Interactive Agency Meltdown (with Seven Strategies for Surviving the Fallout)

In the shadow of Manhattan’s Flatiron district, the headquarters of a long-established insurance company stood for decades. If you’d peered through its grime-encrusted basement windows, you’d have seen dusty filing cabinets, miniature cities of cardboard boxes, loose files carelessly scattered, reams of colored paper, ancient mimeograph machines. Every once in a while a slow-moving employee would shift a pile of papers from one place to another and then shuffle out of view.

A little more than a year ago, the wrecking crew came through, turning this old-economy, prime Silicon Alley spot into a tabula rasa for the new digital age. The records and other paraphernalia vanished, the walls came down, and a vast, white-washed basement space emerged. Soon modular office panels, thousand-dollar Herman Miller Aeron chairs, and 19" color monitors arrived. They were followed by billiard and foosball tables, gourmet-snack machines, and expensive leather cluster seating in a new rec area. Just like in a game of Sim City, the people showed up, too. Young, mostly. Black-clad, geek-chic. The last element to complete the transformation was the company sign, a huge stainless steel beam inset with light. It proudly spelled out the new tenant’s name: marchFIRST.

In many ways, the rapid rise and fall, the bloat and bravado of marchFIRST mirrors the arc of the digital economy itself. Formed in December 1999 as the largest pure-play Internet professional services firm in the world through the merger of USWeb/CKS and Whittman-Hart, marchFIRST sprang to the top of Advertising Age’s Interactive 100—and held that position for two years. No other agency even came close. After the company IPO’d in March 2000, Robert Bernard, marchFIRST chairman and CEO, stated: “marchFIRST is literally a business imperative for our clients. If they want to lead their industry, to be the first with strategy, to be the first to market, to be the first to shareholder value, they need Internet solutions that are capable of quickly and radically transforming their business.” He went on to say: “marchFIRST has assembled an unrivaled arsenal of people and disciplines. We offer the entire span of Internet professional services that companies need to tackle today’s business challenges, and we can configure them to meet each client’s unique needs.”

In June 2000, marchFIRST launched a multimedia image-and-recruitment campaign that bore the tagline “A new world. A new way.” By then the company had 10,000 employees in 72 offices in 14 countries worldwide. The bad news started to leak this past November. First came the plummeting stock price. Then the announcement of a 10 percent workforce reduction. Next, the “realignments” of strategy and operations. Soon after, the lowered estimates, the sale of non-core assets, the vow to reduce discretionary spending. A continued slide in stock price and the resignations of its CEO and COO followed. Finally, the sell-off of core assets…the slams on…and on April 12, 2001, the filing of Chapter 11. marchFIRST wasn’t the only interactive-services company to suffer, of course. Just the biggest. By offering clients a smorgasbord of services, it didn’t depend exclusively on ad dollars. But the slump certainly fueled its rapid decline.

According to San Francisco research firm, more than 270 dot-coms have shut down since January 2000, and 70 percent of those closures have taken place in the past four months. The downfall and disappearance of so many digital start-ups, along with their inflated ad budgets, took a severe toll across the board.

In the third quarter of 2000, online advertising shrank overall for the first time, dropping 6.5 percent, to just under $2 billion dollars. The average price of a banner ad toppled from a $50 CPM to less than $5. In January 2001 Ad Age officially declared, “The riotous Web ad spending of a year ago is officially over.” And then it got worse.

“As of April 6,” Forbes reported, “three-quarters of 400 listed Net stocks traded below $5 and had a total market value of just $22 billion—about the same as, eBay, and Yahoo combined. Only 41 of the 400 were above the $10 threshold that many consider essential to maintaining investor interest.” All told, investors lost nearly $5 billion in tech stocks. Dot-com advertising disappeared along with the companies it touted, and no one predicts the economy will turn around any time before the fourth quarter.

Add to that the decline of click-through rates, the continuing debates over audience measurement effective ad units, and consumer bandwidth limitations, and you have a new industry confronting its first major catastrophe. As business has disappeared, advertisers’ confidence has waned as well. Myers Reports’ Advertising Confidence Index (ACI) for the second quarter of 2001 reveals that more media buyers will decrease than increase ad spending over the next 12 to 18 months. Estimates by Merrill Lynch analyst Henry Blodget reflect the decline. Instead of the flatline he had predicted from 2000 to 2001, Blodget now believes online ad dollars will shrink by one-fourth, down to $6 billion.

