IQ News: Selling Both Sides – Agencies follow the lure of software development.

You built it, but will it sell? While they’re busy designing sophisticated Web sites for clients, new media and interactive agencies are finding homemade software tools on their hands they can reuse for the next assignment. Some simply consider this a wise amortization of costs. Others see tantalizing new business prospects. Last week, Poppe Tyson, a leading interactive agency based in New York, moved into the products business after discovering an abundance of digital marketing solutions gathering dust in its midst.
“We’ve always applied technology to the business process,” says Tom Wharton, president of Poppe Tyson Interactive. To capitalize on their tech smarts, Poppe has set up Neterra, a separate outfit to develop new Web software and market tools originally cooked up for Poppe clients.
Most new media agency executives can speak volumes on tweaking existing applications to spiff up corporate Web sites. A few examples to note: Strategic Interactive Group in Boston designed a custom database application last year for L.L. Bean to allow the catalog marketer to handle sales online. Red Sky Interactive, San Francisco, rejiggered several types of software to create the popular “Pong” banner for Hewlett-Packard. And Digital Pulp recently came out with NanoSite, an enhanced banner authoring tool that client DoubleClick will offer to its own clients.
Why couldn’t Poppe just keep the unit under its own roof? “It’s not something you should take very far in a service company,” says Wharton. He declines to give revenue projections for Neterra, which has a search under way for top management. Neterra is expected to have a staff of 20 engineers and sales reps by the end of the year.
Spinning off companies isn’t entirely new for Poppe Tyson. DoubleClick, the Internet advertising network, was founded by Poppe executives two years ago and spun off in early 1996. But DoubleClick has close ties to the advertising world and agency practices Poppe is familiar with. Selling software is an entirely different matter.
“The software out there is very much created from a product standpoint,” contends Peter Adams, chief technology officer at Poppe Tyson Interactive. He argues that agencies often feel the need to reinvent the wheel, since the market lacks Web products that work well for agencies.
But agency types who think they can do it better than Silicon Valley developers–whom they see as too far removed from Madison Avenue–may be in for a rude shock. “Software is hard,” cautions John Danner, president of NetGravity, a software firm that makes ad management systems for Web sites. “The position an agency is coming from is that it knows what the customer wants. Anybody who’s got any understanding of the customer will help [the software business], but the question of how to launch software is tricky.”
“A lot of companies that have gone into full-fledged software development have gone astray,” relates David Centner, chief executive of K2 Design, a New York-based new media shop that went public last year. Centner ticks off the potential pitfalls: conflicts with clients in the software industry; the complexity of maintaining and upgrading software; the general overhead of carrying on a software business.
“It’s a considerable expense,” Centner says. K2 looked into acquiring software companies at one point but decided against it for the above reasons, he notes. What’s more, the market is already glutted with new products. Concludes Centner: “There’s lots out there to use.”
K2 has developed a Web tracking and registration product, called Vampire, to help clients recruit users. But K2 goes outside for most Web personalization tools; for instance, it pays a typical $40,000 licensing fee to Firefly to add agent software to sites. This compares to the high salaries needed for in-house programmers, who can command $100,000 or more. “You want to make money, but clients appreciate saving a buck,” says Centner.
Some shops hope to keep their product sales in-house. Digital Evolution, a Los Angeles-based new media shop whose clients include Microsoft and Disney, says its goal is to have equal revenues from its software and client services divisions. To avoid having clients subsidize the agency’s research and development costs, DE has put up a Chinese Wall between its agency and products businesses, requiring each side to “buy” resources from the other.
DE will likely maintain both disciplines under the one banner, says Jonathan Anastas, vice president for marketing. Its main product is Media Conveyor, a software tool that animates and adds sound to brand images that can move from the user’s Web browser to the PC screen. Although it has booked no sales yet for Media Conveyor, Anastas believes the tool was a deciding factor in a pitch for an entertainment client.
Jonathan Nelson, chief executive of Organic Online, figures that software development helps an agency sell its services side, and vice versa. “It shows strategy, he says. “It shows we’re organized enough to launch both.” The San Francisco-based agency, partly owned by Omnicom Group’s Communicade unit, regularly incubates spin-off companies. Its most notable software initiative has been Accrue, a Web site audience analysis toolmaker.
The reality, admits Nelson, is that maintaining both sides “hurts, too. For instance, there’s only one me.” For almost a year after Accrue was launched, Nelson’s time was stretched between both as CEO of Organic and Accrue. Simon Roy was finally recruited from McKinsey & Co. to be chief executive for the product’s fall 1996 rollout. Organic maintains a stake in Accrue.
Besides soaking up the time of agency management, software development is also extremely costly. Hot Web products may make an agency more attractive to acquirers or investors. But they will also burn through lots of cash without assurances of a return.
“For a company planning to go public in the communications business, there’d have to be a lot of due diligence on the part of financial companies to determine the effect [of software development] on earnings,” says Abe Jones, managing director at AdMedia Partners, a New York-based investment banking firm. “And they’d have to look carefully to see if it’s more than hype.”
With the exception of CKS Group, new media agencies have suffered bumps on the road to raising public dollars. The stock market has decided that most interactive shops are really in the agency/client business–where margins are relatively slim and competition fierce–rather than in the potentially lucrative software development game. Nonetheless, the tremendous growth promised by the Web is enough of a spur for shops to pursue digital riches. “We’re looking at this as being a hugely successful company,” says Neterra’s Adams. “At some point, that’s going to require funding from different sources.”
At best, some agency may strike Silicon Valley gold. At worst, software development gives agencies an advantage in hiring talented programmers and burnishing the client’s work. Says Digital Evolution’s Anastas, “The services side is the touchstone to the marketplace.”