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As many of its peers failed, ATG weathered a wild ride

For Art Technology Group Inc. of Cambridge, 2003 was nothing to write home about. The company posted a $4.2 million profit that was due to a restructuring of its real estate leases; factor that out and ATG would have suffered a $6.1 million loss.

Still, you won't hear anybody at ATG complain. The company, which went public in 1999, is lucky to be alive.

Few local tech companies benefited more from the late-'90s tech boom than ATG, which makes software used by online retailers like Best Buy, J. Crew, and Martha Stewart Living. ATG was founded in 1991 by two Massachusetts Institute of Technology graduates, Jeet Singh and Joseph Chung. It wasn't a software company at first; instead, Singh and Chung worked as technology design consultants, building high-tech facilities like cybercafes and museum exhibits.

"When the Web happened in 1993, 1994, the demand for our skill set was really high," said Chung. ATG designed Moviefone, a nationwide service that let consumers buy movie tickets online or by phone. Soon they were swamped with requests to build e-commerce sites. They decided instead to create "application server" software that would let companies do it themselves.

Their main product, Dynamo, was introduced in 1995, but it really caught on three years later at the peak of the Web boom. As businesses rushed to set up their own online stores, revenues blasted to $163 million in 2000 from $32 million in 1999. When ATG launched its IPO in July 1999, its opening stock price was $12; a year later, shares of the company sold for $122.

And then, it all stopped. "When the economic downturn hit," said Chung, "everyone just panicked and froze all their IT spending." ATG's 2003 sales of $72.5 million were less than half of the company's 2000 level. Its stock fell as low as 61 cents a share in late 2001; it presently hovers at $1.27. And ATG found itself with a bloated payroll of 1,200 workers and a lot of unneeded real estate.

But ATG has survived where many of its peers have disappeared. The payroll's now at 350 employees; Chung and his buddy Singh are among those who've moved on. Singh lives on the West Indian island of St. Barts and performs in a rock band; Chung writes a column for MIT Technology Review magazine and declares himself semi-retired.

"I'd been doing it for 11 years," Chung said of his time at ATG. "It was time to do something else." Chung said he still holds a large stake in the company.

Under CEO Bob Burke, who took charge in 2002, ATG has focused on specialized e-commerce software that gives it an edge over more generic products from huge rivals like IBM Corp. and Microsoft Corp.

"They decided not to spread themselves too thin," said Albert Pang, research director at IDC Corp. in Mountain View, Calif. "They decided not to continue to invest in the application server market, because that had really become a commodity market."

ATG's Dynamo application server, which acts as the foundation for an e-commerce system, had been the company's most profitable product. But rival products were just as good, and the big boys could easily undercut ATG on price. So the company refocused on the applications that run on top of Dynamo. For instance, ATG makes a customer assistance product that lets Internet shoppers type in questions using everyday language. This lets e-retailers cut back on live customer support workers, and saves them a bundle. "Others don't have the same kind of product, so we can sell the differentiation," said Cliff Conneighton, ATG's senior vice president of marketing.

Because ATG's applications rely on the popular Java programming system, they can work with application servers from rival firms like BEA Systems, Sun Microsystems, and IBM, though not with MIcrosoft. This lengthens ATG's list of potential customers to include those who don't use its Dynamo software.

Conneighton said that ATG revenues for 2004 are just about at the break-even point, thanks to an economic recovery that's begun to benefit software companies. "I think it's sort of being in the right place at the right time," he said. "There's a pretty strong new boom in Web business overall."

IDC's Pang has his doubts. He believes that the superior features of ATG's software will soon be matched by competitors, while ATG lacks the resources to invest in creating products. "The toughest challenge for ATG is that given the current environment, they do not have the luxury of investing in too many new things," Pang said. He thinks the company's best bet is an alliance with one of its rivals or an outright acquisition.

"It is possible that they will hold on to the company for another couple of years until they can fetch a higher price," said Pang.

Hiawatha Bray can be reached at bray@globe.com. 

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