Hoping to hop on board the Internet advertising gravy train, New York-based DoubleClick filed for an initial public offering Tuesday. But it's anything but clear if the industry can give even the top dog a smooth ride.
The leading ad network plans to issue 2.3 million shares, priced between US$12 and $14 a share, to raise some $30 million in capital. The offering, expected to take place in the first quarter of 1998, is being underwritten by Goldman, Sachs, BT Alex. Brown, and Cowen & Company.
DoubleClick's competitors put on a happy face for the news. "This only further gives credibility to the whole business model," said Caroline Vanderlip, CEO of Softbank Interactive Marketing. "It's good for us," gushed Scott Paternoster, who runs K2 Design's Cliqnow network. "I want DoubleClick to do well."
But beneath the warm and fuzzy words that typically accompany a first IPO within a particular Internet market sector - everyone buzzing about how it "validates the space" - there are important questions about the role that sellers of ad space across networks will play, and whether they'll make money at it. On revenues of $20 million for the nine months ended 30 September, DoubleClick is still losing money. And none of its competitors are crowing about imminent profitability, either.
The idea, though, is that as the Internet advertising business grows to more than $8 billion by 2002, as Forrester Research predicts, a portion of those ad sales will be made through companies like DoubleClick, Softbank Interactive Marketing, Cliqnow, and Petry Interactive. Each of these ad networks offer advertisers the opportunity to buy a particular audience across many sites, based on demographics or psychographics, rather than deciding on and contracting for space site by site. And the companies are increasingly providing more sophisticated targeting, tracking, and measurement technologies to help advertisers spend money more effectively and better gauge the results of their ad buys.
How much is enough?
But how much of that $8 billion will be spent through those networks? The top 10 most heavily trafficked Web sites account for more than 60 percent of all advertising revenue, Jupiter Communications reports, and these sites tend to have in-house sales staff, rather than turning to firms like DoubleClick to represent them. So the networks will be scrambling to lock up as much as possible of the remaining 35 to 40 percent of Internet advertising revenue. Softbank's Vanderlip talks about potentially grabbing as much as 25 percent, but Forrester analyst Jim Nail said it will more likely be about 10 percent.
That's still a nice chunk of money - $80 million - as long as the networks' margins stay high. Analysts estimate that firms like DoubleClick and Softbank currently take about 40 percent off the top of an ad buy. But they expect that number to drop. "Forty percent is really the upper end," said Evan Neufeld, advertising analyst at Jupiter. "They'll head down more toward 15 or 20 percent."
Ad networks also have a built-in problem: as they help budding Web sites to sell ad space, the sites grow more prominent and often discover they can profitably sell advertising themselves. "The more successful [sites] get, the more unsuccessful [the networkers] are," said Nail. "Sites grow in revenue, and leave the network."
That kind of customer churn - which requires the company to constantly bring new sites into the network - is costly.
DoubleClick's IPO filing dutifully warns potential investors about the company's reliance on the biggest sites in its network. The top four sites in the DoubleClick network accounted for 60 percent of total revenue during the first nine months of 1997; the AltaVista search engine alone generated 43 percent of DoubleClick's income this year. That means a big hit if any of the major sites decide to pull out.
To hedge against over-reliance on its ad network for income, DoubleClick offers an ad serving, tracking, and targeting service. A site can opt for the turnkey service without contracting DoubleClick to represent it - and forget about buying and maintaining its own ad management system.
But the service is still an unproven revenue stream for DoubleClick. "There's no track record for that product," said Neufeld at Jupiter. "They're still reliant on the network as a pretty integral part of their revenue equation."
A new slew of rivals
And while none of DoubleClick's direct competitors offer a comparable service, the ad service starts a rivalry with companies that sell ad serving software, like NetGravity and ClickOver. Those companies are already mounting an offensive. "We think they'll encounter some resistance in the marketplace," said Susan Lutter, a spokeswoman for ClickOver, which recently merged with Focalink and will soon be announcing a new name.
"Most agencies and sites are very concerned that the tools they use do not have bias in them," she said. "It's like in the travel business - travel agents have to use a ticketing system provided by the airlines, and those systems are routinely prejudiced toward the airline that provides it. I'm not saying DoubleClick is; I'm just making an analogy."
No one disputes DoubleClick's position as top dog in the networked ad sales space, with Softbank a wily second; the only question is whether the space will be profitable.
"No one has a clear idea of what the importance of these [ad sales networks] will be going forward," said Neufeld at Jupiter. "The big sites like Yahoo are looking to become their own content networks, and lots of money will go to them directly."
In the meantime, DoubleClick's competitors are bracing for the rapidly-approaching day when they have a well-funded public player in their business. "The cash infusion from the public offering will continue their strength in the marketplace," said Paternoster at Cliqnow. "How do I compete with that newfound capital? That's yet to be determined." Softbank Interactive Marketing's approach has been to seek partners that will help fund its efforts; that search is still under way.
And will the Internet advertising gravy train arrive on time for DoubleClick? Janet Stites, publisher of the AlleyCat News, a monthly newsletter that follows New York's Silicon Alley community, has her reservations. "They've done really well branding themselves, operating very professionally, bringing in good management, and expanding internationally. In a sense, they're ahead of the curve," Stites said. "Now, Internet advertising needs to catch up to them."
