The i-shops Advertising Age chose to profile this year represent a cross section of the disparate companies that derive some of their revenue from interactive marketing, ranging from tech-oriented stand-alones to wholly owned units of ad agencies. That said, there was only one skill that really mattered this year: the ability to survive, by translating creative and technical expertise into a business that can sustain itself through the bursting of the Internet bubble to the creation of the next new economy.
Two and a half stars
Agency.com used to be known in the industry as a place with the mantra "churn is good," at least when it applied to having fresh faces and talent. In 2000, however, the economic waters got a little too choppy, and the i-shop was forced to layoff 190 people and close its Vail, Colo., office in December.
But overall, Agency.com is faring better than its Omnicom Group brethren Razorfish and Organic, which have weathered even more massive layoffs. Typical of companies in its sector, it has not been immune to a plunging stock price. While doing better than those two shops, Agency.com, too, is trading in the single digits. Founder and CEO Chan Suh describes it as "a year of maturity," in which the i-shop, formed in 1995, became less of a start-up and more of an established company.
This year is bringing its own difficulties. Fourth quarter 2000 revenues were a healthy $56 million, but the company reported first quarter revenue of $41.1 million. Though that number is in line with earlier forecasts, it also demonstrates that the company is feeling the industry-wide revenue declines. Mr. Suh predicts that, despite the rocky economic landscape, the future of interactive marketing is promising.
"There are a lot of companies who are desperate right now, slashing prices and giving away work," he says. "By the end of the year, however, I think the industry will have rationalized itself."
Mr. Suh says the agency is cutting "non-essential things now. ... We did have great benefits. Now, the focus is on different ways to build community." In the New York office, about once a month, an executive comes in early to cook pancakes. "[these are the] kinds of perks that don't cost anything: Aunt Jemima pancake mix, some electricity, some milk." -- Bonnie Tsui and Adrienne Mand
Digitas demonstrates that if 2000 proved that having a big-time agency holding company parent is great, having a longtime roster of blue-chip clients may be even more important.
Its profile as a digital marketing powerhouse wouldn't be possible if the Boston-based I-shop weren't the 21st-century version of 20-year-old direct marketing business Bronner Slosberg Humphrey. After several name changes and a shift in emphasis to interactive, the resulting company, Digitas, which went public in March of last year, has had success building digital businesses for the same solid bricks-and-mortar companies with which it has done business in the past. Its client list includes American Express Co., Charles Schwab & Co., Delta Air Lines and Federal Express.
But Digitas has more recently had its stumbles. In April it let go 65 of its approximately 1,900 employees, gave top management a temporary 5% pay cut and downgraded its earlier rosy prediction that it would grow by 20% to 25% in 2001 -- now the company says its revenue could be flat and won't increase by any more than 6%.
Still, the company's performance is a classic example of sticking to one's knitting. It wouldn't be so good if the company had succumbed to pressure from analysts before the Internet bubble burst to have more new-economy clients.
Marissa Gluck, a senior analyst at Jupiter Media Metrix, says the firm is in an enviable position compared to its competitors.
"The entire sector is facing a very, very tough market. ... The advantage Digitas has is they actually come from a traditional direct marketing background," she says. "They did a great job of reinventing themselves."
Digitas continues to gain blue-chip clients such as FleetBoston Financial, which named the company agency of record for interactive marketing in February. Still, the company remains well aware of the dismal economic currents around them.
"My concern now is that because so many people were so disillusioned, they've gone to the other extreme," CEO David Kenny says. "The degree of conservatism is quite high right now. That's a cycle. The good news is we're very close to our clients, and they're helping us understand [their needs]." -- Adrienne Mand
From where Managing Directors Norm Lehoullier and Orin Wechsberg sit, it looks like Grey Interactive has made some pretty prescient moves.
Its clients are long-established bricks-and-mortar marketers like Procter & Gamble Co., Liz Claiborne and Philip Morris Cos.' Kraft Foods. More clients are focusing their attention on the agency's specialty, interactive marketing. And unlike most of Grey's competitors this year, the agency has not laid off any employees, though it has lost some to attrition.
"Clients are coming to the realization that [interactive] really means using technological tools for the interest of marketing," Mr. Lehoullier says.
