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DoubleClick Sees Commercial Potential on Web

March 26, 1998|DIANE SEO

Hoping to drive traffic to its Web site on Valentine's Day, Heineken hired DoubleClick, an online advertising company, to place an attention-getting ad on Internet sites not frequented by underage drinkers.

Relying on demographic information it has about Web sites, DoubleClick ran the ad--an animated beating heart inviting users to send an electronic card to loved ones--on sites with mostly adult audiences. The result: 15,000 of Heineken's Valentine's Day cards were e-mailed in one week.

That's the sort of specialized service that has helped make New York-based DoubleClick a leader in Internet advertising. And while questions remain about the viability of online advertising, DoubleClick is well-positioned should the industry become the multibillion-dollar business that many predict it will.

Founded only two years ago, DoubleClick's prospects are tempting investors. The company is not profitable, but the stock market has made DoubleClick one of the hot initial public offerings of the year. Its shares, which went public last month at $17, closed Wednesday at $32.13 in Nasdaq trading.

"There is a lot of optimism due to the growth of the Internet," said Ryan Jacob, research director at IPO Value Monitor and a portfolio manager for an Internet-oriented mutual fund. "And people believe Internet advertising still has a ways to go."

But because DoubleClick is venturing into mostly uncharted territory, risks remain. More than 60% of its revenue came from ads placed with four Web publishers, leaving it vulnerable to dramatic drops in business. New competitors and evolving technology also require the company to expand aggressively into new markets, requiring substantial investment.

The firm has offices in eight countries in North America, Europe, Australia and Asia. Between 1996 and 1997, DoubleClick's revenue grew from $6.5 million to $30.6 million, while its client list surged to 1,100 from 250. Analysts expect the company's revenue to reach $50 million this year, although profit is not forecast until 1999 at soonest.

"To get there first is an important part of our strategy," said DoubleClick Chief Executive Kevin O'Connor. "We're forced to become a global company."

The company's core service involves delivering, selling and tracking advertising on more than 60 high-traffic Web sites on the DoubleClick Network. Many of DoubleClick's clients are advertisers like Heineken that don't want to take on the task of finding appropriate Web sites for their ads.

DoubleClick also licenses its technology to more than 350 Web publishers.

One of the company's selling points is its technology known as DART ("dynamic advertising reporting and marketing"), which identifies characteristics of each viewer and taps into that information to deliver appropriate ads. DoubleClick also uses "cookies," or digital files that record your online travels, to determine how often an ad should be shown to a viewer.

To alert college students about IBM's campus recruiting visits, DoubleClick tailored Internet banner ads to reach students at specific colleges. Ad banners such as "There is life after Boston College. Click to see why" garnered relatively high "click-through" rates between 5% and 30%.

When O'Connor, 36, incorporated the company in January 1996, Internet advertising was in its infancy and many companies were reluctant to divert ad dollars to new media. But the chief executive believed that the Internet was destined to become a "massive worldwide trend."

Last year, roughly half a billion dollars was spent on online advertising. By 2002, that figure is expected to rise to $8.1 billion as more people come online, according to Forrester Research. Yet there are questions as to whether the biggest ad spenders will ever devote a significant portion of their budgets to the Internet.

The destiny of DoubleClick, which competes with search engines such as Yahoo, online services such as America Online and online advertising networks such as SoftBank, is hardly certain. In 1996, the company posted a loss of $3.2 million. That increased to $8.4 million last year despite its substantial revenue gain, because the company has been expanding quickly.

But like most other companies in the highly competitive and rapidly evolving Internet sector, profitability is not its primary short-term goal.

"It's not a deterrent that the company is not yet profitable," said Jacob of the IPO Monitor. "Their objective is to gain in size, and they're in the early stages of development."

Analysts believes a more pressing concern is that 45% of DoubleClick's revenue comes from ads delivered by the search engine Alta Vista, a subsidiary of Digital Equipment Corp., which plans to merge with Compaq Computer Corp.

Jim Nail, a senior analyst with Forrester, believes DoubleClick might become a victim of the Internet's success, because the most successful Web publishers might decide that it is more cost-effective to set up in-house sales forces to handle their advertising.

Still, O'Connor believes the industry will eventually provide countless new sources of revenue.

"The Internet is the biggest trend to ever hit the world," he said. "The Internet is a pipe to the home and the pipes are getting bigger. As this happens, advertising becomes bigger."

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