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2HRS2GO: Online advertising has room for two

CMGi announces the acquisition of AdForce. DoubleClick shares go down. CMGi unveils a deal for Flycast. Doubleclick goes up.

Credit Wall Street for the correct answer the second time around.

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Modern stock markets teem with irrationality, but that doesn't mean they don't get a lot of things right. They did in the case of DoubleClick.

CMGi has done everything short of declaring war on DoubleClick, and that might not be far off either, considering that CMGi referred to its marketing network as an "arsenal" in the press release announcing AdForce's purchase. DoubleClick's roughly 11 billion ads delivered (that was in June, the number has undoubtedly risen since then) puts it atop the online ad hill. And that makes it the target for everyone else.

But CMGi's rhetoric notwithstanding, success for one doesn't translate into bad things for the other. Even CMGi's purchase of AltaVista -- which generated more than 40 percent of DoubleClick's system revenue in the second quarter -- shouldn't hurt DoubleClick in the long run. There are more than enough websites to accomodate any advertiser, notes Daniel MacKeigan, analyst with Friedman Billings Ramsey. That means an ad delivery service such as DoubleClick has leeway to shift advertisements from AltaVista to other clients (one of which happens to be ZDNet, it should be noted).

Not everything can be moved, of course, and given the complications of contracts, it's a little unclear how much Doubleclick can preserve from AltaVista. Not more than half, if you believe executives from CMGi.

But this industry is growing. All the major online ad companies see surging business, MacKeigan points out. "It's an industry wide trend," he says. "We're nowhere near a zero sum game."

You even could argue that CMGi's recent moves raise more questions for the companies involved, rather than their rivals. For instance, Flycast yesterday said it will beat Wall Street's third quarter revenue estimates. If the company is doing so well on their own, why join CMGi?

"It's just odd to see this acquisition at such a time when the industry is so strong," MacKeigan says. "My guess is Flycast thinks they'll see pressure from DoubleClick a year from now ... They want to have a seat with one of the big two players, and CMGi made the most sense for them."

Selling out to CMGi won't hurt DoubleClick so much as preserve the viability of AdForce and Flycast. Ultimately, MacKeigan and other observers see CMGi and DoubleClick dominanting concurrently, although the latter might have an edge right now because its business is already organized, while CMGi still has to assemble its network and figure out where to put each piece.

Judging by today's increase in DoubleClick's value, the market agrees with that view. At least for now.

Other issues:

  • CMGi Inc.
  • (Nasdaq: CMGI) A larger question faces CMGi investors: do CMGi's acquisitions start to change how the company should be evaluated? Most observers have treated CMGi as a publicly-traded venture capitalist, with no worries about revenues as long as the IPO cash keeps coming.

    With AltaVista, AdForce and Flycast, CMGi's stable of wholly-owned operations demands attention. The income statement starts to matter as much as the balance sheet.

    That doesn't have to be a bad thing. The most successful investment firm in history, Berkshire Hathaway, now relies more on outright acquisitions such as Geico Direct Auto Insurance and International Dairy Queen, as opposed to the more high profile stock portfolio.

    Hmm. David Wetherell as the Warren Buffett of the Internet? CMGi shareholders can only hope so.

  • E-Loan Inc.
  • (Nasdaq: ELON) Maybe the Internet will change the way we do business, but it's just as likely that e-commerce will eventually discover that traditional economics matters, as E-Loan found out in the third quarter. The Web doesn't change the nature of business -- it just speeds it up. 22GO>