Responding to an uptick in online ad spending and the growing demand for interactive marketing services, online ad agencies are beefing up their strategic services through acquisitions, hiring and partnerships.
But in sharp contrast to the merger mania that overtook the online agency business during the dot-com days, today's agency growth model is one of targeted acquisitions and strategic partnerships.
"We really needed to grow with the market, but we never wanted to be part of a rollup," said Julie Roth Novack, exec VP-corporate strategy at Agency.com, which turns 10 years old this month.
"There are a lot of challenges with integration," she said, pointing to issues such as culture clashes and managing resources.
Instead, Agency.com has taken a very targeted, selective approach to acquisitions, Novack said. Starting out as a Web design shop in 1995, it recognized a need to provide online advertising and creative services to clients. In 1999, it acquired i-traffic, which now operates as the interactive marketing group within Agency.com.
As online advertising became an even stronger part of its business, Agency.com last year acquired Exile on Seventh, a San Francisco-based online ad agency.
"There is huge growth in interactive advertising," Novack said. "I have met with a lot of CMOs over the last six to eight months, and many of them are pouring money into this space as they're seeing the effectiveness of online advertising."
The final numbers for 2004 are not yet in, but it is shaping up to be a record year for online advertising, according to the Interactive Advertising Bureau.
In the third quarter, online ad spending reached $2.4 billion, up 35.3% from a year earlier, according to the IAB's Internet Advertising Revenue Report, prepared by PricewaterhouseCoopers.
The best year on record for online advertising was 2000, when spending totaled $8.0 billion. The IAB expects 2004 to top that by a significant margin.
B-to-b spending, which makes up about half of Agency.com's business, is up as well, Novack said, with clients including Hewlett-Packard Co., Honeywell and 3M Corp. increasing online ad spending.
Hot areas for b-to-b marketers this year are e-mail, search and rich media ads, she said. To address these opportunities, Agency.com is hiring people with strong rich media design, search and media planning skills.
Digitas, an online agency that was founded in 1980 as a direct marketing agency, has also expanded its interactive services through strategic acquisitions. Its most recent deal was its purchase of interactive agency Modem Media, which was completed in the fourth quarter of 2004.
"As our clients expand their business, we need to be able to handle client conflicts," said David Kenny, chairman-CEO of Digitas. For example, as telecom companies expand into new areas such as voice-over IP, the agency must be able to handle potential client conflicts with existing or new accounts, he said.
By keeping Modem Media as a separate agency, under a multiagency holding company model, Digitas is able to expand its client portfolio and services while avoiding potential client conflicts.
Laura Lang, president of Digitas, said the agency is also expanding its analytics services through partnerships with analytics providers, such as Poindexter Systems, and it is increasing its rich media investment.
"One of the things we're seeing is the creation of much richer experiences online," Lang said, pointing to online video and interactive content with a much richer feel to it. "That's where we are investing."
AQuantive, an online agency holding company founded in 1997 as Avenue A, has also expanded its services through acquisitions. The company started out as an online media agency.
"Our clients were demanding that we produce creative and do some marketing," said Mike Galgon, co-founder and chief strategy officer of aQuantive.
So in 2002 the agency acquired i-Frontier, an online advertising agency specializing in ad creation, ad tracking, e-mail and search engine optimization.
To further beef up its online advertising services, aQuantive acquired Razorfish last year. Razorfish continued to operate as a separate division of aQuantive under the name Avenue A/Razorfish, providing online advertising and media buying services. In January, aQuantive announced the merger of its i-Frontier division into the unit, keeping the Avenue A/Razorfish name.
"In order to drive an integrated approach for our clients, we put the two companies together," Galgon said. "We wanted continuity with the brand. In terms of scope, we really can now manage all online touch points for the customer."
The agency is actively hiring people with strong media, advertising creative, user experience, technology and analytics skills, Galgon said. "On the media and strategy side, we need people who can wrap their brain around search and media advertising, and how to bring those two pieces together," he said. M