Banking on Rich-Media Ads

Companies such as Radical Communications are intent on using souped-up online commercials -- but have yet to prove their case

By Kevin Ferguson

Two years ago, Radical Communication Inc. invented what it thought was a surefire way to shake up the Internet advertising market: It would create software that lets advertisers send near-television-quality commercials through e-mail. The ads -- some of which let viewers buy goods right from their in-box -- would, in theory, grab bored advertisers and consumers by the lapels. Sound exciting?

Sure, but don't touch that dial just yet. Although some big names, including Procter & Gamble and BMG Entertainment's RCA Records, recently signed up for Radical's service, the company and some younger rivals seem to be getting caught in the same downdraft that's buffeting advertising in general.

U.S. online ad revenues grew just 26%, to $2.2 billion, in the fourth quarter of 2000 over the same period the year before. Online ad sales had nearly tripled from the fourth quarter of 1998 to the fourth quarter of 1999, according to PricewaterhouseCoopers and Interactive Advertising Bureau, a New York-based trade group. Meanwhile, spending on new, so-called rich-media ads has been negligible.


  Now Radical, with less than three months of cash on hand, is starting to get radical in a different way. It's holding discussions with eight venture capitalists and merger-and-acquisition suitors, says Radical CEO Bruce Stein. He declined to identify them, noting only that some previous investors were interested in contributing to a second round of funding. The first round, which pulled in $18.5 million, was led by EastWest Venture Group and Lehman Brothers Private Equity Division. Equally hurting is rival MindArrow Systems, based in Aliso Viejo, Calif. It posted a loss of $23.1 million for the quarter ended Mar. 31, despite improved bookings.

Still, there may be hope for rich-media ads: Investors continue to place bets on a technology race that has yet to produce a winner. Two privately held competitors, Dynamics Direct in West Hills, Calif., and TMXinteractive in Conshohocken, Pa., recently received new cash infusions. Dynamics Direct in January raised $12.5 million in venture capital. TMX raised $15 million in October.

Radical, based in Marina del Ray, Calif., can at least boast plenty of new contracts as it passes the hat. Other customers that signed multimonth subscription licenses during the first quarter include Young & Rubicam's Burson-Marsteller unit, The Economist Group, and Time Warner Entertainment's HBO division. Stein says more deals are in the offing.


  One potential new customer is online retailer "We saw their demo and said, 'Wow. That's where the industry is going,'" recalls Guy Palumbo, a senior computer systems manager at Amazon. In a March test, Amazon sent 40,000 video e-mails to consumers, promoting the release of Charlie's Angels on DVD and VHS. The result: The e-mails attracted few new customers, but existing Amazon customers spent more than they had previously and bought a greater variety of goods. "We don't have a contract with Radical now, but we will in the near future," says Palumbo.

Radical and its rich-media advertising rivals face other challenges. Not all of the souped-up e-mails can be read by every e-mail system. For example, Radical's e-mail, what it calls RadicalMail, is compatible only with Hypertext Markup Language, or HTML, the browser technology used by Microsoft Internet Explorer and Netscape Navigator. The problem? Half of the e-mail world isn't HTML-compatible. So, those recipients get only a text message with a link to a Web page that displays the rich-media RadicalMail.

Bandwidth is also a problem. The beauty of rich-media e-mail is that it doesn't clog in-boxes because only a small message is initially delivered. Only when consumers click on the e-mail does the full audio, video, or animation come streaming onto their computer screens. But for consumers stuck with a slow 56- kilobit-per-second Internet connection, the video can appear choppy.

Rich media, meanwhile, has a more worrisome aspect: "It's a potentially dangerous technology if marketers misuse it," warns James Nail, senior analyst with Forrester Research in Cambridge, Mass. "They could turn e-mail into spam on steroids. I'm not sure that marketers have the restraint." Washington lawmakers seem unsure as well. In late March, the House Committee on Energy & Commerce approved a bill designed to rein in spammers. The bill is now before the House Judiciary Committee.


  Marketers will have to tread cautiously if they don't want to alienate lawmakers further. "We're very careful," says Tom Stevenson, global director of online marketing at spirits company Bacardi. Just the same, Bacardi can't guarantee that minors don't circumvent its screening process, which requires consumers to type in their birthdate on an online registration to view the distiller's ads.

A recent "Party by Night" promotion sent by Bacardi to 5,000 California consumers was opened 7,500 times, meaning the RadicalMail message was either passed along to 2,500 other consumers (and possibly some minors) or opened multiple times by some consumers.

So, could rich-media hurt online advertising, instead of help it? Will consumers fall in love with video e-mails? Or will advertisers find there's no love lost? The drama is still being played out.

Ferguson is a freelance writer based in Boston

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