Beyond the Banner Ad

The latest study on banner ads is out, and the news is not good. Banners, the
kind that sit like a valance atop your screen, are still the most popular form
of Internet advertising, though not a very effective one, reports AdRelevance.
The only I-ad delivering fewer eyeballs than the horizontal banner ad is the
vertical banner ad, which runs the length of the screen.

The worst part of this news is that it’s not news. Everyone in marketing
and advertising already knows that banner ads stink. They are a pale imitation
of their richer television and magazine cousins. People’s eyes slide over them
easily. And if they dare to get uppity and try to wave at us and get our attention, we complain. Banners can’t win. Yet marketers cling to them, unwilling to take risks and venture into other tactics.

That’s a shame, because there is a smart way to advertise using the Net,
which only a handful of companies have figured out. Instead of plastering ads on
Web pages in the same old way, savvy companies are launching branding campaigns
that tap into what the Web stands for–tech-smart folks who fancy themselves as
hip.

Take Kmart Corp. The discount chain has a new tech offering, the BlueLight
True Blue Personal Computer, your basic $499 PC. It will do little in the way of
big league profits. But that’s fine, because what it loses in margin, it will
make up in marketing. The key is in its name. It’s branded with the moniker of
Kmart’s hot new online store, BlueLight.com. This gives Kmart a link to more
affluent, techie customers–the Web’s bread-and-butter.

Yule buzz. After years of searching for a Web strategy, Kmart is starting to
get some traction with BlueLight. Among online discounters, BlueLight’s site
traffic is strong: More than 4 million consumers have signed on for its free
Internet access. And, while rival Wal-Mart Stores Inc.’s latest online
incarnation has drawn yawns, BlueLight.com has buzz heading into the holidays.
The new PC borrows on that buzz and boomerangs it back home to the discount
aisles, elevating the Kmart image by connecting it to the Net, according to
Heidi Gibson, director of product marketing at BlueLight. “We leverage that
brand to serve the master brand–Kmart,’’ she says.

Volvo also is taking a stab at leveraging the Web for what it does best. To
attract younger consumers and inject a little pizzazz into its safe-and-boxy
image, Volvo this month is launching its new model, the S60 sedan, entirely on
the Net. Volvo is funneling its marketing for this car into the Web, primarily
into real estate on America Online–with everything from informational Web
sites to sweepstakes. By doing this, Volvo not only reaches key customers–company
research shows 80% of its target market is online–but also gives its brand a
lift by breaking from traditional ads and making a cutting-edge statement
online.

These marketing efforts are exciting because they stray from the beaten
banner path. Instead of trying to make the Internet into a computerized TV, they
reach out and use what works about the Internet. That’s crucial.

E-tailers will draw record numbers of shoppers this Christmas. It remains the
medium of the out-of-the-box and the adventurous. These are worthwhile brand
attributes.

AdRelevance suggests that marketers try other ad shapes and technologies,
such as the button or the form ad, which includes text boxes or drop-down menus.
That may not solve the marketing problem. Creativity gets more attention than a
fleeting mix of pixels. Quit banging your heads against those banners and find
the ways the Web works.

By ELLEN NEUBORNE
in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

BEA is off to a promising start. In just five years, the
company has landed 8,000 customers, ranging from Old Economy stalwart General
Electric Co. (GE)
to Net pioneer Amazon.com Inc. (AMZN)
The draw: BEA’s specialized computer-server software that allows corporations to
custom-build their Web site operations. For the quarter ended on Oct. 31, BEA
reported revenues of $224 million, up 77% from a year earlier, and a $31.3
million profit. This year, analysts figure the company will hit sales of $925
million. That may seem like small change in the grand scheme of things, but it’s
a far sight more than Microsoft’s $7.5 million in revenue when it was the same
age. ”BEA has an opportunity to be a major platform for this new wave of
computing for the Web,” says analyst Rick Sherlund of Goldman, Sachs & Co.

