Dot-Coms Hope to Gain from Traditional Agencies’ Losses

With the stock market in the midst of its wild gyrations, there’s been much hand-wringing about how advertising agencies will fare if the dot-com gravy train derails. But tighter marketing budgets might actually benefit some in the industry — at least they hope so.

Call it the demise of the (AMZN) marketing philosophy. From the beginning of the e-commerce craze, Jeff Bezos has been the guru for the, “grow market share now, think about profits somewhere down the road,” school of thinking. If was doing it, smaller e-tailers could justify such spending to their investors. And, after all, if one player is throwing half its revenues toward customer acquisition, the others must do so just to keep up.

“They are putting an inordinate amount of dollars into marketing right now, in a huge quest for customer acquisition,” said Michele Slack, senior analyst in the online advertising group at Jupiter Communications (JPTR).

But now that e-commerce has fallen out of favor and Forrester Research is issuing reports titled, “The Demise of Dot Com Retailers,” retail investors are abandoning e-tailers as quickly as they can scramble into their lifeboats. And smart entrepreneurs and venture capitalists are re-considering that “spend, spend, spend” philosophy that had become conventional wisdom.

“There’s no question that gravity has started to hit the dot-com world, and I think that, as the IPO and secondary marketplace gets constricted, it’s going to require the dot-com marketing budgets to be spent very restrictively,” said Rich LeFurgy, chairman of the Internet Advertising Bureau and partner at Walden VC. “Our portfolio companies already know that the world has changed.”

Since IPOs and secondary stock offerings seem to be growing increasingly difficult to pull off, the only choice for the largely unprofitable dot-com companies is to pull back. Venture capitalists will only pour in more money for so long, and even the stores of dough in their prodigious coffers will likely dry up if the market continues to shun Internet investments. Cash burn must be slowed, and marketing budgets are one of the most visible targets for cuts.

At the same time that we’re likely to see Internet start-ups tighten their belts, we’re also likely to see fewer companies in the marketplace. Those firms whose stock has taken a beating are likely to get gobbled up by stronger players in their sectors, or by related companies looking to expand.

In its “The Demise of Dot Com Retailers” report, Forrester Research says it believes that, “the high costs of marketing and technology will result in a maximum of three winners in each online retail category.” Fewer players mean fewer dollars going to marketing firms, although the remaining firms are expected to spend as much as always on advertising.

“Marketing is still going to be the big differentiator between who is going to win and who is going to lose,” said LeFurgy. “Brands still matter, and that is not going to change.”

So, are there any potential winners in this situation? Of course, the dot-com survivors will likely end up with a bigger share of the market after struggling through the shake out. And, as online advertising becomes increasingly accountable, Internet marketing firms and media companies hope to benefit by diverting more dollars their way — selling it as the most accountable way for cash-strapped companies to spend those scarce ad bucks.

“People are going to be more and more careful about how they’re spending their money,” said Brian McAndrews, president and chief executive officer of Avenue A, “and they should be.” Partly because of technology like Avenue A (AVEA) provides — which lets advertisers track results from the banner ad all the way through to the sale — industry watchers believe start-ups will make online advertising an increasingly larger piece of their marketing budget.

Another factor — the simple suitability of online media for reaching an online audience.

“Online advertising will remain a mainstay, because it’s highly targeted to the online population, and because it has a low out-of-pocket cost,” said Slack. “Television is going to be the hardest hit, because it’s the most mass medium — the least targeted — and the most expensive.”

Some have speculated that we may someday look back at the recent Super Bowl ad spending and dot-com crowded airwaves as an anomaly, as dot-coms eschew flashy broadcast ads for highly-targeted Internet ads and email marketing.

“In a curious way, the fourth quarter dot-com spending spike really benefited traditional media disproportionately,” said LeFurgy. “The return of gravity to the dot-com world works in favor of the dot-com media companies.”

Not that it will be easy. After all, these Internet marketing companies are themselves suffering from sagging stock prices. DoubleClick (DCLK) has seen its stock slip from a 52-week high of 135 1/4 to 57 1/4 at Monday’s close. Engage Technologies (ENGA) had traded as high as 94 1/2 over the past year, and on Monday closed at 21 9/16. The companies’ own sales and marketing budgets may be taking a hit, and their ability to make acquisitions and hire new staff for product development may also be compromised.

In the end, though, the sector may emerge with fewer scars than their traditional advertising brethren.

“A lot of companies are going to have some difficult choices coming up,” said LeFurgy. And Internet advertising firms hope those choices end up going in their favor.

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