THIS MODEM MOVES AT HIGH SPEED; BUT AGENCY'S TRANSITION FROM BOUTIQUE TO BIG TIME IS NOT WITHOUT STRAIN

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There are two ways to get to Modem Media's South Norwalk, Conn., offices. One is to take the elevator in the brick loft building up four floors. The other is to do like Modem Medians do: Run through the cloud of garlic aroma swirling from the French cafe on the ground floor and up the black iron fire escape outside, shoes clanking loudly.

Nowadays, the folks at this hot interactive agency spend a lot of time in elevators elsewhere-at the Manhattan office towers of blue-chip clients like AT&T, CBS and MasterCard International. But they had to climb a lot of stairs to get to where they are today, and old habits don't die easily.

Things are happening fast at seven-year-old Modem. A year ago, there were 13 employees. Today there are 55. Gross income was $900,000 in 1993; $3.5 million last year.

A year ago, Modem was doing project work for companies like Coors Brewing Co. and J.C. Penney Co. Last month, Modem beat out such Madison Ave. mainstays as McCann-Erickson Worldwide and Young & Rubicam to become interactive agency of record for AT&T, overseeing and coordinating the work of six agencies and numerous AT&T divisions.

"When we pitched AT&T, I basically said that in a lot of ways we spent the last seven years preparing for that day," said agency partner G.M. O'Connell, whose boyish face makes you think he's still 25, the age he was when he founded the agency with his friend Doug Ahlers in 1987. "I don't think it can get much better than that."

While winning AT&T was a coup, it has also forced the agency to deal with momentous issues that will determine its future. Modem is on track to add as many as 40 staffers by yearend, mainly to service AT&T. What was a boutique shop working for a few clients is well on the way to becoming a small agency.

And that transformation is already resulting in growing pains.

Some clients are starting to fret-perhaps selfishly-that Modem is getting too big too fast. They worry whether they'll have the same contact with the partners-Messrs. O'Connell and Ahlers and Bob Allen-that they had before.

Last month, CBS threatened to pull its account from Modem because the network felt the agency wasn't devoting enough time to its business. Just how much work-if any-Modem will do for CBS in the future hasn't been determined, but the agency will now have a significantly reduced role.

Perhaps most tellingly, Modem has gained a reputation for arrogance, an understandable byproduct of its success but a potentially dangerous flaw.

"I don't want to see how big we can get until we suck," said Mr. O'Connell. "That's not a position we want to be in .*.*. I think we made our reputation and our success on client service, and maintaining that level of client service is going to require a lot of resources and a lot of communication internally. This is all about blocking and tackling."

Sitting in Modem's offices on a sunny spring day, it's easy to see why the agency gets 10 or more calls a day from marketers seeking advice and expertise, and why no one at the agency drinks decaf. Two receptionists and an office manager handle a steady stream of ringing phones, and the sounds of squealing modems are everywhere.

Modem is quite literally bursting at the seams. There are few walls; tiny offices are separated by nine-foot-high pieces of sailcloth mounted on metal bars, a reminder of South Norwalk's nautical heritage. A few months ago, the technical staff moved to the building next door (down four flights on the fire escape and up three more), another loft space that's fast becoming crowded with mismatched desks and high-powered computers standing on metal shelving units.

There's a sense of closeness at Modem, and it's not just that Modem Medians, as they like to call themselves, are wedged into offices that are way too small for the work they do. It's a commonality that results from eating, sleeping, breathing and talking little but interactive marketing.

"The adrenaline and energy level and activity-there's nothing like it," gushed "Mother Goose," a.k.a. Linda Johnson, Modem's office manager, resident mom and, at age 56, the agency's oldest employee.

"It's kind of like a little cauldron where we've assembled a team of people from a variety of backgrounds, and everyone has the single focus of interactive," said Mr. Ahlers, 35.

At the heart of Modem Media are Messrs. O'Connell and Ahlers. Both were product managers at CUC International working on electronic retailing concepts in 1987. Both had a vision of a digital future, and they went into business together in Mr. Ahlers' mother's Connecticut condominium.

Mr. O'Connell is the account man: aggressive, outspoken and energetic. Mr. Ahlers, the more contemplative of the two, runs the technical and consulting side.

It's a mix that impresses people like Anne Holows, director of global marketing communications at MasterCard International, Modem's newest client.

"We felt we needed to find a particularly strong partner, and we weren't going to find this in the interactive departments of ad agencies"-like MasterCard shop Ammirati & Puris/Lintas-Ms. Holows said. "They are all so young and so fresh-faced, but when they speak, it's clear they know exactly what they're talking about."