"Increasingly, clients are looking at it as an interactive marketing business rather than an interactive technology business," he says. "Technology-oriented shops are being criticized for not integrating into the overall marketing plan."
It also helped that as the tide turned Grey Interactive could leverage the clout of being associated with a huge traditional agency, though its principals say only 25% to 30% of the group's business is shared with Grey Global Group. Grey New Technologies, a unit that includes Grey Interactive and some of the holding company's other new media ventures, including Beyond Interactive, saw double-digit growth in 2000, reporting $232 million in revenue for 2000, as opposed to $106 million in 1999. But that doesn't mean that the i-shop has been unaffected by the economic downturn.
"Last year, there was a significant growth curve, but in the fourth quarter we began to see softening of online advertising dollars in the U.S. and Europe, a leveling or flattening," Mr. Wechsberg says.
Grey Interactive resisted the trend of luring employees with tons of perks, such as free beer and in-house masseuses, in keeping with its somewhat traditional culture. "We never had that," Mr. Wechsberg says. "We have a coffee machine -- lots of kinds of coffee, but that's about it. I guess we're just not that young."
Mr. Lehoullier sees that as precisely the right difference. "When you have a Fortune 100 base, you don't like to read that [employees at] your interactive agencies are getting massages," he says. "We ended up acting like our clients, which are mature businesses. Others mirror their crazy clients, the dot-com clients. But not us, for better or for worse." -- Bonnie Tsui and Adrienne Mand
One and a half stars
Luminant Worldwide Corp. insists it will be profitable this year, despite a precipitous drop in client billings and major shifts in both corporate focus and leadership over the past several months.
Formed in 1999 from a combination of eight agencies primarily specializing in interactive marketing and advertising, including Young & Rubicam's Brand Dialogue unit, Luminant has been lauded for its Web design capabilities. Now Luminant is following a familiar path in the industry and setting its sights on more meat-and-potatoes work in back-office technology.
WPP Group's Young & Rubicam remains a major investor in Luminant, with a 20% stake, but Luminant's value of $700 million has fallen far from its post-initial public offering high of $18 per share. Its value now hovers around $30 million, and its shares have been trading recently at under $1. Last fall the company, acknowledging the downturn in corporate spending on interactive projects, announced several new initiatives that boiled down to bringing in new leaders to drum up business.
In September, Luminant's founder and CEO, Guillermo G. Marmol, an 18-year McKinsey & Co. veteran before leading the rollup, was replaced as CEO by James R. Corey, another consulting industry veteran, who retained the title of president.
To cut costs, Luminant laid off 18% of its workforce, amounting to more than 200 people. The company closed and consolidated operations among its offices, moving its Seattle headquarters to San Francisco and downsizing its New York and Washington offices.
Like many agencies that had focused heavily on interactive marketing, Luminant late last year announced a new focus for 2001 on more traditional, Fortune 100 businesses. By year's end, Luminant says it expects 80% of its revenues to come from the energy, transportation, telecommunication and manufacturing sectors.
Luminant says it has added new business (and boasts that it has not experienced a significant loss of clients) from core clients including Enron Corp. and AT&T; new areas include supply chain management solutions; and creating digital marketplaces -- but details of these new engagements have not been revealed.
Specific areas where Luminant plans to make hay this year and next are in developing wireless applications for field service engineers; delivering online market research for clients and automating client processes to reduce costs. Mr. Corey has repeatedly emphasized that Luminant had positive cash flow in March and has "adequate funding" to operate "through 2001 and into 2002." Luminant has not let go of its roots in creative Web design. Through its WPP connection, Luminant announced a partnership last June with Y&R's Media Edge and its Digital Edge operations, as well as Avenue A, a Seattle-based digital media specialist.
In July, Luminant announced a $50 million project with Latin America's Grupo de Diarios to create an online marketing operation linking 11 Latin American newspapers; the company continues to add new consumer-targeted interactive assignments from clients including MasterCard International. -- Kate Fitzgerald
Modem Media was around before there even was a Web, but the agency experienced some of its biggest changes and challenges this year, with layoffs, a new CEO and a takeover of its largest stakeholder.
