Two years ago, advertising agencies saw the light. It was coming from their computer screens.

As Internet hype reached a crescendo in 1995, ad agencies rushed to create interactive divisions to design Web sites for clients. That’s because in the mid-1990s, you can scarcely call yourself a full-service agency anymore unless you have the capacity to deal in new media.

But this year, the interactive ardor seems to be cooling considerably.

Last month, TBWA Chiat/Day Inc. eliminated its interactive division, laying off the four employees staffing it. The L.A. office of Grey Advertising Inc. has cut its six-person interactive division down to a single Web guru.

El Segundo-based Fattal & Collins, one of the earliest and most aggressive pioneers in Web development, is in full retreat. The agency that created the first episodic serial on the Web and then spun off a new Web entertainment company called American Cybercast has eliminated its five-person new-media department. American Cybercast is now in bankruptcy court.

What went wrong? The simple answer is that there isn’t enough money in Web design to support in-house development. But that ignores the success that independent designers who specialize only in the creation of Web sites have had and continue to enjoy.

According to some of those Webheads, who until recently were employed by ad agencies, the real answer is that advertising executives had no idea what they were getting into.

“(Ad executives) never were of the belief that the Web would ever generate the same media billings as a large TV campaign, but they just wanted to be able to check off the box to tell their clients that they had interactive capabilities,” said Sally Parker, who created Fattal & Collins’ new-media division in 1995. She is now director of new business development at Culver City-based Web site developer W3-design Inc.

According to Parker, the technological expertise required to develop Web sites falls way outside the range of ad agency skill sets. And agencies are unwilling to spend the money necessary to hire technology experts, because Web development is such a small side of the business.

Further, there is a perception in the industry that going to an ad agency’s new-media division is the equivalent of being sent to Siberia.

“The inside joke in ad agencies is, if you come from the regular media side and are put in charge of the interactive division, maybe it means you can’t cut it anymore,” Parker said.

Although relatively few agencies do in-house Web design anymore, most still tell clients that they have new-media capabilities and they do. Grey, for example, now has a single Web expert who makes strategic decisions about new-media development and hires freelancers or Web design firms to handle the actual design and production work. That seems to be the new paradigm at many large ad agencies.

“We made a major commitment to (new media) early on, but the revenue stream was very periodic,” explained Jeff Alperin, chief executive of Grey’s Western Division. “We learned that we could serve the needs of our clients effectively without the infrastructure we had built.”

In truth, clients don’t seem to care whether or not their ad agencies design their Web sites, so long as the agencies handle the outsourcing.

Ellen Barre, who started up the interactive division at Santa Monica infomercial company Williams Worldwide in 1995 (yes, it was dumped this year; she now works at Hollywood-based Web site developer EntertainNet), said she was at an interactive marketing conference attended mainly by advertisers about a year ago.

During one presentation, the marketing chiefs of various corporations were asked whether they thought it important for their agencies to have new-media capabilities. About 90 percent of them raised their hands in the affirmative, Barre said.

When asked whether they thought it was all right for the agencies to outsource the design work, nearly all of them said yes.

“The advertisers that are coming to us definitely want online capabilities,” said Michael Agate, president of advertising consultancy Select Resources International. “They don’t seem to care whether the jobs are outsourced, though. So long as it’s a seamless relationship and planning is still kept at the agency and all that, they’re happy.”

Chiat/Day has adopted a similar strategy to Grey’s. Deciding the agency didn’t need technical experts on staff, Chiat/Day executives eliminated the interactive division, but the agency still designs Web sites.

Chief Operating Officer Laurie Coots explained that the same agency creatives who design campaigns for other media are also doing the conceptual work for those Chiat/Day clients who want a presence on the Web. The creative direction for the sites is supplied to freelancers, who actually produce the site and put it on the Web.

Coots compares the strategy to the way ad agencies produce television commercials; the creative work is done in-house, but the actual filming is usually outsourced.

This isn’t to imply that all agencies are getting out of the Web design business. Many larger agencies with computer-oriented clients have little choice but to invest in new-media expertise, because their clients demand it. Further, the large communcations holding companies such as Omnicom Group Inc. own a number of Web design shops, and their affiliated ad agencies can simply outsource work to them.

Barre and other observers think that’s where the business is headed large agencies and their owners, having given up on Web design themselves, will begin buying up the successful independent design firms.

Los Angeles Business Journal staff reporter Dan Turner covers the marketing, entertainment and media industries.