Shine a Light

January/February 2008 Issue: Page 42

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As interactive agencies battle it out for clients, the tech-savvy shops are winning clients from the traditional Madison Avenue types.

It's been seven years since interactive agency Razorfish embarrassed itself on national television. When reporter Mike Wallace of CBS' "60 Minutes" asked the agency's co-founders what the company does, the answer was none too clear.

Jeff Dachis, co-founder of Razorfish, said to Wallace, "We've asked our clients to recontextualize their business." Asked for clarification, he added, "We've recontextualized what it is to be a services business." Wallace didn't understand the answer. "We radically transform businesses to invent and reinvent them," Dachis explained.

Even though Dachis couldn't seem to come up with an answer to satisfy Wallace, earlier in the program Dachis said of interactive agencies: "This is absolutely real; this is a revolution; we're packing rifles; and this is going to be something that's going to change the course of the way the world is functioning."

On that point he seemed to be right.

Razorfi sh, now known as Avenue A/Razorfish, owned by aQuantive, survived the ensuing dot-com crash and is currently ranked among the top 10 interactive agencies. Avenue A/Razorfish has even flourished, counting a roster of clients that includes Best Buy, Coors, Starwood, Wal-Mart and Weight Watchers. The company has reinvented itself from a Web design firm into a metrics- and response-focused house. The majority of the top 10 interactive agencies in the U.S. have taken that mantra to heart, spinning out digital firms from their more traditional agency parents and combining Web design with a myriad of client services and metrics-based programs.

While this focus on the end-to-end as well as the most creative solution has indeed changed the way the digital agency functions, there are still lingering questions about who all this change is good for. The two tiers of interactive agencies – the digital arms spun out of traditional Madison Avenue powerhouses and the independent firms that got purely into digital about 10 years ago – are doing fairly well. Still, one faction points to the other as lacking in the forward-thinking bright ideas that will increase innovation and profits in the next phase of Internet advertising, mainly the social Web and search.

"Marketing on the whole still favors the traditional agencies," said Mark Kingdon, CEO of independent agency Organic. "But interactive is coming into its own. How do we work together, is the question." Organic emerged in 1993 as one of the first digital agencies and weathered the dot-com crash to thrive as an agency that specializes in deep customer profiling.

Big vs. Boutique

Organic may call itself an independent, but it is actually owned by giant Omnicom Group, which also owns Agency.com, Tribal DDB and Tequila in the interactive field. WPP owns Grey's digital marketing arm and OgilvyInteractive. Interpublic owns MRM Worldwide, R/GA and DraftFCB. The top 10 digital firms earn between $92 million and $235 million annually, according to AdAge. Avenue A/Razorfish leads the interactive pack with revenue of about $235 million in 2006. Omnicom is currently the holding company with the most revenue from its advertising units – about $11.4 billion worldwide in 2006. That's about $6.2 billion in the U.S. It has also done well on Wall Street. In February of this year, its stock hit $106.90 per share, about 50 cents short of its all-time high in December of 1999.

While Organic is considered a smaller player, with revenue of about $102 million in 2006, Kingdon says that "marketing is under enormous pressure right now." He says that "people want to create a war between traditional and interactive agencies." War may be a strong word, but the perception is that while independent digital agencies get all the "fun" work, bigger houses spun out of the traditional agency environments are still coming to terms with how to handle search marketing and the impact of social media. Spun-out digital agencies say they are best equipped to scale and meet all the client's needs, be they digital or older media.

"Traditional agencies started to niche themselves," says Rohit Bhargava, vice president, interactive marketing at Ogilvy Public Relations Worldwide. "They broke themselves into search and email marketing, etc. Now you have social media agencies. But the traditional agency is in real trouble now. With word of mouth, search and social media all coming from interactive agencies, traditional agencies don't do that well, yet."

Interactive agencies that came from the ranks of traditional agencies haven't been hurting. DraftFCB, for example, earns about $95 million a year, and is the fairly recent marriage of FCBi and Draft Digital. FCBi was an outgrowth of traditional agency Foote, Cone & Belding. DraftFCB's mantra is to stay response-driven but with the added value of more and better data. "In the past decade, the terrain went from silly money to accountability," says Brad Kay, executive vice president, executive director, digital, at DraftFCB. He says that the team has become younger and younger to help stay on top of innovation in thought and technology. The shop also has an elaborate intranet where employees can post "cool" stuff they encounter on the Web. This helps the "stay fresh or die" attitude, Kay says.

The small boutique shops may get a lot of adventurous creative work, but that's how it was in the purely traditional agency universe in the days before digital. The two-man firms always got the regional business where your ad could feature grandmas in tattoos or precocious babies driving Harleys. "Sure," Kay adds, "some business goes to the boutiques and we'll just have to get used to it." He says to help win new business they need to take on more people – something they do to stay abreast of innovation and the "hip factor."

The benefit to bigger traditional agencies is their deep pockets. To build a digital house from scratch seems to be a thing of the past. Buying a digital firm is easier. WPP Group has put Schematic, 24/7 Real Media and Blast Radius in its corral. Publicis back in January doled out $1.3 billion for Digitas and also bought Web agency Business Interactif to bolster its presence in France, Japan and China. Continued on Page 2...

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