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Media services giant to risk interactive spinoff

One of the world's largest media services agencies will launch a new interactive marketing consultancy, despite the recent fate of rivals that have attempted the same strategy.

Carat Group, one of the world's largest media services agencies, will launch a new interactive marketing consultancy Monday, despite the recent fate of rivals that have attempted the same strategy with poor results.

The company, dubbed Carat Interactive, is a new incarnation of the digital services division within its parent--a global media services giant with more than $12 billion in annual billings. Like Carat Group, the digital services division plans, places and tracks advertising, but it will focus on campaigns within various interactive mediums such as digital TV, wireless devices and the Internet.

By standing as a separate company, the group hopes to "earn its stripes in the interactive market," said Sarah Fay, president of Carat Interactive. Independence gives the company space to test new ad and marketing technologies in the industry and develop apart from its parent. "If we just stayed as an interactive division within Carat, you would have a very vanilla-flavored service," she said.

The attempt to fly solo stands out during a period when several interactive marketing agencies are scaling back. Since the market soured last April, the entire industry has been forced to slash jobs or reevaluate business strategies. Organic, iXL Enterprises, Razorfish and others have issued earnings warnings, and shares of many Internet services companies have dropped to 52-week lows on growth concerns.

Forging independence can be costly, too. In December 1999, traditional media company McCann-Erickson WorldGroup launched Zentropy Partners under the same premise, but it flopped less than a year later. Zentropy failed to meet growth expectations and was pulled back under the corporate umbrella after dismissing nearly 15 percent of its staff.

Although these may be cautionary tales for Carat Interactive, Fay said the company is launching at a "more realistic time" as more traditional brands develop interest in the market.

Debuting with about 20 established clients--including Xerox, RadioShack, Pfizer and Symantec--the company expects its roster of traditional advertisers to lengthen in 2001.

"It won't be hard to grow if the traditional advertisers just start dedicating more of their budget to interactive advertising--and that's happening," she said.

Carat Interactive's bent is to provide "360 degree" media campaigns that are planned in close connection with its parent company, which serves such clients as Coca-Cola, Adidas, Walt Disney and Bertelsmann. Branded campaigns across television, print, radio and the Net give the agency and the advertiser a competitive advantage in the market, Fay said.

But some analysts say working closely on such cross-media campaigns may be more difficult for Carat Interactive after it is spun off as a separate company.

"This is a huge mistake because the biggest complaint from advertisers is that (agencies) are separate organizations and they don't integrate their services enough," said Jim Nail, senior advertising analyst at Forrester Research.

Fay's answer to this is that for advertisers, the experience will remain seamless. And freedom from the corporate headquarters gives the company a charter to raise the bar in interactive services, she said.

Despite this, the new company is not necessarily new. It took shape from the interactive services division of Carat Freeman, a division of Carat Group formed by the company's 1997 acquisition of Freeman Associates, an interactive services company.

Nail called the announcement "ad agency spin," and at best, recognition of interactive services as a more important part of the media mix.

"A couple of years ago there was a rationale for spinning off--that the industry moves at a faster pace, and you can learn at that pace within a new company...But now things have slowed," he said.

Nevertheless, Carat Group said it is working on new innovations within the industry.

In a month, the company plans to organize a consortium to test ads and marketing programs via interactive TV applications, allowing it to track and learn how the medium will deliver on various messages.

The company is also working on affiliate marketing campaigns and electronic customer relationship management services with clients.

"New technologies are still coming out of the gates at a frightening speed," Fay said.