INTERVIEW WITH STOCKHOUSE
StockHouse.com Interview - August 3, 1999
StockHouse spoke with Paul Mercia, CEO of Cybersurf about the
future of web-based advertising, how free Internet access will soon
be the norm and their recent Call-Net alliance.
• • •
Cybersurf Corp. [C.CY] is an information technology company developing and marketing
innovative software, connectivity and communications solutions. The company's flagship product
is the 3web Network, Canada's only free, advertising-sponsored Internet and Email service.
In the online advertising industry, clickthrough is the increasingly elusive goal that must be
conquered in order to get a bang for your advertising buck. Although companies are buying more
online ads, statistics indicate that the average surfer has little time for the banner ad. Clickthrough
rates have plunged as low as 0.5% while web marketers are starting to shift away from the
traditional approach in an attempt to target markets. By using banners creatively and targeting
them to specific groups, advertisers could achieve their desired results.
Cybersurf goes beyond the banner ad and believes they have the answer to the falling
clickthrough rate.
Based on their figures: Cybersurf has amassed over 120,000 3web subscribers in Calgary and
Edmonton (a figure that grows at a rate of 300 new users per day), and anticipates a Toronto
launch by September 1999. Subscriber projections are for as many as 250,000 in a four-month
time period. Following the Toronto launch, Cybersurf plans to initiate 3web in Vancouver by
December 1999, and anticipates national penetration of its free Internet service shortly thereafter
To view the Cybersurf website, visit www.cybersurf.net.
• • •
StockHouse: Your business is offering free Internet and e-mail. How are you generating your revenues?
Paul Mercia: It's based on the commercial television model. Through revenues generated by sales of
advertising and different services we provide through our interface. We expect out of all the revenue, about
80%, to come from advertising sales in each of the markets, and the other 20% to come from
e-commerce solutions like our 3auction site and 3web express. Since launching 3web, a lot of
companies have picked up their ad and noticed us and our capabilities. So they have approached us to
do work for them. We are expecting to get a lot of revenue through that as well.
StockHouse: Tell me how you deal with people who are arguing that web-based advertising is ineffective
and on the decline?
Paul Mercia: I agree that it is ineffective.
StockHouse: But, this is your revenue base?
Paul Mercia: Our advertising isn't web-based. We advertise through a proprietary piece of software that
runs in conjunction with the browser, so our advertising doesn't even touch the web. Advertising in the
next five years on the Internet has to be more like the traditional media, like television and radio. Right
now with TV and radio, you are sitting in the comfort of your car, or the comfort of your home, and
advertising comes to you. Where, with the Internet, you have to do a little bit of work, and you have got to
go to it [sites] such as Yahoo, or Excite. Once you are there, and that advertising comes up, they don't
really know who is sitting at the other end of the machine. With our technology, it doesn't matter what
you are doing or where you are, that advertising is going to play for the full 30 seconds. That is why we
are seeing click-through rates that are 20 times higher than on the Web.
StockHouse: Your ads stay up automatically?
Paul Mercia: As long as you [are] running 3web and you are on the 3web
service, our ads are sitting there all the time. Even if you are reading your
email. Even if you go to Yahoo [YHOO], that Telus [T.TSE] ad or that
Molson [T.MOL.A] ad or that IBM ad is going to be playing for its full
30-second spot.
StockHouse: Do you currently have any competition in Canada?
Paul Mercia: No.
StockHouse: Do you have a once in a lifetime fee, such as a couple of
your competitors in the US?
Paul Mercia: No. Absolutely free. All you do is pick up the CD for free. We even make a little bit of
money off the CD. We always look for a corporate sponsor and distributor that pays for the manufacture
and distribution of the CD's. And so to the end-user it is free. [Anyone] in the family can automatically
create their own e-mail address and their own log-in id to 3web. In doing so, they even get to create their
own personal portal to the Internet of their favorite sites, through a customized front end of 3web.
