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THE DAY AHEAD: Debate heats up over online advertising outlook

Could the dot-com cash crunch actually boost sales for online advertising networks?

That's the theory being tossed around by online advertising executives. The theory goes like this: Cash-strapped dot-coms will turn away from expensive TV ads to focus on more effective online advertising. Instead of blowing millions on hit-or-miss Super Bowl ads, dot-coms will spend more online with direct marketing companies like 24/7 Media (Nasdaq: TFSM), DoubleClick (Nasdaq: DCLK), CMGI's (Nasdaq: CMGI) ad properties and Engage Technologies (Nasdaq: ENGA).



Online advertising: Second half slowdown?



24/7 Media CEO David Moore pushed that rosy outlook Tuesday at the PaineWebber Growth and Technology Conference in New York. Moore may have a point. Analysts said struggling dot-coms were becoming more selective with their marketing dollars and forgoing traditional TV ads for online advertising.

"When 38 dot-coms advertised in the Super Bowl it was alarming," said Moore, who noted that at best a Super Bowl ad would be wasted because only 50 percent of the U.S. is on the Net. "Online advertising is more effective. More money is going to online advertising."

You'll be hearing that pitch a lot, especially since DoubleClick execs will present at the PaineWebber conference on Thursday.

There's a good reason Internet ad execs are downplaying the dot-com cash problems -- concerns about a slowdown in ad spending are rampant. Moore noted that sales did slow in as dot-coms unraveled and the stock market slumped. "We saw a slowdown in dot-com spending in April and early May, but it has come back strong and hard," said Moore. He noted that advertising picked up in late May and the first week of June.

Whether Moore can be optimistic based on a late May and first week of June ad pickup remains to be seen, but it does set up an interesting debate.

Wit SoundView analyst Jordan Rohan in a May 30 report sounded some alarm bells about online media and ad services companies. His checks confirmed a slowdown in April and May. Rohan noted that DoubleClick sell-through percentages rebounded from April to May, but the ad rate, or cost per thousand (CPM), fell from $6 to $4.70. Rohan cut his ratings and revenue estimates for DoubleClick, 24/7 and ValueClick (Nasdaq: VCLK).

"We cannot be sure that the softness will not persist," he wrote. "We also cannot anticipate the reaction of non-dot-com ad buyers who may relax their online advertising efforts as they can now maintain a similar share of voice with fewer impressions."

Rohan's last point is key. Offline and online players had to spend more last year to be heard over ad-happy dot-com startups. Now that some of those startups are broke, the remaining online advertisers can get the same bang for less buck.

Rohan reckons that media giants such as America Online (NYSE: AOL) and Yahoo! (Nasdaq: YHOO) would weather a slowdown because those portal giants have longer ad contracts. Yahoo's average length of contract is 238 days compared to DoubleClick's 90 days. Rohan also said fast-growing portals such as About.com (Nasdaq: BOUT) could outgrow a slowdown.

For his part, Moore isn't worried. He touted 24/7's scale and new technology offerings and even pushed up his break-even target. The company had projected break even in the first half of 2002, but is "looking for ways to pull that into 2001."

Among other items on the investment conference circuit:

  • Ameritrade (Nasdaq: AMTD) CEO Thomas Lewis said the company can make money on free trades. The company makes $18 to $20 a trade. Without a commission, that sum would be more like $10 to $12. Subtract the $8.54 it costs Ameritrade to process a grade and Ameritrade still comes out ahead. Lewis said margins could actually improve since customer service would be automated for free accounts. Lewis boasted of the company's operating expense per trade, which is more than $10 better than the competition. Not that Lewis was advocating free trades, however. "It would target a small group of customers," he said.

  • JDS Uniphase (Nasdaq: JDSU) CFO Anthony Muller gave a presentation that sounded more like a physics lesson, but he did make one point clear. The biggest threat to the company is lack of capacity. "Demand shows no signs of abating," said Muller. The company will more than double its capital spending plan next fiscal year. As you may recall, JDS recently bumped up its revenue targets.

  • Microsoft Corp. (Nasdaq: MSFT) Chief Financial Officer John Connors said Tuesday corporate PC demand was picking up, but component shortages were hindering demand. Connors also said Pentium III shortages remain an issue. Meanwhile, consumer PC sales may be slowing in Europe and the U.S. Microsoft will grow in the mid-teens, down from historical levels, and Windows 2000 "is on track with our expected plan," he said.