Marc Particelli succeeded founder G.M. O'Connell as CEO in January, bringing with him a consulting and business background from Booz-Allen & Hamilton and Oak Hill Capital Partners. His arrival precipitated a 10% reduction in Modem's workforce to about 850 employees in March and the closure of its Tokyo office, with business there consolidated to Hong Kong.
Also in March, True North Communications, which owns a 44.6% stake in the agency, announced plans to be acquired by Interpublic Group of Cos. This leaves Modem's future within the holding company uncertain. Interpublic already owns stakes in i-shops, including IconMedialab and Lowe Live.
"They have a number of ownerships of interactive agencies, so it's hard to see where Modem would fit into that," says Marissa Gluck, senior analyst with Jupiter Media Metrix.
Other observers believe the True North buyout could strengthen the Norwalk, Conn.-based company's ties to the agency business. While True North had stated, pre-Interpublic, that it was interested in selling its stake in the company, Modem may be of more interest to Interpublic, which, despite its interactive holdings, has never achieved real success in that field. Bob Allen, Modem's president and chief operating officer, says nothing has been decided yet.
"As far as we're concerned, and as far as we know, True North continues to be a 40%-plus shareholder in Modem Media," he says.
In the meantime, Mr. Allen says, Modem continues to carve its niche in a world where he predicts interactive will be more aligned with other direct response and direct marketing vehicles.
"With existing clients, very often we're working collaboratively on marketing programs," he says.
And its performance is enviable compared to many of its competitors. For the first quarter, it reported revenue of $33.4 million, a 17% increase over a year earlier and only slightly down from the fourth quarter, when the company had revenue of $35.2 million.
Steven Birer, a managing director with investment banking firm Robertson Stephens, says Modem is in good shape to ride out the economic slump because of its bricks-and-mortar clients such as Citibank, IBM Corp. and General Electric.
"They were one of the few [interactive agencies] effective at really penetrating the Fortune 500," he says. "They have far less turnover than their competitors have, but again, they were pulled down with this whole downdraft," he says. "I think they can be a survivor."
And Mr. Allen expects business to grow in 2001, albeit more slowly than in previous years. "We were here at the beginning," he says. "I hope to be here at the end, if there is an end." -- Adrienne Mand
WPP Group's Ogilvy Interactive has been bucking trends since its creation. While independent i-shops prided themselves on not having traditional advertising ties, the agency consistently won awards for its interactive work for Ogilvy client IBM Corp. When other agencies rushed to have initial public offerings, Ogilvy Interactive remained part of its parent organization. And while other shops focused on project work for small dot-coms, Ogilvy worked on multifaceted strategies for established brands.
Its principals say sticking to their guns paid off well in 2000.
"What we have been building here all along is to be proficient in building technology, but technology with a purpose, to make cash registers ring for [our clients]," says Jeannette McClellan, president of Ogilvy Interactive North America. "We must continually develop relationships with the customer to ride through the economy in good times and bad, and grow business."
Ms. McClellan says the agency was able to further integrate technology with interactive marketing in the past year.
"Now, after avoiding temptation to take our company out and public, it's worked out really well. Whether you're in need of planning, design issues, how to integrate Web stuff further in your organization, how to better leverage database info, e-mail marketing, to improve [return on investment], we can now do that. We are getting better, and more full-service and multipurpose."
While the agency has not had the layoffs faced by many of its competitors, Ogilvy Interactive did slow down its hiring, which had been at a level of 600% annual growth. The agency focuses about 40% of its work in digital marketing, such as banners, pop-ups and interstitials, with the remaining 60% on customer-focused relationship (CRM) building, including site building.
"We want to take one-to-one relationships to a new height," says Carla Hendra, president of OgilvyOne North America. She says clients recognize that interactive marketing borrows from direct marketing and branding, and they're figuring out how to take advantage of both on the Web.
"Clients want to know how to manage their investments across many channels, and they want interactive to be viewed with a clear return on investment," Ms. Hendra says. "That's what the heart of direct marketing has always been about."
