BUSINESS PLANS

60-Second Business Plan: Circular Logic

You've got to be either crazy or brave to think you could make a buck in Internet advertising these days. But that's just what John Strisower has in mind.
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60-Second Business Plan

The pitch: You'd have to be either crazy or brave to think you could make a buck in Internet advertising these days. But that's just what AdExpedia Inc. cofounder and CEO John Strisower has in mind. He sees an E-market opportunity in the Sunday papers -- namely, turning millions of pages of newspaper inserts, flyers, and display ads into digital bytes so they can be posted on-line.

Strisower began casing out the newspaper market after selling his last venture, a software-development firm, to a Fortune 500 company in 1997. Although several vendors were converting newspapers' classifieds for the Web, none had ventured into inserts. "Here were these [ads] that people spend billions of dollars on, and I couldn't find one 800-pound gorilla putting any of it on the Net," says Strisower.

AdExpedia, based in Chico, Calif., entered the market two years ago, promising to turn newspapers' Web sites from "sinkholes to profit centers." Using a piece of proprietary software called AdTabs, the company charges a contractual per-ad rate (from $10 to $30 per page, depending on the type of ad) to digitize newspapers' inserts and display ads for the Web. All the ads are posted in a searchable format, creating what the company calls an integrated marketplace, where visitors can search the text by company or product, get directions to an advertiser's store, or link to a retailer's Web site. They can also sign up to receive E-mail alerts when products they want become available.

The 50-employee business has already landed deals with nearly 40 newspapers, including Knight Ridder Digital and the San Francisco Chronicle, based on the premise that the added communications channel will enhance value for advertisers and help newspapers sell more ads. (In 2000 advertisers spent some $29 billion on newspaper inserts and display ads, according to the Newspaper Association of America.)

And because AdExpedia's software can track consumer behavior, the newspaper industry can for the first time solicit ads based on what readers actually click on with their mouse, not just what advertisers are hungry to sell. "Though you're not getting a circulation of 50 million, you are reaching a reader who has sought your product out," says Strisower.


FRIEND OF THE FOREST: AdExpedia CEO John Strisower is putting newspaper ads on the Web, which is good news for trees.


AdExpedia's software isn't exactly novel -- at least half a dozen companies are digitizing newspapers' display ads and inserts. But Strisower claims his is the only company that's also targeting retailers. In the past two years Petco, Lowe's, and crafts retailer Jo-Ann Stores have all signed up with AdExpedia to convert print ads for their Web sites. "AdExpedia has generated more customers and products and services than any other competitor," Strisower boasts.

The company is working to close a $5-million Series B round of financing in the next few months -- money that Strisower says will be used to beef up AdExpedia's sales and marketing efforts, with the goal of signing up an additional 20 newspapers by the end of 2002. "In the last year," he says, "we've seen nothing but increasing numbers and declining costs."


The Quick Once-Over

The Numbers: No revenues, $513,000 net loss in 2000; $428,000 in revenues, $991,466 net loss in 2001; projected $5.8 million in revenues, $380,000 net profit in 2002; projected $18.6 million in revenues, $10.2 million net profit in 2003

Long-Term Goals: To acquire at least 10% of a projected $1-billion market that includes hundreds of newspapers and 50 or 60 of the biggest retailers, all on-line

Capital Raised: $445,000 from the founders and their friends and families; $2 million in Series A from Los Angeles­ based Windsor Capital Group

First-Year Expenses: $513,000

Biggest First-Year Expenses: Payroll; office-setup costs


The Weigh-in: Our Panel Rates the Plan

Clicking or Clanking?

Who: David Hallerman, senior analyst for on-line advertising at eMarketer Inc., a New York City Web-marketing company

Rating: 6 (based on a scale of 1 to 10, with 10 being the highest)

"There's good logic to AdExpedia's plan to bring the display- and insert-ad market on-line. As newspaper readers migrate to the Internet, the publications need a way to help their traditional advertisers migrate with them. And as those traditional retail advertisers see their customers spending more time on the Web, they need a way to reach them.

"On the other hand, it looks as if there's no one high up in the company who fully understands the needs of newspapers. And the prices AdExpedia is charging seem to be on the high side. The economic slowdown has caused ad revenues to drop, so AdExpedia will have to make its prices more competitive if it wants to succeed."


Who: David M. Cole, media-industry consultant and editor and publisher of newspaper trade journal NewsInc.

Rating: 5

"AdExpedia's technology seems to work fine, but I'm not sure there's a real audience on the Web for insert and display ads. The latest Newspaper Association of America survey indicates that consumers strongly prefer to have preprints [such as inserts and flyers] in the Sunday newspaper. So having them on-line flies in the face of that finding.

"In general, the history of suppliers of newspaper technology is not a pretty one. Newspaper publishers are brutal negotiators who wring the last cent out of every contract. Well-established companies like Kodak and DuPont have turned tail and fled the industry because it's just too tough. Plus, the newspaper industry is a consolidating business, which means fewer potential customers for AdExpedia. More and more newspaper groups are buying products and services en masse, so the loss of one sale could be the loss of as many as 100 newspapers at a time."


Who: Tom Hyland, partner and chair of PricewaterhouseCoopers' New Media Group

Rating: 4

"AdExpedia looks as if it has put together a solid tech team, but that strength is not matched on the advertising side. They need more people with publishing and advertising experience, people who intimately understand the newspaper industry and its needs. Also, the plan doesn't include any third-party research on the size of the potential consumer audience, just AdExpedia's own estimates. Who are the end viewers of the ads? I just don't think people will go to a Web site to see ads that presently fall out of the newspapers. If I were an investor, I would have a lot of questions that the plan doesn't address."

Who: Bryan Eisenberg, principal and chief information officer at Future Now Inc., a New York City-based Internet sales and marketing consultancy

Rating: 3

"AdExpedia's technology is fair. However, simply taking newspaper inserts and display ads and converting them to a digital format doesn't make them suitable for on-line viewing. The ads they post on the Web are still upwards of 100K per page, so they're not, as the company claims, a "low page weight." It would take the average user who's not connected through broadband approximately 30 seconds to load one of those pages. Someone could have gone through an entire printed circular in the same time. My wife, who is a perfect candidate for something like this, doesn't have time to surf through eight on-line pages to get the one product she's looking for.

"Even if downloading speeds improve, I'm not sure they have a long-term business. While the newspapers try this out, they will continue to develop their own technology. If the business model is worthwhile, then newspapers will pursue it on their own."


Incubator

High Concept: The Pen and Automated Teller
Dossier: Man of Depth
Main Street: Fine Dinering
60-Second Business Plan: Circular Logic
Business for Sale: A Blue-Sky Deal


Please E-mail your comments to editors@inc.com.

Last updated: Jul 1, 2002




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