Recent times have been eventful for online advertising specialist DoubleClick (Nasdaq: DCLK). Last week the company reported fourth quarter results ahead of analyst estimates. The day after that the company perceived as DoubleClick's rival, CMGi (Nasdaq: CMGI), took another step in integrating its own advertising businesses when it sold AdSmart and FlyCast to Engage Technologies (Nasdaq: ENGA). And this week DoubleClick came under fire for its use of consumer information.
DoubleClick's database was one of many topics covered in a recent chat with its CFO, Stephen Collins. ZDII spoke with Collins recently, a few days after the DoubleClick's quarterly conference call with analysts:
ZDII: How much of a competitive threat do you see from CMGi or from the latest Engage deal?
Collins: Generally, we love our competitive position, and the reasons are as follows:
Number one is, we've been doing this for a number of years and we've clearly established ourselves as the leader in each of the segments that CMGi has gone out and acquired various companies. We're a unified unit, with a single technology platform, and a great sales force, a global reach, very entrepreneurial. So that's good, obviously.
The second (reason) is, all these companies, whether it's Flycast or Adsmart, we've been competing with them before, so it's not like you have a new competitor. Admittedly, you have some of these players who are now combining, but we have established a significant lead over all of them separately.
So the conclusion is, there's no question that CMGi likes our business model and is attempting to rebuild it through acquisition and compete with us. But we've been winning against these companies separately, and even as they've been part of CMGi, we continue to take share from them, we believe. So we like our competitive positioning very much.
ZDII: Might as well segue into that, now that you've mentioned it. During the conference call, you mentioned your ad network is gaining market share. How much market share do you see yourselves having in each of your segments at this point?
Collins: Again, I can't really go out and put specific numbers on that.
What I can say is, first of all, in the media segment: that is by far the largest market, and I think there will always be quite a few players there. But as we get bigger and as we are able to do things better than everybody else -- I think advertisers get smarter because in the early days, you know, people would go out and do huge portal deals for tens of millions of dollars, and I think that we have seen over the last year is that networks have taken several share points away from portals. And we believe that trend will continue. So I think there's a lot of room for a lot of players there.
As far as the ad serving, or technology, segment, we've already got significant shares there already. There are very few competitors, relatively speaking, in that space, and not many people have entered it. Our strategic goal is to be sort of the gold standard for Internet advertising, ad serving infrastructure. I think we're going to continue to progress on that road.
What our data assets through the Abacus Group give us, is that they just give us that many more unique assets to ensure that we bring the best products and services to market, which should help us to maintain our leadership position and increase it.
| Have an opinion on this? |
ZDII: How far along are you in turning Abacus into an online company? When you bought Abacus, it was basically an offline organization.
Collins: Well we just closed our deal on Nov. 23, so we're about seven weeks in. And first point is, one of the reasons that Abacus was encouraged to look online is all their customers, all these direct marketers, see the opportunity to go online. So they were pushed as much by their customers as any other factor in looking to exploit the Internet opportunity. So that bodes well for our ability, if you will, to make them an online company. And the truth is, in the future you won't say on or offline, these direct marketers are just going to try to get to consumers where they buy products. So you don't have those kind of barriers.
The function of getting things going -- what we have to do, I should say, is, we have to develop the products, which means taking the data, leveraging it so we can get the right message to the right consumer at the right time. We have to be able to communicate that to the market, and sell those products, and show that they improve the results of the advertising, the fact that they believe increase return on investment for advertisers. We think that we will be able to start getting traction and get that done in the latter part of this year.
ZDII: When do you hope to have it completed, so you have most of Abacus' clientele doing some sort of online marketing?
Collins: Again, I think, we'll start moving forward pretty quickly in that regard as we get in the latter part of this year. At the same time, there are already some cross-selling opportunities today. Some of our online clients, e-commerce players, are actually, interestingly enough, interested in direct mail. So we've been able to close seven-figure-plus deals going from our online DoubleClick clients over to Abacus' products. So in the very very near term, I think that low hanging fruit, those kinds of things, that kind of cross-selling with our client base is what you'll see in the near term, meaning now, next quarter.
The reason you can't go any faster than the latter half of this year with Abacus online is, you've got to sign up the sites and you've got to build up the data you need,so and so forth, there's disclosure around that, it's on an opt-in basis, it just takes time to build up the database and do matching. It's not technically difficult to do that, but you just can't snap your fingers and suddenly have enough critical mass or enough inventory to out with a meaningful offering.
