Fall-out to follow Webmedia demise

It would be understandable if creditors turning up for this Friday’s meeting of Webmedia Ltd’s receivers had other things on their minds.

But the real lesson to be learnt from the biggest collapse of a UK Web design company so far – with the likes of Alliance & Leicester and Lufthansa on its client list – is that it will not be the last.

Players in the Web design and production market are predicting a new media shake-up over the coming year.

“I think for the next six months there will be continued carnage and fall-out in the market,” says Eamonn Wilmott, managing director of Webmedia rival Online Magic. “There are 100 players and that figure will go down to about ten or 20 – I wouldn’t want to be setting up in business in the UK at the moment.”

Parent company the Webmedia Group, which is to continue its strategic consultancy business, has blamed Webmedia Ltd’s voluntary liquidation two weeks ago on strong competition in the Web production market.

According to a KPMG Consulting report, Electronic Commerce, the average marketing budget devoted to the Internet has almost doubled since 1996 – from 37,000 to 68,000. However, intense competition means that companies are working on tiny margins in order to gain Web design business. As an indication of this, one Web-media creditor suggests that there are just three suppliers which will have lost more than 1,000 from the collapse of the company.

Developments in technology have pushed down the cost of Website production, resulting in smaller Web design boutiques, carrying lower overheads and offering strong competition. That has left companies trying to survive on accounts spending between 10,000 and 15,000. Even if they are able to charge a top-of-the-range 20 per cent margin, the return is small. Online Magic was hired to handle the General Motors World Cup Website which is valued at between 250,000 and 500,000 but deals of that size are rare (MW October 16 1997).

Steve Bowbrick, chairman of the Webmedia Group – in which Meglomedia, the media group chaired by Lord Maurice Saatchi has a 43 per cent stake, says: “The Website production market has totally changed. It’s always been clear in this industry that the lower end (low margin) of the production and online market would be cut away pretty strongly by developments in technology and small firms that can compete on price.”

Webmedia was one of the pioneers in an industry which has seen huge growth, yet is still finding its feet. Set up in 1994, it focused on both Website production and strategic thinking. But as interest in new media grew, so did profit margins for Website production. However, new technology and initiatives such as packages from IBM and ICL to help companies create their own Websites has reduced the amount of profitable work available for Web production houses.

“In most industries, over the long term, margins are driven down,” says an industry operator. “But a lot of agencies chasing loss-leading prestige clients are already forcing margins down in a sec tor which is still in its infancy.”

He is equally sceptical about Webmedia’s chances of success in the consultancy market: “People generally don’t want to pay for mid-range consultancy in the UK. If Webmedia is serious about targeting the very top end of the market, it has to realise it will be competing with the likes of Coopers & Lybrand, KPMG and McKinsey.”

Partly in response to this and other changes in the market, the founders of the Webmedia Group, Bowbrick and Ivan Pope, went their separate ways last August. Pope is now heading the demerged domain service company NetNames. Three months later Peter Beech, managing director of Webmedia Group, reviewed the business and made ten Website production staff redundant.

Webmedia Group repositioned itself as an agency giving strategic advice last spring but this was not enough to save the company’s Website production arm, which went into voluntary liquidation on January 9 with the loss of 17 jobs.

Bowbrick believes that the Webmedia Group is leading the way in concentrating on strategy and is in talks to continue working with Lufthansa and Alliance & Leicester. “The future for companies like ours lies in consultancy, rather than Website production,” he says.

John Strickland, founder and chief executive of InterResource, which provides Web design, production and strategic advice, has been warning of a shake-up for some time. “There was a feeling last year, with the move of some of the US companies such as Poppe Tyson into the UK, that there was going to be consolidation.

“By the end of the year we will probably see penetration from the US, consolidation of the larger players in the UK and small companies moving to become more specialist and taking on sub-contracted work.”

Ross Sleight, strategy director of BMP InterAction, the new media offshoot of ad agency BMP.DDB, agrees. It has made a conscious decision not to do Website production in-house. “You can make a great margin doing production work if you provide a specialised service. But I can see a lot of consolidation happening,” he says.

By Friday a clearer picture will emerge of Webmedia’s future. The fate of the wider market will take a little longer to unfold.