NEW YORK (Dow Jones)--Encouraged by signs of growth in on-line advertising revenue, investors have waded back into Internet stocks this month. Several Internet-related companies are trading at prices not seen in six months or more.
That's surprising, because the very stock that is leading the charge, Yahoo! Inc. (YHOO), was a main culprit in the first washout.
Yahoo, remember, went public amid considerable fanfare on April 12 and peaked at 43 that day, and it hasn't come near that level since. Monday's intraday high of 37 3/8 was the highest point reached since then.
Investors have renewed their optimism because earnings reports issued by Yahoo and C/Net Inc. (CNWK) indicate that advertising is beginning to take hold on-line.
''There's a lot of evidence'' that on-line advertising is on the rise, said Jamie Kiggen, an analyst at Cowen & Co.
Yahoo, a Santa Clara, Calif., search-engine provider, is showing brisk advertising growth, Kiggen said, as are San Francisco on-line publisher C/Net, on-line service America Online Inc. (AOL), and others.
''Granted, it's off of a small base, but it's dramatic (growth) and I think it's going to get a lot bigger,'' Kiggen said.
What's caught the eye of Kiggen and other onlookers are the activities of traditional advertisers - consumer products companies that spend hundreds of millions of dollars or more on traditional advertising media.
Kiggen noted that some of the top traditional advertisers in the U.S. - Procter & Gamble Co. (PG), Ford Motor Co. (F) and Walt Disney Co. (DIS) - purchased banner ads from Yahoo in the latest quarter.
''We expect to see a significant increase in Web advertising revenue throughout 1997 as major nontechnology advertisers, who tested the Internet in 1996, are expected to allocate material budgets for the Web,'' said Keith Benjamin, an analyst at Robertson Stephens & Co., in a recent research report. On-line subscribers have reached ''critical mass,'' he said.
Benjamin expects Web ad spending to grow to about $500 million in 1997 and more than $2 billion by 2000 - a 10-fold rise from an estimated $200 million in 1996. Though analysts are predicting large growth, investors who expect on-line ad spending to ramp quickly may be disappointed.
''People are considering higher (on-line advertising) budgets for 1997, and it is something of high interest to many - not most - of our members,'' said Robin Webster, senior vice president of the Association of National Advertisers Inc., whose membership includes the nation's largest advertisers. ''But it's still a very small percentage of their budgets, and it's going to be a pretty small percentage for some time.''
Web advertising is rising fast, with the fourth quarter up 87% over the previous quarter, at an annual run rate of $288 million, according to a market-analysis report by Simba Information Inc. of Stamford, Conn.
But revenue is still well below levels in other mass media such as television, the printed press or radio.
What's more, the biggest Internet advertisers so far have been technology companies like Microsoft Corp. (MSFT) that have a stake in the Internet's success and whose customers are more likely to be found on-line.
Companies selling traditional consumer products have been slower to commit large-scale dollars. Though many companies have invested heavily in their own Web sites, they haven't yet seen the need to advertise extensively elsewhere on the Web.
''The Internet as an advertising medium is sort of a big formal ball,'' with all of the big advertisers, service providers and content providers in attendance, said Eric Oldfield, an account executive with Wolff New Media LLC, a private on-line publisher in New York. ''What's happening is all the Internet companies are dancing with each other. All the big advertising spenders - traditional advertisers - are standing on the sideline, waiting to see what will happen.''
That could create problems for Yahoo and other search engines like Excite Inc. (XCIT), Lycos Inc. (LCOS) and Infoseek Corp. (SEEK), Web publishers like C/Net, and on-line service companies like America Online and others, each of which to some degree has based its strategy on the development of advertising revenue.
The Internet ''is something that is very important to us, but we're still learning, we're experimenting,'' said Kristen Hall, a spokeswoman for Procter & Gamble, which spends an estimated $3 billion annually on advertising worldwide. ''At this time we have not created dramatic shifts in spending among currently available media.''
The view is echoed by executives at other large companies, including Ford, Toyota Motor Corp. (TOYOY) and Kraft Foods Inc., whose advertising budgets each can be measured in the hundreds of millions of dollars.
''The amount of advertising we have devoted to Internet activities is relatively small when compared with our overall advertising budget,'' said Patricia Shafer, director of communications for Kraft, a unit of Philip Morris Cos. (MO).