The current dismal climate cannot stay this way forever—nor can the hordes of interactive advertising agencies that profited from the boom and are now among its major victims. Except for a few rare success stories, most agencies are struggling to keep their heads above water. Many have already gone under. Call it Web 3.0, the Darwinian epoch, the culling of the herd.

Lately, when my colleague Larry Estridge and I contacted leading online ad firms to profile for this magazine, we heard: “That’s not what we do…we’re not strictly a web shop… we’ve changed our focus.” Suddenly, it seemed that for a company to identify itself as an interactive ad agency meant the kiss of death. Was the species becoming extinct?

The Internet itself has not disappeared. Just the hype. As Christopher Todd, analyst at Jupiter Research, told the trade press, “The bottom line is that online advertising is not dying. What you saw last year was an anomaly.” Jupiter’s surveys show that in the U.S., 122 million users were online in 2000. That number is projected to grow to 138 million users, roughly 50 percent of the U.S. population, in 2001. And as conventional wisdom has it, “Dollars follow eyeballs.”

Even Blodget sees light at the end of the tunnel. After the dismal first quarter, he predicts gradual improvement in later quarters this year. The analyst anticipates 20-30 percent growth in 2002 and beyond.

“It is obvious that the Internet is a phenomenon that’s going to have a profound impact on the economy, on society, and on human behavior in general. And that impact is going to be bigger than anyone can imagine,” Donna Hoffman, professor of marketing at Vanderbilt University, told Media Life. “The web has unique characteristics that make it a very distinctive medium for communication.

“But humans are funny. You saw a lot of really crazy behavior in the gold-rush days. People seemed to check their brains at the door. Now you’re seeing a correction, and it’s really right now an over-correction. But I believe that the Internet is so profound, we will definitely ride through it. The firms that get it are in a wonderful position to lay low and develop a coherent strategy for the long term.”

Interactive ad agencies throughout the country continue to open their doors each morning and go to work meeting clients’ objectives. In many cases the staff has been trimmed, the controllable expenses reined in as tactical responses to the current reality. Some companies have made more dramatic changes, even going so far as to reinvent their role or to shift to a more lucrative core competency.

Nonetheless, the expertise gained in a half-decade or so of online marketing hasn’t vanished into the ether. And while economic pressures call for adjustments, sound reasons remain to continue to advertise in this medium and position clients for when business turns around.

Taking a long-term view, Erwin Ephron told MEDIA, “The reasons to pursue an aggressive recession ad-spending strategy are really simple, because increased share of voice usually results in increased market share. And increased market share usually results in greater profitability.”

Easier said than done, especially when clients are panicky. Mike Donahue, evp member services of the 4As, says, “I think all of the online ad agencies are going through difficult times now—and they have to decide what they’re going to be when they grow up.” Herewith some promising strategies we’ve observed for an industry on the brink of hard-earned maturity.

1. Run a sound business. “There are people who are surviving and thriving,” insists Brayton Johnson, CEO of and a former banker. “They do it by running a business on fundamentals: Don’t spend more than you bring in. Make good hiring decisions. Ensure every incremental piece of business is profitable in the short term. And meet your client’s business objectives.” He points to out-of-control spending without revenue, and venture capitalists who pushed agencies to do unwise things, as responsible for the downfall of firms such as marchFIRST. “When we started our company, we had no outside funding, no debt, no investment capital. We grew it out of cash flow.” In 2000, Johnson tripled the size of his agency. Realizing that “ ot too large too fast, we scaled back in January with a small layoff. We are right-sized right now,” and, he adds, “equally profitable to where we were last year.”

2. Change leadership. A decade ago management consultant Lawrence M. Miller published Barbarians to Bureaucrats: Corporate Life Cycle Strategies. In it he asserted that corporations, like civilizations, have a natural life cycle and that by identifying the stage a company is in and the types of leaders it has, decline can be averted. Updated for today, Miller might agree that the same techno-evangelist who started an online agency may not be as effective for these times as a keen administrator. With the Internet becoming a relentlessly bottom-line business, creative minds and engineers both have lost dominion. Top slots at companies that included Modem Media, iXL, and Organic all recently have been filled with former management consultants, the type of individuals who have the respect and trust of key decision-makers at large companies most likely to buy advertising.

