Finally, Some Pleasant Surprises

In the last couple of years, earnings season has given online advertising industry watchers cause to cringe -- or perhaps bury their heads in the sand. But the latest round of announcements might have even provoked a smile or two, as we begin to see evidence of the turnaround for which true believers have been expectantly waiting.

The story begins with DoubleClick, which has long been the bellwether for the online advertising business. Announcing its fourth quarter earnings last Wednesday, the firm handily topped analysts' estimates and even bested its own guidance. According to Thomson Financial/First Call, analysts had expected a $0.05 per share loss for the quarter, but DoubleClick eked out a $0.01 per share profit, on a pro forma basis.

Even the beleaguered media business, which DoubleClick has been playing down in recent months, saw an increase over third quarter. "This past quarter, North American Media reduced head count 30 percent while increasing revenues by 8 percent," said vice president and general manager of North American Media, Jeffrey Silverman. "In the fourth quarter 2001, we saw both traditional direct marketers and brand marketers, such as Castrol Motor Oil, utilize the Internet as a marketing solution, and I am excited about the increased momentum."

The earnings season momentum continued with the results released by Yahoo last Thursday. Minus one-time charges, the company posted a profit of $16.7 million, or $0.03 per share, topping analysts' expectations by $0.02 a share. For the full year, Yahoo brought in a $0.07 per share profit, on a pro forma basis.

Now, I'm a true believer in interactive marketing, but I'm not wearing blinders. I know that "pro forma" could be considered the two-word summation of everything that went wrong with Enron. I'm also aware of the fact that online advertising -- like all advertising -- is a cyclical business, with a lot of spending going on toward the end of the year to support holiday sales. There's also the diversification factor. Part of the reason these companies did well is because they both reduced their dependency on online media. DoubleClick concentrated on its technology business, as it has for some time, and Yahoo started introducing paid services, such as online personals.

What is important is that the biggest players in the industry are beginning to achieve some sort of a balance. At the moment, they aren't able to subsist solely on advertising dollars, but neither are, say, magazines or newspapers.

Another development that's given me reason for optimism this season has been the long-awaited (surprise) profitability of retailer Amazon.com. And its profit didn't even include those dreaded two words. Why is Amazon's profitability a consideration for online advertising? Well, consider that Amazon was the single biggest online advertiser in the third quarter, purchasing 12 billion impressions across the Internet, according to Jupiter Media Metrix's AdRelevance unit. It's also important because it shows that online retailers -- traditionally some of the bigger online advertisers -- can show a profit. It's the first real evidence we've seen of such a thing so far, prompting a SmartMoney.com writer to pen the headline: "Who Woulda Thunk It?"

But Internet-based companies aren't the only ones turning to online advertising. In a much publicized move, Frito-Lay chose to forego running a Super Bowl spot in favor of a longer-running interactive effort, which includes the relaunch of the Doritos.com Web site. The company explained the strategy by saying that it wanted to reach teens and the Internet is a well-known virtual place where these youngsters "hang out." Though there are certainly reasons to think that teens' usage patterns are partly based on their unique social situation, it's also likely that this group of people -- the baby boomers' kids -- will continue to be heavy users of the Internet as they grow older. Then, where will the dollars go?