Nice mention in the Cowen Internet Observer:
----------- The Cowen Internet Observer ------------
Cowen & Company
Jamie Kiggen (kiggenj@cowen.com) 617.946.3802
Tim Albright (albright@cowen.com) 212.495.7769
Scott Reamer (reamers@cowen.com) 617.790.3128
The Internet Observer, 04.03.98
Cowen Internet Research
Out Of Egypt
Freedom is difficult to define and even harder to achieve. There is freedom from servitude or confinement, freedom from bias, freedom from responsibility, freedom from the past. There is liberty and there is license, just as there is honor and dishonor. But if (to paraphrase some ancient) the secret to happiness is uncorrupted freedom and the secret to such freedom a brave heart, then it's pretty essential to figure out what people are most deeply comprised of before assuming they'll aid in your salvation. After all, you don't want to be surrounded by a bunch of cowards with the promised land a mere parting sea away.
Direct marketers don't necessarily need such a deep level of knowledge about a given population (now that's a segue), but they need more information than they're currently getting. Here, of course, is where the Internet makes its entrance. The whole value proposition of the Internet from a consumer marketing standpoint is the medium's enablement of one-to-one marketing. Each individual network connection is a conduit whereby an enormous amount of consumer information can potentially be transmitted to merchandisers, after which targeted solicitations can be sent back in return, all in an environment that permits a transaction to be executed as well.
A large database of customers and the ability and willingness to mine and act on that database are the key ingredients of Internet marketing (we'll leave a discussion of the complex consumer privacy issues surrounding this business for a separate Observer). Other important components include dynamic information retrieval and filtering capabilities, instantaneous predictive modeling, and a large backlog of solicitations. A company like American Express (AXP-$97) has a very considerable database asset, yet is wary of exposing its customer database to Internet solicitations, while companies like Excite (XCIT-$56-Buy) or DoubleClick (DCLK-$37-Strong Buy) have developed their own database of customers for the sole purpose of Internet-based solicitation. Along with Excite and DoubleClick, we believe that Cendant (CD-$40-Buy) and Yahoo! (YHOO-$103-Strong Buy) are successfully exploiting this opportunity, and that AOL (AOL-$74-Strong Buy) stands to benefit immensely, too.
As always, we need to ask: how big can it be? Price Waterhouse estimates the value of consumer purchases via the Internet will increase nearly 1,800 percent between 1997 and 2002, from $5 billion to $94 billion. Naturally, this sort of consumer commerce activity inspires companies to turn on the marketing spigot. Internet advertising, around $900 million in 1997, is expected grow to $7.7 billion in 2002, according to Jupiter Communications. Separately, Jupiter believes that direct marketing is expected to grow to $1.3 billion on the Internet by the year 2002. The lines blur, of course, where advertising, direct marketing and retailing bump up against each other, but Forrester Research believes that by the year 2000, 75% of all marketing dollars spent on the Internet will be direct marketing oriented. Additionally, the size of the online classifieds market is projected to be between $1.5 billion (Forrester) and $2.0 billion (Jupiter) by the year 2002. It is our belief that Internet database marketing is the mortar between each one of these revenue bricks.
DoubleClick is the purest investment play on Internet database marketing. As the dominant advertising network on the Internet, the company aggregates quality content, sells the ad inventory and manages the ad-serving and reporting process for content sites. During December, DoubleClick managed 7000 Internet advertisements for 600 different advertisers and placed these ads on an aggregate of 350 Web sites, in the process serving around 30 million impressions per day. DoubleClick's robust ad serving technology differentiates it from all other ad sales networks, enabling it to serve over 1000 targeted ads across its network each second. This technology (called DART) is in essence dynamic database marketing. It uses a hierarchical targeting process that dynamically considers the usage history (and thus interests) of the viewer, the site the user is on, the user's geographical location, and various demographic and psychographic characteristics of the user. The value of its targeting capabilities is tied to the database of user information that DoubleClick possesses. This database of user information is built page-view by page-view, based on both smart cookie technology and site usage history, and is expanded by DoubleClick's immense traffic.
The DART serving technology, including the underlying customer database, has also been turned into a standalone product. With customers such as NBC, The Wall Street Journal, and RealNetworks, the DART product adheres to a service model rather than a per-seat software model, whereby DoubleClick gets paid on a per-impression-served basis (around $1.00 per thousand). Additionally (and separate from DART), DoubleClick provides an a la carte pricing option for advertisers to complement its database marketing capabilities called DoubleClick Direct. This provides direct marketers with performance-based pricing, whereby they pay on a per-click, per-lead or per-sale basis. Driving this cost-per-action program is DoubleClick's "Darwin" database technology, which is an iterative, response-focused collaborative filter that utilizes the information gathered on the user and on the solicitation. Naturally, DoubleClick participates in the revenue upside of a DoubleClick Direct program.
