WATCHING THE E-PARADE: WAITING TOO LONG TO DEVELOP INTERNET CAPABILITIES MAY TURN AGENCIES INTO BYSTANDERS.

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When young & rubicam announced last month it was selling the New York business of Web shop Brand Dialogue, the news shot up like a flare from yet another shipwrecked agency interactive unit.

Y&R positioned the sale as a smart financial move -- it is selling the New York interactive division to Clarant Worldwide Corp., a Dallas-based start-up that hopes to strike it rich in an initial public offering of stock. But Y&R admits what many traditional agencies won't: It is increasingly difficult for a general shop's Web division to compete against interactive specialists.

Brand Dialogue ('98 revenue of $7.2 million) had trouble competing with independent interactive shops for talent because of a cultural climate different from that at Silicon Alley shops, says Mike Dolan, vice chairman-chief financial officer, Young & Rubicam. Y&R's package -- a 401K and standard benefits -- also was hardly a match for the get-rich-quick schemes offered by (for now) high-flying Web shops.

Y&R CONSIDERED BUYING

Y&R for a time considered buying an independent. But buying into the Net is a costly proposition for old-line agencies, given that the market price for agencies is based on reality and the price for Web businesses is based on hope. Y&R had a stock market capitalization last week of about $3.3 billion, twice its '98 revenue of $1.5 billion; Web rival Razorfish had a market capitalization of about $900 million, 29 times '98 revenue of $31 million.

Reviewing its financial options and anticipating culture clash, Y&R opted to unload the staff and client assets of Brand Dialogue's New York office to Clarant while retaining rights to the Brand Dialogue name.

"We felt that in order to compete, it'd be better if Brand Dialogue were included in a boutique like Clarant," Mr. Dolan says. Y&R is expected to announce a new Internet strategy in the next few months.

Still, Y&R's decision to jettison the New York interactive operations sent a confusing message to the interactive community -- and Madison Avenue -- about how traditional shops are faring and how vulnerable they are to missing out on a share of the interactive pie.

Analysts, industry watchers and even some big agencies agree that old-line agencies' early inaction may be costing them dearly now. While some believe the chance to get a share of interactive is just getting started, others think it might already be too late, with the major players already in place.

Y&R has plenty of company in trying to grapple with the Web. Ross Roy Communications, Bloomfield Hills, Mich., quietly closed its interactive unit during the spring. Organic, San Francisco, absorbed more than 60 Ross Roy employees and set up an office there. Ross Roy declined to comment. (Omnicom Group, which owns Ross Roy, also owns 19.9% of Organic.)

ORGANIC TO MAKE OFFICE OFFICIAL

Organic soon is expected to officially announce it has a Detroit-area office, even though it's been up and running for several months.

Several other agencies' interactive units are struggling at best, analysts say.

J. Walter Thompson Co.'s JWT Digital division is going through a restructuring and looking to name a national director soon. Similarly, the interactive unit of Omnicom's BBDO Worldwide is temporarily rudderless while it looks for a leader to fill the shoes of Rick Markovitz, senior VP-interactive, who left in May to become partner-integrated marketing communications at USWeb/CKS and is based in Santa Clara, Calif.

Until now, many traditional shops have taken a table-scraps approach to business; the majority of their work comes from the parent company's existing clients.

"That's going to have to change if [traditional agencies] want to compete in this marketplace," says Drew Ianni, analyst at Jupiter Communications, an Internet consultancy. "Clearly the interactive shops continue to eat their lunch and continue to dominate the marketplace."

Scott Litman, CEO of Imaginet, the biggest independent interactive shop in Minneapolis, echoes a sentiment of several major interactive agencies: It rarely competes against Web units from traditional agencies. Most often it goes against other interactive shops, systems integrators or Web consultancies.

BACK-END DEFICIENCIES

"I think [traditional agencies] have had a hard time with the back-end component of it, attracting programmers and tech professionals," Mr. Litman says. Back-end work involves connecting a company's Internet presence to its computer systems and business processes.

In addition, Mr. Litman adds, "If your core business isn't interactive, how do you keep up with the technology?"

Jim Nail, senior analyst at Forrester Research, co-authored a scathing report in December that ranked traditional agencies and found clients were "marginally satisfied with their agencies' online efforts."

While he says things have improved somewhat since then, many shops are still floundering.

"I think the agencies are beginning to wake up more and see this is serious," Mr. Nail says. "If they don't make some investments now, long term the cost will be far higher."

The report classified agencies as leaders, challengers and underdogs, ranking them on interactive strategy, marketing design, technical (ability) and experience.

Forrester interviewed the top 10 U.S. advertising agencies' (based on size) interactive units and surveyed 52 of their clients about the quality of work they were receiving.

Ogilvy & Mather Worldwide's OgilvyOne, which includes Ogilvy Interactive; Grey Advertising's Grey Interactive; and Leo Burnett Co.'s Giant Step received the highest marks, getting B-, B- and C+, respectively.

