VideoIf Nick Grouf wanted to impress his new financial backers, he probably outdid himself. At a meeting late last year with top executives from WPP, the global marketing services titan that had taken a stake in Grouf 's Los Angeles-based startup ad agency, Spot Runner, the young entrepreneur wanted to show off the cheap and easy service that his agency provides for small firms wanting to run ad spots on local cable TV. As his audience looked on, Grouf, using just a few stock photos to hand, whipped up an ad for a client on his PC and then logged on to the Internet to plan and place the client's campaign, all in a matter of minutes.
When Sir Martin Sorrell, WPP's CEO, asked Grouf if Spot Runner could do the same for big advertisers, the answer was, Sure, why not? "You could see the blood draining away from the faces of the people who run our businesses," Sorrell recalled a few weeks later to a nervously tittering audience at an industry conference in New York City.
Anything to do with Web 2.0 — the sequel to the 1990s dotcom boom — seems to be getting similar reactions from big ad executives these days. Many industry experts believe Web 2.0 will change the $1 trillion-a-year industry beyond recognition, and sparky young agencies like Spot Runner are just a small part of it.
Though still in its early days, any company that has been paying attention is already aware that Web 2.0 is all about consumer-controlled, on-demand marketing that now takes place over a vast array of digital channels, from interactive TV to viral marketing to popular Internet sites such as YouTube. Indeed, there's evidence that the big advertisers are rapidly following their consumers in this direction, moving their ad budgets from old, costly media, such as mainstream TV networks, to anything to do with Web 2.0.
According to "The Future of Advertising and Agencies," a new report from the Institute of Practitioners in Advertising (IPA), a U.K. trade body, the big question is what the old-line advertising companies — particularly industry leaders like WPP, Omnicom, Publicis, Interpublic, and Bolloré Group — must do to keep from being rendered obsolete. "In the future, low barriers to entry — especially in the online world — mean that agencies are not just competing with other agencies (though there is still that, too), but also fighting off threats from new 'mutant' competitors," warn the report's authors.
But beyond the basic fear of change, there's another school of thought that is more upbeat. In a paper published last month, Bear, Stearns & Company analysts say the marketing services oligarchs haven't had it so good in a long while. After the Internet bubble burst in 2000, most survived and then thrived, chopping and changing their business models to move into advertising's fast-growing side businesses, such as direct marketing over digital channels. The good news, Bear Stearns analysts argue, is that these companies not only have the balance sheets, but also the size and diversity to attack Web 2.0 on all fronts, and "continue to garner more of the advertising pie."
Same, but Different
Fortunately for Sorrell, this plays to the strengths of his trusted finance chief, Paul Richardson. Having resigned from his deputy treasury post at Hanson, the U.K. building materials firm, in 1992 to join WPP as treasurer (the company's third in four years), Richardson has been WPP's group finance director since 1996. Widely respected by industry watchers for his financial management of the company while also being one of Sorrell's closest advisers, Richardson, 49, can take much of the credit for the strength of WPP today.
His take on Web 2.0? For one thing, this is no case of dotcom déjà vu, says Richardson, who remembers all too vividly how close WPP came to becoming a casualty of the market boom-to-bust just a few years ago. He lists a convergence of factors — from better technology to more sophisticated, tech-savvy consumers to impatient corporate clients, which in WPP's case includes more than 300 of the Fortune 500 companies, tired of seeing their ad spend spiral upwards — to explain why he believes "Web 2.0 is much more significant" than the previous digital euphoria.
It's also much more complex to manage, particularly for companies like WPP. "If I were a $150m company and I only had digital marketing, you'd say, 'You're brilliant at it.' But guess what? Companies like that are probably only in two or three markets," says Richardson, sitting in WPP's cramped, workaday London office, which serves as one of his two base camps (the other being in New York City, just around the corner from Madison Avenue, the old ad capital of the world). "As for a $10 billion company — yes, we're trying to change. Yes, we're finding it difficult to change fast enough.... Nobody is coping with this; nobody can go at the speed that the market is demanding."
Can complacency, if not arrogance, be partly to blame? Some industry observers reckon so. "For a long while, I think the traditional agencies thought they could deal with [Web 2.0] by simply subcontracting the production aspect [of making interactive and Internet ads] without investing in the technical know-how themselves," says Robert Willott, editor of Marketing Services Financial Intelligence, a U.K.-based industry newsletter. "That view has been changing rapidly over the past 18 months and all the traditional agencies are rushing around trying to find the quickest and most effective way to bring digital skills in-house to avoid losing business to specialists or more advanced competitors."
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