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THE DAY AHEAD: As Net services companies soar, consolidation may loom

Tech Industry

The gains of the Xpedior (Nasdaq: XPDR) and C-Bridge (Nasdaq: CBIS) IPOs last week show that Internet services companies can still turn Wall Street's head, but investors could grow weary as dozens of services companies flood the market.

Has this Net services craze become a little too much of a good thing?

C-Bridge was the latest to gain Friday, closing up 150 percent after pricing at $16, the top of its revised range. A day before C-Bridge hit the market, Xpedior made a modest debut.



Net services: Too much of a good thing?



We know the Net services pie is big enough to go around for now, but consolidation can't be too far behind.

The merger of USWeb/CKS (Nasdaq: USWB) and Whitmann/Hart (Nasdaq: HART) could just be the beginning of consolidation as these Net consultants move to get bigger at warp speed.

Why? Size matters and there are simply two many services companies out there. That's a recipe for consolidation. The consolidation may not occur in the first half of 2000, but at some point we'll see some marriages.

Sure there is some differentiation between the Xpedior, C-Bridge, Agency.com (Nasdaq: ACOM) and a host of others, but all share a common goal -- to be a one-stop e-business solution shop.

If you stripped the company names out of the regulatory filings all of these Wall Street highfliers start to sound alike.

First, they all cite the same statistics. International Data Corporation estimates that the worldwide market for Internet professional services will grow from $7.8 billion in 1998 to $78.5 billion in 2003.

That establishes the big services pie picture.

Then comes the revenue, which is usually much better than other Internet companies out there. Xpedior reported pro forma sales of $102.7 million for the nine months ending Sept. 30 with a loss from continuing operations of $3.3 million. It turned a profit on an operating basis.

Other services firms are also posting profits, a fact that's attracting Wall Street even more.

After the strong financials, the companies cite the dreaded "relatively low barriers to entry in the eBusiness services market."

Then comes the competitor listing that really points out how crowded this field is getting.

Most services companies have cited the following as competitors or similar companies: Agency.com (Nasdaq: ACOM), Proxicom (Nasdaq: PXCM), Razorfish (Nasdaq: RAZF), USWeb/CKS, Viant (Nasdaq: VIAN), iXL (Nasdaq: IIXL) and Modem Media.Poppe Tyson (Nasdaq: MMPT). Traditional players include: Andersen Consulting, Cambridge Technology Partners (Nasdaq: CATP), Cap Gemini, EDS (NYSE: EDS) among others.

And there's more services companies going public.

Many of these companies depend on a few customers for the bulk of their revenue. As major corporations consolidate, the customer base could shrink. That could trigger a round of consolidation.

For now all is peachy with Net services companies, but the pie won't be large enough sustain dozens of new companies for long.

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