Ad Age Agency Report 2006

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CHICAGO (AdAge.com) -- With advertisers increasingly shifting spending in marketing communications from traditional media to new media forms, it's little wonder growth in marketing services more than doubled that of traditional advertising in the 62nd annual Advertising Age Agency Report.

Marketing services
Marketing services -- identified as all forms of interactive, sales promotion and direct marketing in this report -- grew 11.3% to $7.66 billion in revenue in the U.S.; traditional advertising and its media component advanced to $12.02 billion, a 5.1% advance that was slightly stronger than last year.
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Couple marketing services and advertising with healthcare advertising's $1.96 billion and PR's $2.74 billion, and total U.S. marketing communications revenue reached $24.38 billion, up 7.2%, according to Ad Age.

Much of this activity in marketing communications is cornered by the world's top four marketing organizations, once again led by Omnicom Group on a global basis, at $10.48 billion in revenue, up 7.5%, and in the U.S., with $5.74 billion, up 10%. WPP Group was a hair's breadth from unseating Omnicom at the global level, recording revenue of $10.03 billion, up 4%, an Ad Age pro forma estimate that includes the 2005 acquisitions of Grey Global Group and Sydney-based Communications Group as if they occurred Jan. 1, 2004.

Distant third: IPG
Interpublic Group of Cos. closed a distant third at $6.27 billion in worldwide revenue, down 1.8%, its third consecutive annual decline, and Publicis Groupe weighed in at $5.11 billion worldwide, up 6.9%.

These elite operations corner the U.S. marketing communications business: In 2005, they claimed 58% of the combined total for advertising and media, or $6.97 billion -- not a surprise given that 40 of the top 50 U.S. agencies by core ad revenue are owned by these behemoths.

The four extended their marketing services reach, generating $3.19 billion in revenue to grab 41.6% of that U.S. market. Omnicom owns the U.S.'s No. 1 direct marketing agency, Rapp Collins Worldwide at $274.1 million, up 12%, as well as the U.S.'s No. 1 sales promotion shop, BBDO Detroit, formerly BBDO Detroit CRM. Omnicom gained $1.43 billion in the U.S. from its marketing services shops in this report, up 13.8%, nearly equal to the $1.46 billion (up 9.7%) it produced from traditional ad and media agencies paced by BBDO Worldwide and DDB Communications Worldwide, both of which are among the nation's top 10 agencies by core advertising.

Rankings methodology
Ad Age develops agency rankings by disciplines. Its primary ranking, for core advertising, peals away all disciplines to get at the core advertising and its media component. Those advertising and media returns from the top 10 U.S. agencies were decidedly mixed in 2005. Declines came from WPP's JWT, (-1.5%), the No. 1 shop; the No. 3 agency, Publicis' Leo Burnett Worldwide (-2%); and the No. 8 agency, Interpublic's FCB Worldwide (-10.8%). All returns for agencies of holding companies were estimated by Ad Age. Holding companies, citing Sarbanes-Oxley restrictions, no longer provide breakouts at the agency level.

Among the big agencies, Interpublic's Lowe Worldwide suffered the biggest year-to-year swing, declining an estimated 25% in revenue in the U.S. that left it No. 27 vs. a No. 17 placing in last year's report. Interpublic pegs its return to profitability -- it has reported losses each of the past three years -- on a reconfigured and rejuvenated Lowe. Indeed, by this time next year the global network will be a shadow of its former self as it is shrunk from 83 offices to 36, with a concentration on eight key markets.

Traditional advertising revenue
Excluding returns for the 105 agencies owned by the top four, traditional advertising and media generated $4.22 billion in revenue in the U.S. from the rest of the agencies in the report, while marketing services drew $4.47 billion. The report captures revenue from 606 U.S. advertising and marketing services agencies. Virtually all of these shops carry multiple disciplines as they seek to capture as much of a marketer's spending as possible. That in itself is blurring the line between advertising as a brand builder and marketing services as a sales tool.

Indeed, Chris Weil, chairman of Interpublic's Momentum Worldwide, says "there's no line anymore, above being commissionable and below, not."

The ascendancy of marketing services gives substance to what many agencies have been observing, that clients have begun to shift spending from mass media to alternate forms of marketing that reach consumers where they are -- at the office, on the Internet, playing games, using cellphones and DVRs, in stores, on the street. Publicis Groupe, in reporting a decline in ad and media revenue for 2005, says the decline wasn't from lost clients (it had a record net new-business tally of $9.8 billion in billings), but dollars diverted by existing clients from advertising and media into marketing services. Its marketing services segment gained well into the double digits.

Marketing services are slaking an advertiser's thirst for return-on-investment because of their measurability. And they also feed the profit margins of marketing organizations.

Top interactive shop
Interactive is captivating agencies and quickly becoming the new ad thoroughfare by meeting customers where they are. Of the 606 agencies labeled traditional or marketing services in the report, 290 have returns from interactive. And the big interactive shops are in a horse race for the top spot, led by Avenue A/ Razorfish at $189.8 million, up 36.5%, followed by Sapient at $176 million, up 22.5%. The interactive discipline in this report jumped 25.5% to $2.48 billion.

Interactive is helping rebuild agency employment, which dropped 15.5% from fourth quarter 2000 to fourth quarter 2004, according to the U.S. Bureau of Labor Statistics. Agency rolls have grown steadily since first quarter 2005, with the final quarter last year up 2.6% from the prior year period. Digitas, in that period, grew by 250 employees: "Interactive just takes a lot more people to do a single campaign than more traditional advertising," says a Digitas executive. Additionally, a lot of interactive activity doesn't show up in the full-time figures monitored by the BLS. Omnicom's Organic interactive shop says its workforce is about a third-again as large as its full-time figure.

Interactive also is a big part of the blurring going on between disciplines.

Pamela Larrick, chairman-CEO of Interpublic's FCBi, ranked No. 15 among interactive shops, says FCBi works with direct, digital and data and has landed on a new meaning for the "i" in its name: "Not interactive, not integrated, but individual."
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