3. Pare down. Reports of staff reductions arrived just about every business day during the first quarter. While the hemorrhaging continues, the closings seem to be less frequent. Online ad networks, whose fate rises and falls on Internet ad revenue, have been among the devastated. DoubleClick laid off some 150 employees. 24/7 Media recently cut 100 jobs and closed several offices, claiming it anticipated saving $10 million annually from the layoffs and other belt-tightening. At the end of March, Phase2Media, one of the largest Net ad-sales firms, announced it would put about 30 percent of its staff, some 30 individuals, on the beach. Even The New York Times Digital unit, which had already undergone a round of firings, braced for another. Unit chief Martin Nisenholtz wrote in an email: “The actions we undertake now are meant to ensure the continued long-term prosperity of our business and position us to achieve profitability in 2002.”

4. Become email gurus. Is email the killer app? While the average click-through rate for banner ads has dropped below a 0.5 response and a “successful” snail-mail package garners 2 percent, email marketers aim for rates of response approaching 10 percent. Add to that the fact that it’s cheap and trackable, and email sounds like the answer to digital advertisers’ prayers. Recently DoubleClick announced it would be expanding from network sales to email, sweepstakes, and other products. Hopefully it won’t be a case of too little, too late. In the past year, the average click-through rate on email ads has dropped by half, to around 5 percent, according to eMarketer analyst Jonathan Jackson.

5. Branch into other media. Online listening to radio stations has increased 60 percent since January. It’s no coincidence the most recent Myers Reports Advertising Confidence Index (ACI) states, “Every measured medium showed a decline in ACI except for network radio.” points out that “Radio stations in major markets are finding traffic to their websites is growing significantly—and so is their market share—despite little promotion.” As these stations continue to attract a larger listener base, opportunities for advertisers expand. It isn’t necessarily a big stretch to move into cable, either. notes: “More interactive vendors are branching out into mainstream business. AdOutlet’s new internal sales solution, Cable Xtend, lets cable operators manage their spot inventory across multiple channels.”

6. Focus on wireless and emerging technologies. “The use of wireless devices to access the Internet is about to explode,” The Standard reported last month. “The market opportunities are staggering. For example, revenues for wireless e-commerce services could hit $83 billion by 2003 and $140 billion by 2004.” Right now, more than a thousand developers are at work devising high-speed, wireless Bluetooth applications that operate over short-range radio frequencies. By Christmas, Ericsson, Palm, and other device makers will bring Bluetooth-integrated products to market. Considering that today fewer than 7 percent of U.S. households have wireless devices, opportunities to market these products are vast. is among those already toiling in this new technology. On behalf of client Visa, the firm developed an animated logo with a sound that indicates a Visa transaction can be made via the user’s computer, cell phone, PDA, or interactive TV. As Stacy Lawrence wrote on, “Long term, analysts are sanguine about digital advertising as it moves beyond banners to email, wireless, and interactive TV. By 2004, these three categories will account for half of all digital advertising spending, with traditional online ads making up the rest.”

7. Secure blue-chip clients. Agencies that fared the worst in the winter of our disconnect are those that depended heavily on dot-com dollars. Fortunately, a shift from dot-com cash to traditional ad money is underway. Within the next five years, according to Forrester Research, the share of digital marketing dollars that comes from dot-coms is expected to drop from 2000’s high of 69 percent down to 16 percent by 2005. Traditional advertisers will account for the balance. In the meantime, says Forrester, companies such as Procter & Gamble, Coca-Cola, PepsiCo, and General Motors are all budgeted to spend more online during the second half of 2001. Yet not all capital is going directly into web advertising. P&G’s Vivienne Bechtold told the New York Times, ‘’It’s not that our spending on online advertising is getting diminished; but as our overall Internet spending is growing, the slices of the pie for our own websites and email marketing are growing.’’ Right now, GE is a prominent corporate contrarian—and a beacon of light to interactive believers everywhere. Forbes reported, “While everybody else pinches pennies, lays off technology staff, and delays purchases of computer gear, [chairman Jack] Welch and his crew plunge ahead with an Internet buildout, hoping to steal a march on rivals.” Welch, in one of his last major speeches, exhorted: “Now, with the economy tightening, with people cutting back, don’t let yourself cut back for a second on your digitization efforts. This is the time to widen the gap.”

Freelance writer Susan Breslow Sardone can be reached at

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