Internet 2001: Consultants In Survival Mode

Just nine months ago, most of its members were valued at $1 billion or more. Today the largest market cap in the Internet Consultants/Designers sector is a mere $350 million – and shrinking.

Which doesn’t make Consultants/Designers the worst-performing Internet sector since last March. That dubious honor probably belongs to the E-tailer or Advertising/Marketing sectors.

But at least those two groups, decimated as they are, each contain a company with some kind of demonstrable market advantage. In the e-tail group, that’s, while ad services leader DoubleClick dominates its sector.

In contrast, the Consultants/Designers sector consists almost exclusively of
companies in serious survival mode. With stock prices and market caps dwindling rapidly, and with profits nowhere in sight for most, companies in this sector have been among the most aggressive in reducing expenses by cutting employees. In the past month alone, AGENCY.COM, marchFIRST, Viant, Scient and Organic have announced layoffs, and nearly all of the companies in the sector have issued Q4 warnings.

And there will be more warnings to come, for the sector’s potential revenue base continues to erode as Web-based companies die out and large corporations either cut back on their Internet spending or develop the internal expertise to do the jobs themselves. (Let’s face it; designing and building a Web site is no longer an esoteric art.)

Here’s what faces some of the biggest revenue generators in the sector (all figures are in millions):

                           Projected                Q4 1999
                           Q4 Revenue  Q3 Revenue   Revenue

  marchFIRST    $235        $369        $138
  Sapient        139         138          82
  Scient          80         102          43
  AGENCY.COM      56          57          31
  Razorfish       50          77         104
  Viant           28          33          24
  Organic         25          37          26
  Digitas        N/A          76          53
  Proxicom       N/A          60          30
  iXL            N/A          88          76
  Luminant       N/A          38          30
  Xpedior        N/A          51          41

The companies with fourth-quarter projections have issued warnings, but that doesn’t mean the ones that haven’t yet will have any good news to report.

As the numbers above make clear, demand for Internet consulting and design services continues to fall, and no one can say with any certainty when (or if) overall revenue growth. Until there is some clarity, this is a sector that investors should avoid.

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