NETG Negative Forbes Article
Internet physics
NETGRAVITY, the San Mateo, Calif. vendor of Internet advertising software and services, may soon get a painful lesson in Newton's law. The company (NASD: NETG) went public a year ago at $10 and has tripled, giving it a market capitalization of $530 million. Losing money ($11 million in 1998 on sales of $11 million) is not such a bad thing for an Internet company, but losing clients is.
In 1996 NetGravity was one of the first to offer advertising server software—allowing Web sites to deliver, or "serve," ads and track clicks on them. NetGravity won such clients as Time Inc. New Media and CNN Interactive. But the system is costly: up to $100,000, plus the expense of hiring a full-time staff to manage it.
So in late 1997 companies like AdForce and DoubleClick began outsourcing the work. DoubleClick has stolen away such NetGravity clients as Ivillage and MiningCo.com and is negotiating with 55 of NetGravity's 360 remaining customers. NetGravity launched its own outsourcing service last fall to compete, but DoubleClick has an attractive proposition: Switch and it will partially reimburse the money already paid to NetGravity. Customers of its core software business, meanwhile, complain that its software doesn't scale well enough to accommodate increased traffic. There it is losing business to competitor Real Media, which has stolen NetGravity clients like USAToday.com and salon.com.
NetGravity cannot afford to lose business. Overhead has climbed 63% in the past year and R&D costs have climbed 97%. Sales in the core software business, which accounted for 89% of its first-quarter revenues, were off slightly, to $4.1 million. The only bright spot is the new outsourcing business, which accounted for the rest.
If you want to keep tabs on NetGravity's clients, position your cursor over a Web site ad and look in the lower left corner of your browser for a name. A NetGravity server will show as "event.ng."
NetGravity insiders aren't waiting to see if outsourcing will save the company. Chief technology officer Thomas Shields quit six months ago. Cofounder John Danner has sold 300,000 shares since January and major shareholder Ziff Asset Management has filed to sell 1.8 million shares. Short this stock.
–LEIGH GALLAGHER
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