And agencies no longer view interactive as a separate "ivory tower" channel, she says. "Everything is going to be digitized," Ms. Hendra says. "We're all going to be dealing with it." -- Bonnie Tsui and Adrienne Mand
One and a half stars
Organic chairman and former CEO Jonathan Nelson says he does not lose sleep questioning the survival of the company he founded in 1993, but he says he does ponder what the future holds for Organic.
"I stay up at night saying, 'Amidst all this reorganization, what's really core here? What is the value and what's superfluous?'"
Those are good questions to ask during a year in which the company appointed former idealab and PricewaterhouseCoopers executive Mark Kingdon its new CEO, had two rounds of layoffs -- 270 people in December and 300 people in March -- and reported first quarter 2001 revenues of just $14.3 million, down substantially from last year. The company did recently renew its contract with its largest client, DaimlerChrysler.
"In terms of stability, that's a nice thing," Nelson says.
Organic is now focused on efficiency and profitability. "The market was rewarding us just on sheer growth," Nelson says. "It literally changed almost overnight [to be] about profit."
Where Organic will land once the market settles down remains unclear. Minority-owner Omnicom Group's recent deal with Pegasus Capital Advisors to form an e-services company leaves its relationship with the holding company uncertain. But Nelson believes the reorganization will help its viability.
The company is still doing a blend of strategy, interface and technology work, though it has now been regrouped into verticals. Nelson says, "If you came to Organic now, you'd just say, 'Wow, they're more focused than I've ever seen them.'"
Where the industry goes as a whole may well determine Organic's path. Nelson notes that many IT services companies that were dabbling in the marketing side have retreated to their core offerings. "There's a reduced subset of competitors, so the shakeout should leave fewer companies standing," he said. "In the longer term, we will be stronger."
Last week proved the denouement for Razorfish, after a more turbulent year than even most of its competitors experienced: founder and CEO Jeff Dachis stepped down as chief executive of the high-profile i-shop as the company posted another bad quarter. It had revenue of $42.7 million, down from $64.1 million a year earlier.
Dachis' decision to step aside (he and Craig Kanarick, who resigned as Chief Strategy Officer, will remain as co-chairmen) comes after a year in which the company experienced more than 400 layoffs. Recently, the company has also had a barely-there stock price. When the company announced poor third-quarter results in October after not warning Wall Street, its stock fell 43%, dropping from $8.75 per share to $5. Investors were not pleased, and several class-action lawsuits were filed. More recently, share have traded at around $1.
An era ends now that Dachis is no longer at the helm of the company; he was probably the industry's best-known executive, who during the new economy heyday was featured everywhere from The New York Times to 60 Minutes II.
Industry experts say Razorfish, minority-owned by Omnicom Group -- which sold much of its stake in 2000 as the firm's woes became apparent -- fell victim to its own hype and vision. Having the image of being the hippest of the new media shops in Silicon Alley, the place where everyone wanted to work and where straight-laced clients like Charles Schwab went to gain some Internet panache, has turned into a massive liability during the sober days of 2001.
Still, there was substance behind the hype. Steven Birer, a managing director with investment banking firm Robertson Stephens, credits Mr. Dachis and Razorfish with having the savvy to know where the marketplace was going, first from brochure-ware to e-commerce sites to "connected commerce," which is integrated with supply-chain systems and customer support.
Mr. Dachis also saw the wireless phase coming very early on, Mr. Birer says.
Jean-Philippe Maheu, who had been chief operating officer and now takes the CEO reins from Mr. Dachis, says the company began addressing clients' concerns last fall with a focus on measurement and results.
"In September, it wasn't really fashionable. I would say by the time we had the product in January, now everybody wants it," Mr. Maheu says. "Any measurement needs to be tied to cash."
Where Razorfish goes from here remains to be seen, although venomous postings against the company on message boards indicate that it has many detractors.
"The vitriol that former employees and competitors exhibit towards Razorfish is astounding," notes Marissa Gluck, a senior analyst at Jupiter Media Metrix.
Another issue is Omnicom's recent deal with investment firm Pegasus Capital Advisors to form an e-services company with stakes in Razorfish, Agency.com and Organic. Under the agreement, Omnicom would contribute its minority stakes in each company -- including its remaining 12% of Razorfish -- to the new venture, though what this means to any of those i-shops is unclear.
