CAMPAIGN REPORT ON NEW MEDIA: Web Audit - Over the past year, the internet industry has grown up rapidly as closures and takeovers prevail. Richard Lord takes stock of developments and asks if a US invasion will be successful

By RICHARD LORD, campaignlive.co.uk, Friday, 30 October 1998 12:00AM

During the short history of the internet, 1998 may be remembered as the year the web agency market started to grow up. It will also be remembered as the year when things got complicated. Closures, takeovers and the inexorable march of American agencies have all helped reshape the industry.

During the short history of the internet, 1998 may be remembered as

the year the web agency market started to grow up. It will also be

remembered as the year when things got complicated. Closures, takeovers

and the inexorable march of American agencies have all helped reshape

the industry.



A couple of years ago it was simple. If a client wanted a website, it

went to a company that built them. Some of these companies were

divisions of ad agencies or below-the-line specialists, some were

standalone digital agencies. Some were big, most were small, but they

had one thing in common: they designed and built websites.



That’s all changed. Quite a few of them are no longer in a position to

build websites because they’ve gone bust. The veteran UK agency,

Webmedia, shut this spring, retaining just a skeleton staff and retiring

into its shell company; the Cambridge-based New Media Factory went to

the wall; Lowe Howard-Spink closed its Lowe Digital new-media division;

and the production-led digital agency, AMX, was bought by its

competitor, Real Time Studio.



Moreover, the agency market has been transformed by an influx of

American companies setting up in the UK, buying British agencies and

merging with each other. The Omnicom-owned US giant, Agency.com,

acquired the UK’s Online Magic after a lengthy period of partnership.

USWeb, which claims to be the largest of all the web consultancies with

1,200 staff, bought the British company, Xplora, as part of a global

expansion which has also seen it buy the marketing agency, CKS. The US

agency, Poppe Tyson, merged with its media specialist compatriot, Modem

Media; and the UK agency, CHBi, was acquired by its American peer,

Razorfish.



Put this together and you have what looks like a shakeout. Of the

agencies who have emerged intact at the other end, however, few would

still position themselves as companies that build websites. Clients are

moving away from ’we want a website’ to ’we want a new-media strategy’,

and agencies have had to change. The upshot of this is that agencies

that operate in the new-media sphere have increasingly tried to

differentiate themselves.



Online Magic’s managing director, Eamonn Wilmott, believes that agencies

need a global reach to cope with the requirements of multinational

clients.



’On one level, you do have to acknowledge the fact that there’s a

globalisation happening anyway, quite apart from the internet,’ he says.

’Companies need a global strategy. A lot of companies have had totally

incompatible web strategies in different countries, and a lot of

multinational companies are now looking for a global agency: that’s a

client-led requirement.



’US companies are looking to buy agencies in the UK because it’s a

difficult market to start up in. Building the necessary infrastructure

is just no fun. The smart US companies are looking for partners.’



Ian Charles Stewart, chairman of the internet consultancy, Aztec, which

includes the BBC and Pearson among its clients, believes the influx of

American companies is motivated more by fear than strategic nous. ’US

companies want to expand here, they see a lot of deals being done and

they’re afraid there won’t be anything left to buy,’ he says.



’It’s a bit of a feeding frenzy. People are talking about really vacuous

things: they just think bigger is better. Some are trying to take over

as many companies as possible so they can inflate their value. Others

buy the wrong company: you have companies that are effectively

management consultants trying to buy web designers. If you’re going to

buy something, know why you’re going to buy it.



’The thing is, a lot of the smaller UK agencies need the Americans. The

problem for them is that once you get to 30 people, it becomes a real

company, and you need both capital and process. A lot of those companies

have no experience of that. If you don’t grow, there’s a possibility

that you’ll stagnate and die. So to grow, you need to find partners, and

the logical place is with US companies.’



’The US is a year or two ahead in terms of structure,’ CHBi Razorfish’s

managing director, Mike Beeston, agrees. ’The market is larger there,

and financial backing happened sooner, which fuelled accelerated

growth.



They worked out a business model before we did. The decision we made to

go with Razorfish was based on asking: strategically, what are the

opportunities?



It’s clear the US is coming to the UK. There will be consolidation and

there will be winners. Where do we want to be? The option to go with a

US company proved to be the best: they have money, they have learning

and there’s empathy between the two companies which you don’t

necessarily get with pure cash investments.



’The people who eventually emerge as the winners in the UK will have

gone through this route. I think the UK industry will consolidate and

sub-divide into companies with specialisms. Over the next three years,

there might be one big UK company which emerges but most of the big

players will be those who joined with a US company.’



Not every British agency believes investment from a US company is the

correct route. Clarity, for instance, has opted instead for a

partnership with Market Relations Group, part of the US IT marketing

consultancy, Regis McKenna. The arrangement between the two companies

involves an exchange of intellectual property but no equity swap. ’We

have different skillsets in different areas,’ Clarity’s chairman, Martin

Chilcott, says. ’They have core competencies in areas where we would

otherwise have gaps, particularly on the technology side.



’This way is much better than flogging off your company. People may say

all these buyouts are for strategic reasons, but the reality is that so

many British companies are short of cash and what US companies really

give them is a future.’



Before reaching the deal with Market Relations Group, Clarity had

conversations about a similar relationship with McCann-Erickson’s

Thunder House. ’We decided we weren’t interested because we didn’t have

a shared vision,’ Chilcott comments.



