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Post of the Day
April 19, 1999

From our
DoubleClick, Inc. Folder

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Subject: Gorilla?
Author: tickletoe

Lately I've been wondering if DoubleClick is capable of achieving gorilla status in its market.

The term "gorilla" is most often used to describe the success of Microsoft's business model over the past decade. Microsoft had an industry-leading product with Windows. Users and software writers didn't want to deal with more than one desktop operating system. So when the tide turned towards Windows, almost everyone adopted it. Microsoft was ready for this and took advantage of it beautifully. The success of Windows led to the success of Microsoft's office automation software and networking products. These lines of business grew both in terms of market share and profit margins. Everyone knows what this strategy has meant to Microsoft stock price. Those who bought stock early and held it are rich now.

I think evolution of DoubleClick's DART product could be similar to Windows under the following scenario:

1) DART is clearly the leading product in its industry.

2) There are some strong reasons that might force the internet advertising industry to standardize on DART.

3) DoubleClick's business strategy puts it in a great position to capitalize on DART standarization, growing their non-DART businesses as well.

Before I make my case, here are a few basics about DART:

DART is the technology DoubleClick uses to decide which advertising should go to a specific user, then it serves an appropriate ad to him/her. On the back end, DART tracks how many of which ads went out and what the response rate was to those ads. It also collects information for DoubleClick's database. The service is entirely performed by DoubleClick at its own sites from its own servers--it is an outsourced solution. The DART product comes in two flavors: one for publishers and one for advertisers.

DART for Publishers. Publishers who sell advertising have some complex database needs, and they have strong financial incentive to sell their ad space at the highest price possible. DART tracks the inventory of ads available. It targets users to receive those ads. It ensures that the highest rate ads go out when appropriate users are available, then it reports on the ads that have gone out and what the response rate was to those ads. Using DART helps the publisher manage relations with the advertisers by doing the reporting and by helping the publisher sell new inventory. It tells the publisher what still needs to be sold.

DART for Advertisers. Advertisers want to ensure that their ad impressions go out to their intended target audience. They want to know if they're getting the ad impressions they pay for. They want to develop strategies to improve the responses to their ads. They want to have objective data to assess comparative creative components to their ad campaigns. DART gives them same-day reports on response rates to their ads. DART breaks down the user community very finely, because DoubleClick serves the widest variety of advertiser needs. Their experience in the field--always serving a wide variety of needs--has given them a superior database to draw on.

DART is the leading solution of its kind for several reasons: it is reliable (DoubleClick serves from sites all over the world, and any failure at one site can be picked up at another); it is scalable (DoubleClick's competitors have had some famous failures in keeping up with net growth); it uses a superior database (DoubleClick serves more advertisers than anyone else and more publishers than anyone else); and finally (the point I really want to emphasize here) it is becoming a standard--the effect in turn is becoming the cause.

The Case for a Standard

Advertisers want a standard ad serving solution. In fact, that's the reason for the existence of the "DART for Advertisers" product. If advertisers let AOL serve some of their ads, and Yahoo! perhaps some others, they have a real headache assessing the success of their campaign. Inevitably the reports they get back will have data broken down into incompatible categories. AOL will give some nice data on click-through rates for some classes of users, and Yahoo! will break down the users differently. The adverisers will get their reports at different times, reflecting activity that took place over different time periods. On the other hand, an advertiser who uses DART for Advertisers can still run ads on AOL or Yahoo!--wherever they want--but the reporting will be the same, broken down by the same categories, and compared over the same time periods. In addition, the advertiser can compare response rates at different publisher sites and adjust strategy based on objective data--free from any "spin" a publisher wants to put on the data.

Publishers must accede to advertisers' wishes in order to maintain decent pricing on their ad space inventory. If publishers are using technology that breaks the users down into categories that make sense to their advertisers, the advertisers are willing to pay more for ads targeted to their desired audience. (More on this below.)

DART is the most likely candidate to take advantage any trend towards standardization. If you look at the world of ad serving, any solutions used by the portals is unlikely to become a standard. Why would AOL use Yahoo! technology? DART is far less threatening. DoubleClick does not compete directly with the portals.

On the other hand, when you compare DART to the other independent ad serving solutions (NetGravity or 24/7 Media), DART wins by virtue of superior technology and service. No competitor has been able to provide a similar service on the same scale as DoubleClick. (When DART was serving five billion ads per month, it was processing more transactions per day than NASDAQ; now it's over eight billion transactions per month.)DoubleClick is retaining its customers at a higher rate than competitors, and it is winning over customers using competing solutions at a higher rate. At this level there's really no contest.

How is DoubleClick prepared to take advantage of standardization on DART?

This is the real test for the strategy. If DoubleClick can't leverage it's ad serving leadership over other lines of business, it doesn't qualify for gorilla status.

In addition to selling the DART service, DoubleClick makes money by selling advertising for publishers. DoubleClick has relationships with more advertisers than any other internet advertising service. DoubleClick also has the most extensive advertising sales force, with organizations in seventeen countries selling internet advertising.

Until recently, DoubleClick was only selling advertising for publishers who wanted to outsource all of their ad sales. But now DART technology is allowing DoubleClick to tailor its ad sales to specific publisher needs, which appeals to a wider variety of publishers. Here are some examples:

1) Non-US users. Statistics show that most US publishing sites get as much as 30-40% of its traffic from overseas. US advertisers know this and are unwilling to pay high prices for "run-of-site" advertising, because the non-US impressions don't help their business. The growth of overseas traffic has led to declining click-through rates, because overseas users are not likely to click on advertising not directed at them. Since DoubleClick has the largest and best overseas advertising sales force, publishers who don't have relationships with non-US advertisers can ask DoubleClick to sell just the advertising targeted at non-US users. This way both the domestic and foreign advertisers are willing to pay higher margin for the ad impressions most appropriate for their business.

2) Regional US advertising. This is really the same problem in reverse. Some regional US advertisers have an interest in advertising on the web, provided that they are only paying for impressions to users in their local area--they don't want the ads just to go to any US user. DoubleClick is forging relationships with Yellow Pages sales forces (there are agreements with US West and Ameritech) who have on-going relationships with local advertisers. The Yellow Pages salespeople are selling ads for DoubleClick's network. Again, this is possible when DART serves the ads, because the technology has to be capable of reliably targeting local users. So far only DoubleClick has been successful in exploiting this ad sales channel.

3) Unsold Inventory. Due to tremendous competition on the web for eyeballs--fueled by all the capital flowing into web publishing--there is a lot of page space that is going begging for paid ads. Publishers who adopt DART can ask DoubleClick to sell whatever page space is unsold. Instead of selling the space for next-to-nothing and ruining profit margins, DoubleClick can provide advertisers who want to target the remaining users, getting a better price for those ads.

The Future?

I'm hoping that the upcoming earnings report will provide more evidence to support the gorilla theory. In particular, I'll be looking for some concrete data on DART for Advertisers, non-US ad sales, and local ad sales. Any evidence that these products are blossoming would be great news indeed.

Maybe then we DCLK longs should send Kevin O'Connor some bananas to show our appreciation.

--Randy