ZDII: Abacus generated, I think, $17 million in the latest quarter?
Collins: $17 million in the quarter, that's correct.
ZDII: Do you have any idea, can you give us any detail, any idea of what sort of multiple going online can provide to that, going forward?
Collins: I really can't give you a good answer to that question, simply because that's not exactly how we think about our business or why we do things.
Abacus is a part of Doubleclick now, and I don't believe that people break down each of the segments of DoubleClick and assign them different revenue multiples. I would say that people look at DoubleClick, they look at the revenue growth we've been able to deliver, they look at our march towards profitability, they look at, as much as anything, they look at the fact that there's intense demand for the products and services that we provide, because we're providing a lot of value.
And I think our valuation -- you know, who can explain the stock market all the time? -- but people see we're a leader, they see that we're growing, they see that we're entrepreneurial and aggressive, and they see that our addressable market is very significant. In four or five years, that market could be $60 billion dollars, if you look at the various people who go out there and predict these things. And if we have significant shares, obviously they see we could be a large, profitable company, and all those kinds of things are discounted into the stock valuation.
But I can't get into revenue multiples, or why people pick one thing over another, or how they might look at one segment over another. I don't perceive that's how people look at us.
ZDII: Let me ask you about the other acquisition that people think of recently with DoubleClick. I'm wondering how the NetGravity integration is doing?
Collins: Actually, our integrations for both companies are complete from sort of a mechanical, functional point of view. We spent a lot of time and effort in this quarter making sure those things happened, and that the people were retained and so on and so forth.
But the NetGravity merger was a different animal from Abacus. Abacus and DoubleClick was such a perfectly complementary, there was no overlap, we needed data assets, they needed an online strategy, it was a beautiful fit. In the case of NetGravity, while we had a different way of solving the customer's problem, one was online service and the other was software, we were intense competitors, and it's just different to merge with a company that way.
But I think we discovered that we were a lot alike, we liked each other, I think the merger has gone extremely well, and what we have done there is, we have combined the sales forces. So we don't have a software sales force and a service sales forc. We have one company, we go out and we provide a suite of solutions, and our customers tend to choose either software or service based on their internal needs, not so much a price comparison. Some people want to control their environment more; like, they may be a larger company that just has its own IT operation and likes the idea of having things in-house, and they're going to do it that way, no matter what. Other companies say, "This isn't my area of expertise, I don't want to deal with it, I'm going to outsource it."
We just want to present both options in an objective way, and the end result of that has been, in the fourth quarter we signed up more technology companies than we ever have on a combined basis. We saw our cycle times for closing sales shrink, because I think we were able to provide a deeper offering, or broader offering, and it wasn't clouded with all the sort of competitive jargon, if you know what I mean, that occurs when you have really tough competitors going at each other, trying to sell one philosophy over another. So we're very pleased with how that's gone.
ZDII: During the quarterly conference call, you mentioned that you expect going forward to see more seasonality in first quarters as Internet advertising starts to behave more like traditional advertising.
Collins: That's right.
ZDII: I was wondering if you could expound on that. In what ways were they different in the first place, and what sort of change are you seeing?
Collins: Well, first of all, we've always had seasonality in the first quarter, so we've always seen that the media spending in the first quarter is less intense than it is in the fourth quarter, and that's for obvious reasons, right? Holiday sales.
As we get larger and as more traditional advertisers spend more money on the Web, which they are and they certainly are with us -- in the early days of the Web, you didn't have General Motors advertising, you had strictly other dot-coms and small companies that were dabbling, and advertising on the Internet wasn't even part of people's budgets. It was just play money.
But now as people make Internet advertising a much more serious and planned component of their annual plans, there are Internet ad budgets being created, and now you get sort of lumped into the cycle of advertising planning of traditional companies. And that in and of itself actually starts creating the seasonal effect that you see in other industries.
Also, it's just, you come right off the Christmas season, and you get that sort of uncomfortable pause, where people are getting things back in gear in January before they really go out and start getting things going again, which usually happens around March.
