The Silicon Alley Heart Of Internet Advertising DoubleClick has made itself the key player in Madison Avenue's hottest niche. Now it just has to thwart the hottest holding company on the Internet.
By Eryn Brown

(FORTUNE Magazine) – In 1995, Kevin O'Connor, then 34, decided he wanted to start an Internet company. The problem was, he didn't know what kind. O'Connor spent eight months holed up in his basement with his friend Dwight Merriman, looking everywhere for the "right idea"--a business that could take advantage of the Web's ability to link up with users, track their behavior online, and tailor data to them. Advertising, he figured, might fit the bill (he couldn't really be sure, since he knew nothing about the business). He checked out some library books, made some calls, and set to work.

Given those humble beginnings, it's pretty amazing that the company O'Connor eventually started, DoubleClick, has become what it is today: the biggest player in the race to build and operate the infrastructure to support Web advertising. That industry niche may generate as much as $11.5 billion in annual sales by 2003, up from $3.2 billion this year, according to Jupiter Communications, a research firm in New York City. Already DoubleClick is one of the most successful dot-coms in New York's Silicon Alley; sales this year could reach $180 million, up from $80 million last year. The company has 1,200 young, talented, committed employees. It has enviable relationships with advertisers and advertising firms. It has offices in 20 countries, and headquarters with spectacular views of--what else?--Madison Avenue.

And even though it has yet to make a profit, DoubleClick has the nod from Wall Street too. The shares are up over 300% since the company's April 1998 IPO, giving DoubleClick a $5.7 billion market cap. That makes Kevin O'Connor an extremely wealthy man--worth around $455 million (see America's 40 Richest Under 40," FORTUNE, Sept. 27, 1999).

So DoubleClick sounds like your typical dot-com tale: Boy has idea, boy starts company, boy takes company public, boy and a few lucky shareholders (the ones who get in the game early) become outrageously wealthy.

But at least for investors, DoubleClick is not quite so simple. When you buy shares of Amazon.com, say, you make a bet that Amazon can sell more and more stuff, do a good job warehousing and delivering the goods, and perhaps, someday, even eke out a profit. When you buy shares of DoubleClick, on the other hand, you're making a bet on something a lot less sexy, something that's more like plumbing. For starters, you can't buy anything on DoubleClick's Website--heck, you can't do anything on its Website, which is nothing more than an online brochure. And what kind of "advertising" firm doesn't create a stitch of content? DoubleClick doesn't even care what form Web advertising takes--so what if today's static banner ads, buttons, and the like vanish in a couple of years? No, DoubleClick is strictly an infrastructure play: It maintains a highly specialized, behind-the-scenes system to facilitate advertising that other people create.

DoubleClick's business breaks down into two segments: ad sales and ad serving. Around 80% of revenues come from the former. The idea behind DoubleClick's ad-sales network is simple: Acting as an agent, the company sells ad space on behalf of 1,500 sites, including AltaVista, Travelocity, and Edgar Online.

The service can be expensive--DoubleClick has charged commissions as high as 50% on the ad space it sells--yet it's immensely popular. Most sites in DoubleClick's network are second-tier players at best; they stand little chance of selling ads efficiently on their own. In DoubleClick's network, they become part of a tempting package offering advertisers the chance to reach 31.7 million unique users a month. That's comparable with the exposure advertisers get on big portals like Yahoo. "The network's function is to aggregate the smaller sites to get the power of Yahoo," says Lowell Singer, an analyst at Robertson Stephens in San Francisco. "It lets the little guys act big."

It also lets dot-coms that can't afford to develop an ad-sales department be represented by a world-class organization that will pitch their sites. "There are thousands of sites selling ads on the Internet," says Wenda Harris Millard, the executive vice president who heads the network. "How many of them can get in to see a P&G or a GM? Advertisers want clout and scale." DoubleClick competitors like 24/7 Media in New York City and Adsmart in Andover, Mass., have similar networks, but they don't have DoubleClick's size or status.

The second part of DoubleClick's business--ad serving-- represents its future. A bit of explanation: When you visit a Website, the page that appears on your screen is composed of information that may come from several computers. The content may be from one machine at the Website, while the background look of the page, the frames and borders and colors, may be from another; the ad, meanwhile, might come from an advertiser's computer or one at DoubleClick. Serving an ad, as this is called, is no simple matter. Besides choosing to zap it to your computer, Double Click generates a real-time report on the ad's success (recording, for example, whether or not you click on it). Eventually an advertiser will use those reports to decide whether to show you the ad again.

Whether a client ships its own ad or outsources that function to DoubleClick, the software behind all this behind-the-scenes action is DoubleClick's DART (dynamic advertising, reporting, and targeting). Its magic is its ability to target ads--and this, more than anything else, is what a DoubleClick investor is banking on. When you visit a Website, DART can learn about you by reading bits of data that reside in your PC. It can collect information you've supplied about yourself when registering at a Website; it can note your computer's Internet (IP) address, which, like a zip code, holds clues to your location and potential as a customer; or it can read "cookies"--bits of software that Websites place on your hard drive to record your surfing behavior. DART analyzes such data; then, according to parameters created by the advertiser, it delivers a targeted ad to the Web page popping up on your screen.

This kind of targeting is what makes Web advertising potentially more attractive than old-media advertising. Whereas TV and print advertising shoot for swaths of the population, Web advertising offers companies the potential to deliver an ad to exactly the kind of person they want to reach. That's worth a premium, and is why DoubleClick wants to be the source for targeted marketing services on the Web.

But while the potential of Web advertising is huge, the reality is something less. "Targeting today is pretty low-tech," says Jim Nail, an analyst at Forrester Research in Cambridge, Mass. To get advertisers to pay the big premiums, DoubleClick will have to tell them more than just where you are and the kind of site you visit. It might have to tell them whether you are married or single, what your income is, and whether or not you have kids. What it needs to do above all is predict, with greater accuracy, how likely you are to buy an advertised product. To help do that, DoubleClick this summer announced that it would merge with a catalog database company called Abacus Direct, which tracks offline buying habits. If DoubleClick integrates its database with Abacus', it should have some real targeting ammunition.

Even with Abacus, there's no guarantee that DoubleClick will dominate the future of Web advertising. Technology isn't the big threat: DoubleClick's targeting will work even if, as many observers predict, banner ads are eventually replaced by interactive video ads that look more like TV. The threat to DoubleClick comes from CMGI, the Internet holding company in Andover, Mass. Thanks to a series of acquisitions, CMGI can now match DoubleClick, at least on paper, feature for feature. CMGI owns, or will soon own, sales networks Adsmart and Flycast; a respected ad-serving company called AdForce; and AdKnowledge, which tracks the success of ads and reports those data to advertisers. It also owns Engage, a targeting company that tracks surfers' behavior online. CMGI even owns DoubleClick's biggest ad-sales customer, the search Website AltaVista. Some 40% of DoubleClick's 1998 revenues came from ads placed on AltaVista, and most people think CMGI is unlikely to let AltaVista remain such a large DoubleClick client for long.

All in all, industry observers believe DoubleClick now has a fight on its hands. But CMGI's ad companies aren't unified, which plays to what may be DoubleClick's greatest strength. Haphazard as O'Connor's approach to the business may have seemed in 1995, he did one thing extremely well: He built a cohesive, efficient team of employees. "We all grew up together," says Millard, who, like CTO Merriman and most of the senior management team, has been at DoubleClick since the early days. Now that O'Connor's company faces its first serious competitor, that unity may be just the edge that will keep DoubleClick at the center of the Internet advertising world.