European Advertising Market Emerging
AOL Bertelsmann Europe ( 2.2mm members) signed a strategically
important new commerce deal
last week, announcing that it had reached a multi-year $13 million
agreement with Books On-line
(BOL), the international electronic commerce business of Bertelsmann,
to make BOL the exclusive
bookseller for the AOL and CompuServe services in Europe.
This deal is important insofar as it represents one of the largest
Internet commerce and advertising
deals in Europe to date. Though the growth of the Internet
Internationally has always lagged the U.S.
(by about 18+ months), this deal signals an important first step in
Europe's maturation and
understanding of the Internet as an advertising medium. We recall
vividly how Tel-Save's deal with
AOL a few years back kick started the Street's understanding of how big
a revenue opportunity
advertising could be to these Internet companies. Add a sizable
European component to the
advertising and commerce opportunity for the AOLs of the world, and the
visibility of this high-
margin revenue stream increases nicely.
Amazon (AMZN)
AMZN Opens Not One, But Two, New Stores
Amazon "opened" two new stores this week in anticipation of what should
be a strong online
shopping holiday season. In addition to the much-anticipated video
store (which debuts a full two
months ahead of our optimistic Q1:99 expectation), Amazon also opened a
Holiday Gift store, which
features consumer electronics, toys, games, and other holiday-themed
gift items. We had already
been expecting (and proselytizing), of course, that Amazon would
increase the breadth of their
offerings, particularly with videos.
The new news here is the timing of these roll-outs, which, because it's
before the holiday season,
suggest that they'll have exposure to holiday spending, which could be
huge (see The Week above).
The really new news is the holiday gift store, which none of us on the
sell-side had been modeling,
and should be entirely incremental to the top line. In sum, none of
the potential revenue from either
videos or holiday gifts are in our model; if they execute half as well
against these categories as they
have against music, well, you can understand why we (and the stock)
have reacted so positively.
It's important to recall that something around $20 billion per year are
spent on video sales off line
worldwide, which makes Amazon's market opportunity here smaller than
books ($84 billion
worldwide) and music ($38 billion worldwide), but no less impressive
with respect to the sheer
growth to be extracted from this market's move online. Of course, the
pace and timing of this
market's move toward on-line sales will determine the ultimate size of
Amazon's video opportunity,
but we're hard pressed to see this as anything but a very large (and
incremental) market that is
Amazon's to lose. As importantly (perhaps more importantly), the
Holiday Gift store on Amazon
speaks directly to the Amazon-as-commerce-portal thesis that we have
been tracking (and pushing)
for some time. We put it this way in our initiating coverage piece:
"It is increasingly becoming clear that Amazon has very little
intention of merely being a bookseller online,
but rather being a web retailer of much bigger dimension and with much
more presence in vertical product
categories that extend well beyond books. Amazon's entry into music and
videos is but the first step toward
this commerce portal evolution."
We were as surprised as anyone about Amazon's aggressiveness in opening
their holiday gift store;
whereas we would have thought a more deliberate process of rolling out
new vertical categories
would have prevailed, it is clear that Amazon is not only thinking well
beyond "the first step", but is
taking actions well beyond the first step as well.
At this point there can be little doubt in skeptics' minds that Amazon
is undertaking this e-commerce
portal strategy in earnest; perhaps the only thing we can all debate
anymore is (1) how successful will
they be at executing against this strategy and, (2) how much should we
pay for the entity. The too-
simple answers to these questions are (1) extremely, and (2) a lot.
Though we provide plenty more
back-up to these answers in our initiating coverage piece (please call
or write for a copy), Amazon
has a skill set that sets them apart from other retailers (offline or
online) that should accord them a
marked different (read: greater) valuation than either of these
entities long term.
A more subtle point to observe in Amazon's roll-out of the holiday gift
store (and all subsequent
stores - perhaps a Valentines Gift store, an Easter Gift store, etc.?)
is the importance of cross
promotion to on-line retailing. It, literally, changes, the game. We
like to state with frequency that
the Internet, as a medium for commerce, advertising, and entertainment,
is unique to our collective
experience; via no other channel is the retailing experience completely
controllable. Cross-
promotion, that idea of bundling products together with similar
attributes, function, or taste,
becomes a series of infinite, dynamic possibilities, rather than
whatever a store manager deems to be
"right" for the week, month, or season. Believe us when we state that
this changes everything.
We encourage investors to go to the new holiday gifts section on Amazon
and see how well AMZN
understands this. Promoted with their Leatherman tool (a favorite of
ours) is a book about the great
outdoors, about fly fishing, or about Outdoor magazine's 20 year
retrospective. Imagine the cost and
difficulty of doing the same thing in a brick-and-mortar store, but
Amazon can do this in any possible
combination and in untold different ways (a skill set they've been more
than able to pick up over the
last few quarters; e.g. see their music execution). In our minds, this
fundamentally changes the
dynamics of shopping; the benefits will become increasingly clear in
Amazon's top-line results in
time (probably less time than we think).
