Cost-cutting, Layoffs, Office Closings Were 2001 Strategies

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NEW YORK ( -- Faced with the continuing fallout of the collapse and recession, the advertising
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industry's interactive shops stuggled mightily throughout 2001. Many tried a variety of methods in an attempt to reduce costs and survive.

Advertising Age's annual analysis found that three of the most common strategies for coping were draconian cost-cutting, widespread layoffs and office closings.

In Ad Age's annual Interactive Agency Rankings, the top 100 shops suffered a 31.7% drop in interactive revenue from the up-and-down year of 2000. The report shows only those shops still in business, leaving the shuttered companies out of the picture and therefore offering a more limited view of the damage.

Cost cutting became a necessary strategy to stanch the hemorrhaging cash-burn rate for many, and the employee counts were affected as much as the revenue, with employee ranks falling 34.2%.

Office closings
Offices closed in waves throughout 2001 as companies back-tracked on the aggressive expansion of years past.

Recent mergers of weakened former competitors include Scient and iXL, followed by Lot21 being absorbed into Aegis Group's Carat Interactive. Seneca Investments purchased, Red Sky Interactive and Organic. Many of these were survival moves.

Nasdaq delistings
IPOs were once the rage, but those publicly traded companies that have since seen their stock price slide to less than a cup of coffee have had to contend with Nasdaq delisting.

I-shops ensconced under the protective arms of traditional ad agencies with diversified revenue streams fared better. Havas' Euro RSCG Interaction and Grey Global Group's Grey Digital Marketing are constructs that encompass all interactive services within those networks.

WPP Group: A year to forget
It was a year to forget for WPP Group. Its largest in-house interactive unit, Ogilvy & Mather Interactive, New York -- which analysts often called "the poster child" for how an agency should integrate interactive services with an agency's overall branding strategy -- came up flat, with 2001 revenue of $84.5 million, up a mere 0.8% from the previous year.

Interactive still only composes a fraction of WPP's U.S. revenue, approximately 6.5% in 2001. Other units had better luck: J. Walter Thompson Co.'s [email protected] JWT, New York, for example, reported $39.4 million in revenue, up 15.2%.

WPP also had write-downs from the collapse of the technology sector. According to an unaudited WPP yearend financial report, WPP reported that it wrote down $102 million in tech investments. One loss on its books is Luminant Worldwide Corp., Dallas, a roll-up that Young & Rubicam had invested in before WPP purchased the ad agency.

Y&R sold its i-shop Brand Dialogue, New York, to Luminant for $75.5 million in stock in September 1999 as part of Luminant's public offering. Y&R was Luminant's biggest shareholder, owning 26% of the company, including additional stock Y&R bought and assuming conversion of stock options it obtained. Its stake was worth $355 million at Luminant's November 1999 peak of $52 a share. When WPP bought Y&R in October 2000, the Luminant shares WPP inherited were worth $16.8 million, or $3 a share, and the options were worthless. Since Y&R and WPP never exercised the stock options, WPP ended up with an 18% stake in Luminant when the shop went bankrupt. The stock is trading at a fraction of a cent.

Eric Salama, CEO of, the umbrella network, downplays the Luminant investment. Mr. Salama says WPP's overall strategy hasn't changed. "Interactive will grow in importance, and we need to embed it into in all of our operations," he says. -- Patricia Riedman

Omnicom Group: A hasty retreat
Omnicom Group bravely ventured into interactive in 1997 with stakes in then-flashy shops such as, New York; Organic, San Francisco; and Razorfish, New York. It even restructured its i-shop holdings around the New York-based Communicade, a wholly owned subsidiary that functioned as a holding company for Omnicom's investments in 16 online agencies.

But by April 2001, Omnicom was making a hasty retreat, inking a deal with Pegasus Partners II, a private investment company, to exchange its equity in Communicade for a stake in Seneca Investments, New York, a new interactive services holding company formed by Pegasus. Seneca later acquired the remaining equity in both and Organic, offering shareholders $3.35 per share and Organic shareholders 33� per share. Razorfish remains an independent public company. At the time of the Seneca deal, Omnicom owned 38.6% of, a 17.3% stake in Organic and 12.1% of Razorfish. Through Seneca it retains a preferred non-voting stake, according to documents filed with the Securities and Exchange Commission.

