SPECIAL REPORT: The New Interactive Agency

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Do they really get it? Mad Ave's finest say they do, and they can prove it

Thirteen years ago, Ogilvy & Mather became the first big U.S. ad agency to establish an interactive division. Since then, O&M Interactive has turned itself into one of the better-known new-media units on Madison Avenue.

So why was producer Bill Carmody ready to quit? "We were too separate from the rest of the agency," he said.

Spurred by assignments from IBM Corp., O&M Interactive embarked on a new "unification" strategy. Management now envisions working more closely with O&M's direct marketing and advertising agencies, with the ultimate goal of making interactive spending part of a client's general media plan.

After the changes, Mr. Carmody decided to stay put.

FOLLOWERS, NOT LEADERS

Until now, large ad agencies have been following, not leading, the interactive revolution. Slowed by cautious clients and layers of bureaucracy, Madison Avenue's finest have done an awkward and halting dance with new media.

But finally, there is strong evidence that they want to pay more than lip service to the interactive realm. An Advertising Age survey of the U.S.' top 20 agencies shows real commitment to the medium, with interactive staffing levels in the dozens at most shops and actual, revenue-generating work to show for it.

The large agencies lost ground to small, nimble multimedia companies in the past few years--and they admit it. But they fully expect to be leading when the interactive revolution succeeds in remaking the world of advertising and commerce--when the big advertisers' money starts rolling in.

INTEGRATE OR SEPARATE?

In the "early" days of interactive media--say about 1993--agencies installed one or two people as chief gurus and made them the source for all things interactive.

Now, the landscape has changed. Some shops, like O&M, have established relatively autonomous interactive units and encourage them to pursue business both on and off the client roster. Grey Advertising, D'Arcy Masius Benton & Bowles, McCann-Erickson Worldwide and Bates Worldwide fall into this category.

Bates, for example, has separate interactive units in six countries: U.S., Canada, England, Germany, Singapore and Australia. One of its most successful Web sites, for Perrier, came from a non-advertising client.

These agencies view interactive as a profit center that is expected to cover its own costs, but the goal is to migrate it into the rest of the business eventually.

Other agencies, like Saatchi & Saatchi Advertising and Young & Rubicam, prefer to keep interactive staffers within the fold, usually reporting to the media director. These typically do not seek interactive assignments from clients not already on the roster.

The rest fall somewhere in between. At DDB Needham Worldwide and TBWA Chiat/Day, interactive groups are encouraged to seek outside clients.

"We have a lot of clients in the U.S., [but] not all of them want interactive. So if we want to build that [interactive business]...we have to go outside that roster," said Page Thompson, exec VP-U.S. media director, DDB Needham, New York.

True North Communications created a joint venture with R/GA Media Group, New York, a digital communications company. With 30 active Web sites, True North Technologies is one of the busiest interactive units at a big agency.

Bozell Worldwide has a small in-house staff but has been content to let its sister agency, Poppe Tyson, handle most interactive work.

Trailing the pack is BBDO Worldwide, which has no full-time interactive staffers.

BBDO Chairman-CEO Allen Rosenshine said through a spokesman that his agency will soon reorganize to deal with interactive. But he won't be specific.

Bozell also recently went through an interactive reorganization, creating a consulting group for new media.

MAKING MONEY

While not all agencies have set up interactive work as a profit center, all want to make money on it. And the revenues are just starting to trickle in.

Breaking even "would be nice," said J. Walter Thompson USA's Jean Pool, exec VP-director of North America media buying services.

DDB Needham's Mr. Thompson laughed when asked how much money his agency is making on interactive projects.

"You think I'm going to tell the truth?" he asked. "There is a possibility for this to be tremendously profitable down the line."

When? "I'd say three or four years from now." For now, DDB Needham is bringing in about $3 million to $4 million in revenue, Mr. Thompson said.

Leo Burnett Co. hopes to turn a profit on interactive for the first time in 1996, said Rishad Tobaccowala, VP-account director, Interactive Marketing Group.

Bates, which has made a heavy investment in proprietary interactive research in the U.S., made money on interactive in Germany, England and Australia in 1995.

McCann also earned a profit on interactive in '95, said Ira Carlin, exec VP-worldwide media director.

True North executives wouldn't disclose profits, but with $20 million in interactive revenue, it brought in more money than most.

INVESTING FOR THE FUTURE

While a few agency executives appear impatient for interactive profits, most are thinking ahead, focusing on investments in resources and technology.

Some agencies, like DDB Needham, have created entire digital-production facilities. Bozell's Poppe Tyson has spent more than $1 million in the past two years upgrading equipment for interactive projects. And Grey Interactive, whose 30 full-time staffers in New York have produced only a few projects for public consumption, has earned a reputation for making big investments and working closely with clients such as Procter & Gamble Co. to explore possible interactive applications.

Grey is positioning itself to work on projects with client departments the agency has never had to deal with before--information technology, systems, customer service, distribution. It's a risky and aggressive strategy from an agency not usually associated with the cutting edge.

