| Web agency aims for super status
06/13/2000 By Chris Oliver Web Connection has been on a shopping spree to transform itself into a super-agency that provides one-stop Internet consulting and implementation services for multinational companies seeking an online presence in Asia. In recent months, the design and consulting arm of chinadotcom has announced five majority-stake acquisitions designed to bolster its e-business research and solutions services. These include Australian e-business integrator XT3; e2e Business Solutions (formerly Chelcon Technology Group), a mainland software and professional services firm providing business-to-business solutions in Hong Kong and the mainland; Dae, a United States-based interactive agency specialising in reaching international, in particular Asian-American, markets; WayX, a Beijing-based Web solutions company; and TKAI, a Web company helping US firms enter the Japanese market. Web Connection has also teamed with Jupiter Communications, a leading US provider of e-commerce research, to distribute research in Greater China through its subsidiary Web Connection Research. Even before these deals, Web Connection was the largest Asian Web agency by size and regional presence, employing 300 consultants and 500 support personnel in 12 offices in seven countries. The next largest, Datacraft, supports about 125 consultants and has a much smaller regional office network, while Andersen Consulting ranks third, according to Merrill Lynch. "We have a very simple but difficult-to-achieve strategy," said Steve McKay, president and chief operating officer of Web Connection. He aimed to bridge the gap between Web developers and the big five consulting firms. To do this, Web Connection needs to have a regional profile and the ability to provide world-class client services. It also needs to have "the intersection of technology and strategy that you would normally find in the advertising world". The recent acquisitions aimed to strengthen Web Connection's knowledge base and foster development of vertical-industry groups within the company, Mr McKay said. These "subject-matter experts" would give the agency expertise in providing e-business solutions to services in specialised areas such as banking and finance. The acquisitions would also bolster Web Connection's strategy of creating a multi-dimensional agency capable of meeting clients' online needs, he said. Offering consulting and technical assistance to firms ranging from dotcom startups to major corporations, the agency bills itself as an e-business solutions provider. Unlike pure strategic consulting firms, Web Connection is prepared to provide the hard labour to build e-commerce infrastructure and Web sites. The company has an agency structure with core competencies in digital strategy, technology integration, creative design and online marketing. To attain its goal of developing a super-agency, Web Connection has recruited staff from across the graphics, consulting and marketing industries. Mr McKay said the acquisitions, particularly Dae and TKAI, would bolster the agency's US profile and create a pipeline to identify companies with an interest in Asia. Both Dae and TKAI were among the most recognised Asian-focused Web companies in the US. "We went to the US very consciously looking for organisations that were focused on Asia," said Mr McKay, a former consultant with Andersen Consulting. "We want to be the go-to company for US multinationals and dotcoms that awaken to the global nature of the Internet and the Asian opportunities." Industry analysts say Web Connection's expansion should help strengthen its lead position as an all-in-one agency while boosting its first-mover advantage. "The acquisitions make a lot of sense because it's about people on the ground being able to create and implement strategies," said Rajeev Gupta, Internet analyst with Goldman Sachs. A company with operations in multiple Asian centres would need interactive Web sites in each of those centres, he said. It could go to individual players in each market or turn to an agency such as Web Connection that integrates the back-end service and ensures each site has a similar look and feel. "For multinationals and high-profile domestic corporates, this makes a lot of sense," Mr Gupta said. Web Connection had an established position and strong management, he said, but its biggest selling point was the ability to offer strong regional coverage through its pan-Asian network. Its nearest competitors with Web-design capabilities, Scient and Viant, had limited geographical reach. Matei Mihalca, regional Internet analyst for Merrill Lynch in Hong Kong, credited Web Connection with solid earnings at a time when most Internet companies had yet to establish fiscal credibility. Those earnings are expected to grow steadily as an increasing number of international companies target Asia. Launched in 1995 as a Web-design firm, Web Connection booked US$10 million in revenues last year by providing agency services to blue-chip clients such as Cathay Pacific Airways, IBM and General Motors. However, the company's long-term earnings prospects suffer limited upside as agencies charge clients under the "billable model" - a one-off fee for services. Its average fee per client could drop as its reach extends into emerging markets such as Thailand, the mainland and India. Web Connection also suffers from a poorly diversified client base. Just 10 clients represent 60 per cent of its revenue, according to Merrill Lynch. "It is not as scalable as some of the other Internet models. That's why these companies don't trade at 100 times next year's revenues," Mr Mihalca said. "To create new opportunities you have to do more work." One way to boost earnings is to develop vertical expertise. By selling off-the-shelf Web models, Web Connection could slash development costs, boosting its gross margin over time. For the first quarter of the year, Web Connection's parent company, Nasdaq-listed chinadotcom, posted revenues of US$20 million, far outpacing the US$20.1 million the company generated for all of last year. As of the end of March, chinadotcom had US$560 million in reserve from its previous capital-raising activities, and an estimated burn rate of US$3 million per month, according to Merrill Lynch. Copyright 2000 South China Morning Post |