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As chairman of the WPP Group, Martin Sorrell is arguably the biggest and most powerful player on Madison Avenue. With ad agencies such as JWT, Ogilvy & Mather, and Y&R, and media shops like MindShare, Mediaedge:cia, and MediaCom, Sorrell's organization has emerged as the No. 1 buyer of media in the world, purchasing more than $40 billion worth of advertising time and space for its clients in virtually every corner of the planet.

But recently, Sorrell took a meeting that left him feeling quite small. It was during a WPP strategic planning session at which Sorrell, a British knight, was playing host to the senior management team from Internet search engine Google. While comparing notes, Google advertising sales head Tim Armstrong casually disclosed that WPP is now Google's largest customer.

Why would being Google's top ad spender make Sorrell feel small? Because, Armstrong says, big isn't what it used to be in the Internet economy. As Google's top customer, WPP spends just $150 million annually with the online search giant, a mere 1.5 percent of Google's $10 billion search advertising business. If ever Madison Avenue needed a lesson on how the long-tail economy is impacting the advertising business, it is now, when all the players - consumers, clients, shareholders, the media, and even Madison Avenue itself - seem to be turning their backs on the old media economy and hopping back on the digital freight train.

Feeling Frothy?

Bring back memories? It wasn't a decade ago when the rapid ascent of the Internet, and online-based businesses, were transforming advertising and media models and raising dire predictions about the obsolescence of traditional media. That all came crashing to a halt, of course, with the bursting of the dot-com bubble, but it looks like it's back again. Internet market values are once again soaring past those of offline businesses. Marketers are once again pushing their agencies to shift budgets online. And Madison Avenue is once again reorganizing itself to take advantage of all things digital.

But there is something very different about the new Internet economy. Web 2.0 is not like the earlier version. It's less about the kind of mass scale that drove traditional advertising and media businesses and more about aggregating the kind of discrete opportunity that has made Google such a formidable player, one that traditional agencies aren't even sure whether to regard as a friend or a foe.

Following WPP's meeting with Google, Sorrell says, he came up with a term to describe Madison Avenue's relationship with the search giant. "Frienemy is the best way," he quipped during a recent investor's conference. Google is friendly, he says, because it wants to work with WPP's biggest clients to help them find better ways of using search and delivering better-targeted advertising messages. But Google also inspires fear on Madison Avenue because it is growing so big and is already beginning to extend its reach offline.

Shifting Media Sands

Steve King, the CEO of Publicis' ZenithOptimedia Group, uses Google's soaring market value to illustrate the shift taking place in the media economy. In 1996, before there was a Google, the biggest media companies ranked by Wall Street market capitalization - the sum value of all their publicly traded shares - were General Electric, Walt Disney Co., Time Warner, News Corp., and Viacom. By 2006, Google had emerged as the largest "pure play" media company, with a market cap equal to its next closest rivals, Time Warner and Disney, combined. In fact, with a market value of $153 billion, Google's capitalization is bigger than all of Madison Avenue's publicly traded companies - giants like WPP, Aegis, Havas, Interpublic, Omnicom, Publicis - combined.

"If Google isn't a bubble, I don't know what is," says longtime Google watcher Sarah Fay. As president of Isobar, Aegis Group's digital advertising unit, Fay collaborates regularly with Google and is part of the vanguard leading Madison Avenue's 2.0 charge. And it's not just Google, she says, but an array of new "participatory" media that are altering the economics of advertising.

For client Adidas, for example, Isobar purchased an island on virtual online world Second Life. The island, which includes a virtual retail outlet where Second Lifers can design and purchase from Adidas' new Micro Ride line of athletic apparel, was not your conventional media buy.

Fay wouldn't say exactly how much the island cost Adidas, but she implied it was a fraction of a conventional media buy. "We're talking penny CPMs," she says of media buys on social networks such as Second Life, Facebook, and MySpace. "And they do have a ton of inventory."

And therein lies the rub in the shift between the two media economies. The digital media economy has to mature before it can command the kind of advertising values that traditional media do. And the traditional media values are increasingly being challenged by marketers and agencies.

Fay recalls just such a case, when a major client conducted an audit of its media buys. The client, a marketer targeting teens, spends $100 million a year on media, and wanted to know precisely how much time its hefty outlay actually generated with the consumers it was trying to reach.

"On average it got them six minutes of time with their audience," recalls Fay, conceding, "And that didn't feel very good."

But Fay says her clients are beginning to shift away from traditional cost-and-time-spent advertising metrics and are focusing more on the quality of the time consumers spend with their brands. Web 2.0 media buys such as Second Life, Facebook, and MySpace are all about getting people to spend more time with them online. "This means more money," Fay says. "Spend more time on a site, feel more comfortable, spend more money."

