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The Dot.Com Dilemma

His name is Damon. No last name, he asks. He wants to eat lunch in this town again. He's had plenty of experience with dot-com advertisers.

Good experiences (they're usually receptive to ideas). Bad experiences, too (some aren't always receptive to paying for them). A first-rate creative man who has developed campaigns for a few of the world's leading corporations, Damon has whipped up a number of them for the dot-coms over the last couple of years as well, and while he professes to know nothing about their media buying habits, or how dramatically they upset the television markets last year, he knows a little something about how they spend their money. And why so many of them decided to get into advertising for the first time in 1999.

"It's for potential investors," he explains bluntly.

Not for customers, although those would certainly be wonderful. Or for increased site traffic (ditto). But for investors. The apparent logic is that if a fund manager sees a nice slick network TV commercial that obviously cost a LOT of money, then he or she will envision a strapping dot-com startup with a brilliant future (albeit one still in need of investors).

If true, then the looming question circa April 2000 would appear to be an obvious one. What happens if investors, large and small, are no longer willing to place their bets on struggling dot-coms even if they do have killer ad campaigns?

There are other rather obvious questions, too. What happens if venture capitalists are no longer willing to bankroll hugely expensive campaigns that have questionable or barely demonstrable efficacy (see: Super Bowl)? Or what happens if many dot-com advertisers realize that they've wasted all this money on media campaigns targeting consumers whom they barely understand or (evidence suggests) barely understand them? How, then, might that affect the looming upfront market, which skyrocketed last summer, or the scatter market, which has done the same since last fall?

Or this more pressing issue: what happens if dot-com companies, which were badly hit in the massive sell-off in mid-April, have no more money...at all?

Does anyone smell "shakeout" in the air?

A few people do, and a few have, in fact, for quite some time. Last year's remarkable tsunami of dot-com ads-some smart, some funny, some memorable, most not-may be cresting, and we won't insult anyone's intelligence by pointing out how huge an impact this could have on the dot-com-sotted agency and media business.

To be sure, the debate has begun in earnest and no one can be sure exactly what will happen in the crucial weeks ahead. Naturally, everyone has an opinion. During the stock market debacle of early April, Forrester Research declared that if "current market conditions" continued, a number of dot-coms would go under. Of course, if such "conditions" continued, a number of brick-and-mortars would tumble into a pile of dust as well. Barrons published a chilling account in late March that graphically chronicled how two dozen dot-coms may be looking at an early grave.

But contrarians beg to differ. Jack Myers, chief of the Myers Group (which specializes in media consulting) insists this year "will be more active" in dot-com advertising because "there is a battle going on for dominance and dominance depends on building your brand. Just look at the number of dot-coms that received funding over the last twelve months. These companies won't shrivel up and die. If anything, they'll be more aggressive."

Even so, there seems to be a growing feeling that much of the advertising simply is not working, if only because there has been so much of it so quickly. Scott Rosenberg, managing editor of Salon-in a stark reflection of the presumed dot-com ad backlash underway out there-observed last fall that "the TV networks, radio stations and Internet-ad-fattened magazines and newspapers are laughing their way to the bank. But their glee will be short-lived: This madness is a one-time, self-limiting epidemic."

Ah, but what glorious madness it has been. In 1999, dot-com advertisers spent a total $1.1 billion on network and spot television, or a mere billion more than '98, according to Competitive Media Reporting. Among TV advertisers, the category is now ranked 16th, right behind old standard bearers like cereals (14th) and food/beverage retailers (15th) and ahead of property insurers (17th) and retailers (18th). A fun fact: dot-com advertisers as a whole spent more on television last year than all major national advertisers, save General Motors ($1.4 billion). Cable revenue grew 33 percent in the first quarter alone, which the Cabletelevision Advertising Bureau directly attributed to you-know-who.

And more facts: dot-com companies and start-ups assigned $3 billion in billings to agencies last year (according to this publication). There was $5 billion in venture funding in the especially frenetic third quarter of last year alone. Because many dot-coms have typically ploughed between 50 percent and 90 percent of this dough into marketing costs, you realize that can add up to real money fairly quickly.

Who are these nouveau riche from the land of Silicon? Household names they are not: WebTV and WebMD assigned nearly $100 million in billings last year. Drugstore.com, Bol.com, CarsDirect, and Autobytel had another $130 million to spend. A question, unfair or not, is: what did all that money buy?

It's a question lots of people have been asking, and the answer is not clear-cut. Patrick Keane, senior analyst with Jupiter Communications, which follows the dot-com industry, says that the broadcasters and publishers have had "just a cavalcade of [dot-comers] banging on their door, and the majority of them at this point that have been willing to pay above market value are the Internet companies. Most people I know in cable and broadcasting are probably saying to a lot of their traditional buyers, 'Hey, I'd love to sell you this but I can get 290 percent over that from the online company.' That said, what you're going to start to see is a pullback in the market."

