Big ad firms find stumbling blocks in jump to Net

Interactive services are a logical next step for companies such as McCann-Erickson, Saatchi & Saatchi, Leo Burnett and Ogilvy & Mather as their business models evolve. But taking the success they've had building brands such as Coke and McDonald's in the real world to the Web has been limited--in part due to the focus and strength of an aggressive crop of interactive companies including Razorfish, IXL, Organic Online and Agency.com, analysts say.

All the advertising giants have launched interactive divisions, some which have tackled false starts or have been branded and re-branded. McCann-Erickson has Thunderhouse, which last month was folded into Zentropy Partners, a new company backed by Interpublic, McCann's holding company. Ogilvy, which has had a rocky interactive strategy, has OgilvyOne. Leo Burnett has little-known Giant Step. Saatchi has Darwin Digital.

"It's absolutely essential that (advertising companies) have some interactive practice," Jupiter Communications analyst Drew Ianni said. But Ianni, who believes the big advertising winners of the future will combine both interactive and offline skills in a soup-to-nuts package, argued that the giants, with the exception of Ogilvy, haven't been aggressive enough online.

Despite that argument, no one is quite sure how the nearly $200 billion-a-year advertising and branding industry is going to shake out--and how crucial interactive services are to the traditional industry's success.

There seem to be two schools of thought. The first argues that fast-growing Net-focused companies will win the advertising race in the long term because they are more nimble, smaller and focused solely on the Web. The other side contends advertising giants that built Fortune 500 company brands could use their war chests to buy what they lack in Web design, marketing and branding strategies.

That said, interactive companies--many that aren't yet turning a profit--are raising their own big bucks through IPOs. Organic, known for its groundbreaking Web work for Nike, Club Med, Volvo and Saturn set an estimated share price for its public offering last week, hoping to join fellow online success stories Agency.com, iXL, Scient and Razorfish, among others.

Organic CEO Jonathan Nelson contends that OgilvyOne has probably fared best in the interactive niche. However, he said Organic rarely competes against the interactive divisions of traditional ad firms, mainly because the work it does is too specialized.

"I think (Web branding and design) is a lot harder than people think," he said. "We're really cross-disciplinary. There are elements of an IT shop, high-end consulting, design, branding, media and logistics. Ad agencies are really good at making 30 second movies."

Razorfish CEO Jeff Dachis is less diplomatic, calling the ad firms' interactive efforts "a joke."

"The fact is that the ad agencies haven't got a clue yet," he said.

But Ryan Magnussen, head of Zentropy Partners, a Net services company backed by McCann-Erickson, argued that the Net in many ways isn't yet a priority for advertising firms.

"Coca Cola is still going to ship their cans in a big truck and the Internet isn't going to do anything for them," he said.

Of course, the lion's share of the offline leaders' revenues don't come from online initiatives. More than half of the $154 billion advertising dollars spent in 1998 went to television and newspaper campaigns, according to advertising giant McCann-Erickson. That same year, just $2.1 billion was spent on online advertising, compared with $44.2 billion on newspaper ads and $39 billion on television, according to Jupiter Communications.

Despite limits for the online advertising industry, the brick-and-mortar holding companies that run the nation's largest agencies continue to invest in interactive start-ups.

Omnicom Group, with holdings including advertising and creative agencies BBDO Worldwide, DDB Worldwide and TBWA Worldwide, has invested in Agency.com, Organic Online and other Web services start-ups, setting up a separate group to oversee that venture. Omnicom Group will hold a 24.7 percent stake in Organic after the latter's upcoming IPO. Interpublic was an early investor in USWeb/CKS.

Omnicom Group today said it has acquired a minority interest in Nuforia, an Internet-focused creative services company.

In the meantime, Net-focused agencies are beefing up their ranks with acquisitions and hiring blitzes.

One prime example is Agency.com's acquisitions over the past two years, which include the Primary Group in August 1998; Interactive Solutions and Eagle River Interactive in April; Digital Vision in May; Twinspark Interactive People in July; Interactive Traffic (known as i-traffic) last month; and Visionik earlier this month.

Despite the online agencies' huge growth and some star clients, Ianni predicted big branding campaigns will stay owned by traditional agencies rather than the upstarts. Nonetheless, the interactive firms do pose a threat--particularly if they start expanding into traditional firms' strongholds.

"AOL bought time Warner, not the other way around," Ianni said. "Who's to say Organic won't buy Young & Rubican?"