Engage's New Commission Rates Draw Ire

An attempt by Engage Inc. to readjust the commission rates it pays its publisher affiliates has outraged some of the small Web site owners affected by the new policy.

In a quarterly filing with the Securities and Exchange Commission in October, Engage included a paragraph about its plans to charge a greater commission — and subsequently pay smaller amounts to affiliates.

Engage, Andover, MA, plans to renegotiate its contracts with publishers and reduce commissions to 40 percent of the ad dollars generated by serving banners to Web sites. Engage would not say how much it used to pay, but publishers said they generally received 60 percent.

“In an effort to improve our profitability, we are in the process of renegotiating agreements with certain of the Web sites in our network to increase the percentage of revenue retained by Engage, as well as to require in certain situations that Engage recuperate certain costs associated with its ad technology prior to sharing net revenue with the Web sites and terminating certain Web site contracts that are no longer economically beneficial to us,” the company wrote in its SEC filing.

“We are not renegotiating contracts with all of the sites in our network and are not disclosing the specific number of sites which we are renegotiating with,” said Mike Mayzel, an Engage spokesman. He referred to the SEC statement as the company's official reply.

In a Jan. 2 letter from Barbara Kelly, Engage's senior vice president of media services, the company told publishers it needed to realign its commission policy to provide the publishers with better service. The company noted that it had been paying “below-industry-standard” rates to some sites.

“This notice is to inform you that the commission on the ad sales for your site will be changing — you will receive 40 percent effective Feb. 1, 2001,” Kelly wrote. “Again, charging this commission is necessary for us to maintain the breadth and caliber of the products available to our sites and will enhance our product offerings as well as provide publishers with the technology needed to secure greater market share with advertisers.”

Engage admitted in its SEC filing that its contract renegotiation may lose it some business, but the company said it ultimately would save it money. Engage said this and other restructuring efforts should help it save $120 million to $150 million annually.

Engage president/CEO Tony Nuzzo sent a letter to clients Jan. 8 to explain the company's dismal financial situation and the firing of 550 employees as an outgrowth of the company's acquisition of seven companies in 18 months.

“While this announcement includes a significant reduction in force — 550 employees over the next several months — it should not be equated with other Internet company cutbacks,” Nuzzo wrote.

“Engage has a very different story: In the past 18 months, we have acquired seven separate companies. Predictably, this merging of organizations has produced duplication, overstaffing and general inefficiencies. Thus, our reduction in force would be warranted under any circumstances.”

Publishers see it differently.

“They're trying to sound real positive,” said one client of Engage, a Web site CEO who asked not to be named. “They haven't done too well. Facts are facts.”

Linda Hammer, who operates the-seeker.com, a Web site featuring resources for people searching for lost friends and relatives, said she has been using Engage to serve ads to her site since early 1998. However, since this new development, she said she would take all of Engage's served ads off her site by the end of the month.

“I can sell an ad myself for $5 and get more than I get from them,” Hammer said.

She said Engage was paying her less and less even as ad impressions increased. When she signed with Engage — back then it was Flycast, which Engage acquired in June last year — she received about $900 a month. The latest check was for less than $200, she said.

“I get 500 e-mails a day,” she said. “I get about 1.5 million impressions. The traffic is there.”

According to Hammer's site logs for the first week of January, the-seeker.com received 49,672 impressions. Engage said her net revenue from the ad network for the period was $23.91.

“I have more e-mail than they show I have hits,” she said. “The bottom line is, the stats from Engage never, ever reflected the upswing in my viewers.”

The Web site CEO echoed Hammer's theme, saying traffic at his site has grown 79 percent, but his revenue from Engage has fallen 88 percent.

“In January 2000, they represented that 90 percent of our traffic sold,” he said. “In December, only 6 percent of our traffic sold. These are numbers they can't deny.”

Giving Engage the benefit of the doubt, the CEO said he could not blame current management for Engage's problems because they inherited a bad situation.

“The mistake they made was that when they started, they were good at developing software to deliver ads,” he noted. “But they had little knowledge of how to do advertising. Companies were depending on them to be competent and do ad sales for them.”

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