Fitch Applauds Re-Integration, Warns Of Disintermediation

Influential credit rating service Fitch Wednesday issued a report indicating that Madison Avenues' biggest players face some considerable challenges - the erosion of the traditional TV advertising marketplace, the continuing fragmentation of media and a corresponding consolidation of media services, a shift from traditional advertising to "below-the-line" marketing services, the reintegration of creative and media services, and the threat of "disintermediation" from advertisers dealing directly with online services - but are generally better positioned than the rest of the media industry to weather some big changes in the years ahead.

"The rapid evolution of the media landscape has required that ad agencies adapt their offerings in favor of the new media alternatives that are gaining acceptance with clients. As advertisers get more comfortable with the measurability of online media, they will likely continue to demand the same transparency and accountability from their agencies," warns Fitch, adding, "They will increasingly expect agencies to demonstrate return on investment (ROI) to justify expenditures on agency work."

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The report, which focuses on the market trends and financial issues facing the industry's big agency holding companies - Interpublic, Omnicom, Publicis and WPP - indicates that the majors are moving quickly to adapt to these changes, and are effectively reengineering there services and product offerings to deal with a rapidly changing marketplace.

One of the biggest organizational developments, Fitch says, is the reintegration of media and creative services. Citing Interpublic's recent realignment of media shops (Initiative and Universal McCann) with brand agency networks (Draft FCB and McCann WorldGroup, respectively), and Publicis' integration of Arc Worldwide with Leo Burnett, the credit agency said it believes that agency holding companies, "that fail to develop tighter coordination are at risk of client defections to other [holding companies] or upstart agencies that can deliver integrated solutions to clients."

The report also predicts that big agencies will continue to be challenged by shifts in the media marketplace, especially the attrition of the traditional TV advertising markets, but says media services operations are actually better positioned than their creative department/agency counterparts to adapt.

"Media planning and buying may be somewhat less affected by these shifts in the short run, but the creative arms of agencies have historically generated meaningful profits from television advertising are more exposed," Fitch cautioned. "If the 2006-07 [network TV advertising] upfront did signal a long-term decline in the importance of the upfront, then companies that have already aggressively shifted their business mix toward marketing services will be best positioned. Omnicom and WPP have been the most aggressive in driving this shift as marketing services make up well over 50% of their revenue stream, while Publicis and Interpublic still derive a larger proportion of their revenue from advertising."

But the biggest potential challenge faced by Madison Avenue ultimately may be its fastest growing form of new business: digital media, especially the Internet.

"In 2006, several major advertisers announced they were forming a consortium to experiment with auctioning television advertising inventory in the U.S. Another potential threat is from the key internet players such as Google, Yahoo and MSN," Fitch says, noting that such players so far have focused on expanding advertising services to the "long tail" of smaller advertisers that might not otherwise employ traditional advertising agencies. That was a strong reason for both Interpublic and WPP Group to invest in automated online advertising and media services provider Spot Runner, WPP chief Martin Sorrell said during the recent UBS media conference in New York.

"So far, major advertisers typically buy their Internet advertising with one of the [holding companies'] buying operations acting as intermediary. There is the potential for the Internet companies to try to move up the value chain to deal directly with advertisers," warns Fitch. "These developments, and others described previously, continue expose agencies to potential to the risk that certain functions may get commoditized or that agencies themselves could be disintermediated in this broad media transition toward more consumer and advertiser control."

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