So ultimately what this means to us is that we still have overall demand increasing for Internet advertising, so year-on-year, you know, the market is going to continue to grow significantly. I think what'll you see is people evaluate their experience from the fourth quarter, to figure out what worked and what didn't worked, and they'll come out and they'll spend a whole lot more over the course of 2000 than they did before. But you've got to give them a minute to figure out what they thought was really effective, because they did the most advertising they've ever done before in the fourth quarter and they have to digest it.
It just reduces visibility, you just can't know as well what's going to happen in the first quarter, versus the fourth quarter, because of this cycle. So, you know, I think companies like DoubleClick and everyone, it's an exciting business, we're all growing very quickly, but it is also important to be cautious and prudent -- cautiously optimistic, I would say. We're excited about our prospects and we want to get people used to understand the business cycles that affect our company as we get more mature. It's important to communicate that.
ZDII: Speaking of business cycles and traditional ads, CMGi loves pointing out that ad dollars on the Internet haven't matched the audience draw...
Collins: Yes, and that's a wonderful comparison too.
ZDII: I'm wondering, when do you think those two numbers will coincide?
Collins: I'm probably not the best person to ask for that, it would probably be someone on our media side, but I think it might be awhile, it might be a few more years. I think the growth in online advertising is really just cranking up. I think there are other developments that are going to accelerate that.
One of them is going to be the increase in bandwidth. Everybody talks about this, but, you know, traditional advertisers, branded advertisers are going to be, I think, intrigued when more and more rich media comes about. I think the explosino of personal digital assitants and interactive TV is going to draw more and more advertisers online into an advertising focus. So the eyeballs are clearly moving over, but the companies are still trying to figure out what the right thing to do is.
So I'd say it's going to be a few more years before that fully evens out. But that certainly is something that makes it all very exciting when we look at that, because we know ad dollars follow the eyeballs. Or ears or fingers or whatever it is.
ZDII: One thing you mentioned during your analyst call, you talked about international revenue being 19 percent of your revenue in the latest quarter, and one of you called it an "inflection point". Can you go into that a bit? Why is it a turning point now?
Collins: Really, I think we said the last two quarters have been an inflection point.
We moved very early to establish businesses internationally, and one of the reasons is, because of the information we get as we deliver ads, we know where the reach is, we know if it's U.S. or if it's Germany or what have you. And we could see very early that a lot of Internet usage was coming from overseas. So we said overseas is going to be big. Kind of a no-brainer, but we moved two years ago, we said we're going to be aggressive.
So when we started initially setting the businesses up there, the only demand that there was, is, advertisers in the U.K. or Germany would buy inventory on U.S. sites that had German or U.K. users. You follow me on that?
So there weren't any local sites. There really wasn't any inventory to sell to local advertisers, sites in the U.K., so on and so forth. Well, we went ahead and set up there and said we're going to set up a local network, we're going to repeat the DoubleClick model internationally, we're going to sign up local sites and augment the U.S. inventory of foreign users with foreign users on local sites.
And in the last two quarters what we've seen is we've seen the foreign markets, principally Europe and certainly Asia, that their Internet industry is 18 to 24 months behind the U.S. but now, the local sites are starting to get significant traffic, and advertisers are able to access this inventory, there are more dot-coms over there, there are more traditional advertisers recognizing that this medium is powerful, and they're buying on local sites. And now all of a sudden there's a whole new source of inventory in demand that really is just now starting to show up. And it's driving growth, and that's why we think international growth is going to grow faster than the rest of our growth, because of the maturing of the local content and the local markets.
ZDII: Do you have a target percentage of your revenue that you expect to see from overseas?
Collins: We've often said that some years into the future, it might be three years, it might be seven years, we can certainly see between 40 and 50 percent of our revenues coming from international. The Internet is going to change the way advertising is purchased, because right now, if a General Motors wants to buy all around the world, they really do buy in all the different markets separately.
But if you go to any DoubleClick office in any country, you can access all the ad inventory in the world, through that office, and they can facilitate that buy. So that's a powerful efficiency that we think will change the way advertising is purchased globally. And I think also willhelp demand. But we're very bullish on international and on the percentage of revenue that it will ultimately be of our company's revenue. Sorry, I'm repeating the words twice.
ZDII: That's ok. Talking about being able to access inventory anywere, I know, in the past, other ad companies and DoubleClick also have mentioned they have more inventory at the moment than ads. Do you expect that ever to change?