StockHouse: Do you have 24/7 tech support?
Paul Mercia: Not at the moment. By the time we move into Toronto, we are actually going to be
outsourcing our tech support and by then we should be providing 24/7.
StockHouse: Are you looking into alliances with any of the major banks?
Paul Mercia: We have been approached by a couple of banks, and for that I am under nondisclosure.
Recently you have read in the news about AOL [AOL] and the Royal [RY] [Bank]. A lot of these other
guys see this as an opportunity not only to drive traffic into the banks to pick up their free Internet
access, but [as a] means now to do their online banking and trading.
StockHouse: How many registered customers do you have right now?
Paul Mercia: About 120,000 between Calgary and Edmonton. Of that, 85,000 are in Calgary.
StockHouse: When is your expected launch in Toronto?
Paul Mercia: We are shooting for the end of September. The alliance now that we have with Call-Net
[T.CN] is great. They bring so much to the table that other groups who have approached us couldn't. For
example, their experience of providing an online service coast to coast. As far as the back end goes, I
could say we can launch two weeks from now, especially with the experience Sprint already has and with
the infrastructure they already have in place. Our problem has been in building the 3web server
infrastructure. We are talking about a system that is going to handle half a million households right off the
bat and, putting it together is a huge build on the part of the company that we go with.
StockHouse: How many subscribers are you expecting for the Toronto market?
Paul Mercia: We are expecting a much faster acceptance of the product in the Toronto market than we
[had] here in Calgary. We are looking at between 200,000 and 250,000 subscribers in about a three to
four month window for Toronto.
StockHouse: Is Vancouver in your immediate expansion plans?
Paul Mercia: Yes. Because Sprint is there, it's just a quick build for us. We want to hit all the major
markets where advertising is key. Calgary has been great but as far as the advertising dollar is
concerned, there really isn't that much to compared to Toronto.
StockHouse: For Call-Net's $12 million investment, from what I can see, you are basically handing $7
million back to them. How does that work?
Paul Mercia: The service that we are buying from them for the $7 million, is almost like an investment
back into them in that we are going to be counting on their IP Network infrastructure. This is something
that we would have had to pay for regardless of who we went with, no matter what telco or cable
company that [we] signed up with. That $7 million goes back to them to pay for the dial-up modems,
access to the Internet and the access to their national network.
StockHouse: Sprint has Internet customers. Won't those customers say to themselves: why am I paying
for Sprint service when I can go to Cybersurf and have it for free?
Paul Mercia: You know, it is true, if you go to www.3web.net we have a graph there that indicates where
people are coming from when they download our software. A lot of the people that are signing onto 3web
are coming over from Sprint, but they are also coming from Sympatico, Telus Planet, Shaw, AOL - really
all over the place.
I asked this question of them as well. They see this as the way of the future and that this type of service
is not going to be paid for any more. In the future all dial-up services at this stage will be run like
commercial television. They saw this as a huge opportunity to move forward with their own products and
services, because you can bet that for sure they are going to be advertising on 3web, because they have
seen the effectiveness of advertising on 3web.
StockHouse: What would you say makes 3web technology different from others in the industry?
Paul Mercia: What we have that they don't have is an advertising engine using technology that we have
developed in-house that closely replicates television quality commercials, but using our compression and
our technology it takes up very little bandwidth and very little disk space.
If we ever went into a market where our competitors were located, and an advertiser saw our form of
advertising compared to theirs, which is really just an animated gif, hands down, they would go with us.
On top of that, we do so much more for the user than the others do. What you are going to notice right off
the bat as far as taking care of the end user is that we do everything from install to set-up.
StockHouse: Netgenie [www.netgenie.com] operates in 2200 cities across the US. Are you looking at
expanding into the US market?
Paul Mercia: Yes. We want to get in there by next year.
StockHouse: How are you planning on competing with players like this who are already established in all
the major cities?
