The Daily Interview: A Recovery in Internet Advertising?

"Internet advertising."

In recent months, that coupling of words has evoked a response akin to "white rapper": There isn't a great deal of credibility or confidence attached to the term. However, one media and Internet watcher is betting on a recovery.

Gordon Hodge Media Analyst Thomas Weisel Partners

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Gordon Hodge, a partner and media analyst with Thomas Weisel Partners, follows AOL Time Warner(AOL), Yahoo!(YHOO), Viacom(VIA) and other Net and media outfits. In today's Daily Interview, Hodge says that in the wake of the dot-com bust-up, major advertisers are beginning to warm up to the Internet again. And once the smoke clears, he believes media stocks and ad revenue could rebound as early as May.

TSC: What are the media companies, advertisers and ad agencies you talk to saying about the outlook for the Internet?

Hodge: The environment has been confusing -- it's hard to see the forest for all of the dot-com trees that are falling around us right now. But many major consumer goods, beer, fast-food, travel and automotive advertisers have recently made major, multimillion dollar commitments to online advertising.

As evidence of this, I would point to a 90% increase in Yahoo!'s non-dot-com advertising business in the fourth quarter. Compaq(CPQ) and Pepsi(PEP) have committed serious dollars to Yahoo!. General Motors(GM), which has been cutting back on its television advertising, just signed a multimillion-dollar sponsorship for Univision.com(UVN). Sportline.com(SPLN) has landed significant business from Holiday Inn and Miller Beer.

There is clear evidence that the Internet as an advertising medium does, indeed, really work. Unlike television, Internet advertising has much more to offer with a two-way feedback loop. It offers instant gratification to a consumer, and it makes it much easier for an advertiser to target and gather information about consumers. I also think that the seven new advertising standards that the Internet Advertising Bureau came out with this week are pretty exciting.

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But, again, we are still in the really early stages of the Internet as a medium. That will change once broadband -- only 8 million out of a total of 100 million Internet households now have it -- becomes a reality.

Also, there's still a lot of short-term focus on profitability that's unrealistic because these businesses are still evolving. There was a tremendous amount of barter and IPO-related Internet advertising in the first half of last year, which is making 2001 comparisons look horrific.

Still, I am projecting online advertising growth of 10% to $8.8 billion in 2001, vs. an average of 4.4% for all media. I think there's even a chance that online advertising could reaccelerate to 43% in 2002. So, yes, advertisers and media companies are talking about the next generation of media, and they believe it will include an improved Internet, interactive television and wireless devices. We are in the midst of an evolution.

TSC: Many media conglomerates were quick to launch Web sites, some without well-developed business models, that have since been curtailed or shut down. Have any major media companies launched successful Web sites, and if so, what makes them work?

Hodge: Companies with a leading brand position in their market that offer consumers access to something that's intangible, unattainable, inconvenient or coveted have online business models that work.

USA Networks(USAI) has three profitable online companies that are examples of this: Ticketmaster.com(TMCS), Home Shopping Network online and the online discount Hotel Reservation Network(ROOM). All are profitable in terms of operating cash flow. Univision.com and Sportsline.com are also successful.

These are all no-brainer online applications.

TSC: You have likened current ad revenue comparisons to "The Perfect Storm" due to a trio of factors -- last year's high levels of dot-com, Olympic and election advertising -- inflating year-earlier results. When are comparisons going to improve?

Hodge: Comparisons should improve in May. That's when the network television upfront buying season will end. Also, first-quarter earnings will be reported in April, and in these figures, I think we'll hear the last of the bad news and finally reach bottom. The first quarter is seasonally always the most challenging, and advertisers began cutting back their budgets last January.

I will be paying particular attention to Yahoo!, which I consider a bellwether. Yahoo has set expectations for the first quarter quite low, in the $220 million to $240 million range. If they squeak by at $220 million, you'll know that things are pretty challenging. If they are in the high end of the range or even at the middle, we'll get a sense that we've found the bottom and can work off that.

TSC: If comparisons across industries are going to be easier later this year, when do the stocks get a lift?

Hodge: Our sense is that stocks are going to begin to move just in advance of the better numbers being reported beginning in May or June. The market will anticipate a reacceleration.

TSC: How big an improvement are we talking about?

Hodge: That is the critical question for all of the stocks in the media business. The companies we are recommending are those that have not budgeted into their earnings guidance a hockey-stick [translation: shooting higher] recovery in the economy in the back half of the year.

We are recommending companies that are being conservative, both about the first and the second half of the year. Companies on my "strong buy" list include Ticketmaster and Liberty Digital(LDIG), which are immunized from the ad cycle, as well as USA Networks, which has only 15% of its revenues generated from advertising.

Of the companies that are very dependent on advertising where expectations have been set at reasonable levels for the second half of the year, I would highlight Yahoo!, Clear Channel Communications(CCU) and Lamar Advertising(LAMR).

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