The reasons are both obvious, and more subtle. Foremost, the money may well be running out. Barrons listed 26 struggling dot-coms that may be forced to dramatically tighten their belts by late summer. Some are big names-Cdnow, Peapod, drkoop.com-and represented nearly $200 million in media expenditures last year.

Moreover, ad gratification has been hard to come by for many. A key strategy for most has been to grab instant mind share. But there's only so much share-of-mind the average person can devote to a dot-com. The result of all the activity, as Keane puts it, is simply like "throwing another log on the fire."

This year's Super Bowl became the world's greatest roaring log fire. Eighteen dot-com advertisers appeared, and most were promptly forgotten by viewers. A day-after recall study by Adweek found that only 36 percent of respondents could remember a dot-com advertiser, which adds up to an awful lot of wasted money. Dot-comers-hoping to replicate Monster.com's big success in '98, when site traffic exploded after its Super Bowl ad aired-pushed the 30-second rate to $2.2 million. Most amused was the ABC sales staff, which was handed a perfect example of the dictum that a sucker is born every minute.

For its part, ABC did not play the sucker: it demanded, and got, payment upfront from the dot-comers.

But the fact remains, most dot-com advertisers did not play the vanity game in the Super Bowl. Most worked, and continue to work, the spot and scatter market, and the result last fall was the strongest scatter market in memory. Prime-time scatter rates soared, in some cases as much as 50 percent, making those who paid 15-18 percent hikes during the upfront look like geniuses.

Now the great guessing-game-of-the-moment: what's next? Most observers do not expect the dot-coms to be a significant presence in the upfront; they spent peanuts last year-only $60 million, by one estimate.

There are two key reasons they have stayed away from the upfront. The first is obvious: venture funding, in many instances, did not become available until after the torrid market closed last May. (Even dot-comers couldn't figure out a way to spend money they didn't have.) Second, most of them-particularly the e-retailers-wanted to play the scatter market to boost Christmas traffic and sales.

When the money finally did come in last fall, even the networks were shocked by the massive flow. One high-level source recalls, "I never expected a billion dollar scatter-maybe $500 to $700 million-and it was all because of the dot-coms."

So now what? In network TV buying, the tail frequently wags the dog-scatter, in other words, has a profound impact on the upfront. If many major advertisers fear a similar scatter boost later this year, some will no doubt increase their upfront commitments. That could mean 1999's record $7.2 billion prime-time market could be surpassed this year, and rate hikes-which averaged in the mid to high teens-could be topped as well.

Almost certainly the bet in some quarters is that the dot-coms-most of which are struggling to regain confidence among investors-will not materialize in either the upfront or scatter markets. And if they don't show up for fourth quarter scatter, then why spend your wad in the upfront?

It's a risky bet, to be sure. Another network source-reflecting some of the confusion out there-says "they were never even in the ['99-2000 upfront] and I don't frankly expect any of them to be part of it this year. I don't think they can figure out what their marketing needs are going to be. And some of the dot-coms have run their course, even though there are two or three behind them who think they've got a better idea of inventing a mousetrap."

Nevertheless, one highly respected buyer who has seen categories come and go over the years lays out the upfront-versus-scatter debate this way: "I think there are a number of advertisers out there who are saying, 'Is this going to continue into 2001? Or are we going to see a slowdown after the first of the year?' It's all speculative at this stage, but it's not inconceivable that a number of advertisers may [want to] hold back for scatter because if the dot-coms fall apart, [they] can make some good deals."

True, but it's a dangerous bet indeed. Consider: if the networks also decide the dot-coms are on the skids, and that some major upfront players are holding back for scatter, then they may simply sell more in the upfront and decrease available inventory for scatter. This means they would be constricting the supply of scatter avails later this year. And that could mean high scatter rates, again.

So perhaps the moral of this tale, in the end, is a sobering one. The dot-com ad boom may simply peter out, drained of cash and ideas for truly effective ad campaigns. Venture capitalists may grow impatient with campaigns that don't improve red-ink-drenched balance sheets. Or the dot-com boom may keep roaring right along, as more and more keep looking for the magic formula that will turn losses into profits, and more and more simply assume that the pot of gold really is somewhere at the end of the rainbow.

But never-never-bet against the networks' ability to hike rates. Like spring turning into summer, that seems to be one of the natural and inviolable cycles of this business.


Verne Gay, MEDIAWEEK. April 24, 2000

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