From: Linda (joelinda1@home.com)
Date: Thu Jun 15 2000 - 19:40:20 PDT
http://www.fortune.com/fortune/technology/daily/
June 15, 2000
The Dumbest Dot-Com
Mark Gimein
April's Internet crash
stranded dot-coms. With their IPO hopes
put on indefinite hold, many lie suffering
like huge, beached whales bleeding cash.
Just recently the talk was of who would
have the biggest IPO. Now, the talk has
changed to who will be bought next, who
will die next, who will blow up with the
biggest boom, and what was the silliest
idea to start with. In the last two
categories, there is no better answer
than AllAdvantage.
Right now AllAdvantage is the fattest
whale on the dot-com beach. It might
take some months for the game to play
itself out, but if you care to bet on the
biggest private company blow-up in
Silicon Valley-- a blowup at least as
spectacular as the ill-fated Boo.com and
Digital Entertainment Network--put your
money on AllAdvantage. In close to one
year of operation, AllAdvantage raised
$135 million and has already spent the
bulk of it, losing $66 million in the first
quarter alone. But sheer numbers don't
really convey the magnitude of the folly.
There are other companies that manage
to lose huge amounts of money. What
sets AllAdvantage apart from the others is
that of all the big dot-coms that have
come out of Silicon Valley in the past two
years, AllAdvantage might be the purest
expression of Net frenzy: It signed up
millions of members, and paid them to surf
the Web--literally giving away money in
the hope that simply having enough users
would magically make it profitable.
When members sign up on the
AllAdvantage site, they download an
advertising bar that stays on their
screens as they surf. For every hour that
a member browses around with the
AllAdvantage bar on his screen, he gets
50 cents. And, if that user refers another
member to AllAdvantage, he gets 10
cents more an hour for every hour he
surfs. So, he gets more money for every
member that he refers, on to several
levels of referrals. Members with a big
"downline"--lots of referrals--could make
several thousand dollars a month.
So how was AllAdvantage supposed to
make money? In theory, it was easy. It
would collect information about its users'
surfing habits and use this to target
advertising. Known as an "infomediary"--a
site that collects and aggregates
information from a lot of users remains a
popular one among theoreticians of the
Net. Started by two newly minted
Stanford Business School grads, a
computer science Ph.D., and
investor/entrepreneur Jim Jorgensen (who
signed on as CEO), AllAdvantage had all
the neatness of a business school
project. How do you get users to look at
a lot of ads on the Web? Pay them for it.
But anybody who is familiar with multilevel
marketing can guess where this story
goes next. AllAdvantage expected 30,000
members after four months. Instead it got
millions. Eight months after its launch, at
the end of the first quarter, AllAdvantage
had 2 million active members, each
costing $6.49 a month in payments and
referral fees. Member payments in the
first quarter ran over $40 million. And the
numbers just keep growing. While other
dot-coms can cut down on marketing
costs and cancel big planned television
campaigns to trim costs, the AllAdvantage
model calls for it to pay even greater
sums as more members sign up.
As for advertising, in the first quarter
AllAdvantage took in less than $10 million
in revenue--less than a quarter of what it
paid out in member payments. That's no
surprise: Each hour of "active surfing"
winds up costing AllAdvantage about 60
cents, after referral payments are taken
into account. In comparison, that's more
than a television network gets for
showing a viewer about 30 commercials
(some with big-name stars) in an hour of
TV. And advertisers aren't exactly lining
up to pay that much money for banner
ads across the bottom of users' screens.
(To make up the difference, AllAdvantage
has started selling ads that appear on
users' screens when they're not actively
surfing the Web in order to avoid paying
out to members. This gives AllAdvantage
more ads to sell, but hasn't proved to be
successful.)
Meanwhile, the prospect of "highly
targeted" ads that would take advantage
of the information that AllAdvantage
collects about users' surfing habits is still
a dream. The information is in
AllAdvantage's data banks, but only a tiny
fraction of it is actually useful to
advertisers. And to top it all off, Internet
advertising rates are falling across the
industry.
So where does this leave AllAdvantage?
Depending on whom you ask (citing SEC
rules, the company would not comment
because it still hopes for an IPO),
AllAdvantage still has $50 million to $65
million in cash. But much of that money is
already committed to member payments.
In other words, despite the cash on hand,
AllAdvantage still owes members many
millions of dollars for their surfing time in
May and June. On June 1, AllAdvantage
announced that it would reduce member
payments (its contract with members
does let it alter the terms) and pay
members on a longer cycle--a sign that
the company is trying to manage its cash
position. But it can't reduce payments so
much that members stop using the
advertising bar because getting paid to
surf was the original idea. And while it can
use a number of techniques to delay
payments, eventually AllAdvantage will
have to pay up or go broke.
AllAdvantage filed for a public offering in
February. As with so many other
dot-coms, the hope was that raising over
$100 million would at least postpone the
moment of insolvency and give the
company a chance to dream up some plan
for profitability. For now, the offering is
delayed, leaving investors to watch in
horror as the $135 million they have
already given up circles the drain. Now
those investors and especially Softbank
Capital Partners, the late stage
investment fund that has sunk $70 million
into this venture, get to decide how much
good money they are willing to throw
after bad. Sources familiar with the
company believe that it has enough cash
to keep going until the end of the year.
Even if that is true, the huge liabilities
building up on its balance sheet might
push its net value far below zero even
before the cash runs out.
The only winners in all this are the few
members who have taken AllAdvantage
for thousands of dollars apiece. There is
some delicious irony to the thought that
these more or less ordinary Net surfers
should be the beneficiaries of a scheme in
which some of Silicon Valley's hotshot
themselves.
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