terra Lycos and Excite@Home.
Plotting a recovery
Newman contends that online advertising will rebound only after traditional methods--print, television and radio--bounce back.
Traditional advertisers are likely to flock to what they already know before committing more money to online advertising, he said.
In fact, Andrew Marcus, an analyst with Deutsche Banc Alex Brown, last week said the "up-front" market for TV networks is likely to be down about 9 percent from a year ago.
In television, the up-front market consists of advertising that is bought in advance.
As for publishing, Goldman Sachs analyst Michael Beebe cut his estimates for a host of newspaper companies and said a second-half recovery looked "dubious."
"Online advertising is unlikely to rebound until after traditional advertising emerges from its current slump," said Newman. "A recovery in online could be as late as mid-2002."
Reamer said he expects Yahoo to at least meet First Call estimates for the second quarter and indicate that it has more visibility into the second half of the year. According to First Call, Yahoo is expected to report pro forma earnings of breakeven on sales of $172 million.
According to Reamer, advertisers are saying positive things about Yahoo for the first time that he can recall. It doesn't hurt that Yahoo has been busy holding meetings for media buyers, including a two-day shindig in Princeton, N.J., which will start Thursday.
Although Reamer was upbeat, he declined to upgrade Yahoo shares beyond a "neutral" rating until he sees some evidence that online advertising is about to grow again.
ABN AMRO is forecasting that the U.S. online advertising market will be $7.2 billion in 2001, down 13 percent from a year ago. Many analysts have said that there won't be a recovery until mid-2002.
Wit SoundView analyst Jordan Rohan said Yahoo is still likely to struggle. His checks show that Yahoo had more trouble landing customers in May than in April. He also cut his second-half revenue targets because there's no evidence of a rebound, he said.
"Clearly the magnitude of erosion that we witnessed in the first quarter has abated, but we still do not expect to see much near-term improvement," Rohan said.