We have been saying for some time that Amazon's skill set and brand
power should allow them to
cross sell products into their customer base with relative ease. With
video retailing, the concept is
relatively easy to picture (and execute on): the vast majority of book
buyers are also music buyers
and video buyers who transact with a similar purchase frequency and are
demographically similar.
This makes Amazon's marketing pitch a pretty simple extension of
current programs. Extend this to
other categories (making sure that Amazon's customers want these
categories, as management has
made clear that they do), and you start to get the sense of why we
remain so optimistic about the
story and the stock. Getting customers in the door is the hard part, as
any retailer will tell you;
monetizing them is not much easier off-line. On-line, however, things
like one-click ordering, Gift-
Click, and Gift Matcher give Amazon an enormous advantage over their
off-line counterparts. If you
have any optimism for holiday sales this year off-line, then there is
every reason to be wildly bullish
about online holiday sales this year. And Amazon will lead the way.
Amazon Announces A 3-1 Stock Split
In a move that will, no doubt help make the security more efficient in
its daily trading, Amazon
announced a 3 for 1 split that will go into effect on January 4th. That
should increase the float from
about 18 million shares to something north of 50 million, making the
stock, theoretically, less
volatile. That said, as we write this, Amazon's stock is up 15 points
on the news. More on this later in
The Capitalist.
Yahoo! (YHOO)
Yahoo! launched Yahoo! Shopping, which enables consumers to locate,
compare and buy something
north of two million products from 2,700 online stores; add items to a
single shopping cart; make
purchases in one easy check out; and ship orders to multiple locations.
Products range across 14
categories, including apparel, books, electronics, music, and movies.
Participating merchants include
FAO Schwarz, Egghead.com, Inc., Tower Records, Dean & DeLuca, The
Company Store, FTD, Inc.,
Service Merchandise Co., Big Dog Sportswear, Copeland's Sports,
Frederick's of Hollywood, Tweeds
and The Vermont Teddy Bear Company, among others.
DoubleClick (DCLK)
DoubleClick filed a registration statement with the Securities and
Exchange Commission for a
proposed public offering of 2.5 million common shares, all primary,
suggesting that DCLk could raise
someone around $75-80 million (DCLK's current cash balance is about $35
million). The roadshow
is expected to wrap up some time around mid-December.
Excite (XCIT)
We had the pleasure of sitting down with Bob Hood, Excite's CFO, last
week on a trip through San
Francisco. It sounded to us like Q4 business is going well, though we
think the more interesting
conclusion to draw had to do with MatchLogic; we came away with a much
better understanding and
appreciation for the importance of MatchLogic to the Excite story, and,
as importantly, how it plays
into Excite's idea of monetizing their traffic stream, an idea that
will grow more important as Excite
matures over the next several quarters.
An ongoing debate in the portal space has been the relative importance
of reach to advertisers and
shareholders. Historically (see The Internet Capitalist, 10/23/98), we
have stressed that advertisers are
seeking not only breadth (reach), but also depth (usage, activity) in
their on-line media buys. As well,
we, like the rest of the Street, have been frustrated by a lack of hard
data that gives us a sense of how
valuable a portal company's inventory is; surely reach is key, but
other metrics, like targetability,
must also matter.
To this end, Excite has positioned itself, thanks to MatchLogic, to be
able to better target it's
inventory, and, theoretically, better monetize the traffic stream.
Match does this through various
direct marketing skills, including a robust data mining effort; Match
has collected more than 45
million unique Internet user profiles.
Though the Match business is doing well on a stand-alone basis ($9.2mm
in revs in Q3), the real
value in the Match asset will be created when the advertising community
at large starts to pay greater
attention to targeting. In theory, Excite will be ready, and we're
already starting to see metrics that
suggest Excite is generating greater dollars per page view than their
competitors. Right now, the
differences aren't significant; over time, as the Internet matures as a
medium for advertising and
targetability becomes as important as "reach", Excite could be well
positioned.
On the news front, Excite, like AOL and Yahoo!, has been busy signing
advertising and commerce
deals and making on-line shopping announcements of its own ahead of the
holiday season:
In a visible deal struck this week, Excite is partnering with Bank One,
the fifth largest bank in the
U.S., to create a full-service financial center for Excite users. With
performance incentives, the
agreement has the potential to be worth more than $125 million to
Excite, with a minimum of $8
million to Excite in the first year. The three year deal is
bounty-based (that is, a sizable portion of the
$125mm potential rests on Excite delivering customers to Bank One), and
is expected to launch in
the first half of 1999.
In another finance-related deal, Excite also entered into a partnership
with Schwab to offer
investment education on Excite's money and investing channel
programmed by Intuit's
Quicken.com. The new content is anticipated to appear in December 1998
and we hear that the deal
is standard fare: $20 or so million over 2 years. |
