From the Set to the 'Net

Some of the ad industry's top executives recently offered rare public glimpses into how America's shift toward digital media is affecting Madison Avenue. Their view: Agencies are being radically transformed by the changes in the media marketplace, especially the explosion of online searches and broadband video.

“The big shift has been in Internet usage,” said Martin Sorrell, chairman/CEO of London-based WPP Group, the largest buyer of media time and space in the world, during a presentation at UBS' Media Week conference in New York last week. Sorrell, whose units include big-media shops MindShare, Media­edge:cia and MediaCom, said the business is dividing into a “two-speed world” of slow-growth markets, such as traditional media, and high-growth ones like the Internet. While TV will continue to be a major advertising medium, he said, WPP's focus will increasingly be on the Internet and other emerging markets. The reason, he said, is higher profit margins: Traditional-media advertisers are holding the line on rate inflation, while his agencies are reaping higher margins by working online.

“We have strong double-digit margins in this area,” he said, adding that ad agencies don't feel any penny-pinching pressure from clients when they use online media. “Those areas are very sexy.”

Sorrell, noting that revenue for WPP interactive-ad unit Ogilvy One grew 50% during first half 2005, conceded that much of the rapid rise in online advertising is because it is “fashionable.” But Internet advertising, he added, is also “more measurable” and has a lower out-of-pocket cost than traditional media, making it an easier sell.

Online advertising currently represents only 4% of WPP's total business, but Sorrell said that will increase and WPP will become a far more media-centric and research-oriented company than it is today. That means shifting away from the kind of traditional forms of TV advertising popularized by its full-service agencies, such as JWT, Ogilvy & Mather and Y&R.

That's almost exactly the blueprint for WPP rival Aegis Group, according to David Verklin, CEO of Aegis' Carat America's unit, who presented at the UBS conference as well. Aegis, the younger of the major agency-holding companies, only buys media and conducts research and is also the only agency not affiliated with a traditional creative shop. Verklin said Aegis derives 64% of its revenues from media services, more than twice the percentage of its closest full-service counterpart, Paris-based Publicis Groupe, the parent of Starcom MediaVest and ZenithOptimedia.

While Aegis already is the most media-centric of the major agency-holding companies, Verklin said it also is being transformed by shifts in the marketplace and will be moving increasingly toward online media at the expense of other media—particularly television. Online currently represents about 8% of Aegis clients' advertising budgets, he said, predicting that will grow to about 15% within three years. At that rate, online would become the third-most–dominant medium in Aegis' media mix, behind television and newspapers.

And that erosion will continue. “I think it is going to come from television,” Verklin said at the conference. As a result, the average media plan would shift from about “two-thirds television” to 50%. However, while much of the shift toward online will go toward search advertising, he said, broadband-video advertising—which many see as just another form of television, one being distributed via the Internet—would be the second-fastest–growing segment of online advertising.

While not nearly as bullish as Verklin, other ad-industry leaders at the UBS conference predicted a marked shift toward online-ad spending at the expense of television, including both London-based ZenithOptimedia CEO Steve King and New York-based Universal McCann Director of Forecasting Bob Coen.

The principals differed, however, on the rate of change. King predicted online advertising rates will begin to soar as demand from advertisers outstrips the supply of desirable online-ad inventory.

But Verklin indicated that the online-ad inventory problem might be a short-term one and may be due to the same kind of seasonal advertising demand patterns that influence the TV-ad marketplace. There currently is “inventory pressure” at the end of the calendar year, he said, “but you don't see that pressure in Q1.”