Y&R's Brand Dialogue; DDB Digital, owned by Omnicom's DDB Worldwide; and Foote, Cone & Belding's FCB Digital all received Cs. Meanwhile, McCann-Erickson Worldwide's Thunder House Online Marketing Communications and J. Walter Thompson Co.'s JWT Digital received scores of C-, Bozell Worldwide garnered a D+ and Omnicom's BBDO Worldwide came in last with an F.

To be fair, Susan Smith Ellis, exec VP-director of integrated marketing for BBDO, contends it's specious for the Forrester report to grade agencies on services they don't offer.

BBDO'S PARTNERSHIPS

Till now, BBDO's only interactive offerings have been online media. It's partnered with various interactive shops in Omnicom's Communicade group, a collection of interactive agencies the holding company has invested in during the past two years. For example, it collaborates with Red Sky Interactive, San Francisco, on Visa USA Web work and Razorfish, New York, on Charles Schwab & Co.

"We've retained [agency of record] media status on the clients we do work with," Ms. Smith Ellis says.

"There has to be some thoughtfulness of why you're on the Web," she adds. "Those are things we want to think intelligently about before we dive in."

Ms. Smith Ellis says BBDO is about to add creative and other interactive capabilities, most likely building an internal unit rather than buying another shop.

"The time is right for us to start thinking about what we can offer," Ms. Smith Ellis says.

As BBDO clients such as Pepsi-Cola Co. begin to move more into other integrated offerings, she adds, "it's working off the brand strategy. I think that's an important point of difference for BBDO."

BLUE-CHIP CLIENT ADVANTAGE

One large advantage big agencies hold is relationships with blue-chip clients. Kevin Wassong, senior director-digital communications at JWT, says he believes this is what will help it attract more work and Web-trained staffers.

"Our strength is understanding consumers. Then technology and digital communications [have] to be an integral component of that," Mr. Wassong says.

While integration is key to its strategy, JWT doesn't provide back-end support for its clients or Web-site creation. It outsources those functions, as it would production of a commercial.

However, Mr. Nail doesn't buy the approach that JWT and many traditional agencies are selling.

'KIND OF A MESS'

"It seems like kind of a mess," Mr. Nail says of JWT's strategy. "It looks great on paper -- pulling the best from the organization -- but you run into all the turf wars and boundaries within the organization and it doesn't work."

Similarly, he dismisses BBDO's plan.

"The problem is that they come at it purely from a creative perspective," he says. "They've never put resources into the technology to understand what the technology can do. . . . Until you can do that, you can put pretty pictures on a computer screen but you can't build a powerful online identity for a client."

Mr. Nail is quick to add, however, that several big shops are making the Web work.

Even Ogilvy Interactive, which Jupiter recently called "the poster child for integration," failed in its early attempts at interactive, Mr. Nail says.

FCB is among the majors working to revamp interactive strategies. In January it launched FCB Digital, an interactive division housed within FCB Direct, New York. Previously, the agency worked with Modem Media-Poppe Tyson, Norwalk, Conn., to provide interactive services to its clients. True North Communications, FCB's parent, owns 51% of Modem. But because of client conflicts, the Modem arrangement was less than satisfactory for FCB, says FCB Direct CEO Steve Humphrey. So the agency launched its own interactive division and in March hired Mary Kelly, a former Charles Schwab executive, to head FCB Digital as president.

While FCB Digital works with FCB general-agency clients, the interactive unit has its own staff of creatives, media buyers, database managers and account managers, Mr. Humphrey says. "It requires a certain level of expertise to be able to do this [interactive work]," he adds.

Then there's Y&R, which might start another dialogue on the Web. Y&R's first attempt "was tripping over itself," Mr. Nail says. "They're going to clean up that mess and start anew from a new direction."

Y&R's Mr. Dolan says the agency is considering opening another New York-based Brand Dialogue to provide interactive services.

"If Clarant works best for our clients, we'll use them. If in-house is better, we'll use them. We wanted to be sure to offer multiple options. We found a clever way of offering additional capabilities in a way that creates value for our shareholders," he says, referring to the Clarant deal. Y&R will own 11.3% of Clarant.

Mr. Dolan says it's unclear whether a new Brand Dialogue would be integrated with Y&R's direct marketing arm, Wunderman Cato Johnson, or another division.

STRATEGY KEY

"But the whole notion of Brand Dialogue may be an old-fashioned concept," he adds. "Maybe we'll have Internet capabilities built into many businesses [within Y&R]. Whether they call it Brand Dialogue or not, each of our businesses needs to develop an Internet strategy."

Y&R is still working on its game, but Jupiter's Mr. Ianni says some agency units are thriving, noting Burnett's Giant Step, Saatchi & Saatchi's Darwin Digital, Grey Interactive and JWT Digital "are coming along and doing some good work."

While traditional agencies rush to build up internal interactive units or think about buying out Web shops, the tables may soon be turned, especially as interactive agencies realize "it'll take a lot to wrestle the brand away from the traditional agencies," Mr. Ianni says.

Given this realization plus hot Web market capitalizations, he is among those who predict interactive media conglomerates soon will be snatching up traditional agencies.

"Sometime [during] the remainder of this year, we'll see a major acquisition or merger that will be a bit out of the ordinary," he says.

Mr. Ianni wants to know when that happens, "Who's going to assume the leadership role?"

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