Indeed, it’s the promise of radically new ways of doing
business that could catapult these small fry into the big leagues. Using the
Internet, companies are tackling big and small projects alike–from capturing a
company’s storehouse of expertise on Web pages so employees can do smarter work
to comparison-shopping for tape dispensers and toilet paper with the click of a
mouse. The explosion of ways that companies are squeezing out new efficiencies
via the Web holds the tantalizing possibility that Internet software will
eventually grow to dominate the market. Today, e-business software is a $13.5
billion market–just 13% of the entire corporate-software market. Yet in just
three years, e-biz software will account for $44.7 billion in revenues and 24%
of the whole, according to Merrill Lynch & Co.

Even the threat of an impending economic slowdown hasn’t
dampened enthusiasm for the brash upstarts. Experts say the young software
makers are likely to fare better than the rest of the industry because they sell
must-have products that can improve productivity or help open new markets. Boise
Cascade Corp. (BCC),
for example, is automating the way it handles transactions with suppliers and
customers, using the Internet to speed up communication and share information.
The paper-products company is spending $100 million on technology this year,
including about $1 million on marketing software from E.piphany Inc. in San
Mateo, Calif. Says Robert Egan, Boise Cascade’s director of information
services: ”You have to keep moving ahead. Five years out, all of our
competitors will have these capabilities.”

It’s spending plans such as Boise Cascade’s that have kept
the stocks of the insurgents afloat in a market that’s under water. In the past
six months, shares of our 16 upstarts have risen an average 13%, vs. -5% for the
Nasdaq Composite Index. And some have soared. The stock of Ariba, a maker of
e-marketplace software, is up 44%, BEA’s shares have climbed over 93%, and
Interwoven, whose software manages Web content, is up a startling 200%.

That doesn’t mean that every one of these pipsqueaks will
grow to be a Goliath. Any Microsoft wannabe must first contend with Microsoft,
which is also angling for a fat slice of the Web-software pie. Then there’s IBM,
Oracle, SAP (SAP),
and Siebel Systems (SEBL),
today’s software kings, each with its own strategy for grabbing market share in
the new Net fields. And they wield key advantages: Gobs of money, existing
relationships with customers, and the ability to price low on key products to
edge out the whippersnappers. Says Oracle CEO Lawrence J. Ellison: ”You have to
distinguish between companies that have endurance and meteors.” Are the
upstarts cowed? ”Oracle and SAP are dying a very slow death,” responds Sanjiv
S. Sidhu, CEO of rival i2 Technologies.

Who will be the winners and who will be the losers? After
the dust settles 5 or 10 years from now, analysts predict that just a handful of
companies will end up being the royalty of software. Microsoft seems almost sure
to be among the winners, though not likely the king of kings that it is in the
PC world. Microsoft’s software for heavy-duty server computers is shaping up as
a solid foundation for e-business applications. But so far, it’s the software
platform of choice for only one of the 16 upstarts–Commerce One Inc. (CMRC)–to
develop its programs on. Worse, customers have yet to clamor for it (page 42).
Other giants that seem likely to retain their thrones: Oracle, because its
databases power many of the largest e-commerce sites, and IBM, thanks to its
mighty consulting business.

And the new kings? A handful of the upstarts will carve
out sizable niches where they can thrive–such as Vignette Corp. (VIGN)
for handling Web-site content, and Commerce One and Ariba (ARBA)
in e-marketplaces. To become a true giant of the industry, the upstarts will
have to branch out to offer a broad set of products or create software so
powerful that it becomes a platform–much like Windows–for customers and other
software companies to build on. Two of our 16 insurgents have those qualities:
i2 can help corporations automate a huge swath of their businesses–from
ordering and inventory management to collaboration with suppliers–while BEA has
the best chance of supplying the basic building blocks upon which Net computing
is built. ”BEA is probably the next big infrastructure company,” says Charles
E. Phillips, a managing director at Morgan Stanley Dean Witter.

