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As Marketers Shift to Digital, Big 4 Keep Pace

But Agency Cos. Will Face Pressure as Advertisers Put More Controls on Web Spend -- and Deep-Pocketed New Rivals Enter Scene

By Published on . 1

Agency holding companies may actually be ahead of the curve on this digital thing.

Digital services in 2007 accounted for 12.3% or $4.7 billion of worldwide revenue for advertising's Big Four -- Omnicom, WPP, Interpublic and Publicis -- according to Ad Age DataCenter estimates.

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Numbers rounded. 1. Ad Age estimate. Source: Company reports, Ad Age DataCenter estimates

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Put another way, digital's share of revenue at each of the top holding companies is higher than digital's estimated share of worldwide media spending.

The groups appear to be more than holding their own as marketers shift money to digital.

WPP Group, the second-largest agency firm, says it generated 12% of revenue from digital last year. No. 4 Publicis Groupe says digital accounted for 15% of 2007 revenue. No. 1 Omnicom Group brought in about 13% of revenue from digital, while Interpublic Group of Cos. pulled in 10%, according to Ad Age estimates.

The internet in 2008 will account for $48.4 billion, or 10.1%, of worldwide media spending vs. 8.8% last year, estimates WPP's Group M. Publicis' ZenithOptimedia puts 2008 world internet ad spending at $44.6 billion or a 9.4% share, up from 8.1%.

Group M and Zenith peg '07 internet spending at $39.7 billion and $36 billion, respectively. The Big Four's estimated digital revenue equates to 12.4% of last year's estimated internet ad spending (using an average of Group M and Zenith figures). To be sure, holding companies' digital services extend beyond buying and placing internet ads.

Holding companies tout their digital wares to varying degrees. Omnicom, with the biggest digital-revenue cache (an estimated $1.6 billion last year), mentioned "digital" just twice in its latest annual report. Publicis trumpeted "digital" 23 times in its last U.S. annual report filing.

Omnicom got into the digital game years ago with acquisitions of pure plays Agency.com and Organic. Publicis made a big bet last year, paying a lofty $1.3 billion, or 3.3 times revenue, for Digitas. WPP, on a multiyear digital buying spree, snatched up web-ad network 24/7 Real Media for $649 million in 2007, or about three times revenue.

Publicis has made Digitas a foundation of the company's digital plan, but Digitas Chairman-CEO David Kenny isn't ready to trumpet Publicis' current digital percentage. "To me, it's still way too low," he said. "We don't view it as a great success to be at 15%. It's a great start."

Homegrown
Some of Madison Avenue's strongest digital plays are homegrown. Marketing-services shops such as WPP's Wunderman, Omnicom's Rapp Collins and Interpublic's MRM have become top-tier players in digital.

A year ago, WPP Group CEO Martin Sorrell happily noted that client procurement departments, which have pressed for lower costs on traditional agency services, hadn't really gotten their hands on digital budgets. "These areas are sexy, and you are not going to get shot or fired as a CMO if you invest a little bit more money in the digital area," he told analysts in February 2007.

But digital isn't a panacea. Agency companies likely will face pressure going forward as marketers put more controls on digital spending. Interpublic Chairman-CEO Michael Roth last month told analysts: "Ultimately, as this becomes more embedded into what we do, then procurement people get involved."

Agency companies also are grappling with the costs of building digital operations, with the price of talent. Mr. Roth said late last year: "Right now, it's cost us some money ... but it's money well spent for the viability of our businesses."

That's not to say all holding companies will endure. Maybe assets will be consolidated among existing players, or maybe an emerging player will pick off assets to gain client relationships.

Competition
Madison Avenue already is competing with deep-pocketed new rivals. Microsoft Corp. last year scooped up aQuantive, parent of No. 1 digital agency Avenue A/ Razorfish, for $6 billion, or 11 times revenue. That's enough to buy one and a half Interpublics.

Holding companies have yet to convince Wall Street they are hot tickets to the digital future. The market caps of Omnicom, WPP and Publicis are little more than one times revenue; Interpublic sells for far less. Star performer Omnicom trades for less than 15 times earnings, one of its lowest price/earnings ratios in years.

Near-term fortunes for this sector are still heavily tied to old media and nondigital marketing services. Yet the holding companies have demonstrated an ability to adapt to the digital economy. Investing in these companies could turn out to be a cheap ticket to marketing's digital future.
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