Market analysts regroup in tough times
During the boom, analyst firms such as Jupiter Communications, Media Metrix, NetRatings, Gartner and Forrester were busy churning out report after report about the intricacies of the Internet, how important it was for old line business to "get the Net." Analysts popped up on television, were quoted extensively by journalists following the dot-com phenomenon, and brought in beaucoup bucks selling their studies.
But now, as their clients write off inventory, lay off workers, and in general scale way back on technology purchases, the pressing need for a $50,000 study on click-through rates seems less important somehow.
This economic situation has left them to find ways to kick their way out of the slump. They've been busy redefining themselves--merging and cutting costs--and in some cases, companies are returning to what life was like before the Internet explosion.
Their own studies illustrate the kind of troubles they've been facing.
A recent Forrester study revealed that 60 percent of large companies surveyed planned to reduce their tech consulting and implementation services budgets by an average of 30 percent. Gartner is predicting that the IT industry will continue to consolidate and won't return to normal until at least 2003; a survey of European businesses found that the number of companies cutting IT budgets had increased 10 percent.
Like others, the research firms were hurt by the terrorist attacks of Sept. 11. Sales pitches were canceled, consulting projects delayed, and research suspended in some cases, causing a blow to quarterly results. But for some of the companies, the problems go deeper.
Live by the Web, die by the Web
Analysts that focused heavily on the Internet sector have been the hardest hit. Where there once were three companies, there's now one. Jupiter Communications and Media Metrix announced a $414 million merger in June, which they completed in September. Over the next year the company laid off 30 percent of its workers and was acquired by competitor NetRatings for $71.2 million.
"Jupiter Media Metrix needed to either find a merger partner or secure substantial additional financing in order to continue operations," wrote Fred McCrea, an analyst for Thomas Weisel Partners.
While all of the analysts firms have mainstream clients, the Internet-centric firms relied more on dot-coms. As the companies died, so did their businesses.
Some of the numbers are stark: Jupiter's stock has dropped from a 52-week high of $15.62 to close Thursday at $1.46. Its revenue fell 48 percent in the third quarter compared with a year ago. At NetRatings, things aren't much brighter; its stock closed at $12.18 Thursday, down from a 52-week high of $18.43. Revenue for the most recent quarter was $5.6 million, down from $6 million the year before, while a year-ago $138,000 in profits turned into a $611,000 loss.
Jupiter's customer base dropped from 1,895 at the end of the second quarter to 1,363 at the end of the third. At NetRatings, customer renewal rates slipped from 47 percent in the second quarter to 40 percent in the third quarter. Revenue from audience measurement services fell 9 percent. Revenue from analytical services fell 9 percent, and international revenue fell 50 percent.
"This is a challenging market in which to be selling Internet measurement data and research," said John Corcoran of CIBC World Markets. He speculated that the combined firm will have to cut back on the number of panels it conducts, and possibly retreat from some international markets to stay afloat.
The more generalized IT analysts have had a slightly better time of it, in part because they didn't have so many dot-com clients.
Gartner, for instance, managed to beat Wall Street estimates by a penny for the fourth quarter, when it saw revenues eke up $6.5 million from the previous year to $224.1 million.
"Gartner seems to be one of the few research products clients are willing to pay for," said John Mahoney, a Raymond James analyst.
But Forrester Research isn't faring quite as well. The company reported last month a pro forma profit of $4.7 million in line with analysts' expectations, but alerted Wall Street that fourth-quarter and 2001 results would fall below estimates due to lower renewal rates and a decline in deferred revenue.
Forrester also suffered from having a client base with many smaller customers; many of those vendors didn't renew their business this year, and more are likely to cancel projects when their renewal dates come up in the fourth quarter, McCrea speculated.
"The weak economy is negatively impacting technology budgets and demand for Forrester's research products and services," Mahoney said.
Fighting for a comeback
So can the consulting firms recover? Most Wall Street analysts think they will, because despite economic woes, companies continue to develop new technologies at a fast pace. The contraction of the marketplace evidenced by the Jupiter/NetRatings merger should also help.
The companies are finding ways to change with the times.
Forrester, for instance, has added new products and expanded its TechRankings service, which helps companies choose software. The goal is to help its customers spend what little tech dollars they have more wisely.
Turning their focus to nuts-and-bolts technology as opposed to more high-flying Internet research is less sexy, but may bring in more money, analysts said.
Gartner is extending its business out beyond the tech market. It's new "G2" business, which has signed up 100 clients, studies categories like the automotive industry and health care, albeit with a tech bent.
And the research firms are optimistic about some Internet sectors such as e-tail--although online merchants do not always agree with this sentiment.
But the firms believe some of the Internet dollars will come back eventually.
"While we do not expect the market for Internet measurement to return to the heady days of 1999 and early 2000, we do believe there should be an uptick in the number of firms buying these services as the Internet sector begins to strengthen," Corcoran wrote in a recent research report.