M-word is back

By Published on .

For a few days last month it might have seemed, for those who scan the headlines about publicly held Internet shops, that it was 1999 all over again. " Razorfish posts profit; stock doubles," trumpeted Reuters on April 17.

But take a closer look, and it's obviously 2002, two years after the fortunes of New York-based Razorfish and its competitors plummeted. The company's stock doubled, all right-it shot up from a woeful 18 cents to 33 cents. (Flash back to April 1999, when Razorfish's stock doubled on its first day of trading, from its offering price to close the day at $33.50.)

Another sign that this is indeed 2002 is that Razorfish posted first-quarter net income of $2.5 million, and that's by following the strict guidelines of generally accepted accounting principles. Asked what his company's priority is these days, CEO Jean-Phillippe Maheu says succinctly: "Profitability."

It's true that much of the turnaround can be attributed to the thicket of cost cutting and restructuring that Razorfish has had to wend its way through since late 2000; as with most competitors, revenue is still on the decline and Razorfish is pursuing a reverse stock split to keep from being delisted. But now, at least, independent i-shops are demonstrating they may indeed be viable businesses. Those that have stayed afloat, that is.

The infamous list of i-shop reversals is a long one. Atlanta-based iXL (which was No. 10 on last year's Ad Age Interactive 100) merged last November with tech-focused Scient, New York. Even though the merger brought the agency, which kept the Scient name, up to No. 2 on Advertising Age's 2002 ranking, consolidation hasn't been a boon. The company recently took the dangerous step of securing $5 million in financing on its accounts receivable and said in April it was "exploring its strategic alternatives." Scient did report a small-$300,000-increase in first-quarter 2002 revenue, hitting $21.1 million, compared with the fourth quarter of 2001.

vote of confidence?

When Divine, the Chicago-based company that last year bought most of the assets of former reigning i-shop giant MarchFirst, said in early April it would buy Viant Corp., Boston, Divine's stock dropped by 10%. Some vote of confidence.

Lante, a technology consulting company based in Chicago, bought the assets of WPP Group-backed roll-up Luminant Worldwide Corp., Dallas, for $5.2 million. Organic, San Francisco, and Agency.com, New York, both found refuge in Seneca Investments, a joint venture of Omnicom Group and distressed assets handler Pegasus Partners II. Seneca took the companies private and is allowing them to repair themselves without the steady gaze of Wall Street. Fringe players such as Rare Medium, New York, have exited the interactive consulting business entirely, to focus on other businesses.

And those are just the more high-profile restructurings.

But the moment of clarity may finally be here. Though the shakeout isn't quite over-Agency.com laid off 90 staffers earlier this month-most of the major players say they've found a direction that could sustain them over the long haul. And in almost every case, the new direction is, in fact, an old direction.

During the height of the bubble, a raft of companies-ranging from Sapient, Cambridge, Mass., to Modem Media, Norwalk, Conn., to Boston-based Digitas-all claimed an expertise in both technology and marketing, though few, if any, could support dual specialties.

Now, they've all gone back to their corners. "We're not trying to be all things to all people," says Chan Suh, CEO of Agency.com. "Which is requirement No. 1 these days."

Indeed, if one divides up the business into the marketing shops and the tech shops, the lines have probably never been clearer. While Organic, Agency.com, Modem Media and Digitas all consider themselves to be marketing-driven, Sapient, Scient and IBM Corp.'s IBM Global Services Consulting are clearly aligning themselves with the technology side of the business. "We were selling to two sides of the [client] business," David Edelman, chief marketing officer at Digitas, says of the split personality syndrome that used to plague the business.


Perhaps the most obvious marker of the changed world is which companies compete with one another in new-business pitches. "We don't pitch against IBM, whereas we used to occasionally," says Jonathan Nelson, chairman of Organic.

For now, the marketing side of the fence looks like the place to be, since marketing-specialist i-shops have been able to leverage trends toward database management and return on investment. At the end of the first quarter, not only Razorfish but Digitas and Modem Media posted profits, according to GAAP.

To Modem Media CEO Marc Particelli, whose company is minority owned by Interpublic Group of Cos., the reasons for the marketing i-shops' better performance than the tech players is obvious: Technology solutions are a commodity and marketing expertise is not. "We're in the early stages of a true transformation in marketing," he says.

Of course, there are those who would say they've heard all this before. But with reined in costs and an eye on profitability, maybe this time the optimists at i-shops are right.

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