01190264
Title: Evolution of the Internet Economy -- Just how much has changed in the year that has passed?
Author: Jordan, Peter
Source: VAR Business:48, December 18, 2000. ISSN: 0894-5802
Document Type: Journal
Publication Country: United States, Language: English
Record Type: Fulltext, Word Count: 1196
Text:
By: Peter Jordan
A year ago, almost everyone involved in the digital economy-from CEOs to Web designers to secretaries-had dreams of instant riches as they leafed through BMW and Lexus brochures, ready to trade in their junkers as soon as they could exercise their options.
Companies like Agency.com-which closed at $76 and a market cap of $2.55 billion the day of its IPO-were soaring out of sight, while many traditional VARs who specialized in making businesses work were watching with envy from the sidelines.
Then a funny thing happened on the way to the Beemer showroom. On April 14, 2000, Nasdaq suffered its biggest point loss in history, and the bad news for the stocks of e-businesses and those who once hoped to get rich servicing them has continued ever since.
Businesses that provide services to the digital economy are laying off employees, waving goodbye to CEOs, watching customers disappear and seeing their market capitalization shrink to a tenth of what their companies were worth a year ago.
Only a handful of the fittest will survive in the Darwinian world of e-services, says Terrence P. Tierney, vice president and senior research analyst for U.S. Bancorp Piper Jaffray, New York. And the ones that survive will be the companies that do what VARs have done all along-help the economy operate more efficiently, as opposed to helping a whole new economy invent itself.
Those who believed in a limitless future of dot-com companies-and the dot-com arms of brick-and-mortar companies-have received a frightening dose of reality: "It's the end of the dot-com world and the beginning of the next phase of development for Internet technology development firms," Tierney says. Just what that next phase will entail is somewhat unclear, but it will be much more back-end focused and infrastructure-focused than a lot of e-business service providers were predicting a year ago.
The pendulum has swung with a vengeance, agrees Stephen Lane, Aberdeen Group's research director for professional services in Boston. "A year ago at this time, we would have been talking about start-up Internet integrators like Scient, Razorfish and the other usual suspects, and how they were eating everybody's lunch and dominating the market. We would have been asking, 'Where are the Big Five, and where are the other major players?' It doesn't take much to see that the pendulum has swung in the other direction."
If you look at where the stocks of Internet integrators are trading, Lane points out, some of them aren't even trading above their opening prices. "There are lots of reasons for that," Lane says, "but a large part has to do with the fact that a year ago, even the leaders of major Fortune 500 businesses were scratching their heads and asking, 'What in the world are we going to do about this Internet thing? We're going to get our lunch eaten by these start-ups.'"
Last year, Internet integrators almost had the stage to themselves, and their market valuations put them in a wonderful position not only to gain attention, but also to go out and acquire more companies. Design specialists, for example, acquired back-end businesses and vice versa.
When the Nasdaq balloon popped, however, the whole dot-com euphoria began to deflate. Solution providers that once worried about whether they could hire enough people to handle all the new business coming their way suddenly began to worry about whether their dot-com clients could pay their bills.
Agency.com, Razorfish, Scient and Viant are four of the companies whose stock is off some 90 percent from their all-time highs. Giant MarchFirst is one of the loss-leaders, recently trading below $2, off more than 98 percent from its once lofty price of over $81.
"Depending on the percentage of clients those companies had, if they were heavily invested in dot-com start-ups as their clients, the pendulum swing kind of took the wind out of their sails," Lane explains. "It left a lot of them with revenue projections lower than expected."
But there's some light at the end of the tunnel, and it's not just the headlight on the front of the onrushing Nasdaq freight train.
"Even though some of the air has gone out of the balloon, I don't think it's a total return to what we had before," says Audrey Apfel, vice president and research director for Stamford, Conn.-based Gartner Group. "There's no going back to the way business was done."
The services businesses that will survive and flourish in the latest phase of the e-business economy are the ones that understand the Internet and how to integrate it with the underlying infrastructure of the businesses for which they develop solutions.
As Apfel points out, it's a much tougher playing field than the early days when companies simply wanted a Web presence of any kind and then a hasty B2C implementation on top of their business-as-usual practices.
According to VARBusiness' State of the Market research, some 34 percent of all solution providers offer Web integration (corporate LAN to the Web and to the database), and 59 percent offer LAN/Internet connectivity. And, the bigger the solution provider, the more likely it is to be involved in integrating its clients' businesses with the Web. While 27 percent of small solution providers offer such services, the percentage rises to 43 percent with large companies.
Because of the complexity and mission-critical nature of Web solutions clients will demand going forward, U.S. Bancorp's Tierney predicts size will be an asset.
"As project sizes have grown above $3 million, Internet technology projects have begun to show up on the radar screens of some of the larger players that have strong existing client relationships," a recent U.S. Bancorp Piper Jaffray report states. "We continue to believe that scale will become a larger factor in this business as traditional systems integration firms begin to compete aggressively."
Tierney says Diamond Technology Partners, MarchFirst, Sapient and Viant have the best chance of surviving the competitive heat of the latest evolution of the e-business economy. (See "Five Companies To Watch in 2001," page 60.) Many of the remaining companies will be bought up or go out of business, he predicts.
But even though the e-services economy is shaking out, former VARs and integrators now working in the e-business space typically have the strengths necessary for success.
"They have to move 45 degrees from where they were," says Gartner's Apfel. "But the value proposition is the same."
Solution providers bring two crucial strengths to the Web solutions table, Apfel says. They understand their customers and they understand infrastructure. "Businesses have to embrace [the Internet]," she says, "but staffing is not getting any easier for them, so VARs can extend their expertise to provide services, assistance, hosting and ASP [offerings]."
"We all know there's a pot of gold out there," Apfel adds, but she warns that, to date, most B2B solutions are "like Hollywood sets-when you open the door, there's nothing behind them."
E-services companies that help their customers build real solutions behind those doors will earn that pot of gold.
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Read more about the evolution of e-services in our online Q&A with Paul DiGiammarino, Sapient's North American executive
vice president, at www.varbusiness.com.
http://www.varbusiness.com/
December 18, 2000
Copyright 2000 CMP Publications, Inc.
Concept Terms: Information Technology; Business strategies; Internet; Outlook
Department: Information Technology
Geographic Area: United States (USA)
Named Persons: Tierney, Terrence P