• by David Goetzl  @dgoetzl, April 19, 2010

CAPTIVA ISLAND, Fla. -- Bruce Biegel warned marketers that wringing savings from service providers may be a Pyrrhic victory. While procurement departments may appreciate paying lower fees, inferior work may follow, he explained in his keynote address at MediaPost's Email Insider Summit.

As marketers have pressured email service providers (ESP) to cut rates, some have responded. But Biegel, an investment banker and strategic adviser, said it's "bad for both sides of the industry."

When an ESP can't bulk up R&D or upgrade offerings, the marketers suffer. "[Without] a reasonable profit on the supply side, they can't reinvest in their services ... so there's got to be a balance," he said. "Suppliers have sort of had to stiffen their spines a little bit."

Biegel has an interest in ESPs succeeding, since advising them helps Winterberry Group, where he is the senior managing director. His Wall Street company has been involved in various deals, including the 2005 purchase of Bigfoot Interactive by Epsilon and TA Associates taking a majority investment in eCircle in Europe this year.

On Monday, Biegel suggested that M&A activity in email marketing would increase in 2010. Industry observers are particularly interested in whether major ESP ExactTarget will finally go public. The company raised $140 million in venture funding last year, prompting Biegel to say it "won the lottery" in 2009.

Biegel suggested that most deals will take on what he termed a "capabilities expansion," where ESPs will look to buy small shops with expertise in social media, mobile, analytics, e-commerce and other abilities. They can then bolt the functions onto their current offerings. In March, ExactTarget used some of its capital to buy Twitter management operation CoTweet.

Biegel, who chairs the Direct Marketing Association's technology council, said marketers are hungry for an ESP to provide a single platform working across multiple channels. Investors, too, are attracted to firms that have stable profits in email, but are successful in moving into the social media and mobile spheres.

"That's what investors are looking for, and frankly, that's what marketers should be demanding of their ESPs," Biegel said.

More broadly, Biegel said email's strength is in customer retention, where 80% of spending lies. As social media matures, email can provide it with retention opportunities.

"It's a retention channel primarily," Biegel said. "It does have some acquisition [capabilities], but acquisition is still very much second. And [email] is doing some transactional work, but it's absolutely [counted on] as the retention choice for marketers."

Biegel cited a stat showing that email marketing spend is estimated to increase 9% in 2010 to about $1.4 billion. From a 50,000-foot perspective, he expressed bullishness on the economy in general. Unemployment remains high and is dragging down consumer spending, but he said bluntly: "The recession is over -- don't worry about it."