Beyond Dot-crash: What’s left of the bubble?

Beyond Dot-crash: What’s left of the bubble?

Australia’s Web developers were the darlings of the dotcom boom. Servicing a new and poorly understood market, they were able to charge exorbitant rates, and with demand for their services increasing exponentially, the sky was nothing but blue. Two and a half years after the tech wreck, however, the story is very different, writes Brad Howarth.

The collapse of the dotcom bubble coincided with a growing awareness among clients of what they should be getting for their money, which squeezed margins and drove companies to the wall. Most of the big brands of the dotcom era are gone. Australian companies Zivo and Spike collapsed, while imports such as Razorfish, Sapient, Oven Digital and MarchFirst packed up and returned to the US, sometimes to die there.

The marketplace today consists of a handful of medium-sized developers and a multitude of smaller ones, competing fiercely in a less lucrative market. Surprisingly, though, despite market difficulties, new Web developers are multiplying like crazy. This is partly due to the fact that the barriers to entry as a Web developer are incredibly low -- a few high-power computers, a broadband Internet connection and a core group of Web developers are pretty much all it takes to get a basic agency going. With hiring in the industry much slower than it was three years ago, retrenched employees are finding work hard to come by. Starting an agency is a viable alternative.

According to Dion Wiggins, Asia-Pacific research director for Gartner, the phenomenon in Australia is similar to that happening all over the world. “There are a lot of small, almost mum-and-dad organisations, that have a small group of staff, and they are living month to month getting small contracts. And it’s very hard for them to grow based on small contracts.”

Danin Kahn, the founder and managing director of Sydney-based agency Glass Onion, says he is coming in contact with at least three or four new agencies each week.

“There are hundreds of companies that do Web development,” Kahn says. “Some of them are just two guys who left Spike. In terms of established companies, there are probably 80 to 100 out there, and 20 of those are good. We’re starting to find there’s a core group that we are regularly pitching with.”

Wiggins says a significant problem for these companies is that when one employee goes, they often lose a significant part of the company. “Often with the smaller companies, the project management and project processes aren’t mature, so they don’t have a lot of documentation. Often companies are left in the lurch, because they have an application that’s three-quarters built and the programmer that’s working on it has gone.”

It’s an issue that’s been recognised by more seasoned developers. Simon Van Wyk, founder and managing director of eight-year-old Sydney-based agency Hothouse, says his company has patented part of its project planning methodology in order to differentiate it from competitors. “It’s a physical representation of the content on a Web site. The clients can sign off on it, and they understand it, even if the functionality is really complex -- everyone knows what they are getting.”

Along with Massive Interactive, Hothouse is one of the few surviving big brands of the 1990s. Today it is a profitable company with 30 employees. Van Wyk attributes Hothouse’s longevity to it having remained focused on its core business, whereas others chased international expansion and public listings. The most notorious, Spike, collapsed in July after it proved unable to get its high cost base in line with its income.

According to David Trewern, founder of Melbourne-based DTDesign, agencies now have to go through a more rigorous process to win work. “There’s probably bigger projects around, but the clients are a lot more savvy. The challenge of our industry has been that the expectations of clients can vary so much, and projects can vary so much, so these days it’s better for us that clients are more educated and know what they want.”

Trewern says that in the past, developers were keen to get as much project work as possible with little regard for the end result, but now they must be much more accountable if they want to survive.

“The only way to do well and move forward is to have repeat business from clients and word-of-mouth referrals, which you’re only going to get if you prove to them you’re providing value,” Trewern says. “These days, we’re totally worried about the end result, to the point where we’ll tell a client that we should be doing less work if some areas aren’t adding much value. We know if we do that work and there’s no ongoing benefit for the client, we won’t be doing any more work with them.”

Glass Onion’s Kahn says that as clients become more aware of the role of the Internet within their business, a significant shift is taking place in the market, as clients come to expect more from their agencies.

“Two or three years ago you only needed to be a Web developer. Now you need to have a decent solution that brings a return to the client within some sort of strategy, and the business knowledge to show them how you will deliver that. So customers are starting to ask more about the returns.”

He says clients are expecting a broader range of services from their agencies, such as taking care of their Web hosting requirements.

None of this solves the problem of the market being hopelessly over-serviced. Talk of mergers and acquisitions has been rife among agencies for the past year, but with little result. This is even more surprising given the number of companies that are barely breaking even, or, like Spike, going out of business altogether.

According to Van Wyk, one of the major barriers to consolidation is that no-one is willing to pay cash for another Web developer. He has been in active discussions with other agencies about merger and acquisition proposals, but says many developers still have stars in their eyes, and are clinging onto the late 1990s belief that their business is worth millions.

“If you take a Web developer doing about $1 million and making no money, they’re not worth anything, because they’re making no money. We’d give them equity, but we can’t pay them anything. That’s a bitter pill to swallow, and it’s the biggest stumbling block in being able to merge with a lot of these organisations.”

Kahn has also heard talk of consolidation, but is uncertain how this will come about. “There is so much talk of it, but no-one’s acting. No-one’s really sure what they should be doing.” While agencies have been acquired in the last 12 months, these have often been distressed companies that had little option. The two main acquirers have been publicly listed companies BMCMedia, which acquired Hyro in September 2001, and Multiemedia, which has acquired several companies including WSA Online in March and Nethead in April. Both companies have been able to execute their purchases using shares, although both are trading at less than 5 cents on the ASX.

Trewern believes, however, that as the industry matures, many companies will opt to specialise in order to differentiate themselves. “That’s something that the industry couldn’t support until now, because the clients didn’t have the knowledge of what was involved in building a Web site and the areas of specialisation.”

There is good news for the industry, however. According to Aaron Arbib, managing director of recruitment company Xpand IT, there is a definite buoyancy among the agencies he speaks to that wasn’t present a year ago.

Both Kahn and Trewern say that since July there has been a marked upswing in the demand for services. Kahn expects this to continue beyond Christmas, and attributes it to clients rediscovering the importance of the Internet in their business development and marketing programs.

“Everyone’s pretty busy. There’s a lot of work if you know how to do it and know how to get it.”

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