By SARA FISHER
Staff Reporter
A consolidation wave is sweeping through L.A.’s new-media industry, changing the shape of a still young field that constitutes a growing part of the local economy.
Unlike other consolidations, this one is not expected to result in layoffs and business closures. Just the opposite.
“It is unlikely we’ll see the attrition of jobs that we saw with aerospace or banking in L.A.; instead, the new-media market will look more like the entertainment industry that continues to create new job opportunities,” said Jim Jonassen, founder of the new-media trade and consulting group Lawnmower.
Why more job opportunities? Because local companies are being snapped up for their creative talent arguably more than for the brand name of the company itself.
The new-media industry is comprised of businesses that provide an array of Internet services, ranging from Web site design and online advertising to digital entertainment.
“The market is maturing at a lightning-fast speed,” said Nick Rothenberg, managing partner of USWeb/Los Angeles and former CEO of W3-design, which USWeb Corp. acquired at the end of last month. “Everyone expected consolidation, but not this soon. But since the underlying technologies are themselves evolving so fast, we’re seeing a compressed time frame in the L.A. new-media market.”
Jonassen said the sudden consolidation is evidence that the small developers have reached critical mass.
“What we are also seeing is a couple of big companies recognize that the new-media market is reaching across industries as more use online technology in their daily business,” he said. “Companies such as iXL and USWeb are betting on this and bulking up.”
One of these companies, Atlanta-based iXL Holdings Inc., will announce as early as this week its acquisition of two more L.A. new-media companies, said Kevin Wall, chief executive of iXL West, the company’s regional division.
New-media holding company iXL first entered the L.A. market last year by acquiring the Web developer and digital entertainment company BoxTop, which Wall founded.
“We have two acquisitions one big and one small pending in L.A.,” said Wall. “iXL’s acquisition strategy is very aggressive right now. We want to boost revenues to prepare for an IPO later in 1998.”
Wall would not give any details about the acquisitions, but said an announcement would be made within the next week.
At the beginning of February, iXL disclosed that it had raised $30 million in new capital to acquire interactive firms in major cities.
iXL’s activities come on the heels of another significant new-media acquisition in L.A. On Jan. 30, W3-design Inc. announced its acquistion by Santa Clara-based USWeb Corp.
“A lot of my colleagues expressed shock that (W3-design) decided to merge,” Rothenberg said. “Our company had been experiencing double-digit growth every quarter since we started three years ago, so we didn’t really have a financial need pushing us to merge with USWeb. Now I know a lot of strong L.A. independent companies are looking over their shoulder wondering about their future.”
Rothenberg said he and his partners had carefully looked at the market and decided they would merge in order to reach new, large clients quickly.
According to Jonassen and iXL’s Wall, another company looking to enter the local interactive market, possibly through acquisitions, is CKS Group Inc., a Cupertino-based marketing company.
CKS executives would not confirm nor deny any current negotiations with L.A. companies.
“We look at a number of strategic alternatives, and one is geographic expansion,” said Gina Bianchini, manager of business development at CKS. “Beyond that, I can’t say anything.”
A number of small L.A. new-media companies contacted for this story confirmed that they have been approached with acquisition offers from a variety of larger companies. But many said they are not yet ready to jump on the consolidation bandwagon.
DigitalFacades, a Santa Monica-based Web and CD-ROM design company, intends to stay independent for now.
“Big consolidation is coming into play, but we’re profitable now so there is no imperative for us to merge,” said Steve Klinenberg, general manager of DigitalFacades, whose clients include Litton Industries and Bugle Boy Inc. “We were approached by a New York company, but the talks didn’t go anywhere. We were concerned about changes in the corporate culture and losing what our company is built on.”
Klinenberg continued: “There is no proof that the consolidation model works. It’s an excellent theory, but no new-media company has been large-scale or national long enough to know if it will actually work.”
The good news for small Web designers is that they are expected to have an ongoing niche in the market.
“By the time the consolidation rush slows down, we are going to see a handful of big companies, but there will still be hundreds of small new-media companies in L.A.,” Jonassen said. “There is enough business to go around.”
As Wall and Rothenberg explained, their companies work on large accounts, often for Fortune 500 companies. There is an ongoing demand, however, from smaller accounts that constitute the bulk of small boutiques’ business.
“For pure economic reasons, my company isn’t able to consider small-scale projects and there are a lot of them out there,” Rothenberg said. “Boutiques are going to have an enormous business base.”
Wall agreed.
“With every movie and every record label having Web sites and every start-up company developing an online presence,” he said, “L.A. can support the small shops.”
