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DoubleClick doubles down

The leading online ad network has trounced rivals, but analysts say its troubles are far from over.


DoubleClick hedges its bets in a bid to stay on top

By Stefanie Olsen
Staff Writer, CNET
June 21, 2001, 4:00 a.m. PT

Frustrated by a lack of research on the effectiveness of online advertising, DoubleClick Chief Executive Kevin Ryan recently decided to start compiling some of his own.

His solution: Diameter, a DoubleClick division set up in April to prove the value of online advertising and perhaps, by extension, of DoubleClick itself.

"The fundamentals of the Internet are so strong...Where TV viewership is down in the last five years, Internet viewership is way up--and ultimately ad dollars follow eyeballs," Ryan insists with the assurance of a true believer among heretics.

DoubleClick could use some vindication these days. The company has long been pilloried by critics for ruining the Internet with marketing campaigns that not only don't work, but that may trample consumer privacy rights. Now, as the dust from the dot-com shakeout settles, analysts say the company is emerging as the tallest player on the online ad network field, making it once again a lightning rod for the hopes and concerns of Net advertising.

Although some analysts view DoubleClick as a "category winner," trouncing rivals such as AdForce, Engage and 24/7 Media, its troubles are far from over. It still must weather the overall slump in the ad marketplace, where zero growth is expected this year.

More significantly, DoubleClick's core business remains under threat. Critics allege the company violates consumer rights by tracking Web surfing activities, making it the target of several lawsuits. Meanwhile, prospective customers remain skeptical about some of its key ad-targeting products, saying they are not yet willing to pay for the profiling technology that lies at the center of those legal battles.

"It's not a question of whether they're a leader; it's a question of how they manage their business, move forward, and make money from it," said Adam Gerber, media director for DigitalEdge, a digital component of marketing and communications company Young & Rubicam.

Just this year, DoubleClick laid off about 20 percent of its employees and posted a loss of 8 cents a share after two profitable quarters. Revenue dipped to $114.9 million from $132.3 million in the fourth quarter of 2000, and its stock is trading around $11 a share, down from a high of $18 in January.

But the company largely owes its position to its competitors, which are in worse shape than it is. Just last week, rival AdForce shut down, while others such as Engage and 24/7 Media have seen their stock prices plunge below $1--about the same as the average price of 1,000 ad impressions at today's fire-sale prices. That compares with about $5 per 1,000 ad impressions on mainstream sites just a year ago.

DoubleClick "emerged as a leader because they have more customers, better products and better people, unlike many of their competitors," said Lanny Baker, a financial analyst at Salomon Smith Barney who covers the media industry.

Rivals, however, insist they are still in the game. Engage, for example, is making strides into other businesses to avert the ills of online advertising. "We continue to focus on the online media business, but we're putting a lot of resources into building up our mainstream marketing business," said Betsy Vikakis, Engage's vice president of marketing.

If DoubleClick survives as the leader in the struggling industry, its practices may become even more important to the health of the Internet by setting a stage for the future of online advertising.

The company's technology is a backbone to thousands of Web publishers and advertisers for delivering, managing and reporting online ads. Consumers are touched by such practices every day, often under the ephemeral promise that they will one day receive promotions geared only to their preferences.

Such targeting tactics are the subject of ongoing privacy concern. In a May quarterly earnings filing, the company said it faces 20 lawsuits focusing on Internet user privacy, data collection and other business practices.

A history of criticism
DoubleClick landed in hot water in late 1999, when it bought Abacus Direct in an effort to combine consumer data online and offline to better deliver marketing messages. But its plans for combining the data were squelched after privacy advocates and federal regulators saw the move as a threat to personal privacy.

Regulators recently backed off their investigation of DoubleClick, concluding that the company had done nothing wrong in placing electronic tags known as "cookies" on Web surfers' hard drives. In addition, several federal lawsuits have been quashed.

But DoubleClick is not free of the courts. Just last week, a California judge allowed four class-action lawsuits to proceed against the company over its privacy policies. Privacy advocates also say that state attorneys general and class-action litigants could decide the fate of many ad companies that use tracking technologies to operate their advertising services.

"Even though DoubleClick's the industry leader, it's still a very volatile industry, and a lot of the issues concerning the survival of the industry will be decided based on the outcome of these cases," said Larry Ponemon, a privacy expert and former head of PricewaterhouseCoopers' privacy practice.

For its part, DoubleClick is confident that the threat is minimal. "I don't see any lawsuits out there that will have any impact on our businesses," Ryan said. "We've done a very good job in safeguarding consumer privacy while still trying to make advertising a successful business for us."

Advertisers balk
One of the challenges DoubleClick may face comes not from competitors or even regulators, but from its customers.

The company has paid dearly in public-relations disasters and in acquisitions to create new ad products that are intended to target messages to individuals based on their interests.

