"Layoffs in the media-agency business are the next thing," said one top media executive. "There is no way we can hold back the bloodletting in this kind of economy. Clients simply are not supporting the business."
Three large media shops already have taken hits. Last week, Interpublic Group of Cos.' Initiative Media laid off about 50 people throughout its U.S. offices, and WPP Group's MindShare cut close to 40 jobs, according to media executives. Grey Global Group's MediaCom earlier laid off 50 employees; it's now adding jobs after winning GlaxoSmithKline's $600 million account.
Some observers say media agencies are like the beleaguered fishing boat Andrea Gail in "The Perfect Storm." Soon, the giant media conglomerates will be socked by the same market tsunamis as the creative shops.
"There are going to be some layoffs [at media shops] coming in the near-term," said Lou Schultz, CEO of Initiative, two days before the cuts were made at his agency.
Last fall Initiative trimmed about a dozen jobs, before the downturn became apparent this year. Like many media agencies, it also made cuts through attrition, in addition to the 50 recent layoffs. Hiring has been put on hold for 30 or 60 days, with the exception of key positions on accounts that cannot be left unprotected.
"We've gained about $300 million of new billings in the first two months of the year, but we've had erosion of close to that of clients cutting their budgets back," Mr. Schultz said. "That net is that there is no gain. If this is going to continue, we are going to have to see some scaling back in our efforts. It's just a matter of time. When people get through [the first half] and look at their balance for the year, I think you will see major adjustments."
Media spending is slowing, with December figures showing the first decline in years, according to Taylor Nelson Sofres' CMR. Why have most large media shops so far risen above the tide while creative shops lose ballast?
"We haven't had any layoffs," said Renetta McCann, CEO of BCom3 Group's Starcom Worldwide. "We don't plan on having any. We're doing fine."
John Perriss, CEO of Zenith Media, owned by Cordiant Communications Group and Publicis Groupe, also said his company has not made any cutbacks. "We are much better protected against this recession than the ad agencies. The ad agencies are not only suffering a billings downturn, they are losing revenue to their sister companies, the media specialists companies."
Mr. Perriss attributes this situation to the increasing growth of planning, in addition to buying services, at the larger media
"We have so much media planning now [that] we are getting the fee income for planning even though the buys aren't at the scale originally planned for," he said. "But if you are at an ad agency, you used to have that media-planning revenue, and as the clients are moving towards planning and buying consolidation reviews, the agencies are losing all the media revenue."
While advertisers cut back on creative work and the high overhead at the personnel-intensive creative shops, they are increasing their investments in sophisticated buying and planning systems and operations at media agencies.
For example, General Motors Corp. has poured millions of dollars into development of a sophisticated media and management software system. The system is being tested at GM Planworks, a division of Bcom3 Group's Starcom MediaVest Group, which handles the agency's $2.9 billion GM planning account.
"Starcom has built from scratch a media-management system that is Star Wars. It is the next generation; it's got me sweating," said a top executive at a competitive agency. The new system is actually called Mission Control.
Additionally, the rise of custom "modeling" that simulates the results of a marketing plan is another growing source of revenue. AT&T Corp., a client of WPP Group's Media Edge, pumped financing into the media agency to develop a model for tracking consumer response to the telecommunication marketer's services.
Media shops are feeding on a steady diet of low-end media such as direct marketing and brochures. "In this kind of an economy, retail becomes so important," said Carolyn Bivens, the newly named chief operating officer of Initiative North America. "The worse
sales are, the more they must advertise. Media companies have rich histories in retail."
"Traditionally, we do well in counter-economies," said Bob Kubis, president of Starlink, a unit of Starcom MediaVest, "because our clients will divert some of the working media into collateral. We still get the work; the projects are still there."
The larger media companies mostly have held the line, but their smaller brethren shops with nine-figure billings are getting hit hard. For example, KSL Media, a unit of True North Communications, has been relying more heavily on barter relationships to maintain its business.
"I think we are all watching expenses," said Frank Muratore, president-CEO of Catalyst Media, previously TBS Media Management. The agency recently laid off seven employees, or 5% of its 106 employee staff, due to belt tightening.
Last year at this time, the big issue confronting media agencies was finding skilled talent to staff growing media agencies. Much of the talent pool at the time was sucked up by sexier dot-coms and technology startups. Now that big agencies have finally staffed up, the softening economy threatens to cut into their hard-won roster of new talent. But rather than letting people go, agencies are holding on to their people for as long as they can, according to several media executives.
Many media agency execs are watching-and waiting.
Chris Geraci, senior VP-director of national TV buying at Omnicom Group's OMD, is among the many executives eyeing the upfront market, the period next month when TV advertisers negotiate with networks for time next season. "After the upfront," Mr. Geraci said, "if there still is marketplace softness, everyone will have to re-evaluate where they are."
Said one media executive: "If the soft market continues,we'll be forced to do the dirty work."