Publishers Enraged at Engage

Some Engage network affiliates are outraged that the company plans to restructure its relationships — by announcing that it will cut its commission to them by 20 percent.

On January 2, several publishers received a letter from Engage Media Services’ senior vice president, Barbara Kelly, stating that the commission they receive from each network ad sale would be reduced to 40 percent.

Engage refused to disclose the amount it had originally been paying out to publishers, but sources close to Engage Media and several publishers said that the rates are typically 60 percent.

And now, some of those publishers say they are furious with the reduced rates — which they claim Engage unfairly forced on them.

“They just sent me, and a few others, the ‘kiss of death’ letter saying we will only get 40 percent, and we must sign a new contract,” said Linda Hammer, who operates The-Seeker.com and who alleges that Engage does not accurately report impressions on her site. “40 percent of what, two cents? I’ve had it with them.”

Another publisher’s company is now going to begin selling and serving its own ads, using Engage only to “fill in the gaps.”

“I have watched [Engage’s] Run of Network rates go from $5 CPMs to $1 … Their problem is, as CPMs have dropped, the amount of money they bring in has decreased,” said the publisher. “If someone a year ago purchased $1,000 worth of advertising, [publishers] were getting $400 of it. Now days, that same advertising is being sold for $200, so they would only be receiving $80. Now [Engage] are trying to get their revenue up, so now they take $120 of that $200.”

“I think that the contract actually states that we are not supposed to tell anyone about the contract. I would like to keep my ever-dwindling revenue from them,” said the source, explaining the choice to remain anonymous.

But Engage defends its actions. According to the letter to publishers, the readjustment is meant to bring commissions more in-line with industry standards.

“While building services to meet our customer needs, [Engage] continued to charge below-industry-standard commission rates on some sites … In order to continue to provide you with the best service in the industry, it is necessary for us to realign our commission rates.”

According to terms of the letter, publishers must agree to the new terms by the end of January. Publishers who do not agree to the revised terms will have their contract terminated.

“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,” Kelly wrote.

Engage declined to indicate what it considered “standard” rates, and wouldn’t say how many publishers had been charged “below-industry-standard commission rates.” Engage spokesman Michael Mayzel declined to specify the number of sites that received the letter, but he said it was not sent to all of the company’s affiliates.

“Basically we’re [renegotiating] … so that the structure of the contacts is more equitable for both the publishers and Engage,” Mayzel said.

Mayzel said the reduction in commission reflects what Engage considers “the value added services we bring to publishers,” including ad campaign targeting and optimization. He said these services, performed for advertising clients, “enables publishers to secure greater market share with advertisers.”

Mayzel also referred inquiries to the company’s filings with the Securities and Exchange Commission, which address the contract restructuring.

“In an effort to improve our profitability [for the Media Segment], 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 … we believe that such efforts will improve our results of operations and financial condition.”

Engage could certainly stand to see that happen. Thursday, the company announced a massive restructuring designed to simplify its corporate structure, and announced that it would lay off about half of its employees.

And some industry watchers are concerned that the restructuring, which will shave about $120 million to $150 million in annual costs, might be too late to save the company. Engage said it had $100 million in cash and marketable securities by the end of November 2000, but would take a restructuring charge of $40 million to $45 million, of which $17 million to $20 million will be in cash. That’s on top of normal operating losses — the company said it had a net loss of $47.8 million last quarter — and it’s not clear when the savings from restructuring will begin.