But so far, ad buyers aren't interested.

"For profile-driven ads, we don't see that big of a demand for it. The premium doesn't pay for the performance," said DigitalEdge's Gerber.

Little more than 18 months after buying Abacus, DoubleClick remains cautious when it comes to the profiling business, leaving some industry analysts to question the value of the acquisition. Others say the importance of advertising based on consumer profiles is less than originally thought.

Earlier this year, the company launched an "intelligent targeting" service based on statistical modeling from Abacus. It tracks people online anonymously and then serves ads based on personal tastes. The company is also making use of the Abacus deal by selling targeted e-mail list services to its catalog customers.

"The only part (of our business) that's taken longer (than we thought it would) is the data-targeting techniques online. We're trying to take modeling techniques that have been developed over 30 years in the offline world and duplicate them in one to two years in the online world," Ryan said. "But I'm more optimistic about adding targeting than I have been in a while."

Even so, Ryan agrees that targeted advertising hasn't lifted off. "Profiling hasn't had a big impact on the industry," he said. "Part of the reason it hasn't taken off is that most of the targeting to date is contextual and not data-driven. But that will change slowly over time."

Finding shelter through diversification
Faced with uncertainty on so many fronts, DoubleClick is hedging its bets.

Once billed mostly as an online advertising network, the company has turned itself into what it calls an "integrated marketing" partner, selling technology, media and data services. As some rivals have withered on the vine, the company has branched into several new markets to avoid the pestilence in online ad sales.

DoubleClick has been investing heavily in e-mail marketing services, which it expects will come to represent more than half of the online advertising market. To gain a wedge in this industry, it bought e-mail marketers FloNetwork and MessageMedia earlier this year. The company also made an aggressive move in the online research industry with February's acquisition of @Plan and the creation of its Diameter research division.

DoubleClick's high note at the moment is in technology and e-mail services. The ad-serving industry, where it pulled in more than half of its revenue in the first quarter, is consolidating quickly. Analysts say some rivals in this market may be taking their last breath.

But although its ad-serving technology has gained ubiquity, DoubleClick is not impervious to competition.

"They're fairly entrenched, but at any point they could be leapfrogged," said DigitalEdge's Gerber. "Their challenge is to stay leading-edge and give advertisers and agencies what they need." 


DoubleClick runs three business units: TechSolutions, Media and Data. Through these units, it covers every nook and cranny of digital marketing, with a toehold in direct marketing. It offers, among other services, research and media planning tools; online ad and e-mail sales; and technology for delivering, optimizing and reporting on campaigns.

The tech group is an umbrella for DoubleClick's Dart ad-serving technology, which sells in two packages: one for publishers and one for advertisers.

Building on DoubleClick's $530 million acquisition of NetGravity, the publishers' tool lets Web sites manage ad inventory, target ads, and report on campaigns for advertisers. Dart for advertisers does the same, but it puts the reins in agencies' and marketers' hands, giving them bird's-eye views of ad campaigns and their performance.

Under this unit, DoubleClick also sells an application to manage and deliver e-mail promotions--an area pumped up by its FloNetwork and MessageMedia acquisitions this year.

Roughly 4,100 publishers and advertisers use DoubleClick's software. The unit pulled in $54.9 million in revenue in the first quarter of 2000, down from $61.5 million in the previous quarter.

This group is a reservoir of media buying options for online advertisers. The choices include ad space across a network of brand-name sites, including Edgar Online, and Palm. The "Audience Network" lets advertisers buy space on niche sites based on targeting techniques such as delivering ads during a specific time of day.

MediaMatch is another service that lets Web sites swap ads for roughly 75 cents per 1,000 impressions. And Boomerang uses anonymous consumer data to deliver ads to customers who have previously visited the marketer's site.

This unit drew sales of $46 million in the first three months of 2000, down from $60 million the previous quarter. Its gross profit margin, however, is nearly half the tech unit's.

This group folds in Abacus Direct, which DoubleClick bought in 1999, and a new research unit, Diameter. Abacus sells insight into customer behavior and purchasing patterns to companies in the direct marketing industry, such as catalogers.

Applied to the Web, the unit has an alliance of roughly 1,800 marketers to pool customer data and apply statistical modeling techniques, pinpointing which customers are likely to respond to certain promotions. The data are used to target e-mail campaigns and deliver ads based on anonymous profiles.

The research arm, fueled by DoubleClick's purchase of @Plan and its partnership with ComScore Networks, produces reports on Web traffic and campaign effectiveness to help advertisers and publishers know where and why to advertise.

The data group produced $18.2 million in revenue in the first quarter of 2000, an increase of about half a million dollars from the previous quarter.

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Editors: Evan Hansen, Julie Laing, Jennifer Balderama
Art: Ellen Ng
Production: Mike Markovich