Large Ad Agencies Slowly Discovering the Web
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Not Godzilla.
Not Mark McGwire.
Not even Madison Avenue can make the Internet go away.
While Godzilla and Mark McGwire don't have to concoct responses to the rise of the Internet, big ad agencies must dance a new jig.
So far, they're not exactly diving in head first, but they're not turning a blind eye, either.
Mindful that the fast-growing market is still miniscule, the biggest names in advertising--Omnicom (NYSE: OMC - Quotes, News, Boards), Interpublic (NYSE: IPG - Quotes, News, Boards), WPP Group (NASDAQ: WPPGY - Quotes, News, Boards), True North Communications (NYSE: TNO) and Young & Rubicam (NYSE: YNR - Quotes, News, Boards)--so far have been content to quietly lap up pieces of the small interactive ad players in preparation for the future.
Sure, online ads are expected to generate about $3.5 to $4 billion in revenue this year, says analyst James Dougherty of Prudential Securities. This would double the $2 billion racked up last year, which was more than double the $900 million for 1997. And the eternally optimistic Forrester Research expects the number to double again in 2000.
However, 'it's a small number to the ad industry and small to ad firms,” Dougherty adds. Afterall, the total ad market is a whopping $280 billion, he points out. “All believe it's (the Internet) an important factor and are serious about being in it within the context of the total business. But, it's still a number of years away. '
At this point, Omnicom arguably stands out as the most aggressive player among the major companies. Grouped under its Communicade Interactive Media division, Omnicom boasts six top firms: Agency.com, Interactive Solutions, Organic Media, Razorfish, Red Sky interactive, and Think New Ideas, among its holdings. In AdWeek magazine's most recent ranking of the top 50 interactive agencies, four of Omnicom's six online firms ranked among the top 20.
Even so, keep in mind that Omnicom's company-wide revenue in 1998 came to $4.1 billion. So, Omnicom's online revenue is estimated to be only about 5% of that sum.
And Omnicom's competitors are not about to concede this market either. 'I would say we're very bullish on the growth potential for interactive ads based on our success over the years,' says Carla Hendra, president of OgilvyOne. 'We believe it's going to be very fundamental to clients' marketing mixes. And we're making sure interactive grows up and takes its rightful place in agency capabilities.'
WPP Group, which owns ad firms Ogilvy & Mather and J. Walter Thompson, finds its online presence with components such as the aforementioned OgilvyOne, which generated an estimated $60 million in revenue last year.
Interpublic is on the map with its stake in Thunder House Online, which focuses on marketing, public relations, and brand equity in addition to advertising. It also holds a stake in USWeb/CKS (NASDAQ: USWB - Quotes, News, Boards), among the smaller ad companies that are making big strides in the interactive market.
True North holds Modem Media.Poppe Tyson (NASDAQ: MMPT - Quotes, News, Boards), another interactive leader, and R/GA Interactive. Y&R recently sold its interactive agency, Brand Dialogue, AdWeek's 14th-ranked agency to Clarant Worldwide, an online business consultant. However, following Brand Dialogue's planned IPO, Y&R will become its top shareholder, with a 12.8% stake.
Will the ad giants ever become big players, or will they continue to concede this rapidly expanding market to the feisty upstarts like DoubleClick (NASDAQ: DCLK - Quotes, News, Boards), the dominant ad sales firm. 'The real issue is broadband,' says Michael Krauss, an interactive marketing columnist at Marketing News and
partner at Diamond Technology Partners. “When broadband hits, the opportunities
will be so enormous.”
Why will broadband be such a seminal event? Because broadband--the cable
modem--and its technological competitors will enable advertisers to deliver much more
sophisticated, creative ads and without the current seemingly endless wait to
download, which borders on aggravating. “Once we can deliver on the web the same
caliber of creative we currently see on T.V., agencies will take note,' Krauss predicts.
In fact, in the next five years, interactive cable and digital TV are expected to blur the
lines between web and traditional ads, resulting in what could be the big bang for
interactive advertising.
That said, the best companies for investors to watch in the interactive agency sphere
are still the up-and-comers such as Modem Media.Poppe Tyson and USWeb/CKS,
firms that might even be better positioned than the Omnicoms and WPPs to sweep the
market.
About 53% owned by another ad giant, True North Communications, Modem
Media.PoppeTyson was formed last spring after the merger of Modem Media, one of
the first interactive marketing pioneers, and Poppe Tyson, a global ad firm. The
resulting firm, which went public in March, plans to add only about six new clients a
year so it can focus on advertisers whose overseas online spending is expected to
balloon in the next few years. Among its current clients: AT&T (NYSE: T - Quotes,
News, Boards), General Motors (NYSE: GM - Quotes, News, Boards), IBM
(NYSE: IBM - Quotes, News, Boards), 3M (NYSE: MMM - Quotes, News,
Boards) and CitiGroup (NYSE: C - Quotes, News, Boards). Not too shabby.
USWeb/CKS was also formed from a merger last year when USWeb, an Internet
consulting firm, bought advertising and marketing firm CKS Group for more than
$540 million in stock. Devoted primarily to online advertising and marketing,
USWeb's output includes creating the identity and offline advertising for the Go
Network, the Disney (NYSE: DIS - Quotes, News, Boards) portal, as well as
identity, packaging and in-store work for Apple Computer's (NASDAQ: AAPL -
Quotes, News, Boards) iMac computer.
With revenue of $229 million in 1998, USWeb beats out the top ad agencies, which
typically only rack up about $100 million apiece from web advertising.
Modem, still quite fresh on the market, reported revenue of $42 million for 1998, and
is expected to generate $58 million in 1999.
Both Modem and USWeb are well-positioned to emerge as sector leaders as the online
ad market really takes off.
Already Grey Advertising's (NASDAQ: GREY - Quotes, News, Boards) Grey New
Technologies and media.com interactive subsidiaries have made a commitment to
Flycast (NASDAQ: FCST - Quotes, News, Boards), one of the leading ad networks,
to help develop new Internet-related media products and services for their clients.
Although the major ad firms for now seem content to own minority stakes in online
firms, as the market expands so will the ad firms' appetites for larger pieces of the
business. Then, look for the behemoths to step up and buy several of the smaller
players rather than develop this capability in-house.
Which companies will they stalk? Well, of course there are the industry leaders,
DoubleClick (NASDAQ: DCLK - Quotes, News, Boards) and 24/7 Media
(NASDAQ: TFSM). Indeed, Doubleclick is nearly 50% below its high while 24/7
around $31.75, down from its high of $69.63.
Modem Media is trading around $26.25, near its low of $22.12 and way down from its
high of $55.13. USWeb is around $21.75, down from its high of $47.
'The business models are changing, and the question is whether agencies' management
will be hip enough to get it,' Krauss says. 'My guess is that they should and they will,
but I could be wrong.'
Bottom Line:
Look for the large agencies to make their big push into web advertising via
acquisitions. |