"This is a business where oftentimes you're creating new products for clients," said Norm Lehoullier, co-director, Grey Interactive. "This area touches half as many more [client departments] as a traditional agency."

HOW TO CHARGE FOR INTERACTIVE

Grey's approach looks smart because, at least so far, interactive revenue depends more on project complexity than on brand size.

Since almost all agencies charge interactive clients on a cost-based fee system, complexity and creativity are their paths to higher revenue and profits.

Aubrey Balkind, president-CEO of Frankfurt Balkind Partners, a small New York agency with a strong new-media slant, sees interactive as one more hammer chopping away at the agencies' traditional media-commission billing system.

In the future, he predicts, successful ad agencies--big or small--will operate more like creative production houses than like media-buying services. Those showing the most creative and strategic expertise across all media will be able to charge more for their services.

Leaders of new-media units at the big agencies agree with Mr. Balkind--and think they can triumph in this future world because of their superior brand-building experience.

`THE TIME HAS COME'

"The time has come to make this a profitable business if it's not already. There's no reason this can't be [profitable] for both client and agency," said Hunter Madsen, senior partner and director of JWT/i.e. (short for interactive enterprise), San Francisco. "All you have to do is make sure you don't underestimate the cost the agency will incur upfront, and/or develop sufficient flexibility with billing arrangements with the client so you can come back and adjust" if necessary.

Easier said than done. For now, "This is a market with no business models. There are no standard organizations within agencies, no standard ways of getting paid, no standard contracts," said Grey's Mr. Lehoullier.

WHAT OF THE WEB SHOPS?

Dealing with the small multimedia shops that have successfully lured away interactive accounts from blue-chip clients remains an issue with most big agencies.

But instead of viewing them as villainous raiders, most are recognizing them as necessary parts--or partners--of the ad landscape.

"Agencies that will prevail will succeed in marrying content to advertising," said B.J. Choi, chief operating officer at O&M Interactive, New York. "Boutique Web agencies will consolidate or disappear."

"Do you fear it? No. You can't fear anything that is ultimately going to help our clients," said Ron Burns, president of JWT North America, which formed a strategic alliance last year with Magnet Interactive Group, a Washington-based multimedia developer.

Other agencies with similar alliances include BBDO, Y&R and McCann. And even agencies without formal alliances use specialists to help produce projects, just as they use editors, directors and production houses when shooting TV or radio commercials.

HAVING THE CAPABILITIES

"Our goal is to have the capabilities, but that doesn't mean we want to play that role for every client," said Burnett's Mr. Tobaccowala, who matched client McDonald's Corp. with Web developer Organic Online, San Francisco, for its Web effort due later this quarter.

Stand-alone interactive agencies still are a thorn in the side of traditional agencies.

Modem Media, a Westport, Conn., shop that handles interactive work for MasterCard International, AT&T and others, earned revenues "in the low tens of millions," said agency partner G.M. O'Connell.

"The bigger agencies continue to look at this through the lens of the traditional agency, which is that `we create ads and we put them out on the Internet, or we create sites and we put them on the Internet,' " Mr. O'Connell said.

"When the traditional agencies open up an interactive department, they open a Web department. We don't have a Web department. We have an interactive agency."

NEAR-TERM PROSPECTS

None of the big agencies knows for sure when interactive will hit the ad dollars jackpot for them.

"I don't think interactive is so important yet that it's a capability an agency has to have," Mr. Lehoullier said. "I think 1996 is the first year you're going to see clients choose agencies based on interactive capabilities, [but] you don't have the tail wagging the horse yet."

The only thing that's certain, said McCann's Mr. Carlin, is the lightning speed with which it will happen.

"It won't take much to trigger it," he said, comparing it to the time in the 1980s when household penetration of home video went from 9% to 15% in three months, just because the price of VCRs dropped below $1,000.

Technology will make it possible, said Robert Greenberg, president of R/GA Media Group. But "technology doesn't lead it. Creative and conceptual have to lead."

ANOTHER CHANCE FOR O&M

Back at O&M Interactive, Mr. Carmody is optimistic. He knows O&M has the experience--and the clients, such as IBM--to be an interactive leader. But it's had those things all along.

Its ExpressNet, an area on America Online for existing and potential American Express cardholders, remains one of the more impressive interactive marketing vehicles, combining strong customer service with an engaging interface. However, the agency has yet to repeat that level of success for another client, and it has been roiled by management turnover in recent years.

So, while he works on projects he hopes will make 1996 a ground-breaking year at O&M, Mr. Carmody says he'll keep his career options open.

Do you think agencies really understand interactive marketing? Which agencies do you think are doing it best and why? E-mail interactive editors Debbie Williamson at IMM@adage.com or Kim Cleland at Kimcleland@aol.com or go to AdAge.com/InterActions/index.html to post your ideas on our bulletin boards.

Copyright February 1996 Crain Communications Inc.

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