Online Marketing: The new gold rush
Microsoft Corp.’s (Nasdaq: MSFT) willingness to pay a whopping 85% premium for Seattle-based aQuantive, the largest interactive marketing company, is indicative of the tectonic transformation in marketing services as they move online. The acquisition came in quick succession to similar deals by Google Inc. (Nasdaq: GOOG), which acquired advertising company DoubleClick for more than 20 times estimates revenues of $150 million, and WPP Group plc (Nasdaq: WPPGY), which bought online advertising company 24/7 Real Media Inc. (Nasdaq: TFSM) for $649 million, or $11.75 per share, a 30% premium over the average closing price for the prior two months. An earlier acquisition by AOL of German ad network AdTech AG, both prominent interactive marketing companies, went largely unnoticed. Investors will now be challenged to find online marketing stocks at reasonable valuations.
Growth in interactive marketing (a buzzword for marketing services companies that conduct marketing campaigns on the Internet) has been rapid in recent times. According to Advertising Age, the growth of revenue in U.S. interactive agencies was a robust 23.1% in 2006; the leader aQuantive Inc. (Nasdaq: AQNT) grew 30%, while traditional agencies grew much slower at 4.2%.
Interactive ad and marketing companies fulfill the long-felt need in the profession for measurable performance from investments in marketing. The frustration with existing methods is widely described by the wry apothegm, “one-half of advertising money is wasted, and it is hard to tell which half.” The waste and uncertainty have grown as media consumers use devices like TiVO to bypass commercials altogether.
Interactive marketing targets the most relevant messages for specific segments of the population and measures the response. Media consumers are more likely to watch commercials that matter to them. On the Internet, marketing services companies, such as aQuantive’s Atlas ad server, use cookies, which are small – and harmless—text files that are placed in a temporary folder on a PC, to track the click-through behavior of views to measure the impact of advertising.
A great deal of innovation in online marketing is still in the pipeline as behavioral targeting, broadband wireless, and Internet video and social networking gain currency. Behavioral targeting technology, such as the one offered by advertising network TACODA, Inc., tracks online users’ clicking behavior over a period of time, much like Amazon does when it makes suggestions for books. The click-through data reveals shopping preferences and helps to make the most relevant offers. According to a survey on interactive marketing conducted by William Blair & Company, an investment management company, 76% of respondents considered behavioral targeting as a big opportunity.
Online social networking facilitates word-of-mouth marketing that has proven to be more effective than traditional means of marketing. Social networking sites enable the chatter that helps to spread the word around about new products and services. The William Blair survey indicated that 79% of the respondents expect social media to generate significant marketing revenue.
Internet video opens new possibilities; the automobile industry, for example, makes footage of auto expos more widely available on-line. More than three-quarters of respondents in the William Blair survey considered video advertising as a major opportunity.
Broadband wireless adds to the toolset that advertisers can use especially for location-specific advertising. People on the move can receive offers that are most relevant to the place they are visiting.
comScore, which on April 2 filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of stock, would be a promising stock to buy when it is issued. With a panel of 2 million online users, comScore provides data on advertising effectiveness, online usage patterns and demographics of online users that are widely used for media planning in the interactive advertising industry. The company has experienced rapid growth in revenues, which rose from $15 million in 2003 to $66 million in 2006 for an average compound growth rate of 40% per annum. From a net loss of $23 million in 2003, the company earned a profit of $2.5 million in 2006. comScore will be able to sustain the current growth rate as the overall industry is growing rapidly and the demand for analytics is growing even faster. Also, comscore is launching a new product, Campaign Metrix, for web-based reporting of metrics measuring effectiveness of promotional campaigns, and higher revenues are expected from recently launched products for rating Internet radio and for measuring effectiveness of video ads. The rapid growth in revenues will help to absorb $81.2 million in loss carried forward.
Unica Corporation (Nasdaq: UNCA) supplies web analytics solutions that are used to gather data on the click-through behavior of website users and finds patterns in the data. Unica’s customers include ABN AMRO, Arval PHH, Best Buy, Capital One, Comcast, E*Trade, Medco Health, Monster, Orbitz, Starwood Hotels & Resorts, Tribune and Vodafone.
In the second quarter ended March 31, Unica swung to a profit of $913,000, or $0.04 a share, from a loss of $1.7 million, or $0.09 a share, a year earlier. Sales rose 38%, to $26 million.
Nine analysts surveyed by Thomson Financial are expecting earnings per share of $0.37 to $0.40 for fiscal 2007, up from $0.31 the previous year. Analysts are forecasting 2008 earnings at $0.52 to $0.69 per share.
Unica’s share price has recently exceeded target price of many analysts, having established a new 52-week high of $17.98 on Wednesday before settling at $17.82, up $0.31, or nearly 2%. The 52-week low of $7.86 was recorded nearly a year ago, on June 9.
The distinctive characteristic of Unica’s methodology is that it gathers data on marketing metrics at every touch point with customers, whether offline or online. With this ability, marketing planners can optimize their expenditures between interactive marketing and more traditional forms of marketing by examining the inter-relationships between them, such as the impact of a television advertisement on online buying. In addition, Unica’s software helps to manage the processes involved in marketing campaigns such as keeping records of expenses incurred and facilitating collaboration among members of the marketing team.
Analysts rate Unica as the leader in a very appealing space.