Collins: Understanding the dynamics of inventory for the Internet can be complicated.
In a way, it's infinite, because you can come up with so many different combinations. Inventory isn't just a place on Dilbert. Inventory can be sliced and diced by demographics, or where people are coming from, or what time they're on. So inventory management is a complex area.
But it is absolutely true, I would say, that supply, in terms of impressions and what have you, has outstripped demand right now, because more and more people are coming to the Web, and advertisers and other things are behind that, they're catching up. Also, you can add more ads to a page and so on and so forth.
But it's not necessarily true that people don't buy it, it's just that different types of inventory have different price points. Chat, for example, is much less attractive to, certainly, a branding advertiser like Procter & Gamble, than it would be to a direct marketer. And it may not even be very attractive to a direct marketer, because click-through rates aren't very high on chat sites. And that's where a lot of inventory comes from. So you can sell certain things, but you can't sell $100 cpm, premium-branded stuff.
So what you do is you segment your inventory for what it's good for, and you try to get the maximum yield that you can get from that segment. And, you know, that's what our software helps us do, and that's what we do a good job of. So we sell it all in that respect. It's just that all of it's not saleable at the same price, like anything else.
Does that make sense? That's a hard one to describe well, and I don't always do a good job.
ZDII: I think I see where you're coming from. You did raise one point that I want to pursue, you talked about different types of ads having different rates, and I guess that the higher value ones are the ones that are more performance-oriented, based on click-through rates and things like that ...
Collins: Actually, that's not necessarily true.
Collins: No, because if you're -- I'm using these as hypotheticals, these are not actual campaigns -- if you're General Motors and you want to advertise about a luxury car, you might choose to put that ad on Autobytel, but you also might choose to put that as a sponsorship or a premium position on Dilbert, or Individual Investor online, if you think there are a lot of people are there who would look at Lexuses. So there is definitely --- advertisers that look to increase the value of their brand through advertising do find benefit on the Internet. And they're not necessarily looking for click-through performance, and having premium positioning on a site, just like any other television show that's important to them, they pay a premium for that.
So pricing is not a pure function of clickthrough at all. Now direct marketers are much more focused on that, because all they care about is ROI.
In some respects, I would say that people have too much of a focus on click through. And in a way I think the industry did itself a disservice early by being so focused on that, because there are lots of different reasons to put your message up on the Web. Sometimes it's for click through and sometimes for branding, and people put varying values on that.
The difference with the Internet is, it's the first medium that you actually can measure performance with a high degree of certainty, even though people are still trying to figure a lot out about that. And I think sometimes that's a strange wakeup call for people, when all of a sudden they've been trying to brand and they're getting feedback on how many people are clicking on it. It's apples and oranges.
ZDII: The reason I this up is because constantly -- I've been seeing articles about this since the Internet became a commercial medium -- there are always questions raised about the effectiveness of banner ads: do people even look at them as they're surfing? Do you think in the future that will continue to be a question?
Collins: You know, I think every advertising medium is questioned for its effectiveness. I think that the thing that's important about the Web, it's like television was in the first two or three years of its existence. Banner ads are out there, they are effective, and ones that are done well have exceptional response rates. Ones that are placed wrong and aren't sent to the right consumer and are deep down in a chat site, I'm sure no one is looking at.
But the Web is going to evolve. We already can deliver any kind of rich media, and we do. So you're going to see interstitials. You're going to see ads going through personal digital assistants. You're going to see ad campaigns with your e-mail certainly. You're going to see ad campaigns get more sophisticated in the sense that it won't just be a one-shot banner, but it might be a series of banners that an individual sees over time.
So I think the strategies are evolving, they're going to get more complicated as people learn how to make the medium more effective. Bandwidth and technology improvements are going to allow for some amazing new things. So I think there'll always be room for the banner in a sense, but already things have evolved so much in the three years since I've been with DoubleClick. It started out, there was one banner on one page all the time. Now people have text links and buttons and interstitials and all sorts of stuff, and it's just going to get more complicated. It's a long winded answer of saying, "Sure, things are going to evolve. But that's great, we're happy."
It just means that people are finding ways to get things from a the Web. You know, a banner's just a hunk of data to us, and the only reason people do banners the way they do is because it's a convenient standard and it makes it easier to do dynamic targeting, because of the size of the space. That's why everybody uses the same size. Technology can cchange, it already has, where size can be flexible.
