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The Check is in the Email, DoubleClick Promises

In advertising, the Web is on the ebb. Will email fail, too?

That's a question worth posing to Internet advertising firm DoubleClick (DCLK), which last week staked its future to email marketing by forecasting fourfold revenue growth in that business through next year.

There's no doubt that DoubleClick is wise to expand beyond Internet ad sales, which are expected to fall 20% in the third quarter from already reduced second-quarter levels. The email marketing business will likely expand, and DoubleClick could grow simply by consolidating the highly fragmented sector, as it did in ad sales.

Still, considering how sharply Net ad sales have fallen compared with how much they were expected to rise, it may be a stretch to see email as DoubleClick's salvation. One question is how profitable the email business will be: Though an email firm that DoubleClick is acquiring had good profit margins in the first quarter of 2001, the company wasn't expecting to be cash-flow positive on a stand-alone basis until the end of the year. Until DoubleClick can show its move into email is paying off, investors will be skeptical of its plan.

Running the Numbers

To get a sense of whether DoubleClick's reality check is in the email, let's look at some of the numbers that DoubleClick disclosed last week.

DoubleClick forecast that revenue from its email marketing business will jump to $100 million for 2002 from $6 million last quarter. Any revenue growth DoubleClick might have next year will owe a great deal to the email business: Analysts surveyed by Thomson Financial/First Call expect DoubleClick's sales to rise from $426 million for 2001 to $481 million in 2002. Were those estimates to hold up, email would account for all the growth and end up accounting for 21% of revenue -- a reasonably steep ramp that DoubleClick says it can scale, in part, by continuing acquisitions of email-related companies.

Email to the Rescue?
Revenue expectations for DoubleClick
Source: Thomson Financial/First Call, DoubleClick executive comments, TheStreet.com

DoubleClick says it delivered 2 billion pieces of email to Internet users in the second quarter, reaping revenue that Chief Financial Officer Stephen Collins pegs at $5 million to $6 million. That roughly translates into a dollar of revenue for every 364 marketing emails the company sends out.

By that rule of thumb, the company would have to send out 36.4 billion pieces of email to hit $100 million of revenue in 2002. Because DoubleClick says virtually all of its email business is in the U.S., and because Nielsen/NetRatings estimates that about 113 million people are accessing the Internet about once a month, that means DoubleClick would have to send email to every one of them 322 times a year, or about nine days out of 10. That assumes prices won't come down, though they likely will, given the precedent set by Web advertising. It also threatens a future beyond 2002 in which DoubleClick would have to send more than one email a day to keep growth going. "I'm counting on prices coming down," says CEO Kevin Ryan, "but volume going up a lot."

Count Again

That being said, Ryan calls the 322-emails-per-year calculation flawed because it doesn't properly account for the expected revenue contribution from MessageMedia (MESG). DoubleClick is slated to close on its acquisition of the Colorado-based email company during the third quarter; it closed on another email firm, FloNetwork, during the second quarter. On Tuesday, Collins told analysts that DoubleClick expected its email business to be garnering revenue at the annualized rate of $60 million at the close of 2001.

For starters, a significant part of MessageMedia's revenue, says Ryan, comes from messaging software sales, not sending messages; that revenue amounted to $2.6 million, or 30% of revenue in the first quarter of the year. Second, Ryan says that MessageMedia is getting much higher revenue per email than is DoubleClick. MessageMedia charges about $17 per thousand emails sent, says a MessageMedia spokesman, thanks to various complex services it can offer. Ryan wouldn't specify DoubleClick's revenue per thousand emails, though using the round numbers the company gave out regarding the second quarter, one ends up with a $2.75 CPM, as the per-thousand rate is known in industry lingo.

Approaching the $100 million email goal for 2002 from a macro perspective, Ryan says it's only natural that DoubleClick will be able to do in the email arena what it did in the Web advertising business: build market share in a consolidating industry. Four years ago, says Ryan, DoubleClick was only one of about 40 companies serving ads (that is, delivering them to Internet Web pages while people viewed them on their computer). Now DoubleClick has more than half of that market. Ryan says DoubleClick estimates the highly fragmented email industry -- a $400 million market this year and possibly a $500 million market in 2002 -- is ripe for a similar shakeout. "Do we think next year we can get 20% of the market?" asks Ryan. "It's absolutely achievable."

The Haze

Scott Reamer, Internet analyst for SG Cowen, isn't quite so confident. "Keep in mind we're only two quarters into [DoubleClick] having an actual email product," he says. Yes, the growth rate for email is impressive. And "email is certainly an alternative to impression-based media that seems initially to work better," he says. (Reamer rates DoubleClick neutral; his firm hasn't done recent banking for the firm.)

But until pricing and supply/demand issues are worked out, and until better research is available on the effectiveness of email advertising, advertisers are unlikely to move to email advertising in huge numbers, Reamer says. "That makes it very, very difficult," he says, "to project a number that's so aggressively ahead of where we're at today."

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