Dot-compensation: Ad agencies feel Net effect

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The dot-com revolution is producing far more than a West Coast billings bonanza.

It is fundamentally retooling the agency business, changing compensation, establishing upfront payment for media and production costs and forcing a tradition-bound field to get up to Internet speed. The change can be seen nowhere more greatly than San Francisco, ground zero for dot-coms, and in booming markets to the north and south.

The Internet's sea change may well spread to across the ad biz.

"We're the early indicators," of the changes in the ad business, said Austin McGhie, President-CEO, Y&R Advertising, San Francisco.

The dot-com mother lode turned a buyers' market for advertising services into a seller's market last year.

Agencies, accustomed to spending thousands on pitch presentations and being squeezed by clients on compensation, suddenly found themselves with the upper hand in dealing with dot-coms. Dozens of calls a month streamed in, many from from entrepreneurs begging for help and chanting a litany of venture capital backers. Agencies rediscovered the long-lost luxury of picking and choosing clients.

Some agencies, such as Citron Haligman Bedecarre, San Francisco, quit paying dues to search consultants, such as Select Resources International, said Chairman Tom Bedecarre.

Although agencies anticipated a slowdown in dot-com calls after the make-it-or-break-it 1999 holiday season, the "impending dot-com boomerang," as McCann-Erickson Worldwide, San Francisco, Managing Director Nick Bishop calls it, has yet to materialize.


Consumer-focused e-tailers are cutting costs and rethinking strategies as they encounter skepticism on Wall Street; that could lead to reduced ad spending. Investors this year have turned attention to business-to-business sites, creating new opportunities for agencies as b-to-b ventures step up spending in high-profile media.

The Internet influx has lifted the tide for West Coast shops. Y&R, San Francisco, which lost $55 million in Clorox Co. billings last year, more than made up for the loss with a combination of tech and dot-com clients, including Covad, a high-speed DSL Web-service provider, and Chinese online community, Mr. McGhie said.

Marina del Rey, Calif., start-up Siltanen & Keehn, founded by former TBWA/Chiat/Day executives Rob Siltanen and Pam Keehn, claimed billings of nearly $100 million within a month of opening its doors. Clients include, a free Internet service provider.

Citron, despite an acquisition by Euro RSCG Worldwide that fell apart, grabbed a string of dot-com wins and now is reconfiguring itself in preparation for its own initial public stock offering.


Beyond added billings, the dot-com revolution has changed the way agencies get paid.

"This is a new chapter in compensation," said John Yost, president of Black Rocket, agency for Yahoo!. He said stock gives agencies a way to share the upside.

His agency developed the "Do you Yahoo!?" tag for the Internet portal, a line he said embodies "the personality and spirit of the company" and is used in more than 25 nations. Equity relationships would be "more commensurate with [those kinds of] contribution," he said.

Mr. Yost wouldn't discuss financial details with Yahoo! and other clients, but indicated some pay cash for agency services; some, a combination of cash and stock; and some, stock only.

Equity arrangements are growing in popularity even among San Francisco shops tied to global holding companies.


Y&R is "open" to fee-plus-incentives arrangements, including stock and equity options, said Mr. McGhie, who declined to give details. Young & Rubicam, Y&R Advertising's parent, is an investor in iWeb, a New York start-up.

Omnicom Group's Goodby, Silverstein & Partners agreed to take stock as partial compensation from, an online golf e-commerce site reporting an ad budget of $20 million.

"We want to do more of that," said Jeff Goodby, principal and co-creative director.

Goodby General Manager Harold Sogard said that, in general, some agencies are charging fees covering the cost of work plus a "fair profit margin." Part of that profit, under 10%, could come from stock and, he said.

Still, even if some in the community fantasize about lush retirements through lucrative dot-com investments, others prefer cash.

"I'm not in the investment business," said Fred Goldberg, chairman, Goldberg Moser O'Neill, a San Francisco agency owned by Interpublic Group of Cos.


Others question whether agencies can make as much money on five dot-com accounts as on a single offline account.

"I don't think anybody's getting rich on them," said Bob Kuperman, president-CEO of Omnicom's TBWA Worldwide, New York, which nationally handles more than a dozen dot-coms including bookseller and


Other shops have taken a second look at contracts. A standard contract "doesn't cover all the ground the new business needs," said Courtney Buechert, managing director, Leagas Delaney, San Francisco, agency for sporting goods site (see sidebar, below).

Agency executives are taking a hard look at how to make a profit on smaller jobs dot-coms require help with -- projects ranging from logos to trade-show exhibits.

"It has forced agencies to figure out how to get paid better for non-media work," said Jack Boland, president, Pickett Advertising, San Francisco.

Agencies, like media and production companies, increasingly are demanding cash up front. Since dot-coms expect the work to be done in weeks, one agency executive said, "I expect to be compensated accordingly, so I insist on more money" in the early days of the relationship. Besides, he noted, many dot-coms might not be around in six months.


The world order of clients is changing the game.

"It's not the big eat the small anymore. It's the fast eat the slow," said Pickett's Mr. Boland.

Not only are ads being produced in record time, the process has been turned upside down, with agencies starting with day-to-day tactical salvos and leaving the broader strategic vision for later, said Geoff Thompson, chairman, FCB Worldwide, San Francisco.

"So much advertising has become disposable," vs. a time when a campaign's shelf life was at least a year, he said.

San Francisco agencies are working to get up to Internet speed.

FCB, for example, set up an eBusiness Strategy Group to deal with dot-coms. Citron has a "strike force" it deploys for new dot-coms.


Creative powerhouses such as Goodby, TBWA/Chiat/Day and Wieden & Kennedy, Portland, Ore., are putting new emphasis on integrating the Web into offerings.

Publicis Group's plan to buy Fallon McElligott and create a Web-centric global network is another ambitious example.

Interactive shops also are serving up a version of Y&R's old "Whole Egg"; ZDTV just moved its $10 million to $15 million primarily offline account from FCB to Tonic 360, a San Francisco interactive shop that also does traditional advertising.

Dot-coms have rewarded agencies with billings, which may come and go with the fickle clients. But dot-coms also have forced the slow-to-change agency field to accept new ideas and approaches, which could have a longer-lasting effect.

The new economy may make agency life better in many ways, but one of the businesses' thorniest problems -- that of conflicts -- appears likely to be exacerbated, particularly as Web ventures of all genres -- from search engines to media companies -- move to sell all things to all people.


If advertising is beginning to move at Internet speed, so, too are ad accounts. Wieden, for example, lost after a few months when the dot-com shifted to a direct-marketing strategy.

But it's not a given that a short-lived dot-com need be a money loser for an agency. Citron's "proctologist" spot last summer for CNET often was cited as a classic example of dot-com advertising pushing the envelope of taste limits, and the tech site soon moved broadcast to Leagas. But word on the street in San Francisco is that Citron made some $5 million on the deal with its media commission from CNET. "I have no comment," said Mr. Bedecarre when asked about the report.

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