Uncertain Prospects Greet Online Card Industry

The online greeting card industry could use some of the good cheer it helped spread during the holiday season.

Already, a slower economy is dispensing gloom on a business that instead should be celebrating its busiest season ever. Los Angeles-based Getacard.com, for example, will announce today that it is for sale, despite an increasing march of visitors to its site.

An anticipated slowdown in advertising spending is one reason for the industry’s post-holiday blues. Internet advertising declined for the first time in the third quarter of 2000. And direct marketing expenditures are expected to grow 5.4% this year, down from 5.7% in 2000, according to one estimate.

The industry faces “a lot of challenges,” said analyst Jeffrey S. Stein, who follows American Greetings for the Cleveland investment firm of McDonald & Co.

Online greeting card companies fall into two business models, neither of which is profitable. The largest sites, led by BlueMountain.com, American Greetings and Egreetings, focus on electronic greetings sent by e-mail. The greetings are free to consumers, so the companies raise revenue primarily through advertising on their Web sites.

A smaller category of online greeting card firms sell, address and mail paper cards for customers who use their Web sites. Getacard and rival CardStore.com, based in Emeryville, Calif., target businesses that use cards year-round as thank-you notes or invitations. Sparks.com, the largest paper card site, targets consumers and employs “scribes” who add handwritten greetings for an additional charge.

The experience of Getacard.com points to another worry facing the emerging online card industry: funding. Chief Executive Gary Hickox said the company ran into investor skittishness after its launch in April. It hasn’t raised money beyond the initial $3.5-million round from such investors as Belo Media and former Universal Studios President Frank Biondi.

That’s hurt operations, said Hickox. Getacard has spent $500,000 on marketing, less than competitors and not enough to reach large numbers of potential clients, said Hickox. It slashed its work force by 54% to 22 from 48.

“We’ve taken body blow after body blow, and we still ship cards,” Hickox said. “We make a positive gross margin when we sell a card. The basic business is good. It is just very difficult to raise money.”

CardStore, with a client roster that includes Bank of America, Staples and Martha Stewart Living Omnimedia, is raising an additional $15 million in capital. Chief executive and co-founder Jinne Tao is optimistic as the firm’s initial backers--Highland Capital Partners, Roda Group and Crimson Global Internet Fund--have agreed to ante up additional funds.

“We’re lucky, because it is a tough environment,” said Tao, who declined to provide revenue figures.

In CardStore’s favor is the historical resilience of the direct marketing business to economic slowdowns. “It generally holds up well and outperforms broader [industry] trends,” said Lauren Fine, advertising industry analyst at Merrill Lynch & Co. “Of course, that is no guarantee.”

The Direct Marketing Assn., a New York-based trade group, is forecasting 5.4% growth. Jack Myers, a New York media consultant, said direct mail advertising will grow 3%, up slightly over the 2.3% expected for 2000.

Internet advertising, a product of boom times, hasn’t yet faced the test of a sluggish economy. The decline in the third quarter signals caution for electronic card sites, though Myers predicts growth overall, once barter deals and equity transfers are factored out. Egreetings, the third-largest electronic card site, slashed its revenue projections for the fourth quarter in half to between $2.5 million and $3 million. In October, it laid off 60 employees and its chief executive resigned.

“I think everyone is a little concerned” about a slowdown, said Mark Rinella, vice president and general manager of BlueMountain.com, which is owned by Excite. That concern comes despite news that, according to research firm Media Metrix, growth in visitors to online card sites outpaces growth in Web users overall.

The electronic card sites are developing additional sources of revenue to supplement ad dollars. BlueMountain, for example, derives a fee when consumers attach a gift certificate from its marketing partners, which include 1-800-Flowers, Harry & David and Mrs. Fields.

Analyst Stein doesn’t believe gifts will overtake advertising as a source of revenue for online card companies, though, he said, “it makes sense as a product category.”

American Greetings and much smaller Sparks.com face an additional worry: the malaise in paper greeting cards aimed at consumers. According to Stein, the market for non-special-occasion cards is shrinking, and that category accounts for about 30% of American Greetings’ sales.

The card business is being hurt by other easy ways to communicate, such as e-mail and cell phone. “Advances in technology have created alternatives to cards,” he said.