In each case, the Net pioneers spotted an opportunity when
others simply didn’t see it. Four years ago, for example, Commerce One CEO Mark
Hoffman foresaw that there would be a need for software to support
e-marketplaces in which buyers and sellers could meet and make deals. Most of
the established companies didn’t figure that out until late last year.

Often, these CEOs took huge risks to get their companies
off the ground. i2’s Sidhu bootstrapped his company with $200,000 of his
personal savings. He didn’t collect a salary for the first two years, and, to
save money, he insisted that new employees assemble their own desks when they
first reported to work. Others walked away from bucketloads of money by leaping
from sure-bet mature companies to the uncertainty of shaky startups. BEA’s
Coleman left behind 50,000 shares of not-yet-vested Sun Microsystems (SUNW)
stock, which would now be worth $72 million. His reward: His BEA shares are now
worth $650 million. Whether he can turn that nest egg into a fortune of Gatesian
proportions depends on what happens next.

Taking an early lead with the latest technology plays a
major role in separating winners from losers. Unlike the established giants,
which are trying to adapt their old products to the Web world, the upstarts have
been able to build from scratch. That often means that their programs are easier
for customers to install and use and easier to update when new features become
available. ”Running these companies is not so much about the competition as it
is figuring out the next generation of technology,” says David C. Peterschmidt,
CEO of Inktomi Inc. (INKT)
in Foster City, Calif., which makes software that speeds content delivered on
the Net.

Keeping that technological edge is a necessary but costly
proposition. Inktomi, for example, is spending over 20% of its revenues on
research and development. And that’s not unusual for the top tier of
Web-software makers. The 16 insurgents we cite are, on average, funneling 23% of
their revenues into R&D–compared with just 7% for Siebel, 11% for Oracle,
and 16% for Microsoft.

Some upstarts have learned the hard way that old-time
technology could hurt them dearly. Last July, BroadVision Inc. (BVSN),
a maker of software for running online shops, lost one of its blue-chip
customers, American Airlines Inc. (AMR),
to startup rival Art Technology Group (ARTG).
American Airlines declined to comment on the deal, but analysts estimate that it
may be worth at least $150,000 to Art Technology. The reason for BroadVision’s
loss: It was slow to embrace a new kind of software programming called
Enterprise Java Beans that makes software products from different suppliers fit
together like bricks do at different construction sites. The fallout was
immediate. Although BroadVision was profitable and growing at a 300% annual
clip, the Redwood City (Calif.) company’s market cap was cut to a third of its
June value in September when the shares bottomed out at $17.62. Stung,
BroadVision went so far as to forge an alliance with sometime rival BEA Systems
to incorporate BEA’s Java technology into BroadVision products.

Most of the young software makers, BroadVision included,
got off the ground by focusing intensely on doing a few things really well. That
gave them breathing room because they could invest all of their relatively
meager resources in one place and concentrate on small but promising markets
that haven’t yet attracted the attention of the big players. For four-year-old
Ask Jeeves Inc. (ASKJ),
the bull’s-eye is Web-search technology. Ask Jeeves has kept its 725 employees
focused on creating cutting-edge search technology. That made it the choice for
Ford Motor Co. (F)
when the auto giant went looking for a search service for its consumer Web site.
The service, on fordvehicles.com, allows buyers to ask questions about Ford
products and services, such as information about discounts for recent college
grads.

For other upstarts, the key has been to get critical mass
in their niche–fast. That way, customers don’t spend as much time sizing up the
alternatives. Ariba is a good example. Last November, Ariba, which at the time
was selling only corporate-purchasing software, spent nearly $2 billion on
auction-software maker TradingDynamics and e-marketplace software maker Tradex
Technologies. That gave it the complete package of software for companies
seeking to set up business-to-business e-commerce Web sites.

Those that don’t broaden their portfolio are destined to
run into trouble. Lower-tier outfits, such as e-sales specialists InterWorld
Corp. (INTW)
and Web-marketing company NetPerceptions Inc., posted disappointing revenues for
the third quarter and watched their stock prices crater by as much as 90%.
”Those companies that haven’t moved beyond being a small piece are getting
killed,” says Internet software analyst Greg Vogel of Banc of America
Securities.

