Last week the web agency Deepend closed as its parent Deepgroup, which housed six other satellite businesses, went into liquidation with 180 job losses.

One might be tempted to ask "So what?". It is a blow for those who have lost their jobs but there is no shortage of problem companies in the internet industry, and the web agency market in particular has been under siege. Prominent industry names such as Head New Media and Blueberry.net have disappeared, while Razorfish has closed its London office, joining the likes of Wheel, Grey Interactive and Agency.com, which have cut jobs.

For many in the industry, Deepend's fall represents more than just an addition to a long line of cutbacks. The agency was revered for the quality of its creative work.

Deepend was started in 1994 by the design graduates Simon Waterfall, Gary Lockton and David Streek, taking its name from a sign at Richmond swimming pool, where the trio went to work on their first brief. Deepend's work - which also took in gaming, 3D, interactive TV and broadcast - was regarded as a beacon of excellence. And it had an array of industry awards to prove it.

Advertising Age named it "No 1 creative interactive agency" in 2000 while Campaign ranked it as 1999's leading creative agency. This year it added Bentley, Conran shops and French Connection to a client list that included Cartoon Network, the BBC, Volkswagen, and ntl.

Even rivals are unstinting in their praise. Richard Davies, managing director of the Good Technology web agency, says: "They were a fantastic brand. Sometimes they beat us and on others we beat them."

It had also grown ambitiously, with spin-off businesses including the PR agency Relish, online ad agency Gluemedia, the consultancy Airtight, IT division Backend, web production business Poolside and digital TV ad specialist Sleeper. It had offices in Rome, New York, San Francisco, Sydney, Toronto and Bangalore, and a sprawling base in Shoreditch.

So what went wrong? Did Deepend's hubris encourage it to grow too fast? How significant is its failure for the web agency market?

Davies points to Deepend's ambitious growth and diversification, along with a failure to see and deal with looming problems, as key factors. "Any expansion of that kind is going to cause problems and it appears to have got the better of them.You've got to focus on the bottom line as much as on the work you do."

In addition, Deepend was vulnerable because clients were buying services that cut costs or brought a direct commercial return, rather than the high-end creative work it has been associated with, says Syzygy's chief executive Chris Robson. "Clients are buying services that contribute bottom line value _ Deepend was a brilliant brand but it's difficult to put a value on the work they're doing and that's why they've suffered."

However, Deepgroup contends it was not ill-prepared. Its chief executive, Gary Lockton, says: "We were aware we had challenges. The dot.coms' failure last year had an impact on our client base [because] confidence in digital media did drop away. Second, we were a private company - we didn't have a war chest. Third, there was a lot of aggressive undercutting and loss-leading by the publicly funded agencies. That put the icing on the cake."

Deepgroup had refrained from making large-scale redundancies because such a move would have destroyed its unique culture, says Lockton. Instead, the focus had been on securing investment. A deal with two US groups had been under negotiation, but fell through last week.

However, there are concerns that Deepend's failure could damage the industry. Davies says: "I don't think it's good. I think competition is healthy. One of my worries is that there will be people saying that if Deepend can't do it no one can, but I don't think that's the case. You can make a business in this market - we see ourselves as a full-service agency and we make it pay."

And it's not all doom and gloom at Deepgroup. Relish will stay in business under the wing of partner Whiteoaks, and Lockton believes that negotiations with liquidators could provide a future for other Deepgroup businesses.

Lockton himself is moving on. He has secured a job as chief executive of North Creative, a Soho-based multimedia agency, and is taking 11 staff with him.