Omnicom builds an interactive holding company

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Through all of the World Wide Web's short history, ad industry watchers have wondered: Where are the 800-pound gorillas?

Omnicom Group just raised its hand.

With recent investments in six interactive agencies, Omnicom has taken the boldest steps into new media of any major holding company, except for True North Communications. In effect, Omnicom has created the first traditional holding company for interactive marketing.

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(TN Technologies, while technically also a holding company, links its different units together more closely operationally than a traditional holding company would.)


Christened Communicade, the new division of Omnicom will operate much like Diversified Agency Services, a vast Omnicom unit comprising dozens of disparate marketing communications agencies. Felice Kincannon, a consultant who helped Omnicom identify the six interactive shops, will run Communicade.

"This gives us six silos instead of one," said John Wren, Omnicom CEO, who carefully studied dozens of agencies before settling on six. "I'm hopeful that we've created another significant jewel for Omnicom."


Each of the six, Interactive Solutions, Organic Online, Razorfish, Red Sky Interactive and Think New Ideas--will continue to operate independently. Omnicom has acquired minority positions, with options for bigger stakes, at a total cost estimated below $25 million.

Before the recent deals, Omnicom was considered a laggard in new media. Its lead agency networks, BBDO Worldwide and DDB Needham Worldwide, have barely dipped their toes in the Web.


Rival Interpublic Group of Cos. had taken a significant stake in Wall Street darling CKS Group. Another rival, WPP Group, had made a number of small investments in developers of proprietary interactive systems.

All the while, Mr. Wren said, he was carefully studying the burgeoning new-media market and the shops making names for themselves in it.

Then last fall, he pounced. In one fell swoop, Omnicom announced five investments. Last month, highly regarded Organic Online jumped aboard. The result: a group that rivals CKS in interactive revenue and may contain more top-level talent.

"We're probably six of the top 10 companies in the industry," said Jonathan Nelson, CEO of Organic Online.

Mr. Wren sees new media developing into a market like direct response. After an initial proliferation period, the sector will break into three tiers: Five or six major players will dominate the industry; a large number of smaller--in many cases more specialized--agencies will find profitable niches; and big ad agencies will develop base-level competency.

Omnicom won't require its traditional agencies DDB Needham and BBDO to use Communicade shops for interactive expertise. Nor will it police the Communicade companies for conflicts.


Some view Omnicom's strategy as primarily a financial bet.

"Omnicom's gone into the venture capital business," said Fergus O'Daly, chairman-CEO of Poppe Tyson, New York, one of the leading interactive agencies.

Mr. Wren disagrees: "We're not bankers. We didn't get involved with this as a wonderful financial transaction. We're there because we think it's going to be a viable contributor to the way clients market their products. We want to be able to penetrate our client list and grow with them as they begin to use the Internet" as a major part of their media plans.

The power of that client list--including PepsiCo, Gillette Co. and Anheuser-Busch--wasn't lost on the members of Communicade.

"Omnicom owns lots of relationships that we can add value to," said Scott Mednick, chairman-CEO of Communicade's biggest agency, Think New Ideas. Actually a combination of several agencies, Think went public in November; Omnicom owns 15%.

"There were two key factors for our interest: financing to grow and privileged introductions to significant clients," added Chris Butler, president of Interactive Solutions.


Omnicom's overseas reach was particularly appealing to most of the Communicade members.

"It is the World Wide Web," Mr. Mednick said. "International becomes a very key issue."

With Communicade, Mr. Wren will use the hands-off strategy that has been his--and Omnicom's--trademark.

"They're going to allow us to do what we do best," said Jeff Dachis, president-CEO of Razorfish, a design specialist.

"I was very suspicious," said Tim Smith, president-CEO of Red Sky, describing his first meeting with Mr. Wren. "I had met with all of these venture capital firms that wanted a lot of control. But John said, `We just want to help you execute your business plan faster.' They have done nothing but assist us."


Interpublic has used the same approach with CKS, to great reward. CKS Chairman-CEO Mark Kvamme credits the holding company for providing invaluable assistance in matters like financial management and dealmaking.

Despite its ambitious vision, Omnicom's plan remains as cautious as it is aggressive.

It has invested a small amount compared to the $200 million it spent on acquisitions in each of 1994 and 1995. It also has set low profit expectations for the short term.

"This is an investment made far in advance," Mr. Wren said. "This whole industry is only two or three years old. But when all is said and done, I think we'll end up with a disproportionate share of the better companies in the sector."

Copyright March 1997, Crain Communications Inc.

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