UPDATE: Ad Networks Hit Hard by Dot-Com Woes

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The softness in the online advertising market and the financial troubles of many Internet companies are taking their toll on the ad networks, which are taking substantial hits to their bottom lines.


DoubleClick Inc. said last week that it would eliminate 100 to 150 positions -- about 5 percent to 7 percent of its 2,100-person work force -- and 24/7 Media Inc. said it would take substantial charges against its bottom line as a result of the slowdown in online advertising spending.


DoubleClick said the layoffs were part of a realignment it announced two weeks earlier that began with the repositioning of some executives. As part of that realignment, DoubleClick created the new position of chief marketing officer.


In a statement, DoubleClick said the layoffs were necessary to "better align" its organization with the new executive changes. The company said it has always "carefully managed head count to assure [that] our productivity outpaces our competitors'."


Brian Bartholomew, an analyst at Banc of America Securities, said most online ad networks will struggle to post improved revenues in the fourth quarter. He also noted that many of these companies may post numbers below their already revised forecasts.


"We continue to forecast a difficult environment in coming months for e-mail marketing service providers, particularly those with heavy exposure to dot-com clients and those that tend to focus on customer acquisition [as opposed to customer retention]," Bartholomew said.


Online advertising measurement company AdRelevance said in its latest report that the number of retailers advertising online this season nearly quadrupled, from 657 in 1999 to 2,313. But the report found that ad impressions are growing more slowly, total median impressions per retailer are down, and the number of holiday-themed ads in October was less than half of what it was last October.


"Despite high levels of holiday-related online advertising this season, it is becoming clear that retail advertisers are starting a little later this year. The truth of the matter is that seasonal online advertising impressions and expenditures grew faster in 1999 than 2000, through about mid-November," said Charles Buchwalter, vice president of media research at AdRelevance. "It's interesting to note, too, that during the first six weeks of the fourth quarter, only 14 companies, out of roughly 2,700 retail online advertisers, made up 50 percent of all retail online ad impressions."


Proving Buchwalter's point, 24/7 Media told analysts last week that it expects to lose $150 million to $157 million in the fourth quarter. The company said all but $5 million to $7 million of the loss would be from non-restructuring charges as it moves toward its goal of restructuring to eliminate redundancies and to achieve cost savings.


24/7 Media Inc. already has given the ax to 200 employees, a company spokesman said, including some in senior sales positions.


For the fourth quarter ending Dec. 31, 24/7 Media said it expects to lose 39 cents to 44 cents per share on revenue of $48 million to $55 million. A year ago, the company reported a fourth-quarter loss of $13 million, or 58 cents per share.


In a statement, 24/7 Media said it is "aggressively raising cash" to meet its long-term objectives and will "continue to be opportunistic" in its sales of non-core assets. The company spokesman would not say which non-core assets may be cut.


Dana Serman, an analyst at Lazard Freres & Co. LLC, said the layoffs would have a minimal impact on the ad networks' bottom lines. The real worry, he noted, is their cash positions.


"The real issue is [24/7's] cash detriment," Serman said. "To what extent are they in a cash crunch?"


24/7 said it already raised more than $18 million in cash this year.


"They need to monetize their stock holdings," Serman said. "They are in a tough bind."


Serman said 24/7 Media has two options: find additional financing or become profitable.


"They can probably become profitable by cutting low-end sites and less-profitable ad serving clients," the analyst noted. "But it's unproven if a downsized business model can be profitable."


Engage Inc. also recently eliminated 175 jobs, citing a need to streamline after having made a number of acquisitions.
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