Bay Area Shops in Major Retreat

This time last year, dot-coms were gearing up to wow Super Bowl viewers, and every other day, it seemed, agencies announced they had won yet another e-commerce client with $20 million or more to spend.

A lot has changed.

Ad agencies in Northern California, the key hub of dot-com activity, were hit last week with a wave of layoffs—the first major staff repercussions of the dot-com market crash and the client failings that followed. Among the shops that cut staff, sources say, were Leo Burnett Technology Group, BBDO West, Publicis & Hal Riney, GMO/Hill, Holliday and McCann-Erickson/A&L. Sources say GMO was hit especially hard, losing 30-40 staffers. Some Southern California shops are cutting back, too.

Mainly to blame are shrinking client rosters at scores of agencies. FCB Worldwide client Kibu.com folded just months after its launch. TBWA\Chiat\Day client Pets.com, which became a household name thanks to the sock puppet, closed when it couldn’t find a new backer. Many smaller shops, too, acquired clients that quickly disappeared.

For many agencies around the Bay Area and throughout California, this New Year may be the most challenging since 1995, when the Internet took off. Attendant to the layoffs is a general re-evaluation of which clients are safe to pitch and what kind of creative work is now in order. Even well-known e-tailers like Amazon.com are being viewed more skeptically when they go into review, executives say.

Many think the downturn will mean a back-to-basics approach, with agencies looking at businesses more for their growth potential than for quick profits. The natural consequences, many say, will include cautious account directors and fierce competition for smaller business.

“There are some agencies now that are just laying off massive quantities of people,” said Vikki Garrod, new-business director at Tonic 360 in San Francisco. “People were trying to jump on the gravy train and got burned.”

Tonic pitched (and won) Sun Micro systems’ $100 million account with J. Walter Thompson last year, but passed on many e-commerce accounts—looking only for “best-of-breed” dot-coms with strong venture capital backing, says Garrod. So far, the shop has avoided layoffs.

“There were a lot of companies where we said, ‘Good luck, we’re not interested because we’re not interested in your business plan,’ ” Garrod said. “We were fortunate we didn’t get burned, but we missed out on some good opportunities. Some other agencies lived by the adage that they never saw a piece of business they didn’t like and got hurt.”

Some executives say times are particularly tough for smaller agencies in the West that have coasted on dot-com billings for several years. These shops may now have to pitch against bigger, more entrenched agencies and cut already small staffs.

Shops are also being forced to steer many clients away from TV toward the less expensive radio, print and outdoor. They are also often encouraging a regional approach first rather than a huge national splash.

Seidel O’Neil & Partners in San Francisco, which works for such clients as Photobition and Upside Today.com, changed its business model to deal with the dot-com fallout. But agency partner and creative director Howard Seidel doesn’t put much stock in doomsday predictions.

“I’m not sure it’s a shakeout as much as a sobering of the economy,” he said. “I’m actually dismayed by the glee people take in this fallout. Some of our best clients may have a hard time surviving. But some also have great business models and deserve a chance to do well.”

Seidel suggested many venture capitalists will be ready to fund more startups when the market settles.

Seidel’s partner, D.J. O’Neil, compared the dot-com market to the personal computing industry of the 1980s. There were too many players at first, he said, but the market was highly successful in the 1990s with a smaller number of smart, streamlined companies.

“The VCs are just waiting and setting high-water marks,” he said. “Everyone is in survival mode. What’s going to happen next is people will see some business ideas were stupid but others were really good. You’ll also see a lot more real-life companies using the Internet to improve their business. Instead of the Internet changing the world, it will just be another place to do business.”

Jack Boland, president of midsized Pickett Advertising in San Francisco, said the larger shops are also having trouble, partly because of their networks’ expectations. “The public agencies are looking to be as efficient as they can,” he said.

Others have been fortunate. Goodby, Silverstein & Partners in San Francisco continues to roll out work in major markets for Internet stalwarts such as eBay. And start ups also occasionally announce they have hired an agency.

But creatives and account executives alike generally believe the shakeup is far from over. Jennifer Solow, managing partner at Kirshen baum Bond & Partners West in San Francisco, said shops will continue to pay for taking on shaky clients that offer a quick check and the chance to do offbeat creative work.

“It’s all about getting back to real companies who make real things,” said Solow, who works with Mother’s Cookies and Ricochet, among other clients. “Anything Internet-related is in trouble now. My guess is we’ll have another year or so of crisis.”