Brick houses for i-shops

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Bricks and mortar: 98. Dot-coms: 2.

If New York i-shop charted its revenue as if it were a basketball score, that's how it would read. When the company announced its fourth-quarter and year-end 2000 last month,, minority-owned by Omnicom Group, received only 2% of its $56 million in fourth-quarter revenue from dot-coms.

Though may never have been as dependent on dot-com revenue as some of its competitors, that the shop points out how little of its current revenue comes from dot-coms is a sign of the times.

A year ago, revenue was revenue-its source didn't matter. If anything, dot-com i-work had cachet. These days, interactive shops are only too happy to play up their associations with bricks-and-mortar companies as an indication that they, like their Global 1000 clients, are here to stay.

But the increasing prevalence of traditional companies on i-shops' client rosters tells only part of the story: Bricks-and-mortar clients are making up a higher percentage of revenue, but that portion of the pie itself is shrinking. Thus, many i-shops that have looked to bricks-and-mortar companies to pick up the slack are seeing jaw-dropping falloffs in business.

"My sense is that a very powerful trend right now is the delay and cancellation of projects," said Natalie Walrond, a research analyst with Pacific Growth Equities.

Atlanta-based iXL is one dramatic example of the downturn. The once high-flying rollup's revenue dropped from $87.8 million to $52.3 million between the third and fourth quarters. Even, faring better than most, is predicting a substantial drop in first-quarter revenue to between $40 million and $45 million- only slightly higher than what it reported in the first quarter of last year

Earlier this month, Sapient, considered one of the most respected companies in the broad spectrum of interactive shops and consultants, became one of the last in the sector to lay off employees, cutting 20% of its staff.

"It's almost scary," commented Rich Young, an analyst with the consultancy Yankee Group, of the lack of new business in the sector. Still, Mr. Young said he sees a potential turnaround in the second half of the year.

Companies weathering the storm are few and far between, but what sets them apart is a track record of long-term client relationships-admittedly difficult for companies that often are less than five years old.

One such example is Boston shop Digitas. It predicted growth of between 20% and 25% for 2001 and recently won a major assignment from FleetBoston Financial Corp. Agency Vice Chairman Kathy Biro attributed the company's success not just to a client base that hearkens back to its direct marketing heritage, but to the philosophy that stems from it: "Focus organic growth on a small client base." Indeed, even as the company continues to grow, Ms. Biro said the company, which currently draws 80% of its revenue from interactive, never had much dot-com revenue. "Our client base was never spending based on whether was running their ads," she notes. Digitas' blue-chip clients include American Express Co. and General Motors Corp.

What's truly frightening about the current downturn is that Digitas is the only stand-alone public company among the top 25 in Advertising Age's Interactive 100 to so far predict robust growth for 2001. Though other shops, such as the OgilvyInteractive unit of WPP Group's Ogilvy & Mather, say they are benefiting from a business philosophy similar to that of Digitas, they aren't obligated to break out interactive revenue separately, so their recent growth is more difficult to prove.

There may be no greater sign of trouble than the rash of ratings downgrades investment banks have issued for companies in the sector. Pacific Growth Equities' Ms. Walrond said she expects information technology-focused consultancies such as Sapient and Proxicom to survive the downturn, even though just last week she downgraded Proxicom to a "long-term buy" from "buy." "All of these ratings reflect the fact that we don't like the macroeconomics of the industry right now," she said.

Even houses built with bricks can fall down.

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