Now, some five years down the road the Internet has gained tremendous momentum as a viable, mainstream advertising medium. And there's a widespread perception that traditional agencies still just don't get it.
The signs are everywhere. Even conservative package-goods behemoth Procter & Gamble Co. left traditional agencies off the invitation list for the main brainstorming session of a two-day new-media summit last summer. Instead, P&G rolled out the carpet for agencies that specialize in new-media communications, the same shops that have been eating Madison Avenue's Internet lunch.
"I think some of the traditional agencies were slow on the uptick," said Richy Glassberg, VP-sales and marketing at Turner Interactive Networks, who sells online advertising to both mainstream and interactive agencies. But "as they've seen their AOR accounts being taken by upstarts, they're taking it more seriously."
Indeed, interactive assignments from megamarketers such as AT&T Corp., IBM Corp. and Kellogg Co. have shifted in recent years from those advertisers' general agencies to interactive shops such as Modem Media-Poppe Tyson, Think New Ideas and Magnet Interactive.
The bottom-line impact is significant. Modem, which at the start of the decade was a small, unknown Connecticut agency specializing in telephone promotions, reported revenues of $30 million for the first nine months of 1998. By comparison, the interactive unit of Ammirati Puris Lintas, New York, claims only $15 million in new-media revenues for the full year.
Chief executives of traditional agencies admit they were slow to figure out the potential of interactive marketing and how to provide services in the niche. Unlike big-budget TV commercials, Internet advertising was considered a geeky craft best left to Silicon Valley gear-heads. Creatives were no more interested in writing banal banner copy than in producing price-discount ads for weekly shoppers.
Besides, the billings weren't there to justify the expense of hiring expensive techies who talked in a language no one understood. And many major marketers weren't yet convinced new media was something they needed to pay attention to.
That's all changing now, and traditional agencies are finally fighting back. As Internet ad revenue approaches $2 billion this year and consumer goods players such as Johnson & Johnson, Levi Strauss & Co. and Toys "R" Us raise their interactive spending, general agencies are embracing interactive with a vengeance.
Their approaches to interactive marketing vary widely. Some have set up interactive units with specialized staff, housed in the same building -- often on the same floor -- as other core disciplines. Others have spun off new media "hothouses" as stand-alone businesses, usually in buildings across town or even across the country. Still others have simply acquired or invested in existing interactive shops.
No matter the approach, though, leading agency executives know that to survive in the next millennium they need to invest heavily in understanding new media and integrating it into their core businesses.
"Interactivity is at the center of where advertising is going to be," said Bob Schmetterer, chairman-CEO of Euro RSCG Worldwide, New York, a $7 billion agency network that has formed a global group linking its 22 interactive units in 12 countries. "How could it not be central to what our business is all about, as opposed to being separate?"
Each Euro RSCG Interactive unit has different competencies depending on its origins, clients and region of operation, said Mr. Schmetterer. Euro RSCG Interactive in Amsterdam, a stand-alone company, concentrates on electronic commerce and database integration for its banking clients. In Sydney, the interactive unit of Euro RSCG Partnership has built a laptop application for Coca-Cola salespeople to use at retail locations to demonstrate creative for in-store campaigns, or to order promotional materials over the Internet.
Now, Euro RSCG is taking the expertise from each interactive agency and translating that to the entire organization. Every 100 days, heads of the agencies meet at different locations around the world to share interactive knowledge and case studies and work on joint projects.
One of the key advantages cited by agencies and marketers for integrating interactive into overall marketing plans is the ability to communicate the brand essence consistently across different media platforms.
THE BRAND'S HEART & SOUL
"You can't develop the best Web site or the best advertising unless you are bumping up against the heart and soul of the brand," said Steve Farella, exec VP-director of business development and integrated communications at Jordan McGrath Case & Partners, New York. The agency's new-media unit, JMCP Touch Interactive, is integrated with other agency services such as direct marketing and creative.
"JMCP is the best example for P&G where we've worked with an agency that has attempted to develop interactive in-house," said Pete Blackshaw, brand manager-interactive marketing for P&G.
