• by Nate Elliott , December 6, 2004

I WAS SURPRISED TO LEARN last week that Viewpoint had agreed to acquire Unicast, the maker of superstitials and video commercials. The $7.4 million deal, announced last Wednesday, marries two enigmatic companies.

Each brings compelling strengths to the deal. Unicast has real industry credibility, and has built strong relationships with marketers and agencies. For its part, Viewpoint offers close ties to AOL and access to the public markets. However, the companies have struggled to capitalize on these strengths. While each has reached profitability at certain points in the past, neither has ever been able to build a sustainable business. At the moment, both companies are losing money.

Although Viewpoint has been around for years, it never quite found its identity. The company started out selling three-dimensional rich media banners. But in order to see the banners, consumers had to download and install a special plug-in. And because advertisers were the only companies using Viewpoint, the only benefit consumers received for installing the plug-in was the ability to see flashier ads. Needless to say, downloads were slow.

So the company decided to focus instead on selling its technology to manufacturers and retailers. It reasoned that consumers would install a plug-in to see products in 3D. Some major companies, including IBM and General Motors, started adopting the technology. Somewhat remarkably, the change in strategy was working.

In 2001, AOL licensed Viewpoint's product at the princely sum of about $10 million. AOL's more important contribution, though, was distribution: Viewpoint's technology was now being installed on consumers' machines whenever they set up the AOL dial-up service or AOL Instant Messenger.

With both AOL and a host of manufacturers encouraging downloads, Viewpoint's plug-in penetration numbers were steadily growing. Most advertisers look for 80 percent penetration before they'll use a rich media technology for their ads. At last check, Viewpoint claimed that 64 percent of online consumers had installed their plug-in. It was beginning to look like Viewpoint might become a viable advertising product after all.

But for some reason, the company changed course again. Last March, Viewpoint stopped actively selling its rich media product, and tried to reinvent itself as a search firm. The company introduced a search toolbar that, instead of presenting results as text links, presented them instead as thumbnail pictures of Web sites. It's a creative take on the toolbar, but the move put Viewpoint in direct competition with search giants Yahoo! and Google. It also forced Viewpoint to begin the excruciating process of creating a new base of installed users from scratch. Only nine months into Viewpoint's experiment in search marketing, it may be too early to draw a conclusion on whether the new business model will succeed. But to date, only 5 million consumers have downloaded the Viewpoint toolbar, leaving the company far behind the leaders in the space. It's also worth noting that the company has lost $9.2 million so far this year, while bringing in revenues of just $9.8 million. It's going to be tough to make the new business model work.

While Viewpoint's troubles seem to stem from a lack of focus, their new acquisition's inability to generate profits may be the result of too much focus. Next week, we'll take a look at Unicast's fortunes, and examine why a respected leader in the rich media space was willing to sell itself for so little.