E-quake ripple spreads to service sector
USA Today
Call it the other dot-com crash.
The e-quake that has shaken the Internet industry to its core is spreading to the service sector that includes interactive ad agencies, traditional Madison Avenue shops and Web marketing consultants.
These secondary service providers have even coined a cutesy euphemism to describe the bloodletting: "rightsizing." But there's nothing funny about their recent troubles.
"Many companies that provided the backbone and support to the dot-coms are feeling the pinch," says John Challenger, CEO of outplacement firm Challenger Gray & Christmas in Chicago.
"In some cases, the dot-coms are their only source of revenue."
At least 54 Internet companies shut down in May vs. 13 in May 2000, according to research company Webmergers.com. At least 493 have tanked since January 2000, with more than half of them going under this year.
Even more are being sold and consolidated. Buyers spent more than $3 billion to acquire 110 Internet companies in May alone.
Among them: Outpost.com, the online retailer that started the wave of wacky dot-com commercials with an outrageous spot showing gerbils shot out of a cannon.
The ad and marketing companies that feasted on the 3 billion ad dollars thrown around by these former highfliers during 1999 and 2000 are sharing the hit. And it has become a one-two punch. Not only are dot-com clients disappearing, but with the dot-com competition no longer a threat, bricks-and-mortar clients are cutting back on Web marketing.
The bloodletting shows no signs of abating. Dot-coms slashed 13,419 jobs in May, according to Challenger Gray. April was the worst month for dot-com layoffs, with 17,554.
And the layoffs are contagious. By Challenger's tally, the "Professional Services" category — companies providing ad, marketing and consulting services — accounted for 2,265 of the May layoffs and 2,023 of those in April.
"The second wave of cuts is hitting the companies that supported the dot-coms," Challenger says.
And experts warn that the worst is still to come for them. "It's their turn to feel the pain, and it's not over yet," warns trend-spotter Marian Salzman of Euro RSCG Worldwide. "The worst hit is San Francisco. The whole city is being turned upside down."
Among advertising, marketing and consulting companies hit:
• Ad agencies to the dot-coms. The new industry of interactive marketing agencies, or I-shops, is crashing to its knees.
MarchFirst in Chicago has entered Chapter 7 liquidation after first seeking Chapter 11 bankruptcy protection in April. The breakup came after the company fired more than 3,000 employees.
Hook Media in Boston has filed for bankruptcy protection after slashing its 100-person staff in half.
Other companies are laying off staff or changing management.
"People were enamored of clicks and eyeballs and market share. But now we're returning to more rational business thinking," says MarchFirst President Steve Pollema.
The rise and fall of these New Media wunderkinds provides some satisfaction to executives of traditional ad agencies who were dismissed as Old Economy dinosaurs just a few months ago.
"They were saying, 'You guys are history.' Now a lot of them are in my lobby looking for jobs," says Chuck Porter of Crispin Porter & Bogusky in Miami.
MarchFirst could be the case study for the collapse. Just a year ago, the company had 8,500 employees, 50 U.S. offices and claimed $1.3 billion in revenue. CKS, one of the first I-shops in the mid-1990s, was among units merged into a patchwork I-giant.
MarchFirst even launched an expensive ad campaign to promote itself. The TV ads showed "firsts" such as penguins staring at the first Antarctic explorers, the first man on the moon, the first bikini and the first Cubist art exhibition.
Now? The company is down to a few hundred staffers as a court-appointed trustee sells its assets. Forget about firsts. Will I-shops even last?
"I hate to foretell the death of an industry. But I don't know," MarchFirst's Pollema says.
• Traditional ad agencies. Traditional ad agencies are doing better than the I-shops, but they are feeling the heat — literally. A fire broke out inside a conference room at FCB San Francisco on May 2, the same day the agency laid off 45 employees, according to spokeswoman Erica Brynes. The fire was "intentionally set," says Capt. Pete Howes of the San Francisco Fire Department.
Deutsch quit client Homeruns.com and is shutting its Boston office this month because of the "dot-com bust," spokeswoman Vonda LePage says.
Lowe Lintas closed its San Francisco office because of a "dramatically softening of the advertising market (there) and a radical reduction of advertising-related spending," says U.S. Chairman Gary Goldsmith.
Across town, Saatchi & Saatchi is closing its 60-person Bay Area office by Aug. 1. Leo Burnett closed the Boston and San Francisco offices of its Technology Group. TBWA/Chiat/Day recently laid off 15 staffers in New York.
• Web consultants. Jupiter Media Metrix recently slashed 15 percent of its work force, about 130 jobs, as its first-quarter loss grew to $10.8 million from $1.7 million a year earlier.
"We've all gone from feast to famine," Jupiter CEO Tod Johnson says. "But this will work its way out eventually."
Challenger is not so sure.
"This is what a recession is all about. It starts in one place — and then it hits all the other companies providing service."