’They think of the internet as a marketing communications channel. To

them, it’s not about coming up with a strategy for a client and

following it through; it’s about developing ways of marketing their

existing business.



Clarity now sees itself as an online business development

consultancy.



It’s not about building websites; it’s about building a strategy, of

which a website may be a component.’



Perhaps the biggest effect of the influx of American companies has been

to highlight the division between companies who see themselves as

traditional marketing agencies and those, like Clarity, that position

themselves as business consultancies. USWeb has repeatedly stated its

intention to be ’the next billion dollar consultancy’, along with the

Andersens and McKinseys of this world. Neal Gandhi, the client services

director for its UK arm, USWeb Xplora, believes the arrival of the

Americans will transform client expectations.



’There’s a move towards a more full-service offering,’ he says. ’You

need to be able to give top-level strategic advice, and you need to be

excellent at the execution level, both creatively and technically.

Consumers’ expectations of the web have grown: they expect

functionality. If someone visits an insurance company’s website, they

expect to be able to buy insurance there, so you also need commerce

skills.



’The bottom line is: you need scale. You have to offer clients the

levels of service they expect. In pitches, we’re coming up against the

same people over and over again: we’re not coming up against small

independents any more. And there has to be a recognition that

traditional agencies can’t service clients’ requirements. They don’t

live and breathe it: they see it as another medium, not as something

which radically alters the way they do business.’



’If you’re going to go after large businesses, you have to be set up

like Andersen Consulting,’ Dan Fine, chairman and chief executive

officer of the US new-media specialist, Fine.com, comments. ’You must

have really smart people, you have to deliver on deadline, and you have

to understand the whole of your client’s business.’



It’s not only the US companies that want to position themselves as

consultancies. David Scolefield, the strategy director of the small

British independent, port80, is even more adamant that his company lies

outside the sphere of marketing services. ’The internet industry is

changing, and much of this is driven from the top end of the market,

where traditional marketing companies are trying to distort a client’s

view of the internet into one where brand is everything,’ he says. ’On

the way, they are buying up older internet production companies in order

to improve their technical credibility.



’Large marketing companies are starting to realise that not only is the

world of the internet lucrative, but they can promote the fact that

there is a strong relationship between the issue of branding and a

company’s online presence. If they do not become deeply involved with

producing and managing websites, then they will lose their stranglehold

on their clients’ marketing budgets.



’However, traditional marketing companies don’t have much experience in

the new medium. Of course, they are capable of buying in internet

expertise, but this is not the point. If an internet consultant within a

marketing company is expected to work within the existing constraints of

the concept that brand is king, then they might as well not be there -

they are not going to be in a position to innovate and develop new

working practices for their clients.



’Any internet consultant worth their salt is going to need to talk

regularly about issues of business practice which the brand guardian is

going to be uncomfortable with.



’The internet has more to do with a company’s working practices and

business model than with the brands owned by that company. The internet

provides an extension to a company’s business model, and to understand

the full implications of this fact requires people who are looking at

management and business practices. The best people to undertake this

work are management and business consultants who have a thorough

understanding of the internet’s potential.’



Unsurprisingly, marketing-driven agencies demur. ’To claim to be a

business consultant is naive,’ Simon Andrews, the strategy director in

the UK for the American new-media agency, Modem Media.Poppe Tyson, says:

’If a client wants business consulting, they’ll go to McKinsey. I don’t

think anyone in this business is a realistic competitor to the

consultants, if only because they can’t recruit hundreds of the smartest

graduates every year and pay them pounds 90,000. It is about marketing

communications and we should be positioning ourselves on the web as

something like the advertising agencies before the unbundling of the 50s

and 60s, when they did everything to do with marketing for their

clients. We’re turning into something like the traditional agency market

and we’ll get the shakeout that happens in any industry.



’You must be a big player with the resources of the traditional ad

agencies to have any chance of succeeding in this market. There’ll be

room for big players, and there’ll be room for very small niche

companies in areas like production, but there’ll be no room in

between.’



’The industry is dividing into two parts,’ Beeston agrees. ’There will

be a small number of big players who are one-stop shops and can sell a

strong strategy, and then offer process: everything from production to

client handling. You have to know how to do that if you’re going to have

a full-service offering. Generally speaking, smaller companies will find

themselves at a disadvantage. So they’ll specialise in a particular

vertical market or in a niche like design, online promotion or

strategy.’



’There’s no doubt whatsoever that most clients who have gone to one

company for strategy, one for production and so on, have got burnt,’

Wilmott says.



’They want one company with ownership of projects. There are not many

agencies in Europe that can sustain that kind of relationship.’



If this vision of the future is correct, more small British agencies are

going to be looking for a buyer. Fine says the sort of deal he’s

interested in would be with ’a ten to 15-man, business-focused,

process-orientated company’. Beeston pinpoints medium-sized UK

independents such as Clarity, AKQA and NoHo Digital as likely future

takeover targets for big US companies.



There’s a notable shortage of British new-media companies with

recognisable brands, however. The real story of the recent shakeout

isn’t one of the Americans invading, or of the internet bubble bursting,

but of a frighteningly immature industry having to grow up double-quick.

Perhaps a new breed of digital consultancies will grow up; maybe

marketing specialists will win out. Only time will reveal the true shape

of the new-media agency market, but the really interesting developments

in the future will be in the area of agency-client relationships.



This article was first published on campaignlive.co.uk

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