Mr. Maheu believes Razorfish's new focus will help it ride through the tough economic times. He added that it's not fair to be both the poster child and whipping boy of the industry. "I think that we played a critical role in the birth of this industry," he says, "and we intend to play a critical role in the maturation of this industry." -- Adrienne Mand
Sapient Corp., considered by many observers to be a standout among interactive consultants, has been increasingly affected by declining demand for e-commerce consulting services.
After reporting stellar growth through April 2000, Sapient began a slow deceleration, culminating in the announcement in March that the company would engage in its first serious belt-tightening; the company was forced to let go 20% of its workforce in the U.S. and in Australia. Last week, the company posted a pro forma net loss of $6.2 million for the first quarter of 2001, compared to pro forma net income of $12.7 million for the first quarter of last year. It had first quarter revenue of $109.1 million.
Sapient's retrenchment was a dramatic change in direction for the company, whose previous growth had been exponential. Last year, Sapient acquired Austin, Texas-based Human Code, a developer of rich-media and broadband applications for entertainment and e-learning, signaling a move toward developing more consumer-targeted Internet marketing services. The company has since signaled plans to return to more manufacturing and technology-based consulting overseas, although it continues to own Human Code.
An alliance inked in May 2000 with Thomas Weisel Capital Partners LP, which called for Sapient to invest up to $100 million in new businesses, was also dissolved in March, putting an end to Sapient's ambitious plans to expand into new sectors.
CEO Jerry A. Greenberg says the company had been significantly affected by a downturn in technology spending in North America and was seeking ways to ramp up revenue elsewhere, particularly in Europe and India. Sapient's stock continues to ride low -- though higher than most of its competitors -- and analysts say the company is well-positioned to succeed over the long haul, thanks to a diverse mix of clients and broad mix of services.
Mr. Greenberg has announced plans for Sapient to play a major role in the emerging wireless sphere, especially in helping manufacturing and financial services companies automate field services with "anytime, anywhere" access, with at least 12% of the company's revenues expected to come from mobile and broadband projects over the next year. Sapient continues to develop traditional Web interfaces for a broad range of users and recently helped launch India.com, which offers a wide range of information and services for companies doing business with India. -- Kate Fitzgerald
One and a half stars
If 2000 can be summed up in a word for interactive marketing, confusing is probably it.
Michael Tey, president of Zentropy Partners, says clients didn't know what they needed in the face of the changing economic climate.
Zentropy owner Interpublic Group of Cos. didn't know what it wanted out of the unit, either. Back when spinning out one's interactive holdings into an initial public offering was the thing to do, Interpublic was interested in the potential of bringing its rollup -- which combined interactive units scattered throughout the holding company into one entity -- into another big moment on the Nasdaq. But when the market failed and Zentropy ended up not having the profile to be a hot stock, that didn't happen.
In October, Zentropy was folded back into McCann-Erickson WorldGroup and went through a layoff. In addition, there was a reshuffling of management: Zentropy CEO John Connors III, the 33-year-old son of Jack Connors, himself the chairman of Interpublic's Hill, Holliday, Connors, Cosmopulos, was reassigned to Interpublic's Internet Ventures Group. Mr. Tey, who had been Zentropy's chief engagement officer, was named president. Being affiliated with such a large traditional agency is ending up as Zentropy's primary strength. "As we looked at the top 30 McCann clients, we were already working in some capacity with them, which really positioned us well," Mr. Tey says. "We were able to leverage more of that."
That's a good thing because Mr. Tey admits that at the beginning of 2000, Zentropy was extremely influenced by the going trend, which favored revenue growth over profitability.
"For the first nine months, we had that model, too. In October, we started working toward achieving profitability," Mr. Tey says. He adds that Zentropy will do so in an environment where clients "are more cautious, with an increased degree of expectation."
Since October, the agency has been hiring mostly contractors for specific projects. Mr. Tey expects the interactive business to thrive in the future, despite the difficult times.
"The true opportunity that is very much under exploration is how can we leverage it in all ways to be what the client wants to achieve," Mr. Trey says. "There's an opportunity to have a more thoughtful approach in this space, more solution-centric rather than just driving the branding." -- Bonnie Tsui and Adrienne Mand