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Reports of NetGravity&#039s death exaggerated

    To paraphrase Samuel Clemens, the reports of NetGravity Inc.'s (Nasdaq: NETG) demise have been greatly exaggerated.

    The San Mateo, Calif. company sells businesses the software to manage the advertising on their Web sites, as well as handle direct marketing efforts. NetGravity, which sells its AdServer software at about $100,000 a pop, competes with online advertising network providers which give access to ad space on thousands of Web sites and those companies that handle selling that space for businesses that don't want to hire a sales staff.

    NetGravity got a tepid response when it went public in June of last year as one of first companies helping companies track and manage their online advertising, providing do-it-yourself server software. But now, a flurry of stock offerings from online advertising companies and intense competition is threatening any momentum NetGravity has had.

    As for "first mover" advantage, NetGravity has always been in the shadow of DoubleClick Inc. (Nasdaq: DCLK), which has created a network of Web sites for online advertisers and software for targeting specific types of customers.

    Going with DoubleClick is the no-brainer answer for a company looking to see some green from selling space on its sites. DoubleClick maintains its own network of about 450 sites and has a sales staff that will sell space for the company. NetGravity's software requires a big cash investment upfront and needs in-house staff to maintain the site.

    On its face, DoubleClick and other ad network developers like 24/7 Media Inc. (Nasdaq: TFSM) and AdForce Inc. (Nasdaq: ADFC), seem to have the advantage. That's not always the case.

    "It actually turns out to be less expensive," to use server software, said Michael Graham, analyst at BancBoston Robertson Stephens. "There's a fixed cost to put NetGravity in place, so the cost decreases as you place more ads." When outsourcing online advertising, businesses pay every time for the use of an ad network and its management, which adds up over time. NetGravity technology is a one-time fee that is managed by the company itself.

    The niche for NetGravity is a company with a big Web presence, such as USA Today, which needs to place 2 million to three million ads per month and is comfortable having its engineers handle the software.

    A recent column in Forbes hinted that an inordinate number of NetGravity's clients were jumping ship from its do-it-yourself products to its competition's full service solutions. But that doesn't appear to be the case, said Tara Long, analyst at CE Unterberg Towbin.

    "I'm in the process of calling NetGravity's clients, and so far they're all very satisfied," said Long.

    "We would not be surprised if NetGravity loses a few customers over time but we would also expect that the company could gain several new customers from competitors," said BancBoston Robertson Stephens in a weekly report. BancBoston Robertson Stephens estimated that no one customer accounts for more than 2 percent of revenue."

    And NetGravity isn't likely to go hungry even if it just catches the crumbs from DoubleClick's table. Online advertising budgets are expected to hit $7 billion in 2002, only 2 percent of total advertising spending in the U.S., but up from $2 billion this year, according to CE Unterberg Towbin.

    If all else fails, NetGravity is an attractive takeover target. "We believe the company is a logical acquisition target for several companies," said BancBoston Robertson Stephens.