• by Paul Gough , November 3, 2003

Following a less than stellar couple of years, publicly traded interactive agencies are looking to 2004 as further evidence of a recovery in the online advertising market.

It was a good third quarter for aQuantive Inc., owner of Avenue A and iFrontier, which reported a 70 percent increase in revenues to $58.6 million. And it expects even better results for the fourth quarter, with projected revenues topping $60 million. But the news wasn't as rosy at two other pure play interactive agencies. Digitas, a Boston-based interactive agency, posted less third-quarter revenues ($77.9 million compared to $85.5 million in 2002), including flat fee-based revenues of $52.2 million. The third-quarter fee-based revenues improved from the second quarter, however. Norwalk, Conn.- based Modem Media also registered lower third-quarter revenues, $14.6 million compared to $17.8 million a year ago.

And while the current climate made executives hesitant to predict revenues beyond the end of 2003, they believed that interactive advertising was going to come back in a significant way next year. But with clients budgets mostly still to be determined, it's too early to tell how much spending interactive advertising is going to get in 2004. Digitas Chairman/Chief Executive Officer David Kenny said that consumer-goods companies and business-to-business seemed to be poised to spend more in the interactive space.

"Not cover-off-the-ball growth rate, but I think that there's a confidence among our clients that's not been there the last couple of years," Kenny told Wall Street analysts last week. Even among travel and financial clients, clients that have been hard-hit in the recent downturn, spending will stay flat or may even go up a little bit.

"We're not seeing another round of declines in this sector at this point," Kenny said.

Positive is certainly the feeling at Seattle's aQuantive, which said last week that it would be some time before it received client budgets for the New Year. Brian McAndrews, president and chief executive officer of aQuantive, noted that there's a change in thinking among clients about online advertising. Skepticism is being replaced by a new understanding of interactive advertising's benefits in branding and direct response, he said. And aQuantive expects that several clients that began working with aQuantive in 2003 would ramp up their spending online in 2004.

In its conference call Thursday evening, Modem Media President/Chief Executive Officer Marc Particelli said that after a light first quarter, prospects should increase.

Digitas has been adding resources in analytics, as clients ask for more sophisticated ways to measure their performance and return on investment. Growth has been a focus at Modem Media, which has added two senior-level marketing executives and plans to add several more in coming months in an expansion bid.

And a week ago, aQuantive hinted at a breakthrough in the search for proof that online advertising can drive offline sales.

"Since the inception of Internet advertising, there has been much speculation of what, if any, connection there is between online advertising and offline sales," McAndrews said. "While it intuitively makes sense that there is a correlation, Avenue A will shortly announce that we have proof-positive results for what we have believed all along: That there is a direct link between the two."

Although details haven't been disclosed, the development apparently has to do with a retail client with Avenue A, which has been driving 20 percent sales from online marketing. The number apparently was determined by a proprietary capability that Avenue A has been collecting.