JMCP, the agency of record for P&G's Bounty brand, has developed new forms of interactive advertising for Bounty, such as a sample program for Bounty Rinse & Reuse that lets users wipe up a spill within a banner ad and request a free sample of the product.
"JMCP has a very deep knowledge of the Bounty consumer, and it's enabled us to move into fairly creative strategies for complementing our base Bounty copy," said Mr. Blackshaw.
LEARNING THE BUSINESS
Agencies that have structured interactive as a group within the agency, most with their own profit-and-loss centers, admit they need to figure out how to acquire the people, skills and knowledge to drive the business forward.
"We are making an investment by centralizing" interactive media, said Ken Kaess, president of North American operations for DDB Needham Worldwide, New York. Last October, the agency formed DDB Digital to oversee interactive work previously handled separately by its offices in New York, Chicago and Dallas.
Now the agency is conducting an audit at each of its six offices (the others are in Los Angeles, San Francisco and Seattle) to determine where to invest in people and technology to add even more interactive capabilities.
But attracting workers with interactive skills, particularly in technical areas such as electronic commerce, has been one of the greatest challenges for all interactive agencies.
"Where is the power and prestige in the company? If it's not in interactive, the best and brightest will not go there," said G.M. O'Connell, CEO of Modem Media-Poppe Tyson, Westport, Conn., which was recently added to IBM's agency roster, and counts AT&T and Delta Airlines among its blue-chip clients.
"At Modem, that is one of our strengths. That's all we do," Mr. O'Connell said, making it easier to attract talent.
"Historically, the best talent has been going to the independents," DDB Needham's Mr. Kaess agreed. "But now, as more general communications agencies like DDB, Ammirati and OgilvyOne invest in interactive, you'll see that begin to shift."
Indeed, two of the new managing partners of DDB Digital, John Young and Matt Freeman, came from Modem-Poppe. Mr. Young was VP-worldwide creative director and Mr. Freeman was executive creative director.
Another key pressure for general agencies is in justifying the expense necessary to run a business that has yet to prove profitable.
`HOW TO MAKE MONEY'
"Both sides [agencies and clients] know it's growing in importance, but they're unsure how to make money at it or how effective it can be," said Mr. Kaess.
So, at least for now, most agencies are keeping interactive as a separate unit, and in many cases as a stand-alone business, treating it as a hothouse in which to grow people and skills that eventually will be merged into the overall operation.
"There is pressure to keep it separate," said Martin Puris, chairman-CEO of Ammirati Puris Lintas, New York, whose APL Digital unit now contributes roughly 10% to the agency's total revenues. "The Internet is such an industry in development, with radically different learning curves, but I think it will have to be integrated into all of advertising."
The pressure to keep it separate can come from stockholders and investors who don't want to see an interactive unit's losses dragging down margins of other profit centers. Skyrocketing public offerings have shown Wall Street is willing to bet on the growth potential for Internet businesses.
Still, today there are few executives at traditional ad agencies who believe interactive communications can continue to be set off from their main operations.
"The solution needs to be integrated," said Adam Levine, senior VP-director of iDeutsch, the interactive unit of Deutsch, New York. "When Ikea opens a new store, the business question is, `What should we do?' not `What should we do for interactive, what should we do for direct and what should we do for advertising.' "
Even agencies that keep interactive work entirely separate -- such as Leo Burnett Co., which owns an interactive agency called Giant Step -- say interactive learning is being integrated into the entire agency.
"These types of businesses are not for generalists," said Roger Haupt, vice chairman-chief operating officer at Leo Burnett Co., Chicago. "As the whole world of e-commerce explodes, it's beginning to show signs of having a significant impact on the success of certain types of products. We've all got to be smarter about it."
MERGING MARKETING EFFORTS
And while Burnett plans to keep Giant Step as the center of its interactive and e-commerce capabilities, "You can't say any more that direct has nothing to do with e-commerce. Those marketing efforts are moving more closely together," said Mr. Haupt.
Other agency executives point to e-commerce as the defining application that will force agencies to embrace interactive.
"There's no question that e-commerce is the future," said Mr. Puris.
For ad agencies today, he said, not getting involved in Internet marketing "is