Dot-commercials: Will they pay off?

In case you hadn't noticed, dot-com mania has taken over the advertising airwaves. But with so many companies in the red, how long can they keep pouring money into these campaigns?

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
6 min read

Sites spend billions on ads, but will they get their money back?

By Dawn Kawamoto
Staff Writer, CNET News.com
February 21, 2000, 4:00 a.m. PT

special report In case you hadn't noticed, dot-com mania has taken over the airwaves.

Although ad spending may have peaked during the holidays and the Super Bowl, online companies need no special occasion to continue bombarding the consuming public with billions of dollars in TV commercials, radio spots and newspaper advertisements, as well as Web marketing initiatives.

But with so many Internet companies operating in the red, how long can they keep pouring money into these campaigns? The issue has become even more difficult recently as investors have begun to demand bottom-line evidence that they should keep buying stock in businesses that have yet to show a profit.

"They can't keep spending and spending without money coming back, because they'll lose money forever," said Alan Mak, an analyst with Argus Research. In addition to e-tailers, more than a dozen other dot-com companies ran Super Bowl commercials in January, compared with just three last year.

The question of how much to spend on advertising is as old as capitalism itself. Established brick-and-mortar companies have long struggled to determine how much ad campaigns help their bottom lines--or hurt them, if they are too costly or done poorly.

Today, however, the stakes are astronomically higher. From small start-ups to e-tail giants such as Amazon.com and eBay, companies seem to have no qualms about emptying their war chests for multimillion-dollar campaigns, if for no other reason than to keep up with the din of competition.

Those who follow the industry point to the holidays and Super Bowl Sunday as an example of this pack mentality. "I wouldn't say any of the ads were home runs," Mak said. "There was so much dot-com noise out there that it was hard for any of them to rise above it. And there still is."

Even if they do make themselves heard, companies have no guarantee that the recognition will automatically translate to profits. And large ad budgets can be increasingly difficult to justify when compared with revenues.

Internet investment company CMGI, online brokerage TD Waterhouse and CNET, the publisher of News.com, all kicked off $100 million advertising campaigns last year. CNET spent $65 million on ads in the second half of 1999 while reporting revenues totaling $66.7 million--in essence spending 97 cents on advertising for every dollar coming in. The company posted a pro forma loss of $52.9 million during those six months.

Analysts say such ad-revenue ratios should eventually shift as companies see the rewards of advertising in the form of higher sales resulting from stronger brand recognition. But that kind of change does not happen overnight, if at all.

For example, eToys spent about a third of its third-quarter revenues on holiday advertising--a ratio that was virtually unchanged from fiscal 1999, the most recent comparable data available. The toy retailer posted a third-quarter loss of $75.5 million.

Luxury e-tailer Ashford.com spent 70 percent of its revenues on advertising during the quarter that ended in December, while posting a loss of $19 million in the third quarter. In contrast, brick-and-mortar competitors like Gucci on average spend 8 percent of revenues on advertising.

Yet comparing advertising dollars to revenues is only one way to measure the success of a company's marketing campaign. The more important question lies in a company's ability to develop lifelong customers vs. one-time shoppers--a question that has yet to be answered in the young industry of the Internet.

In sizing up the short-term performance of some of the advertising and promotional campaigns during the holidays and the Super Bowl, companies posted mixed results on whether they produced enough bang for their buck.

Start-up Computer.com, which essentially launched its site on Super Bowl Sunday, spent more than $3 million of its $5.8 million in seed funding to flash three 30-second ads before and during the game.

At its peak, the company generated heavy volume of 2,200 hits per second. But in the two days that followed, traffic fell to 200 to 300 hits per second, chief executive Mike Ford said, adding that he was satisfied with all those levels.

The company expects to generate enough sales in the next few months to cover its $3 million Super Bowl investment, he said. The company makes money by selling advertising space of its own and pointing consumers to various manufacturers on computer products sold off its site.

Online advertising is more efficient, but you have to do a certain amount of offline ads to build brand. Ford noted that its financial backers were aware of its Super Bowl plans before investing. "They rolled the dice with us and, hopefully, we'll see a great return on their investment," he said.

Analysts question whether such investments ever pay off. "With events like this, companies usually get a spike in traffic but rarely are they ever able to maintain these higher levels," said Cameron Meierhoefer, an Internet analyst with research firm PC Data. "The real test will be in the future."

That's the strategy espoused by E*Trade, which has increased its marketing spending in relation to revenues in the past two years. During fiscal 1999, the company spent nearly 50 percent of its revenues on marketing, compared with about 30 percent the previous year.

E*Trade did not disclose revenue results from its Super Bowl campaign, which included three ads and sponsorship of the halftime show. But spokeswoman Heather Fondo said the company was pleased.

"We were delighted with our Super Bowl advertising and sponsorship," Fondo said. "We didn't do it for a one-to-one account generation but to build brand awareness."

Other companies are more conservative with their budgets. Amazon, for example, spent $71 million on marketing expenses in the fourth quarter--which accounted for 10.5 percent of its revenues, Mak said, up from 9 percent a year ago. The company posted a pro forma net loss of $185 million in the fourth quarter.

During the holiday season, Amazon spent very little on print and television ads, said Jaleh Bisharat, vice president of marketing. She noted Amazon was able to track its return on investment for its print campaign through $10 coupons, adding: "We definitely made our money back."

Some companies have even decreased their ad ratios. eBay, which does not break out advertising figures alone, reported fourth-quarter sales and marketing expenses that ran 39 percent of revenues, down from 47 percent a year ago.

"The more mature your company is, the more likely you are to spend less on advertising as a percentage of sales," said Jeetil Patel, an analyst with Deutsche Banc Alex Brown. "But having said that, we're in a market environment where branding is key and big ad spends are part of the norm."

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In addition to mass-media advertising, companies are experimenting with discounts, giveaway promotions and other ideas that can be less expensive.

One holiday Ashford campaign offered a coupon for a free Montblanc pen with any watch purchase over $500. The company spent less than $1 million on the promotion, yet easily recouped its investment, said Kenny Kurtzman, chief executive.

The luxury site also recently wrapped up its Ashford diamond sweepstakes, which began in December. Ashford plans to give away a 15-carat diamond, valued at $1 million, after drawing a winner's name later this month. Although no purchase was needed to enter the contest, those who bought an Ashford product were automatically registered in the sweepstakes.

"The cost of everything surrounding this promotion was less than one Super Bowl ad...But the sales we received were substantially above the costs," Kurtzman said.

Still, he believes that expensive ads are a fact of life. "Online advertising is more efficient, but you have to do a certain amount of offline ads to build brand. You can't have an online-only strategy," he said.

Most companies find it difficult to quantify a return on an expensive investment like television advertising. Many say they rely on TV commercials for branding, rather than any direct correlation to driving sales.

In the long run, though, industry analysts say the numbers will show whether all these media blitzes are worth it.

"Although it's hard to gauge how successful an ad campaign is, one way is to see if they're increasing their slice of the pie. eToys is the leader in its space, but Amazon is gaining ground fast and was No. 2 in the fourth quarter," Mak said. "If that continues, Amazon will be No. 1 by far next year."   

They can't keep spending and spending without money coming back, because they'll lose money forever.



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