So those are my answers there. We're optimistic, we love the change, we think it's going to be great for us.
ZDII: Coming back to the subject we started with, who are you seeing most often in your contract competitions?
Collins: Which side, on media or just in general?
ZDII: In all your segments.
Collins: I'll just break it down briefly.
In the media segment, we're competing with everyone else who sells advertising on the Web. We're competitng with the Yahoos, we're competing with the CMGi guys, 24/7 Media (Nasdaq: TFSM) is another network. All the individual sites are out there looking for ad dollars, we're all competing for ad dollars with the same population.
ZDII: Is there anyone who you see more often than others?
Collins: Well, I think you see the people who sell the most. Yahoo! (Nasdaq: YHOO) and America Online (NYSE: AOL)are the big heavyweights out there, 24/7 has done a good job, we've been more successful than they have, but again, it's a big market that's growing quickly.
One thing that's interesting that we are very proud of: there's a group called The Myers Group, I don't know if you've ever heard of them, but they're like the J.D. Power for the advertising industry, very prestigious; they'd never done the Web before, they went out and looked at 28 sales organizations, amongst them AOL, Yahoo, and DoubleClick, out of the 13 categories that they ranked, we came back from our customers' point of view as the best in 11 of the 13, and number two or number three in the other two.. And so I think that our customers and our growth are evidence of the fact -- we're out there competing with AOL and Yahoo and the best -- our customers think we're the best at what we do. So a little plug there, I think it was worth mentioning.
On the technology side, really the market has consolidated quite a bit, and it's testament to the fact that this is a difficult thing to do, to manage data operations around the world and handle this complicated software. There are very, very few material, if not completely immaterial, entrants into the ad serving arena. So you have the AdForces that are out there, Engage is out there and Real Media and us, and we're the clear leader there. And that's been a relatively static landscape, with our continuing to take more and more share from those individuals.
On the Abacus front, they pretty much stood alone on their offline side, in terms of, they were considered the best and they were the market leaders. As far as the sort of online data targeting thing, DoubleClick has already been doing already that for several years. With our Abacus merger, we've now got additional unique assets that will absolutely allow us to continue to be the best, as far as database targeting. Certainly the CMGi guys are out there with Engage, but we're way ahead of them, in terms of customer base and everything else.
ZDII: The only other thing I'm wondering about then, I think probably your one of your most high-profile contracts that was announced was Lycos (Nasdaq: LCOS) -- actually, I didn't see a news release on that...
Collins: We haven't done a news release, and we don't always do news releases, but we mentioned it on the (quarterly analyst) call, that was our way of letting everybody know that we've signed that.
ZDII: Relative to your other contracts in the media space, how does it stack up?
Collins: Certainly it's a very significant client that we are unbelievably pleased to have signed for a variety of reasons. In terms of volume of ads served, they're larger than AltaVista, so they would absolutely be one of our highest-volume sites.
I think one that's really -- if you want to talk about inflection points -- it's a great sort of win, in the sense that we've always said that managing data operations and assets is a difficult thing, that even big companies aren't always going to want to do on their own. And I think seeing Lycos turn to us because they know we can help them be more profitable and please their customers more, is in many ways, a validation of our strategy, in that all size sites will look to us for services and solutions, in one form or another. So we're very excited about having them on, we hope we'll do a great job for them.
ZDII: Obviously Lycos likes what you do, but did you get any sense that one reason why they chose to go with Doubleclick is because of -- I mean, Lycos' relationship with CMGi probably isn't what it used to be, ever since the USA Networks thing.
Collins: Well, you know, public companies -- everyone always looks at this like a soap opera, (people think) everybody's making decisions because of who knows who, or how they are emotionally attached -- good businesses make good business decisions, and Lycos felt that working with DoubleClick was the best business decision, and as a public company, you know, you're obligated to do just that.
All of us who are out here competing on the Web, it's an exciting time to be doing this. Everybody wants to win, of course, everybody's working hard, and this is great for consumers overall. But I think it's less of a soap opera than people might want it to be.
But I can't really comment on whether internal politcs played a role in their decision. If anything, I would say Lycos selecting us in the face of whatever could be there shows how much they valued the fundamental, good business part of coming to work with us. QAFOLKS