Paul Mercia: The only way you generate revenue is by selling advertising. If I were to go to a Proctor and
Gamble and show them what we can do with our ads, with full animation and full sound, hands down,
they will choose us to advertise with.
StockHouse: Obviously your sales force is going to be a strong power for
you going into the US market?
Paul Mercia: Yes, we want to partner up with different media partners
and with groups that have experience in selling with the major agencies.
Our goal is to hit the major markets first, in California and New York.
StockHouse: Is your deal with IBM going to help you in the US market?
Paul Mercia: It already has helped us in that when you sign a big name like that to advertise with us, it
does help when you approach other advertisers. Automatically they want to investigate this product.
Coincidentally, I talked to the VP of Worldwide Marketing today, and we are talking to her about the back
end servers. Because of this build in Toronto, we are talking about a huge build of servers and IBM [IBM]
does that. Because we have already established a relationship with them, they bring a lot more to the
table than just the advertising dollar.
StockHouse: How do you target specific demographics?
Paul Mercia: People realize that it is a free service and then in turn what we ask for is their demographic
information. Some of that demographic information is used to customize the front end and, on top of it,
the demographic information is used by advertisers to deliver the advertising. So your demographic profile
might be different than mine and that means I will be seeing different ads than you.
StockHouse: When people sign up for the service, do they know that they are going to be receiving this
advertising?
Paul Mercia: Oh yes, when you sign up there are terms and conditions for use and there is also a
pop-up screen explaining what the demographic information is used for. We make a commitment to all
our users that we would never sell the database to anyone and that their personal information such as
their name, postal code, and their address would never be given to anyone to be used for advertising.
StockHouse: What has been the response from your clients?
Paul Mercia: Oh, it's great. One client ran a campaign on television promoting their products and on
3web and, in both instances, it promoted the website that the products sponsored. We host the website,
and when the television commercial played on CTV people would see the website and then go there, but
out of everybody that visited the site, more than 85% of them came from 3web. So you can see how
much more effective 3web is than television.
StockHouse: Brian Harrison from Rogers and Partners has set a 12-month target of $5 for your stock. Is
this a realistic target?
Paul Mercia: I think so. One of the things that we are seeing right now with our stock is that we have
been able to hover around $3-$3.50. I think that by far the majority of our stock is held by day traders and
I think this is part and parcel with us being on a junior exchange and being a small Canadian company.
We are looking to change that in the short term. We have actually had groups approach us to help us list
on the TSE and then hopefully on the Nasdaq and to help with some institutional buying. That is what our
goal is for the short term right now, to line up some institutional buying. You compare us to some of the
similar services that have just gone public like FreeServe [FREE] (www.freeserve.net) and their market
cap right now is around $1½ billion. We have a technology that totally blows theirs away and we are still
sitting here on a junior exchange.
StockHouse: Are you looking at doing a private placement at some point?
Paul Mercia: Right now we have done our financing, to move into the different markets in Toronto, so we
are very happy with that and we are very happy with the relationship with Call-Net. So at this point, in the
short term, we don't need to do more financing. What we want to do is line up some more institutional
buying and do a listing on the TSE. Before we tackle the US markets, we will probably do another
financing.
StockHouse: You are currently showing a profit. Can you give me any expectations on what that will look
like when you enter the US market?
Paul Mercia: Although we are always going to be shooting for earnings, we want to be far more
aggressive as far as expansion, and as far as generating revenue. You are going to see us in the near
future lining up more deals to sell some of our 3web services like our virtual mall and 3auction and so
forth. We want to align ourselves with other players to help us sell those services. What we are going to
focus on in the next couple of years is on growth and on building revenue. So I really doubt you are going
to see earnings over the two-year period.
StockHouse: I appreciate your time. Best of luck in Toronto.
Disclaimer: The opinions expressed herein do not necessarily represent the views of StockHouse Media Corporation or any
subsidiaries or affiliates thereof.
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