We were at the Park Hyatt Hotel -- a popular watering hole for what USA Today calls those "who like to be seen and not heard." I'd been there just long enough to order a much-needed glass of pinot noir (after nonstop meetings and a sleepless 7:05 a.m. Amtrak that morning thanks to former Pennslyvania Governor-turned-media-commentator Ed Rendell's loud phone conversation with a reporter) when my companion, a public-affairs contact, ran into a former campaign buddy, who proceeded to regale him with a story in which they referred to Madeleine Albright as "Mad."

This is a typical day in D.C., where everyone knows everyone, and government fuels not only conversation but business. It's a breeding ground for trade associations and PR and public-affairs networks. Perhaps what best defines the nation's capital is the aggressive networking culture. As Trevor Francis, a senior VP and partner at Fleishman-Hillard puts it, "It's the biggest small town in America."

AGENCIES
Most holding-company-owned agencies in D.C. are anchored by a PR shop. Fleishman-Hillard has a 400-person D.C. operation that also houses media and creative services. Other large players include WPP's Ogilvy and Burson-Marsteller, Omnicom's Porter Novelli and Ketchum, Interpublic's Weber Shandwick, along with independents like Edelman and Levick and Widmeyer.

For the last full year available, 2011, the largest agencies actually headquartered in Washington, according to the Ad Age DataCenter, were down or flat. Those include independent APCO, which acquired ad shop Strawberry Frog last year; WPP's Glover Park Group; and independent Qorvis. But that's not to say agencies didn't grow in 2012. Edelman touts D.C. revenues of $58.2 million and 8.1% growth.

While the large public-affairs shops are well-established and have muscle, there's no shortage of small players, such as RP3, a newer entrant with 40 employees; SmithGifford; and White & Partners. D.C. is "a town that breeds startup public-affairs boutiques like rabbits," according to Edelman regional president and global chair of public affairs Rob Rehg.

Large networks are increasingly competing with digitally savvy political ad firms like Bully Pulpit Interactive and Targeted Victory, as well as countless small and boutique public-affairs groups such as Harbour Group, BlueText, Goddard Gunster, QGA Public Affairs and Story Partners.

With heightened competition, there's a silver lining. "We're seeing more talented people showing up who, four to five years ago, we would never have seen," said Pam Jenkins, president of Weber Shandwick's Powell Tate. "D.C. is becoming a more creative town."

MARKETERS
In the capital, the U.S. Chamber of Commerce, AARP and American Chemical Society brands are sexier than national and global brands like Pepsi, Procter & Gamble and L'Oreal.

While they're not typically big spenders on measured media, trade associations tend to pour money into lobbying and coalitions. They've shelled out $1.67 billion in lobbying since President Barack Obama entered the White House. according to the Washington Post.

There are only three D.C.-listed Fortune 500 companies, including Fannie Mae, Danaher and Pepco Holdings. Nearby Virginia touts a longer list, where McLean is home to Capital One Financial, while Maryland is headquarters for Lockheed Martin Corp., Constellation Energy and Marriott International, as well as a growing biotech sector.

MEDIA
D.C. is home to the Washington Post Co., which owns Slate, among other local news and broadcast brands. Online political brands like Politico have also gained ground in the local market, as well as nationally, as demand for political news has expanded beyond the beltway, according to a number of executives. Within D.C., media outlets are going beyond big-picture policy to create more nuanced content, noted Mr. Francis. Examples of outlets that tend to "fall on one side of the ideological aisle" include the blog Talking Points Media (Democratic) and National Review magazine (Republican).

CHALLENGES
Ask any agency executive in D.C. to describe their biggest challenge and they'll mention uncertainty around the U.S. government's spending priorities in President Obama's second term. "Ongoing drama over budget issues have put private sector initiatives temporarily on hold because of the lack of clarity over priorities for the policy agenda," said Burson Marsteller CEO Don Baer. "Some companies would rather do less than more at a time like this." Still, he's optimistic for spending in the coming year. A more recurrent challenge for the D.C. shops that work on political campaigns is the instability of that business."We grow every two years," said Andrew Bleeker, co-founder of Bully Pulpit Interactive.

OPPORTUNITIES
Mr. Baer said that there's an opportunity to pick up business on the thought-leadership front, doing more strategic work and content marketing instead of purely tactical campaigns.

For a D.C. network, multicultural and grassroots programming are also smart to focus on, while healthcare and financial industry marketing will also likely be a major opportunity this year.

With testing and digital data and analytics driving political campaigns, the industry is also well suited for continued growth in digital content and social media related to issues and advocacy work.