The online direct-mail business, say analysts, is ripe for consolidation. But it's not quite clear who will end up atop the heap as the alpha email.
Are the ultimate buyers online advertising firms? Firms that manage customer relationships? The theories vary.
The unclear direction of direct marketing over the Internet highlights the difficulty investors face as they try to value the companies in this sector. Built into the prices of several of these stocks may be expectations that they're ripe takeover targets. But money may be an object.
, all of which went public within a few days of each other last November, are all trading above their offering prices, though they've fallen back from last year's peaks.
Certainly, online direct marketing has caught the attention of larger companies in the online advertising business, prompting some recent acquisitions.
last fall agreed to acquire marketer
has acquired privately held
. Online ad firm
says its email advertising revenue in the third quarter quadrupled from the second quarter to $2.5 million.
The goal of these companies is not to indiscriminately email, or spam, an ad to millions of customers, but to target messages at people who have "opted in," or provided personal information understanding that it will be used to target advertising to them. Marketers hope that by being upfront about collecting information on consumers, they'll avoid the
controversy engulfing DoubleClick's online advertising business. "Right now, demand is extraordinarily strong," says Dave Tolmie, CEO of yesmail.com. "And it creates a situation where anybody with a permission-based email list can generate revenues."
Who Doesn't Like Spam?
Though it's growing, the business seems relatively small. About 2% of ad spending in the third quarter of 1999 was for emailed pitches, according to the
Internet Advertising Bureau
trade group, compared with 1% the prior quarter.
As with other online businesses, online direct marketing's boosters see a huge opportunity in taking an off-line business and bringing it online. In this case, the size of the opportunity is some fraction of the $176.5 billion -- including $42.2 billion on direct mail -- that the Direct Marketing Association estimates was spent on direct marketing in the U.S. in 1999. In contrast, the total Internet ad market is estimated at $4.4 billion for 1999.
Some people foresee consolidation as the larger online advertising companies swallow up direct-marketing firms. "Email is a piece of an overall picture," says Bill Jacobson, vice president of
, direct email operations for
, which was recently acquired by CMGI. "You can't have an email strategy without having a Web strategy. You could, but it just wouldn't be as powerful."
Not true, says Rosalind Resnick, CEO of NetCreations, which is building a database for opt-in marketing. "I don't see us as just another product line to include in the Internet advertising mix," she says. Building a list of consumers willing to receive direct marketing messages isn't a narrow goal, she says, because the company will have opportunities beyond email in mobile phones, pagers and other devices.
The Overall Picture
In fact, NetCreations will be an acquirer, not an acquiree, believes Rob Martin, senior Internet analyst at
Friedman Billings Ramsey
. It could acquire one of what he calls the marketing service providers, like Digital Impact, which in turn could acquire other companies like Exactis.com and
. Martin has a buy rating on NetCreations, for which his firm was lead underwriter.
Michele Slack, an analyst who covers email advertising for
, says she sees partnerships or licensing deals more likely than outright acquisitions -- "especially companies that have gone public; they're not cheap."
A DoubleClick executive agrees that it makes sense for email advertising and Web-based advertising to be under one roof, but objects to current prices among many of the email companies. "Just because the market values a company at $500 million doesn't mean that company is worth $500 million to DoubleClick," says Eli Chalfin, general manager of DoubleClick's DARTmail operations.
But perhaps it's wrong to look at email companies like MessageMedia as marketing companies at all, suggests Rick Juarez, Internet and e-commerce infrastructure services analyst for
BancBoston Robertson Stephens
. He says people should be thinking about online direct marketing in terms of a bigger picture he calls "e-messaging," or communicating with a customer over time. That includes not just marketing, but also e-commerce and customer service. Juarez has a buy on MessageMedia, for which his firm did a private placement.