Engage Renegotiating Customer Contracts

Suffering mightily from the Web ad sector’s decline, CMGI-owned ad network Engage is renegotiating customer contracts in a bid to improve operating margins.

New Engage CEO Tony Nuzzo’s primary concern is the company’s low gross margins. In its most recent quarter margins totaled less than 20 percent overall, and only 9 percent in the business that accounts for more than half of Engage revenues — placing online ads on the sites of more than 5,000 businesses in its network.

Engage’s media division pockets the difference between what it gets from advertisers and what it pays the Web businesses. Payments across the network are based on the number of hits each ad, or Web site, receives. Most of the contracts are non-exclusive, meaning business customers can work with other ad networks.

Nuzzo has already indicated that Andover, Mass.-based Engage, which is expected to announce layoffs early next year as part of a restructuring, will focus more on its software business and less on the media division.

The company acknowledged in its quarterly SEC financial filing that it has begun redrawing contracts with media customers so it can keep a greater percentage of revenue brought in by each ad impression.

Engage also told the SEC it had started to terminate contracts of companies that aren’t generating enough impressions.

“While we expect that these efforts may reduce the number of Web sites in our network, we believe that such efforts will improve our results of operations and financial condition,” the company reported.

As part of a consolidation of CMGI-owned ad networks in January, Engage acquired Flycast Communications, a San Francisco-based network targeted at Web businesses generating fewer than 1 million page hits each month. At the time Engage touted the merger as giving it a wider breadth of services. But now it appears that at least some of the smaller contracts will be eliminated.

Owners of two smaller businesses who’d originally signed contracts with Flycast complained to boston.internet.com that their December payments from Engage arrived two weeks late.

Linda Hammer, owner of The Seeker, a site to help people find long-lost friends or relatives, complained that Engage has consistently undercounted the number of impressions she receives, resulting in lower payments.

Hammer wrote in an e-mail, “When my logs show a significant increase in traffic — big time significant, to the tune of 65,000 a day — they show maybe 150,000 a month! … I get more e-mails than they say I get traffic! My site was used on the Jenny Jones show a couple of times, and my logs went way up — not Flycast’s. They’ve had account rep after account rep for me (they keep quitting), and they try to help me, but they can’t.”

Tom Barth, Engage’s vice president of investor relations, said the company was only “exploring” contract renegotiations — a statement contradicted by the SEC statement, in which Engage says it “is in the process of renegotiating” contracts.

In any event, Barth said new contracts would provide “opportunities” for both Engage and its partners.

“It’s a classic partnership situation — if neither party is producing value, then it makes sense to revisit the contract,” Barth said. “This would give member companies a better opportunity to sell their inventory.”

Gavin McCormick is managing editor of boston.internet.com.

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