Ford still spends more on its own Web site than on advertising on other sites, said Larry Dale, electronic marketing specialist for North American automobile operations. He expects the balance to shift by the end of the year. Analysts agree that the Internet eventually will become a mass medium, joining broadcast and cable television, newspapers, magazines and the like.
''On-line will become an extraordinarily powerful vehicle for advertising,'' said David Simons, director of Digital Video Investments in New York. ''Unfortunately, not nearly in time for the business plans of many companies that assumed it was going to happen in 1997.''
In December, Morgan Stanley & Co. analyst Mary Meeker issued ''The Internet Advertising Report,'' a followup to the widely read ''Internet Report,'' issued last February.
Meeker's predictions for the next 12 to 18 months include: ''Several major Web publishers go out of business (or are acquired at low prices) due to high cash burn. Business models that work on the Web remain minorities, and Web publishers continue to scramble for new types of Internet revenue streams.''
Web publishers need advertising revenue ''in some cases yesterday,'' said Simons.
Simons considers America Online one of the most vulnerable players. The company's recent shift to a flat-rate pricing plan makes future profits dependent on new revenue from advertising, transaction fees and other sources.
Simons said advertising revenue also is ''vitally important'' to Lycos and Excite, as well as C/Net.
''These companies are burning cash at a furious rate,'' as much as 10% to 20% a quarter, Simons said. ''At some point, unless this advertising revenue materializes, these companies have to find some additional financing.''
Yahoo, by posting a small profit in the fourth quarter, has temporarily put to rest questions about its cash flow. Yahoo's $19 million in ad revenue was the highest of all Web sites in 1996, according to market-research firm Simba.
That profit is important because experts believe the top Web publishers will garner a larger and larger share of Web advertising. Companies that can't keep up may have trouble surviving.
America Online, despite its recent problems, is also in a good position to attract advertisers, according to some onlookers. Because it is an on-line service, American Online isn't usually included in Web ad surveys.
America Online doesn't break out its advertising, but by mid-December, the Dulles, Va., company had eight advertisers signed to $1 million-a-year-plus campaigns, said Myer Berlow, vice president for advertising. Three contracts were up and running - for footwear-maker Reebok International Ltd. (RBK), HFS Inc.'s (HFS) Century 21 unit and American Express Co. (AXP).
Tuesday, Barnes & Noble Inc. (BKS) announced it will begin selling books exclusively through America Online, another powerhouse marketing arrangement.
Excite's senior vice president of marketing, Bill White, said in December that the company expects to sign some multimillion-dollar, long-term contracts by early February.
''We're exceeding our expectations,'' he said. ''The evidence suggests that there are major nontechnology advertisers in the wings waiting to make large commitments for 1997,'' he said. Given spending choices in other media, the Internet still doesn't make sense for a lot of advertisers, said Scott Grenz, group media director for J. Walter Thompson's New York office, whose client list includes Kellogg Co. (K), Unilever PLC (UL) and Warner-Lambert Co. (WLA).
''It's still about communicating your brand and that relevant message to your key prospects,'' Grenz said. ''If your key prospects are not Internet users, then why be there?''
Toyota, the largest consumer-products advertiser on the Web in the third quarter of 1996, according to Jupiter Communications Inc., spends more than 1% of its estimated $500 million U.S. advertising budget on the Web, said James Pisz, national direct response manager for Toyota Motor Sales USA.
Though Toyota has had a good response to its Web advertising efforts, Pisz said, he doesn't see the Web accounting for more than 2% of ad spending in the foreseeable future.
''We're trying to find the balance right now as to how much advertising we need and where we need to go,'' Pisz said. ''I think we are close to finding that out.''
One of the barriers to higher participation by consumer-products companies is simply the speed at which the technology changes. As new technologies emerge, big advertisers need new ways to accurately measure the return on their investments, said Webster of the advertisers group.
That takes time. For example, a coalition of advertisers and ad agencies, called Coalition of Advertising Supported Information and Entertainment, or Casie, only recently came out with new guidelines for banner advertising, currently the norm on the Internet.
So-called ''push'' techologies, which will broadcast information to the personal computer, will require new measurements for advertising.
Casie itself was formed in 1994, when interactive television was expected to be the big new medium. When the Internet began to emerge, the group shifted its efforts there.
''Today it's, 'Move into the Internet.' Tomorrow it could be somewhere else. We'll be there,'' Webster said.
REPEAT IT'S HARD TO BEAT: Yahoo's $19 million in ad revenue was the highest of all Web sites in 1996, according to market-research firm Simba.
Greg |