Excite has aggressively expanded its one-to-one marketing capability to improve its network's "effective CPM" and to increase the performance-based revenue the company receives from long- term commerce deals. Excite has built a substantial set of data about its network traffic by capturing the individual browsing client's usage characteristics, and it has added robust Internet database marketing capabilities into its network with its purchase of MatchLogic. MatchLogic provides a deep database of consumer information and long-term direct marketing relationships with Fortune 50 companies like GM, AT&T and agencies such as Grey Advertising and DDB Needham. MatchLogic uses a cookie-based usage tracking tool developed by private company Aptex to capture every online footprint in its consumer files. Excite, which captures data on the 4 million unique visits it receives daily, should be able to provide MatchLogic with an avalanche of incremental customer data, especially that sourced from Excite's personalized My Channel. Since an increasing portion of Excite's revenue is coming from commerce-based deals wherein the company captures upside from transaction royalties, the improved consumer response rates that Excite should be able to achieve in conjunction with MatchLogic will have a direct impact on Excite's bottom line.
Cendant boasts the most extensive database of consumer purchase history that we've come across. CUC's merger with HFS occurred because of the potential marketing efficiencies generated by pairing CUC's membership-based services (boasting 68 million members) with HFS' 100 million annual customer contacts. The CUC side of the business, by in effect owning customers via memberships, knows precisely what products and services their members are buying; the HFS side of the business, which does not have the same degree of tie-in with its customers, does, however, know which customers transact with which of its businesses. Thus far, Cendant has principally focused on the Internet as a source of customers (and courtesy of AOL will add almost a million members in six months). However, with the launch of netMarket, Coldwellbanker.com and rent.net, Cendant has begun to extend its Internet database marketing skills toward generating transactions. And guess what? It's working, with netMarket generating $90 million in purchases per month, much of that via direct marketing offers at the site. So Cendant is learning quickly how to database market on the Internet. Given the fact that this company became a $40 billion monster via traditional database marketing, look out.
Certainly we can't talk about this opportunity (or any other opportunity) without mentioning both AOL and Yahoo!. The AOL database has a significant differentiating point from that of its Internet brethren (aside from the fact that it's larger), which is that AOL has the credit card number of each name in it's database. Clearly this is a tremendous commerce advantage, and AOL is doing a tremendous job of exploiting it (witness the Tel-Save deal). However, AOL needs to more aggressively develop its one-to-one marketing capability (we can hear our hotline from Virginia ringing now). Perhaps it's because AOL's advertising partners have signed on for a mass media type of marketing campaign, or maybe it's that AOL is continuing to develop the enabling technology, but whatever the reason, real estate sponsorships and pop-up screens are clearly the preferred form of solicitation, and they don't change from member to member. We're sure AOL recognizes this, and they'll eventually be a direct marketing player; like Microsoft, they may come late to a party, but they always make a big entrance. May we suggest that they could at least in part accomplish this by buying DoubleClick's DART service for AOL.com?
Yahoo! has quietly incorporated several components of database marketing into its mix. The first element resembles both Excite's and DoubleClick's targeted ad serving. Yahoo!'s internally serves ads dynamically selected based on the usage history derived from its pool of more than 80 million page-views per day, and it also boasts approximately 3 million registered My Yahoo! users, by far the largest registration pool achieved by any single free Internet site or network. A final component to Yahoo!'s database marketing capability exists in a relationship with a private company, Junglee (pronounced jungle-e), whose motto is, appropriately, "The Internet is the Database". Junglee has developed technology that pools a variety of data into one virtual database, in order to optimize the search and retrieval process. This serves two particularly well-suited fields of Internet commerce activity: Internet classifieds and price competitive shopping agents. Yahoo!, of course, has a significant presence in both of these categories. Yahoo! classifieds is by far the largest classified network, while the co-branded Yahoo!-Visa store has been the subject of significant investment. Junglee provides Yahoo! shopping agent technology similar to that acquired by Excite in the NetBot deal, and it allows consumers to mine the vast Internet database of merchandise.
Zealots think of the Internet as a balm for almost any ailment. We know there are some things the Internet just can't fix, some shackles it can't unlock. But while the Internet may not be a pillar of light for all mankind, it is showing direct marketers the way to a new and valuable shore.
Cowen & Company makes a market in MSFT, YHOO, XCIT, DCLK, AMZN, and SPLN securities.
Cowen & Company co-managed an offering of AOL and DCLK securities within the last three years.
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The Internet Observer, a biweekly research product of the Cowen Internet Research team, is distributed through email, First Call and fax. To be included on the distribution list simply email "infomail@cowen.com" with the words "subscribe observer" in the body of the text, or contact your Cowen salesperson.
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Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. The information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. Cowen & Company, or one or more of its partners, or employees, including the writer of this report, may have a position in any of the securities discussed herein. The contents and appearance of this report are Copyright and Trademark Cowen & Company 1998. All rights reserved. |
