As with traditional advertising agencies, there are many ways interactive shops can bolster their revenue and diversify their businesses in the process.
One way is through additional business--either from current or new clients. Another is to spend venture capital, cash from an initial public offering of stock or using stock to make purchases for instant gratification.
Modem Media's purchase of business-to-business-ad-agency-turned-interactive-shop Poppe Tyson, New York, contributed about $8 million to Modem Media's bottom line in 1998, says CEO G.M. O'Connell.
But for the combined entity, acquisitions today account for only a small part of overall revenue.The company earns 80% of its annual revenue, which last year was $42.5 million, through "organic" new business from existing clients, Mr. O'Connell says.
CLIENTS FUEL GROWTH
For this year, the shop won new clients General Motors Europe and 3M Corp.; however, earlier this month it lost its biggest client, AT&T Corp., which handed all its interactive business to Strategic Interactive Group, Boston. AT&T accounted for 20.7% of the agency's revenue last year.
Alternatively, Razorfish, whose revenue comes from a limited number of clients--Charles Schwab & Co. made up about 27% of 1998 revenue and four clients accounted for nearly 64% of 1997 revenue--is making a concerted effort to acquire companies.
"Our continued growth will depend on our ability to identify and acquire companies that complement or enhance our business on acceptable terms," the company said in its 1999 IPO filing.
In 1998, the shop closed five acquisitions, including new-media companies Sunbather, Tag Media and Avalanche Systems. Also last year, Razorfish acquired the stock of CHBi, a new-media company in London. Earlier this year, the shop acquired Spray Ventures, Stockholm, for half of Razorfish's stock.
One of the most curious i-agency evolutions, however, involves Rare Medium Group, which went public in April '98 through a reverse merger with ICC Technologies, a company formerly in the air conditioner business. A dozen Web acquisitions and an additional $75 million in venture capital later, Rare Medium is making its play.
Glenn Meyers, Rare Medium's president, says the agency needed to grow to provide the critical mass necessary to service clients.
"We grew organically as quickly as we could, and then we set out to do acquisitions, to get top-quality personnel and to expand our core competencies," Mr. Meyers says. "So in less than 18 months we have completed 10 acquisitions, have opened nine offices across the country and have increased our head count from less than 100 full-time employees a year ago to more than 400."
In February, Rare Medium bought Interface Alternatives, an Internet telephony company. In March, it acquired community and entertainment network LiveUniverse.com. Two months later, Rare Medium acquired Struthers Martin, which integrates back-end technologies.
Last month it acquired Web developer GlobalLink New Media and earlier this month it launched the ChangeMusic.com Network, packaging under one umbrella its digital music site acquisitions that include MP3now.com.
Is Rare Medium afraid of biting off more than it can chew? "Absolutely," says Mr. Meyers. "But this is the Internet. You are supposed to do that."
Copyright July 1999, Crain Communications Inc.