Anyone with a healthy respect for the incredible agility of business in the U.S. almost certainly rubs her eyes at the last decade of the Internet. As fast as cheetahs or Speedy Gonzalez, money quickly found and supported new technologies and businesses and then determined winners and losers with shocking speed and ruthlessness.

One industry that came out of nowhere was Internet advertising. Companies like top dog and first mover DoubleClick (Nasdaq: DCLK) moved in the blink of a digital camera shutter to provide the means for legions of new and old companies to live -- for a while -- on online ad revenue. It required a new way of thinking about an old business, followed by the software to back it up. In three short years we've forgotten how  revolutionary that was, but community member "tickletoe" captured it when he was the first person to run the company through the strategy's criteria on the Rule Breaker Strategies discussion board. Reading that post and looking back should make anyone feel like a veteran of the Internet wars.

You might think that we at The Motley Fool would be very interested in online advertising, and you would be right. Like Yahoo! (Nasdaq: YHOO), we grew very much on online advertising revenues and had to diversify fast when advertising had a heart attack. Offline media companies suffered too. I picked up one of the several Newsweeks we've produced special features for and suddenly realized how light it was compared to one year, five years, or twenty years ago when Newsweek and Time really ruled the news roost.

Better times ahead
Yet despite the decline in advertising spending, online advertising is holding its own and projected to increase as a percentage of total spending. CMR, a company that tracks ad spending in online and offline media, estimates a 1.5% increase in offline spending this year, but a larger 8.8% increase in online spending.

Offline Annual Online Annual Online as (bil.) Change (bil.) Change % of Total 1999 $ 89.7 $1.9 2.0% 2000 105.4 17.5% 2.9 52.6% 2.7% 2001 94.3 -9.8% 2.5 -14.7% 2.6% 2002 est. 96.1 +1.5% 2.72 +8.8 2.75% [source: CMR, CMRi]

CMR President and CEO David Peeler called the drop from 2000 to 2001 the worst since the 1990-1991 recession, but he points out that his estimates for 2002 are just 6% under 2000's peak and about 48% over 1999. The message is that the 2000 jump fueled a lot of marginal businesses that couldn't survive the 2001 pullback. Fewer survivors will gain larger shares of online ad spending, and as that amount increases, the companies that execute their online advertising strategies will feast. 

And if you use CMR data from its press releases, don't be misled by its March 6, 2002 release that says  "total ad spending" in the headline. It's actually only for "total offline ad spending," but it doesn't tell you. I pointed this out to their PR people.    

DoubleClick's companions
Online ad companies today offer much more than banner ads. Their new products pop-up, pop behind, move across your screen, flash, and make a cacophony of noises. That simulated virus ad for anti-virus software we had on certainly made me sit up. Today, companies create online ad campaigns, provide the technology to create, place and serve ads, track their success, bill and pay partners -- you name it. They sell  to top online advertisers eBay (Nasdaq: EBAY), General Motors (NYSE: GM), Providian (NYSE: PVN) and others, and if they can survive the shakeout, they should be able to take advantage of increases in spending.

From a Rule Breaker perspective, we would probably consider only DoubleClick, clearly the top dog and first mover in an important, emerging industry, but there are other companies that may interest investors using other strategies. They joined DoubleClick at capitalism's party at the Internet Hotel, reveling until all hours, gorging themselves on the hosts' limitless food and drink. But some had enough money to stay overnight, while others were severely injured on the drive home.

                      Market Cash &
Company       Price    Cap   Equiv.* TTM FCF**
Avenue A     $ 2.71     158   118 mil.- 15 mil. 
CNET           7.20     988   140     -191
DoubleClick   13.34   1,798   752     - 84 
Digital Impact 3.30      96    26     - 18
Engage         0.40      78    30     - 53 
Media Metrix 0.21 8 33 - 96 L90 1.21 30 116 - 26 NetRatings 12.85 425 323 + 0.3 Overture
Services 34.79 2,010 134 - 0.4 24/7 Media 0.23 11 8 - 51 ValueClick 2.80 145 124 - 2
*most recent quarter
**TTM FCF = trailing-12-month free cash flow

Who will survive?
To see who will survive and prosper, we first want to start by eliminating the penny stocks -- stocks selling for under $5.00 a share -- except David Gardner reminded me the other day that it's really penny companies. Let's define them as companies with low stock prices and low market caps --  these are the problem for investors. Their share price is subject to all sorts of manipulation and that they are more likely to go bankrupt over 10 years. So if we screen out companies with both share prices under $5.00 and market capitalizations (number of shares outstanding times stock price), under $250 million, that leaves DoubleClick, NetRatings (Nasdaq: NTRT), and Overture Services (Nasdaq: OVER) and CNET (Nasdaq: CNET).

Then we look to cash health. The first three have no or minimal cash burn compared to their cash, while CNET appears ready to run out of money or have to raise it on onerous terms.   

There is another company that will likely soon make the cut. DoubleClick owns 15% of ValueClick (Nasdaq: VCLK), whose products include a service where the ad buyer pays only for actual clicks. ValueClick yesterday agreed to acquire online marketing firm Be Free (Nasdaq: BFRE), for about $120 million in stock -- a fraction of its once $30 billion-plus (yes, billion) market cap and less than its $134 million cash on hand. ValueClick management has been acquiring other online advertising firms on the cheap and reducing costs so successfully that even in the current advertising environment its trailing-12-month cash burn is a minuscule $2.2 million. The new company will have over $250 million in cash, and -- if ValueClick management succeeds again -- almost negligible cash burn at stable to slowly increasing revenues, and projected profitability in Q4. Yes, I own shares, but that doesn't mean it's not worth a look.          

I would probably have ignored this whole industry if it weren't for Matt Richey's (TMF Matt, f/k/a TMF Verve) terrific, detailed analysis of all of these Internet advertising companies in our Industry Focus 2002 (free with a subscription to The Motley Fool Select). Check it out for his view of the best companies in the space. If that's an online ad, so be it. I'm proud to ballyhoo Matt's work. He rejoined us yesterday in Fool Editorial and I'll sing his praises whenever, wherever. I may be better looking, but he's smarter. And come to think of it, I'm not even better looking!

Have a most Foolish week -- and be glad it didn't start like this.

Tom Jacobs (TMF Tom9) wants wireless broadband Internet access in his head. At press time, he owned shares of ValueClick. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy. It's fun for the whole family!