MARKETING'S biggest cliche, variously attributed to John Wanamaker, Henry Ford or the guy who founded Lever Brothers, is that half of all advertising is wasted; you just don't know which half.
Baltimore's Advertising.com knows. Or at least it says it does. Its Internet-ad clients pay for only the spots that work. The rest are free. This could remake the face of marketing as we know it or become another dead end in business' endless quest to observe and control consumers like lab rats.
In any case, it's a quantum advance over junk mail and stadium-naming rights. And it might help put Baltimore back on the advertising map.
Advertising.com is set to sell stock to the public. The deal isn't final, but if it goes as planned it will mint a new set of local millionaires, underscore the nationwide comeback in Internet-stock offerings and deliver another win for local venture-capital shops New Enterprise Associates and Grotech Capital Group.
Brothers Scott A. and John B. Ferber, who aren't talking because of the pre-flotation quiet period, conceived Advertising.com in 1997 over Thanksgiving dinner at their parents' house in Owings Mills. Scott Ferber, now the company's CEO, had done consumer profiling and targeted ads during a stint with credit-card Capital One Financial Corp.
They figured the Internet, with its ability to follow the customer from the act of viewing the ad to buying or researching the product, could boost information about ads' effectiveness like never before. They seem to have been right.
Traditional Internet ads - pop-ups, banners or email spam - are little better than skywriting in terms of measuring bang for your buck. You pay to put it out there and get billed for the people that see it - even if they ignore it or curse at it. Most of Advertising.com's revenue, on the other hand, gets generated only when online consumers register on an advertiser's site, request information, buy a product or otherwise respond positively to an ad.
The idea is "to help advertisers get more meaning out of the ads rather than to just put them out there in the ether," says David Hallerman, an analyst for eMarketer Inc., a New York research firm.
And advertisers pay for meaning. Advertising.com records big gross margins because it buys commodity ad space in bulk, smartens it up with its own software and marks up the price accordingly.
"They reach a lot of people," says Lynn Bolger, an analyst with comScore Media Metrix, a Reston, Va.-based Internet data firm. "Their mission is to aggregate advertising inventory that is not being used by some of the big publishers and to make it available to advertisers in big blocks."
Advertising.com's range of purchased Internet space is so broad that sites with its ads, added together, ranked No. 1 nationally in May hits, with 110.9 million unique visitors. That was 71 percent of U.S. Web users, according to comScore. By comparison, Google Web searches recorded 61.7 million unique visitors, or 40 percent of users.
Like all businesses attached to vast global networks, Advertising.com aspires to revenues that increase geometrically and costs that rise only arithmetically, and so far it has succeeded.
Its revenue hit $132.3 million last year, nearly doubling from 2002, which saw double the sales of 2001. Last year's operating expenses were below those of 2000 and were only 17 percent above 2001's level - even though sales nearly quadrupled.
The result: Advertising.com turned an operating profit of $12.1 million in 2003 after racking up tens of millions in losses in previous years. Operating income was $5.6 million in 2004's first quarter.
Advertising.com is an impressive pioneer in value-added Web ads, but it doesn't have a lock on the franchise. Anybody can try to imitate it, and companies such as Tribal Fusion and 24/7 Real Media already are, analysts said. The company is also over-reliant on a few big clients. And the cookies and Web beacons it uses to collect customer information could prompt a privacy backlash.
Launched in 1998, Advertising.com could have been a spectacular initial public stock offering in 1999. It had all the right qualifications for a pre-bust Internet IPO: great promise, no profits, little revenue and hardly any history. For some reason, the proprietors waited until there was an actual business to sell stock in. Regardless of how the shares do later, that moment has arrived.
