Industry comes to terms with a new New Economy

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Welcome to the age of lowered expectations.

Heads of media and advertising companies came before Wall Street last week to explain why they had fallen short this year. One year after they toasted the best advertising market in history, executives came back to the UBS Warburg and Credit Suisse First Boston media conferences in New York to declare this is the worst they'd ever seen-and it's not improving anytime soon.

Most speakers took a "light at the end of the tunnel" approach, where 2002's economy will be flat, at best, and a real recovery will come in 2003, thanks to leaner organizations that came from cost cutting in 2001. As one media executive in the audience said, "In a down market, you hear a lot about core values" at these kinds of gatherings.

slow climb back

The ad recession in the U.S. may bottom out by the end of 2001, but it will be a slow climb back, according to the two top industry forecasters who opened the UBS conference. U.S. ad spending will ultimately drop 4.1% this year to $233.7 billion, from $243.7 billion in 2000, and will climb back only 2.4% to $239.3 billion in 2002, according to Robert J. Coen, senior VP-director of forecasting at Interpublic Group of Cos.' Universal McCann, New York.

Mr. Coen said the rebound will be slow despite a first-quarter spurt due to this year's winter Olympics and upcoming midterm elections. Big advertisers tend to get good deals on media in slow periods and don't give those rate cuts back quickly in a recovery, he noted.

John Perriss, chief executive of Zenith Optimedia Group, London, a joint venture of Publicis Groupe and Cordiant Communications Group, projected overall U.S. ad spending will dip 0.8% next year, with traditional media falling 1.5%. This would be the first time on record that U.S. spending fell two years in a row.

Worldwide ad spending will drop 3.4% this year, with nearly every world region dropping, Mr. Perriss said.

"In 2001, the industry got hit all over the world. ... 2002 [looks] better, but no boom," he said. As world economies emerge from recession, 2002 worldwide spending will grow 0.8%, he said.

This global effect is a new wrinkle to this downturn, said both forecasters. Usually, the U.S. rolls into a recession, followed over time by other world markets. But this year, overseas economies followed the U.S. quickly, said Mr. Perriss. He noted that in the 1990-91 recession nine markets went into recession in 1990 and another 10 in 1991, while in 2001, 23 markets slid into recession nearly at once.

"Clearly the landing was far from soft," said Mr. Perriss, but he added "this is as bad as it gets."

Martin Sorrell begged to differ. The chief executive of WPP Group flatly stated: "I don't see the rays of sunshine." He warned, "We have seen nothing yet to show a reduction in the rate of downturn."

Despite the gloomy outlook, Mr. Sorrell predicted that overall growth for WPP will be 15% in 2002, 15.5% in 2003 and 20% "in the longer term." This growth will be achieved, he said, by focusing less on advertising and more on faster-growing opportunities in research, consulting and media.

Refocusing on fast-growing segments and cutting costs were recurring themes in both conferences, and the messages were strikingly familiar: A brutal economic climate in 2001 led to earnings warnings that required cost-cutting.

worst-case scenarios

"We are in a new economy-not the New Economy of 2000, but an economy where people are struggling," said Publicis Chairman-CEO Maurice Levy.

Indeed, most presentations shied away from optimistic projections for 2002, and speakers adopted a worst-case scenario in their estimates.

Cordiant Chief Executive Michael Bungey said Cordiant divisions have been told to factor no new business wins into their budgets for 2002. The morning of his speech, Cordiant announced it expects revenue to drop 9% this year and added another 400 layoffs to 700 staff cuts announced in September, when it expected revenue to drop 5%.

Revenue growth is tough in these "dark times," said John J. Dooner Jr., chairman-CEO of Interpublic Group of Cos. He urged investors to be patient, saying results of Interpublic's reorganization, unveiled this summer, may take some time. He compared it to the development of Interpublic's McCann-Erickson WorldGroup in the 1990s. "There is no downside in reorganizing companies," he said. "[But] it took McCann nearly two-and-a-half years to see change" after it was reorganized.

On the bright side, Primedia CEO Tom Rogers noted consumer advertising is not weakening as the year ends, but he quickly qualified that statement: "I don't want to suggest it's strengthening in any way."

Some executives saw glimmers of hope for late '02, even if that was sometimes based only on easier comparisons. Harold McGraw, CEO of McGraw-Hill Cos., noted it takes about a year for the economy to show the effect of the Federal Reserve Board's interest rate cuts, and next month will be the anniversary of the first of 10 rate cuts this year

The notion that the economy might be at bottom was cheering to some.

"It's not as bad as I feared," said Ed Atorino, an analyst with investment banker Dresdner Kleinwort Wasserstein. "Things were not getting any better, but they weren't getting any worse." Nonetheless, he suggested the stock market's recent strength could be based on false hopes.

"Are you going to get a U- or a V-" shaped recession, he wondered. "The market says V. But the economic numbers don't support a V yet."

A true recovery won't start until consumers recover from the shock of Sept. 11, said James Treacy, president of TMP Worldwide, the marketing company parent of online recruiter Monster.com.

"My guess is when it turns, it will be fast and furious," he said. "My guess is the second half of next year."

But with every presenter complaining about "low visibility" in the short term, the ad market can only hope that light at the end of the tunnel is sunshine, and not the glare of an oncoming train.

Contributing: Tobi Elkin, Jon Fine, David Goetzl, Richard Linnett, Lisa Sanders, Laurel Wentz

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