March 29, 2001 12:05 PM PST

Consumers fail to make CueCat purr

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As advertising sales go to the dogs, an offbeat marketing scheme aimed at bridging print and online media with CueCat digital scanners is getting bitten.

Last September, privately held DigitalConvergence began giving away millions of scanners through deals with Wired magazine, Forbes and RadioShack. The mouse-sized device allows consumers to swipe bar codes in print ads and find information about a product or service online.

In the latest sign of trouble for the company, DigitalConvergence pulled plans for an initial public offering last week. The Dallas-based company said it decided to request the withdrawal of its registration statement with the Securities and Exchange Commission, citing poor market conditions.

"It's no secret that the markets are not where anyone wants them to be and that you'd want to go out for an IPO," company spokesman Peter Eschbach said. "We just pulled that to...(enable) us more flexibility and go after financing."

Billed as a significant convergence of online and offline marketing, the CueCat scheme raised a stink last fall among consumer privacy advocates, who said the device surreptitiously collected data on individuals. Although those concerns have faded, the scanner still has a lot to prove.

Eschbach says the company has made some important strides with consumers, distributing 3 million CueCats since September. But he says they have generated just 16 million swipes--hardly a ringing endorsement at fewer than 6 swipes per device over the past seven months.

Lack of use could have a significant effect on the company, as its primary revenue comes from technology licensing deals with clients including Forbes, New Jersey Bride magazine and ClassOne Orthodontics.

At least one DigitalConvergence partner confirmed that demand for the CueCat has been extremely weak so far.

Forbes said that although it sent over 850,000 subscribers the CueCat last fall with its "Best of the Web" issue, "the use has softened a bit." Only about 100,000 people ever used the technology, according to Forbes Magazine Group President Jim Berrien.

"Forbes is pretty much committed to bringing its readers the newest, most effective technology, so that was where the original partnership (with DigitalConvergence) came," said Laurie Baker, manager of corporate communications at Forbes. "As the technology continues to evolve, we want to stay on the cutting edge; so if a new technology came along that we felt that might benefit our readers, we would certainly bring that to them as well."

DigitalConvergence declined to discuss details of its finances.

Still chasing deals
Despite weak demand, DigitalConvergence continues to ink partnerships to expand its business. It said Wednesday that it is working with Verizon Information Services, a directory publisher, to distribute interactive yellow pages printed with scanner "cues," which resemble bar codes.

DigitalConvergence said it is distributing 1 million SuperPages directories with cues in community and advertising sections of the yellow pages in Dallas. Advertisers can purchase a cue and place it within their advertisement as a means to drive people to their Web site.

In November, DigitalConvergence and A.T. Cross unveiled a wireless version of the scanner, a pen device that is available to consumers on the Web for $89. Andrew Lavin, a spokesman for A.T. Cross, would not disclose sales figures but said the device has had limited distribution so far. He said the writing instrument manufacturer plans to sell the pens in stores later this year.

The company also is launching the CueCat service with General Electric's NBC this summer and is working with Harcourt Publishers to place bar-codes in textbooks.

Analysts are unimpressed with the company, however, saying it faces serious consumer adoption problems.

"They're spending lot of money to capture an audience," said Ron Glaz, an analyst at IDC. "It's pretty scary...They're starving for demand. It looks like they're trying to find a way to get people to use it, and they have to show the product manufacturers that it's worth their investment."

Founded in 1998, DigitalConvergence met with immediate criticism from privacy experts when it released the scanners last year.

The company denies that it violates consumer privacy rights. It said it does not compile data that can be tracked back to a specific name, address, phone number or e-mail address, although it does collect general, aggregated data based on gender, age and location.

"We're providing an opportunity for companies to take their advertising--as well as their content, for that matter--and actually have some tangible results to tie it to a Web strategy," DigitalConvergence's Eschbach said.

Analysts, however, remain skeptical of the company's future and the willingness of consumers to embrace the technology, which has yet to become mainstream.

IDC's Glaz said it's still too early for scanning technology to take off with consumers, especially since accessing information on the Internet is still a slow process for most people and only 55 percent of households in the consumer market have a PC. He added, however, that the digital marketplace is evolving, and demand for technology will grow as consumers understand how it can simplify the process of searching for information.

But he said a deeper problem remains in convincing consumers that they should search for that information.

"Just because you can do it, doesn't mean you want to do it or you have to do it," Glaz said.

 

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