Within three months, Modem designed and executed a World Wide Web site for MasterCard called "Pointers" (http://www.mastercard.com) that got 1,000 visits a day during the first three weeks it was open last month.

Although MasterCard has Modem on an annual retainer, Ms. Holows admits to concern about the agency's growth plans.

"We feel like we got in under the wire before the pressure cooker starts" for Modem, she said.

Other clients echo her fears.

"I kind of reminded them that we wouldn't want to see things slip" after Modem started winning new business, said Richard Last, manager of new-business development for J.C. Penney's catalog operation, a Modem client since 1990.

"There aren't a lot of agencies, consultants or tech people who can offer those kinds of services," he said. "It'd be tough [for Modem] not to want to become a major agency."

In the case of CBS, things did slip, and it has cost the agency its exclusive relationship with a big client.

With Modem's help, CBS became the first network to open a home page on the Web (http://www.cbs.com). But after Modem won AT&T and began diverting staff and resources in that direction, CBS got left in the lurch.

"I think that we had some miscommunications in terms of whether we were a technology company or a marketing company," Mr. O'Connell said. "We were never an AOR that was supposed to do everything for them."

"We're re-evaluating our relationship," said George Schweitzer, CBS' exec VP-marketing and communications. In the meantime, CBS has contracted Web site work to InfiNet; the network also is discussing projects with Interactive Marketing Inc., Hermosa Beach, Calif., and Interactive Media Works, Overland Park, Kan.

A big part of the Modem culture is attitude. The agency's home page on the Web (http://www.modemmedia.com) asks: "Are you comfortable going it alone? Or leaving it to a `conventional' agency scrambling for its own insight and expertise?"

For Mr. Allen, the youngest partner at age 27 and the agency's new-business chief, the correct answer is no, on both counts.

Traditional agencies, he said, should stick to what they know and leave interactive media to companies like Modem.

Added Mr. O'Connell: "I don't think they will catch up to us .*.*. Right now we've got our eyes on where this business is going to be in a couple of years. The other agencies are trying to get to where we are now."

That attitude, naturally, does not sit well with traditional agencies, especially those that pitched the AT&T interactive AOR business and lost.

"I don't think they understand corporate America," said one AT&T agency executive. "We've been nice to them [because] AT&T demands that we do that."

Modem wants to avoid a public scrap.

"I don't know what the other agencies think or don't think," Mr. Ahlers said. "I think our message is to say we're not after their main turf .*.*. The goal is to move AT&T ahead of its competition in all these [interactive] areas, and we've got to do that as a team. Otherwise we all lose."

One of Modem's first projects is to create an interactive Olympics strategy for AT&T. Modem also is developing software tools dubbed "My Partner" for the AT&T sales force.

Who does Modem view as competition? Not traditional agencies or multimedia production houses. Only CKS Group, which recently opened an office in New York, uncomfortably close to Modem's home turf.

"There are two brand names in the interactive business. There's Modem and there's CKS. That's it," Mr. O'Connell said.

CKS President-CEO Mark Kvamme concurs: "If you're asking a traditional agency person, I don't think they get what either of us do."

As Modem looks to the future, scenes from the past pepper the conversation.

"There's a Lewis and Clark culture here, which is hey, you've got to invent," Mr. O'Connell said. "If that wagon breaks down and you're in the middle of God knows where, there isn't a Mr. Goodwrench around the corner. You've got to invent your own tools here."

That pioneering spirit kept Modem in business in the early days, when it got its first major piece of business, creating an electronic shopping mall for the Genie online service in 1988, and it will again today.

Modem is on track to add one more client in 1995, likely a financial services or automotive company. The agency has been in discussions with all three major U.S. automakers. And the calls from other marketers keep pouring in-Kraft Foods, Rollerblade, Fleet Bank and Saucony have all made overtures to Modem in recent weeks, Mr. Allen said.

Modem developed one of the first Internet audience measurement tools, dubbed Internet Reach & Involvement Scale. A new Network Operations Center not only houses the guts of Modem's internal computer system, but also manages client projects more efficiently, so the agency can, for example, update product databases from J.C. Penney simultaneously on Prodigy, CompuServe, the Web and interactive TV.

Next on Modem's docket: establishing an Advanced Projects Team to brainstorm and develop next-generation tools for interactive media.

"You can't be afraid to be wrong in this business," Mr. Ahlers says. "We're out there trying to discover what works in interactive technology, so you've got to be able to go out on the edge and try things. Some of them work and some of them don't. The real key is, can you learn from them and build cumulatively on that knowledge?"

Modem knows it has to, so clients and employees keep seeing those fire escapes as a way to climb towards the sky and not as emergency exits.

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