• by Masha Geller , June 18, 2002

All of us are sure to remember this last month as one of the more turbulent periods in recent history. And no, I’m not talking about the presidential election. That was huge, but November also turned out to be the month during which we were finally faced with the undeniable fact that the health of the online advertising industry was in serious jeopardy.

To quote a CBS Marketwatch story, “Just when investors in online ad companies might have thought it couldn’t get any worse, it did.” The story was referring to the announcement of disappointing third quarter results and 200 job cuts at 24/7 Media; and an earnings warning and abrupt resignation of the CEO at Engage. Stock prices then took a nosedive and have not yet recovered as of the moment I write this. But that’s temporary.

At the time, not surprisingly, Goldman Sachs and ING Barings downgraded Engage, while 24/7 Media got the same treatment from Merrill Lynch, J.P. Morgan and CS First Boston. And, analysts were saying there’s definitely more room to go on the downside. David Doft of ING Barings was quoted saying, “we are not seeing an uptick in ad revenues in the fourth quarter,” traditionally strong for ad revenues as a result of holiday-related spending.

The only analyst to stay optimistic on 24/7’s future was Rudolf A. Hokanson at CIBC World Markets, who remained bullish and reiterated his “strong buy” position and 12-month target price of $50 per share. In a research report titled “Risk and Reward Time,” Hokanson said, “We continue to believe that...Internet advertising is alive and well. Weak players are falling off, but traditional advertisers are warming to the medium due to its ability to provide rewarding marketing and branding solutions.”

He was right, as it was confirmed by an AdRelevance report, which showed that the number of new companies advertising online has more than doubled since January. While traditional advertisers accounted for approximately 41 percent of the top 100 new online advertisers in January 2000, they make up close to 50 percent in October 2000—with dot-com companies rounding out the other half.

But, only a few weeks later, 24/7 Media was reported to have eliminated more employees, including several top executives. Apparently, some of the company’s most senior management fell victim to the layoffs, with the sales operation especially hard hit. Sources said that 65 employees in the company’s New York headquarters were laid off, and some offices were closed down altogether. So exactly how much trouble are we in as an industry? I’m taking an optimistic stand: Not much and there’s no reason to panic. As one of our online readers put it, the Internet IS a viable advertising medium. It WILL survive. It really isn’t much different than traditional ad agencies and companies. Periodic shakeouts happen in every industry, and this one is no different.

Sounds like the “survival of the fittest” theory, doesn’t it? It’s not new, it’s not original, but it’s more than applicable in this case. Keep in mind that many companies, including 24/7, usually hire for future growth. But with falling stock prices these companies no longer have the dollars to buy and build, and have no other choice but to streamline their operations and become as efficient as possible. And I have every reason to believe they will do just that.

Masha Geller is the editor-in-chief of MediaPost. She can be reached at masha@mediapost.com.