Web-design pioneers squeezed out of business - WebMedia - Industry Trend or Event

CommunicationsWeek International, Feb 2, 1998 by Kenneth Cukier

Independent Web-site developers could be facing extinction.

Small and medium-tier Web design companies are being squeezed at the high end by large system integrators such as IBM, which are developing elaborate company sites, while at the low end, corporate IT departments are taking the job in-house.

The trend was highlighted last month by the collapse of London-based Webmedia Ltd., one of the largest and oldest U.K. Web developers, established in mid-1994. Its founders, said the parent company, Webmedia Group, would continue operations with a different focus: Internet consulting.

Mid-sized companies "can't make money on Web-site production," claimed Steve Bowbrick, chairman of Webmedia Group, which designed complex sites for the BBC and the London-based entertainment-listings magazine Time Out, among others.

In November 1997, Webmedia shed 10 of its 30 staff, and laid off a further 17 last month, despite posting revenues for 1997 of [pounds]1.4 million ($2.24 million). The privately held company, 11% owned by Maurice Saatchi's Meglomedia, does not publish profit figures. Bow brick said Webmedia was squeezed between the multinational high-tech companies, such as IBM and Electronic Data Systems Corp., which offer Web sites as part of their broader work for large corporate accounts, and the smaller companies, which compete on price for less sophisticated work.

Industry statistics support Bowbrick's pessimistic assessment. According to Zona Research Inc. in Redwood City, California, the market for Web-page design will see a decrease in revenue to $321.6 million by 2000 from $405.2 million in 1997. In contrast, the larger Web-site development market-which includes systems integration and application building-will steadily grow into a $556 million market in the United States by 2000. Zona is currently revising the estimates to reflect the rapid decrease in design and increase in systems integration.

Some Web developers have managed to stay the course, however. New York-based EarthWeb Inc., like Webmedia, was founded in 1994 as a Web-site developer. But it foresaw the market squeeze and changed direction in 1996 to focus on advanced system integration for specialty Web-site applications such as database/Web interfaces and advanced electronic commerce programs. As a result, said founder Jack Hidary, the company obtained backing in 1997 from venture capital investors of about $20 million, transforming EarthWeb into one of the most respected Web-site builders in the United States. The company has high-profile clients such as US West Inc. and the U.S. arm of German media group Bertelsmann AG, and focuses only on complex system integration projects. "We made that transition," said Hidary, who predicts that more mid-sized companies will go under in the coming months.

Analysts agree: "It's a matter of economics," explained Todd Haedrich, an analyst at Jupiter Communications Inc. in New York. Web sites, he said, are commodity items unless they are highly specialized.

But others question the prevailing wisdom. "One dead swallow doesn't mean it's winter," mused Marc Curtis, managing director of CHBI Ltd. in London, who has built sites for a wide range of companies, including banks. Nonetheless, Curtis is radically redirecting CHBI's strategy towards "interactive advertising."

Meanwhile at Blackwell's Online Bookstore, whose Web site blackwell.co.uk was built by Webmedia in 1996, the director of marketing and sales, Herbert Kim, is sanguine about Webmedia's demise. "We manage everything internally," he said.

Once the initial design work was done, Blackwell's in-house IT team built the back-end integration and electronic commerce system. "The benefit is control," Kim said.