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Larry Dignan
Why Web advertising needs to look beyond the Internet

Larry Dignan
Department Editor, CNET Investor
Monday, June 18, 2001
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With about a month to go before Yahoo reports its second-quarter results, Wall Street analysts are scurrying to predict when it'll be safe for investors to buy stocks of companies that depend on online advertising. Analysts aren't campaigning for Internet media companies, but they are quietly becoming a little more upbeat. At this point, defining Wall Street's view as cautiously optimistic might be a stretch, but there's a consensus that online ad spending isn't getting any worse.

FOR NOW, that counts as good news. Companies that get most of their revenue from online advertising have been throttled amid profit warnings. Yahoo, DoubleClick, Terra Lycos, and a host of other companies have either cut their 2001 estimates or neglected to provide an outlook.

Nevertheless, online media companies claim they are making strides by courting conventional advertisers, even though analysts disagree on how to define traditional brick-and-mortar advertisers.

SG Cowen Securities analyst Scott Reamer recently voiced the consensus view of Yahoo and its online advertising peers. Reamer upgraded Yahoo to a "neutral" from a "sell" Monday. That's the equivalent of upgrading from a "bail on this stock" rating to a "still avoid the stock" rating, but it counts for something.

SG COWEN interviewed 39 media companies to gauge their spending plans for online advertising and found that business has stabilized.

"We were somewhat surprised by the level of optimism out there, particularly from ad agencies who feel that clients are finally ready to pull the trigger on Internet advertising budgets," Reamer said. "We did not hear any instances of Internet budgets being expanded, but certainly the free-fall they were in since last summer is over."

Sure, the free-fall is over, but the key for online media companies will be boosting their roster of traditional advertisers. And there's a lot of work left to do on that front.

WHEN ONLINE MEDIA COMPANIES report earnings, they've been touting their percentage of traditional advertisers compared with pure dot-com advertisers. For instance, Yahoo on its first-quarter conference call talked up its falling percentage of pure dot-com advertisers.

In the first quarter, Yahoo received 30 percent of its sales from what it dubbed "pure play" dot-coms, down from 33 percent in the fourth quarter.

That sounds impressive, but ABN AMRO analyst Arthur Newman is skeptical. In a 70-page report on the advertising industry, Newman said companies dependent on online advertising--notably Yahoo, Excite@Home, and Terra Lycos--have been using a lax definition of what a dot-com is.

NEWMAN SAID his definition of a traditional advertiser is a company that's purely bricks and mortar. However, Yahoo in its last quarter counted Barnes & Noble.com as a traditional advertiser, although its future clearly rides with the Internet. A Yahoo spokeswoman confirmed that the company doesn't consider Barnes & Noble.com a dot-com advertiser.

According to Yahoo, a "pure play" dot-com is a company that is "born and bred" on the Internet. Barnes & Noble.com is the offspring of Barnes & Noble.

Newman begs to differ.

"IN OUR VIEW, Barnes & Noble.com is clearly a dot-com; the company and its board will likely continue advertising online only so long as the online channel appears to be working," said Newman, who also counts dot-com arms of traditional companies as dot-coms.

Newman said his definition fits because the heritage of a dot-com means little if the business model doesn't work. Disney was the well-heeled parent of Go.com, but it folded the portal anyway, and its marketing dollars disappeared. He said two-thirds to three-quarters of all online ad impressions are from dot-coms or dot-com businesses of traditional brick-and-mortar companies. In the context of the Internet, an ad impression is a Web page that delivers an advertisement.

Newman contends that online advertising will rebound only after traditional methods--print, television, and radio--bounce back. Traditional advertisers are likely to flock to what they already know before committing more money to online advertising, said Newman.

IN FACT, Andrew Marcus, an analyst with Deutsche Banc Alex Brown, last week said the "upfront" market (advertising that is bought in advance) for TV networks is likely to be down about 9 percent from a year ago.

"Online advertising is unlikely to rebound until after traditional advertising emerges from its current slump," said Newman. "A recovery in online could be as late as mid-2002."

Reamer said he expects Yahoo to at least meet First Call estimates for the second quarter and indicate that it has more visibility into the second half of the year. According to First Call, Yahoo is expected to report pro forma break-even earnings on sales of $172 million.

ACCORDING TO REAMER, advertisers are saying positive things about Yahoo for the first time that he can recall. Although he was upbeat, he declined to upgrade Yahoo shares beyond a "neutral" rating until he saw some evidence that online advertising was about to grow again.

"Clearly the magnitude of erosion that we witnessed in the first quarter has abated, but we still do not expect to see much near-term improvement," Rohan said.

Do you think the Web needs more non-Web advertising to stay afloat? TalkBack to me.

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