Online ad agencies consolidate

Call it the tip of the iceberg.

Three agencies that sell Internet ads merged together earlier this week, marking just the latest consolidation deal in a trend that has spanned the industry, from Internet advertising networks to ad service companies.

This move toward consolidation comes at a time when many say the industry is just starting to take off, and is expected to top $1 billion this year.

Despite the money to be made, however, a number of Internet-related companies are joining forces or going belly-up.

On the merger front, Petry Interactive, the former Katz Millennium Marketing, and Interactive Imaginations Monday announced plans to combine forces. The newly created advertising network company, 24/7 Media, also may snap up other players next year, providing the right deal comes along, said David J. Moore, chief executive of 24/7 Media.

"It's the first step in a consolidation play that we are undertaking for the Internet ad sales business," Moore said, adding that potential partners were calling within 24 hours after the deal was announced. "It's a bigger critical mass of audience we can take to advertisers. The timing was right, and we are aggressively going to seek the No. 1 slot."

Meanwhile, Internet advertising service firms Focalink and ClickOver merged last month, just two weeks after Web ad auditor Internet Profiles [I/Pro] bought its biggest competitor, NetCount.

Additionally, pioneering advertising firm Softbank Interactive Marketing is considering selling a controlling stake in the company, said a Ziff-Davis spokesman. Ziff is the U.S. computer publishing arm for Softbank.

Internet advertising auctioneer Adbot, however, last week closed its doors after its founder was accused of propping up the money-losing operation with investor funds from another business.

Industry-watchers point to several events that are driving the consolidation of Internet-related advertising firms. Some note that the growth in competitors is outstripping the rise in Internet advertising dollars. Others cite a maturing market. And as more privately held Internet advertising companies go pubic and raise capital for expansion, some competitors may feel compelled to merge in order to compete.

Last week's $32 million IPO filing by the largest and best-known advertising network, DoubleClick, may have served to pull the trigger on last week's three-way merger. The company, which combines a network sales force and proprietary technology in order to serve and target ad banners, has earmarked a portion of its IPO proceeds for future acquisitions.

"With this kind of capital to develop new technologies, it's definitely going to raise the bar," Ted West, executive vice president for Softbank Interactive, said in reference to capital plans of rivals 24/7 and DoubleClick. Softbank, which has represented such major sites as Netscape, Yahoo, and ZDNet, got into the ad network game in September, later than its rivals.

Meanwhile, Net ad-watcher Bill Bass of Forrester Research offered this observation: "A lot of people thought advertising would explode, and it has, virtually doubling every year."

But, he added, the number of business models being built on the anticipated advertising revenue growth far exceeds the advertising dollars available to go around.

Absent a deep-pocketed parent company or patient investors, the industry faces a shakeout, Bass suggested.

David Carlick, a former adman who now serves as senior adviser with venture firm VantagePoint Venture Partners, has a different view:

"Where there is venture capital, it is typically because there are big market opportunities that are typically grasped by a number of entrepreneurs," he said. "Then, as markets mature, they go from dozens of companies to some companies--sometimes because of failure, sometimes because consolidation makes greater strengths."

Carlick knows firsthand. Founder of the ad sales side of DoubleClick?-itself the product of an earlier merger?-he also serves on the board of directors at I/Pro. He also headed a start-up called PowerAgent, which planned to pay consumers to view ads but cratered before ever launching after burning through $10 million in capital.

A maturing market also is driving consolidation.

"It's a very healthy and natural stage in the development of the business. Networks will grow and proliferate to serve the next tier of sites, those without scale or brand strengths," West said, predicting that as many as ten ad networks may exist after the current consolidation.

LinkExchange, which claims 200,000 Web sites in its banner-swapping network, is a prime candidate to join the elite once it revs up its ad sales efforts with $3 million in venture funding from Sequoia Capital.

Forrester's Bass agreed: "The ad network will continue to be a good model, in the same way that Web publishing is a good model and will make money. The question is, will it make money soon enough?"