Raging Bull interview emailed to subscribers today:
Eyeing number one
Company: 24/7 Media, Inc. (TFSM)
Wednesday's closing price: 32 1/2
Market capitalization: $655.5 million
52-week range: 5 - 69 5/8
Summary: Online advertising and direct marketing network
Cyber-CEO: David J. Moore, Chief Executive Officer and President
The power of the Internet as an advertising medium is still underrated. Just
ask David Moore, the Chief Executive Officer and President of online advertising
network 24/7 Media (TFSM). This veteran of cable TV ad sales has been a pioneer
in the interactive advertising arena since founding Petry Interactive, a
precursor to 24/7 Media, back in late 1995. Since Moore's initial forays into
online advertising, he has been hearing constant criticism from potential
clients, industry analysts, and now investors that online advertising doesn't
really work. After all, the skeptics say, how can tiny banner ads ever generate
the same impact as a 30-second television commercial? I'm sure Moore bristled
at these misguided comments. However, even the harshest critics on Madison
Avenue seem to be changing their tune about online advertising these days. An
optimistic report issued last week by Forrester Research now estimates that the
online advertising market will reach $33 billion worldwide by the year 2004.
It's these types of multibillion-dollar projections that must put a wry smile on
Moore's face. Looks like he'll get the last laugh after all. The bigger the
online ad pie, the better, since 24/7 receives a slice of the action from the
hundreds of Web sites it represents and sells advertising for. One can
understand Moore's unbridled optimism and enthusiasm for the potential growth of
online advertising. The fact of the matter is that Internet advertising
provides the two-way interaction between user and advertiser, instantaneous
feedback, and pinpoint targetability that savvy marketers drool over. It's the
job of 24/7 and other ad networks to sell marketers this tasty sirloin steak.
His firm has now grown to become the second-largest online advertising network
in the industry, behind market leader DoubleClick (DCLK).
With a combination of marquee clients like Reuters (RTRSY) and AT&T's (T)
WorldNet, as well as a separate network of smaller and mid-sized sites, 24/7's
combined network can reach over 50% of all U.S. Web users. While impressive,
with the recent acquisitions of Abacus Direct (ABDR) and NetGravity (NETG) by
DoubleClick, 24/7 Media appears to have been once again relegated to second
fiddle, even after reporting second quarter numbers that were directly in line
with analyst estimates. Quite simply, investors appear more interested in
betting on the Coca-Cola (KO) in this space, DoubleClick, than in backing number
two player 24/7 Media. However, last time I checked, Pepsi (PEP) was still
humming along quite nicely. Last week, 24/7 reported second quarter revenues of
$17.2 million, a 50% sequential increase, and a net loss of $7.2 million, or 37
cents per share. In addition, 24/7 Media recently went down the acquisition
path itself by acquiring ConsumerNet, an e-mail database marketing company, for
$52 million in stock. We recently sat down with David Moore to discuss how 24/7
plans to close the gap with DoubleClick, as well as the strategy behind his
company's recent moves to become the largest "opt-in" e-mail list provider on
the Net. (Opt-in e-mail is the opposite of spam e-mail, whereby consumers agree
to have advertising e-mails sent to them related to their areas of interest.)
Cyberstock: What does your recent acquisition of ConsumerNet really bring to
the table for 24/7?
Moore: The two main ingredients that ConsumerNet brings to the table are
talent, as well as data and a viable business model. In fact, they have a
pretty interesting business in terms of cooperative databases. They actually
end up owning the data from the services that are participating in the co-ops.
They brought in not only a nice opt-in list, but also a list of information that
they actually own, which is very important.
Cyberstock: Are you expecting to see a large shift in ad dollars moving away
from the top 25 most trafficked web sites, and gravitating towards much smaller
sites in the next few years?
Moore: Oh, I definitely think so. Let's just take the portals as an example.
The portals have 15% of all the page views on the Web today, yet they're getting
about 66% of all the ad dollars. Meanwhile, you have 4 million-plus web sites
out there that have 85% of all the page views or usage on the Web today?
Cyberstock: And a large number of them are starving.
Moore: They're only getting 33% of the pie, and there's only a handful that are
getting any money at all. Of course, that's where our model comes in so well,
because what we can do is package all those sites together, thereby offering a
critical mass to an advertiser. A one-stop shop, if you will, a "one report,
one invoice." And frankly, that's the reason I think why the portals have had
such a large share, because they were the ultimate one-stop shop. But at the
end of the day, if I'm trying to reach a guy with your profile, and the
advertiser has determined that you are exactly the right kind of guy they want
to reach, it doesn't make a difference if they reach you through a site like
Comedy Central versus "Tim's Home Page."