Isobar is not alone. Some of Madison Avenue's biggest agencies and clients are scuttling old mass media thinking in favor of 2.0 approaches.

In fact, Interpublic Group recently took a stake in Facebook, and during a recent investors meeting, CEO Michael Roth touted 2.0 solutions as the future of the business, citing a recent viral e-mail campaign for client Microsoft and the video portal launch of the U.S. Army's new ad campaign.

"[McCann Worldgroup's new 'Army Strong' campaign] broke on YouTube, not any of the major networks," says Roth, adding that the viral e-mail video for Microsoft drove prospects to the StationeryIsBad microsite for a fraction of the cost of a regular media buy, but generated $8 million in media value for Microsoft.

Asked by New York Times advertising columnist Stuart Elliott whether these new "thrifty" approaches to buying media and placing advertising were as profitable for Interpublic's margins, Roth demurred, saying that the traditional media will not "go away completely."

WPP's Sorrell isn't as sure about that, suggesting that the shifts taking place are bigger and far more fundamental than effective advertising models. They're about the way people use media.

"It is an issue, because the people who come to YouTube, or MySpace, or Second Life, probably went on there because they didn't want to see a commercial," says Sorrell, noting that it's not simply about the teenage digital vanguard. "Forty percent of MySpace's audience is over 40."

We're in the Money

It's not all bad news for the traditional media. Something that's beginning to bubble up along with online media is online-based businesses. The kind, says Universal McCann ad forecaster Bob Coen, who advertise in other media. In fact, dot-com advertisers are spending the kind of money on consumer media that hasn't been seen since the last bubble burst. Coen estimates that dot-com brands spent about $4.4 billion on consumer media during 2006, an increase of 20 percent over 2005, and enough to make it one of the top advertising categories if grouped that way.

While that's still not as much as the $5.6 billion dot-coms spent on consumer advertising in 2000, before the market crashed, Coen says the growth is now steady and stable, and the companies are much more mature than the ones advertising during the Internet run-up.

"They spend a lot of money, but they probably don't spend as much money as a lot of the companies that spent a lot of money and then threw in the towel [during the dot-com bust]," he said.

Surprisingly, much of the ad spending from dot-com brands is not going online, but into traditional media, especially television. Coen cites another category that is beginning to "bubble up" - automobile insurance advertisers such as GEICO and Progressive that use the Internet to market themselves, but who spend most of their advertising budgets on traditional media.

The auto insurance category has soared fourfold since 1999 to $458.5 million in 2006, Coen says. "Despite what you're hearing about the Internet, they're spending most of their money in television." In fact, auto insurance advertisers spent only 4 percent of those budgets online and 83 percent on television advertising.

Like his boss, Interpublic's Michael Roth, Coen may have hit on the fundamental paradox taking place in the media economy. While online has emerged as a super efficient marketing platform, it is - with the exception of search - not expanding as rapidly as its supposed effectiveness would suggest. The reason, as Isobar's Fay points out, is that it is far more cost effective than traditional media, and when marketers shift money online, it simply goes a longer way.

That's something Steve Fredericks, the president of ad tracking and forecasting firm TNS Media Intelligence, has begun to notice also.

Fredericks believes the relative cost effectiveness of online marketing is slowing down the medium's growth - as well as the overall expansion of the advertising economy - because marketers are simply getting a bigger bang for their buck. He says that may help explain why big marketers - the nation's 50 largest advertisers - are lagging behind their smaller counterparts in online spending growth.

And while nobody knows for sure, this efficiency effect may have something to do with the relative slowdown of the advertising industry, which until a couple of years ago, had been tracking the overall growth in the economy. For the past two years, ad spending has trailed economic growth. Making this shift all the more puzzling is that it comes at a time when big corporations have been generating strong, sustainable profits, a trend that normally fuels a rapid expansion of the advertising economy.

New Ad Models

While the ad economists scratch their heads on the impact the shift toward a digital media is having on the industry's fundamentals, WPP's Sorrell has begun warning of an equally profound change that could be occurring in the way Madison Avenue participates in that growth. While this one's not being caused by his "freinemy" Google, it is being driven by the same digital economics.

New online media buying systems such as Spot Runner, a company WPP, Interpublic, and CBS have invested in, could dramatically change the way WPP's advertising agencies and media shops do business.

During a recent meeting with WPP's senior management team, Spot Runner president and CEO Nick Grouf demonstrated the ease of use of the automated, online system, creating an ad for WPP client Century 21 and doing the job of a planner and buyer in a few minutes, all on a personal computer.

"Nick made an ad, planned it, and bought it in front of people in five minutes," Sorrell recalls. When Sorrell asked Grouf whether the same process could be scaled for big advertisers, Grouf told him it could. "You could see the blood draining away from the people who run our businesses," Sorrell says.

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