At Seneca's tender offer prices, the stake in was worth $49.45 million and the Organic shares were worth $6 million, while the Razorfish stake was worth $19.16 million at the closing price of $1.61 on May 2, 2001, when Seneca and Omnicom closed the deal. Omnicom valued its stake in Seneca at $280 million as of Dec. 31, 2001.

Omnicom's overall interactive revenue edged up in 2001. Interactive composed 1.79% of its U.S. revenue in 2001, up slightly from 1.46% in 2000. At its biggest in-house unit, revenue at DDB Worldwide's Tribal DDB, New York, was up 50.9% at $35.1 million. However, other in-house units didn't fare as well. BBDO Worldwide's Atmosphere, New York, reported revenue of $5.5 million, down 17.7% from 2000, and Martin-Williams (i), Minneapolis, had $6.5 million in revenue, down 8.5%. -- Rich Thomaselli and Mercedes Cardona

Interpublic Group of Cos.: Mixed performance
Interpublic Group of Cos.' performance in managing interactive marketing was mixed in 2001 -- which is positive news, considering the demise of so many once-high-flying shops like Chicago-based MarchFirst.

Early in 2001, Interpublic took a $160 million charge for impaired investments in primarily publicly traded Internet-related companies, including MarchFirst, which declared bankruptcy in April 2001. Interpublic also took a charge of about $15 million in the third quarter as a result of its minority stake in Modem Media, Norwalk, Conn.

An overall downturn in ad spending put more pressure on some interactive shops that grew out of ad agencies-for example, Interpublic's Lowe Lintas & Partners last autumn merged its Lowe Live operation into DraftWorldwide.

But some interactive units and stand-alone agencies held steady through the year. Deutsch's iDeutsch, whose interactive revenue climbed 21.4% to $28.4 million, added marketers including Revlon's Almay and Cadbury Schweppes' Snapple. R/GA's revenue edged up 2% to $51 million. It picked up several new agency-of-record accounts, including Nike and Bank One.

"Business in 2001 was even more difficult than it was in 2000, as the trends of consolidations and company closings continued, and interactive shops struggled to find a financial model that worked," says Robert Greenberg, founder, chairman and chief creative officer of New York-based R/GA.

"We didn't have those problems. We focused on gaining market share in a shrinking market," he adds. -- Lisa Sanders

Havas: Holding its own
In a year that saw double-digit decreases in revenue for many i-shops, the interactive units of Havas held their own, and then some.

Euro RSCG Interaction, the interactive network of Havas Advertising-owned Euro RSCG, was the third largest i-shop in the U.S. in 2001, recording $161 million in revenue, up 2.5% from 2000. Globally, Euro RSCG Interaction claims to be the largest interactive network, with $230 million in revenue in 2001 and 45 agencies worldwide.

Havas' other ad network, Arnold Worldwide, maintains a significantly smaller, but still growing, interactive presence. In early 2001 it opened Arnold Interactive, a 75-person unit based in Boston. In January 2002, Arnold Interactive merged with JMCT Touch, the interactive unit of Jordan McGrath Case & Taylor, to gain a New York presence.

Clearly, the interactive driver at Havas is Euro RSCG, with more than 400 clients worldwide, including IBM Corp., Intel Corp., Nokia and Volvo Cars of North America. Perhaps the biggest testament to Euro RSCG's ability to manage interactive work is the dramatic change in fortunes for, which Euro RSCG inherited in 2001 after Havas acquired Circle's parent, Snyder Communications. The company, renamed Euro RSCG Circle last year, lost nearly $43 million in 2000 on net revenue of $67.3 million, but is now profitable; revenue is expected to grow this year, says George Gallate, CEO of Euro RSCG Interaction. Havas reported a net loss of $50.6 million in 2001 on $1.9 billion in revenue.

Though its interactive business is holding its own, Havas' other businesses face a tough year ahead, says Frederik Kooij, European advertising analyst with JPMorgan in London. The company's media business is weaker than its competitors', and with the pending Publicis Groupe/Bcom3 Group merger, pressure will increase.

"They've got a hell of a lot of things to overcome at the moment," Mr. Kooij says. -- Debra Aho Williamson

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