That’s why forming alliances with major tech players looks
mighty attractive to some of these emerging companies. Back in March, for
example, Ariba and i2 Technologies made a three-way partnership with IBM, which
bought small stakes in Ariba and in i2. The idea is that by making their
software work well together, selling each other’s products, and approaching
customers as a team, they’ll be able to land major buyers. It seems to be
working. So far, the alliance has won 25 customers, including such online
exchanges as e2open, MetalSpectrum, and Worldwide Retail Exchange.

But it’s not just the upstarts that badly want these
partnerships. The tech giants need the little guys every bit as much–if not
more. Look at SAP. It got caught flat-footed last year when corporations started
clamoring for software to run e-marketplaces, connecting manufacturers and their
suppliers. The German powerhouse is expert at operating, financial, and
manufacturing software, but it would have taken too long to create top-notch
e-marketplace software. So instead, it swallowed its pride and made a deal with
Commerce One. Using Commerce One’s products as a starting point, the two agreed
in June to jointly develop and sell e-marketplace software.

When push comes to shove, will these David-and-Goliath
partnerships fall apart? Already, there are signs of fraying. In November, 1997,
Oracle and i2 launched an alliance to sell software for managing orders from
suppliers to large industrial customers. But a year later, Oracle came out with
its own version of i2’s product, and the two began feuding and poaching
customers from each other. ”These are two independent companies. These
relationships will not last forever,” says former Oracle Executive
Vice-President Gary Bloom. Indeed, chronicles of the tech industry are littered
with relationships gone awry. So the smart upstarts will hedge their bets–doing
their own development while keeping a potential partner in reserve.

When it comes to hooking up with the large consulting
companies, however, there doesn’t seem to be a downside. Since the upstarts
don’t have armies of salespeople and consultants, they’re wise to align with
large consulting companies that design, install, and maintain computing systems.
Experts estimate that more than half of software purchasing decisions are now
made or heavily influenced by such integrators. That’s why webMethods Inc., a
Fairfax (Va.) maker of software for tying together disparate computing systems,
forged partnerships with service giants such as Andersen Consulting and KPMG,
plus 92 smaller consultancies. The impact: Thousands of consultants employed by
others extend the reach of its 70 sales reps and 110 consultants.

Those linkups are paying off. In the summer of 1999,
Andersen recommended webMethods (WEBM)
to PolyOne Corp. (POL),
a $3.5 billion plastics manufacturer based in Cleveland, to connect its own
manufacturing and planning software to systems used by its three largest
suppliers. As a result, PolyOne has shortened the time it takes to create orders
from days to seconds and reduced its inventory by 13%. ”WebMethods is a very
good tool, but Andersen Consulting has a deep understanding of how our system
works,” says David Honeycutt, director of e-business for PolyOne.

For the software upstarts, buddying up won’t necessarily
overcome the advantages of the giants. Consider the power of IBM. With annual
1999 software revenues of $12.7 billion, it’s the world’s second-largest
software company after Microsoft. It has 8,000 software sales specialists,
compared with just 511 for BEA. Now that IBM has wised up to BEA’s market, it’s
gaining ground. In 1999, BEA claimed 32% of the market for e-commerce
application servers, vs. 16% for IBM, according to tech research firm Giga
Information Group. But by the end of this year, Giga estimates that BEA and IBM
will be tied, with 24% each. Giga analyst Mike Gilpin says that even though
BEA’s technology has the edge, IBM’s long track record reassures potential
customers. ”We’re gonna be here 20 years from now,” says Steve Mills, an IBM
senior vice-president who runs the company’s software division.

As mighty as they seem, the software powerhouses have some
chinks in their armor. Because they already have thousands of customers, they
spend a lot of their time and energy maintaining and updating old software. IBM,
for instance, has to make versions of its software for at least eight different
server operating systems. That slows down the release of product updates and
makes it hard to break from the past and deliver innovative technology. It’s one
reason why companies that have had tremendous successes in one business era find
it hard to replicate them in the next. IBM dominated the mainframe market but
was overshadowed by Digital Equipment Corp. in the minicomputer market. DEC, in
turn, missed out on the shift to PCs.

