Online Ad Agencies - Challenges

Online ad agencies are an essential partner to advertisers, providing a variety of necessary services including generating creative campaign ideas, managing media buying activities, and facilitating measurement of an ad’s effectiveness. Online ad agencies are likely to witness increased demand in the international markets, and from rising demand for sophisticated and technology intensive rich media, and continued secular growth in online advertising and search. Most of an ad agency’s cost is its people, suggesting limited operating leverage. Traditional offline agency operating margins are between 10% and 20% in the U.S., while margins are usually higher in the international markets. Online ad agencies are facing a shortage of talent, resulting in rapidly increasing labor costs. When the Internet industry experienced a downturn in 2001-02, it triggered an exodus of talent from the interactive advertising industry, leaving experienced personnel in short supply. With the recent growth in online advertising, demand for talent far outstrips supply, driving up the costs for recruiting and retaining talent. The sector is likely to witness increased consolidation due to several factors. Advertisers are becoming increasingly interested in cross-media campaigns and one-stop shop solutions. Recently, publishers like the New York Times (NYT) and Disney (DIS) have combined their ad sales force across all media channels at the request of advertisers. Second, there are scale and business advantages to consolidation. One way to address the labor shortage is to acquire teams of online agency talent. In addition to scaling technology and back office, ad agencies have traditionally diversified risk by moving to a holding company structure. To date, consolidation has already resulted in a scarcity of large independent online ad agency pure plays. Disintermediation and competition look like the Sector’s greatest risks. Internet giants like Google and Yahoo! are increasingly offering automated services for advertisers that could disintermediate similar services provided by online ad service companies. For examples, Google currently provides Google Analytics, broad match function, ROI tracking, campaign tools, and all the technology and services that are often provided by online agencies and technology providers. Competition is another risk as much of value provided by online ad agencies are its people, and the ability to attract, retain, and motivate marketing talent is an ongoing challenge for its players. Top 20 Online Ad Agencies are: Avenue A/Razorfish, Sapient, Digitas, Agency.com, OgilvyInteractive, Grey Interactive, Modem Media, Organic, Tribal DDB, R/GA, AKQA, LeapFrog Online, TMP Worldwide, FCBi, Critical Mass, Digital Impact, Arc Worldwide, Euro RSCG 4D, IconNicholson.
Thanks CIBC World Markets, February 2007.