Cyberstock: Let's talk about the underlying business model of ad networks. You
just told me that you think over the next few years that on a percentage basis,
the amount of ad dollars going to the portals will decline. Well, if that's the
case, if I'm a marquee site starting to feel pricing pressures, one of the first
moves I might make to tighten my belt is attempt to bring my ad sales in-house,
and cut a 24/7 or DoubleClick out of the picture.
Moore: Basically, unless you're a top 25 site, the chances of you being able to
do as good a job as us in selling advertising on your site are very slim. The
(online) advertising marketplace is extremely fragmented compared to network
television or cable TV, where you can open an office in New York, Chicago, L.A.,
and Detroit and have 85% of the marketplace covered. We've got 13 offices here
in the U.S. and we're getting money out of all of those markets. San Francisco
is a big market; so is Dallas and Atlanta, which are places that traditional
advertising wasn't placed out of, and are now hotbeds for Internet advertising.
So if you're not a top 25 site, the amount of revenue that you'll be able to
generate will most likely not cover your costs of a sales force and
infrastructure. Now, when you take a client like AT&T or Reuters, these folks
don't want to be in the media business. Reuters has historically always gotten
a fee for the editorial that it provides, and they've never sold advertising.
It's the same thing with AT&T. They don't sell advertising. So you do get some
of the bigger sites that are in the top 25 that strategically are not going to
do it. Now, after you get by those companies that strategically don't want to
be in that business, then a top 25 site, like an AltaVista, for instance, is
ultimately going to go in-house.
Cyberstock: Is it your belief, then, that AltaVista will stop using DoubleClick
for some of its ad sales functions?
Moore: Well, I know they signed a three-year renewal, and as part of that
agreement, AltaVista has the right to start staffing up with some of their own
people. So we'll see what's going to happen.
Cyberstock: Well, speaking of the competition, I'm sure you're well aware of
the premium that DoubleClick has received for being the top player in this
space. Can you realistically reach number one?
Moore: Well, we certainly think that we can be the number one player. I think
you're seeing a lot of moves on our behalf that will certainly close the gap
between DoubleClick and us. We're not content to be number two. Can we have
tremendous business being number two? Absolutely. But we've had a database
marketing strategy in place ever since we formed the company, which we think is
a better strategy than that which they're trying to catch up with in terms of
Abacus.
Cyberstock: Did the Abacus purchase really surprise you?
Moore: No. I think they recognized that they were behind in their database
strategy. Abacus was a way to catch up.
Cyberstock: Are they still 8-12 months away from being able to apply this
offline database to the online advertising world, in your opinion?
Moore: Well, that's what the analysts have been saying, and it's probably true,
although they are certainly smart folks, and they'll figure it out. I figure
we've got a 9- to 12-month lead on them in that regard. Everyone is saying now
that DoubleClick has to buy an e-mail company. If you look at what we've done
with e-mail, overnight we have become the largest opt-in e-mail database in the
industry.
Cyberstock: What are 24/7's plans for the ad-serving business in terms of
jumping into doing this yourself, instead of using a third-party vendor like
AdForce (ADFC)?
Moore: Well, we've been on a development path with our database to be able to
actually target in the way I described earlier. That development effort on the
database has been under way since the fourth quarter of last year, and it will
be about a year when we're totally operational with that. We're going to be
ready to start targeting by the beginning of next year. Now, as far as AdForce
is concerned, I've told those guys that if they can use their ad serving
solution - which we're using today - to mine our database to put "the right ad
in front of the right person at the right time," that we'd be interested in
continuing the relationship. But as of this moment, I don't have a deal with
them to do that, so I've got to be in a position?
Cyberstock: To go your own route, if that's what you need to do.
Moore: That's exactly right.
Cyberstock: Beyond building up your opt-in e-mail lists, you've made a strong
push internationally with opening a slew of sales offices overseas. In
addition, you're a minority shareholder in recent Net IPO China.com (CHINA),
which some analysts have called simply a propaganda vehicle for the Chinese
government. What initially attracted you to China.com?
Moore: We see Asia as four to five years behind the U.S., and China being
significantly behind that. From our perspective, China.com has top-notch people
associated with it, particularly their CEO, Peter Yip, and what we did with them
is put a franchise agreement in place that goes beyond just the equity we own to
run 24/7 Media Asia. In that unit, we share revenue with them, we provide
consulting to them, and overall advice in terms of how to run the network over
there. We also have a cross-selling agreement so that if we run into an
advertiser over here that wants to advertise in Asia, we'll sell inventory on
their behalf, and vice versa.
COMMENTS: We want to hear from you. Please email any comments or feedback to
the Editor of the CyberStock Investor Report, Matt Ragas, at
matt@ragingbull.com. Matt is available to the press for comments on Internet
stocks upon request.
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