”The leading companies always get toppled,” warns
Clayton M. Christensen, a Harvard Business School professor.

The bigger you are, the harder it is to shift course.
Consider Oracle, which sold nearly $600 million worth of database software last
quarter. Its future growth rate hinges on the sales of its e-business suite of
applications, which includes software for e-commerce, procurement, and online
marketplaces. But it’s having trouble switching its focus. During the third
quarter, Oracle’s application software sales disappointed Wall Street.
Application sales grew 42%, to $156 million, from the previous year, but
analysts were expecting 60% growth. Insiders say Oracle’s sales force has a
greater incentive to sell its core database product because they know it
better–and they get bigger commissions.

Despite Oracle’s hiccups, the incumbents won’t give way
without a fight. Kana Communications Inc. Chief Executive Michael J. McCloskey
says that heads of big software companies use their clout to try to undermine
the small fry. He says the CEO of a large software company, which he would not
identify, recently berated a consulting firm for recommending Kana’s products.
Separately, that same CEO called the head of a large Kana customer to point out
that his company’s software was already installed on its computers. The
not-so-subtle message: You depend on us for help. ”They call very high in the
organization and try to unhook our deals,” says McCloskey.

The upstarts fight fire with fire. Roger Siboni, CEO of
E.piphany, takes advantage of his decade as a top executive at high-tech
consultant KPMG to land customers. A personal plea he made to Greg Carmichael,
CIO at Emerson Electric (EMR),
helped E.piphany edge out Siebel Systems. ”Roger Siboni called me,” says
Carmichael. ”Tom Siebel didn’t.” At i2, CEO Sidhu went so far as to peg a
portion of i2’s fee to its ability to deliver savings. That has won him instant
credibility. The company’s most recently quarterly revenues hit $319.5 million,
up 118% from a year earlier.

It’s not enough, however, to go toe-to-toe with the Old
Guard. The would-be software kings must also look over their shoulders at the
up-and-coming startups. In October, Wal-Mart Stores Inc. (WMT)
selected virtual unknown Atlas Commerce Inc., a one-year-old software maker in
Malvern, Pa., to improve coordination with its suppliers. Atlas’ product allows
numerous Wal-Mart stores to combine orders from various suppliers into a single
purchase order–the procurement market that Ariba dominates. As a result, the
retail giant can get volume discounts and trim shipping costs. ”I worry less
about the big guys,” says Interwoven (IWOV)
CEO Martin W. Brauns. ”I worry more about the three guys in the garage building
something no one has thought of yet.”

When it comes to predicting who the new leaders will be,
one thing is clear: It’s unlikely that any single company will gain the same
kind of dominance of Web computing that Microsoft enjoys in the PC realm. While
some of these young companies rule their markets, a total Net monopoly isn’t
likely since no one company can own the operating system of the Net, as
Microsoft did with personal computers. ”There’s more of a level playing field
than there has ever been,” says Dave Winer, who runs the popular
software-developer Web site, DaveNet.

Ironically, that level playing field may not be the best
thing for the software upstarts. There are some advantages to having one company
call the shots. A single standard-bearer can get the whole industry moving in
sync, minimize incompatibilities between technologies, and assure customers that
they’re making smart investments. These days, many in the software industry hope
that Internet standards can fill the role that Microsoft plays in the PC realm
and that IBM plays in mainframes. But there’s still a lot of work to be done to
assure that Internet software knits together. It’s vital to the upstarts that
these complex systems don’t devolve into a computerized Tower of Babel.
Otherwise, corporations and consumers alike may end up wishing that Microsoft
remains king of the software hill.

By SPENCER E. ANTE and JIM KERSTETTER
Contributing: Jay Greene

Copyright 2001 , by The McGraw-Hill Companies Inc.
All rights reserved.

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