IQ Interactive Quarterly: Independent Agency of the Year

"If the going is really easy, beware, you may be headed downhill." The warning, printed fortune-cookie-like on a small card in a meeting room at one of New York's W hotels, catches the attention of Digitas CEO David Kenny, who is there with his New York and Chicago president, Laura Lang, for a meeting with Adweek. He reads the line and lets out a giggle that seems to indicate part relief and part leftover skittishness about whether the company, and the interactive ad industry, are at last headed uphill. The road back hasn't been easy. Like most of its competitors, Digitas hit an excruciatingly high note in early 2000 that disintegrated into a prolonged lull following the burst of the dot-com bubble. 2003 was the first full year in which the company turned a profit, following its just-before-the-fall IPO in March 2000. The 24-year-old company's estimated interactive revenue last year was up 17 percent to $84 million compared to 2002. With almost 60 percent of its business coming from off-line direct response, it reported net income for 2003 of $16.9 million. Its stock has rebounded as well, continuing to rise even as private-equity investor Hellman & Friedman sold its 45 percent stake in the shop. (In the last year, Digitas stock has gone from a low of just under $3 per share to more than $10 per share as of this writing.)The shop has been hiring again, nabbing R/GA president/CEO Martin Reidy last November to head its West Coast operations, building on what was already considered a deep bench. "You feel consistently, at almost every level, there are bright people that you want to engage with," says John Hayes, chief marketing officer at longtime Digitas client American Express.Its creative product has kept up the pace; Digitas seems equally comfortable building Web sites, crafting rich-media ads and doing online promotions.But as Kenny's giggle indicates, memories of more difficult times are still fresh.In 2002, Digitas posted a 13 percent decline in interactive revenue, to $72 million, and a total net loss of $40.3 million. Although the performance was typical of the industry at the time, it was almost a surprise coming from one of the best-regarded interactive agencies—and one that, up until midway through 2001, looked as though it might bypass the dot-com disaster. Digitas had forecast revenue gains of as much as 25 percent in 2001; instead, it closed the year with a dizzying 18 percent decline. That earlier turbulence could explain why company executives, asked when they first felt a turnaround, do not refer back to early 2003, when revenue began to inch up. Instead, they point to last summer. "It really feels like in the last six months, we reached an inflection point," says Rob Willms, president of the shop's Boston, San Francisco and London offices.That inflection point was constructed both of new business and of a change of heart by existing clients that remained on the fence about interactive even a year ago. Kenny recounts that about six months ago, both the nature and the level of the dialogue between Digitas and its clients started to change. The company knew that client-side Internet marketing specialists were passionate about interactive—but suddenly, so were the CEOs and CMOs. Clients are realizing "this is really going to change the business I'm in today," Kenny says.Lang adds that the guiding client rationale has morphed into the following sentiment: "[Investing in interactive] is how I'm going to make my numbers this year."In addition to increases in client budgets, which account for roughly 50 percent of Digitas' revenue increase, the shop last year also landed assignments from Pfizer and Time Warner Cable and won the $25 million AT&T Wireless account, which had been with aQuantive's Avenue A. (In the interest of full disclosure, it also handled the redesign of Adweek.com.) Other clients, including Microsoft, expanded their engagements. Just last month, GM handed the agency its online BuyPower business, which had been at Interpublic Group's Zentropy Partners.As clients have become more demanding of agencies—and ad dollars—the success of Digitas is linked to the shop's willingness to embrace concrete results. "I think Digitas has weathered the storm exceptionally well and is particularly suited to coming out on the other side," says Chris Theodoros, director of worldwide agency relations for Google. While some of Digitas' rivals have shied away from search, he notes, the agency is "aggressively" staffing its capabilities in that area.Not that Digitas has thrown all its 1,100 employees and five offices behind the piping- hot search category. Its 2003 initiatives also include an elegant e-booklet for the 2004 Saab 9-3 convertible which lets users "flip" through its pages, watch a five-minute video featuring the car's designer, and e-mail the booklet to a friend. An ad for American Express Blue Cash, which gives users 5 percent cash back, used Mission: Impossible-style animation featuring a character who follows a trail of money to drive home the cash-back benefit. Running on the home page of Yahoo! and elsewhere, the ad garnered a lofty 5 percent click-through rate. The agency's ability to brand and sell simultaneously caught the eye of Time Warner's America Online, which last month added Digitas to its $55-60 million online media account. (Digitas began doing retention work for AOL last year.) Says John Lane, AOL's vp/online marketing, "We feel they can keep up with us in some areas and even lead us in others." If Digitas has one particularly sweet spot, it may be its reputation for keeping up with its very technologically savvy clients. Kenny admits that his client list is light on what he calls the fourth tier of interactive marketers: consumer product companies, mostly in packaged-goods. But, the roster is packed with the bluest of blue chips that happen to need direct-response and heavy tech know-how. One of its new Microsoft assignments last year involved building out the client's Executive Circle site, part of a business-to-business program aimed at helping professionals use technology to build their businesses. The site, which can be highly customized, could have been built in-house, according to the program's marketing manager Greg Harris. But Digitas proved up to the job. "For us, primarily [we work with Digitas for] the technology assets and working with their CTO and their software designer," he says.In a similar vein, the shop worked with Allstate Insurance for close to a year to build 11,000 Web sites for individual insurance reps throughout the country. Digitas built a platform to manage customized content, then developed a program to help agents market their sites. According to Rick Heneberry, Allstate's assistant vp/Internet marketing, Digitas provided "the prior knowledge and the experience we really didn't have."One can trace the shop's deep expertise to its beginnings—before the World Wide Web, broadband, and spam as anything besides a canned lunch meat. Digitas began in 1980 as direct-response shop Bronner Slosberg Humphrey and picked up its first American Express business the following year, when Ogilvy & Mather's "Do you know me?" campaign was all the rage. An interactive unit, Strategic Interactive Marketing, started up in 1995. The two disciplines merged and were rechristened Digitas as the company headed for the public market. At least one analyst attributes Digitas' strength to a return to basics. "Essentially, they've gone back to their roots of focusing on marketing," points out Mayank Tandon, research director at Janney Montgomery Scott. While Digitas does serve up technology consulting services, Tandon applauds the agency's emphasis on what he sees as the more sustainable business of marketing.Troy Mastin, an analyst with William Blair & Co., which last month initiated coverage of the agency's stock, feels Digitas is well-positioned to deliver the hard results clients are looking for today. Compared to its competition, "They've got more of an integrated marketing approach," he says.Even as the ad recession wanes, clients are showing no sign that they're any less interested in measurable results. That, coupled with new, highly accountable digital media, could place Digitas in the right place at the right time. No one expects that the company will suddenly begin producing 30-second TV spots. On the other hand, the agency knows how to tie all the marketing pieces together. Digitas is working alongside Ogilvy on a three-to-five-minute "Webisode" starring Jerry Seinfeld that American Express plans to unveil later this quarter. While Ogilvy concentrates on producing the short film, Digitas is working on "how best to present it on the Internet, and how best to use this traffic vehicle to possibly convert to sales," explains Hayes.In so doing, Digitas could give that old question "Do you know me?" an entirely different spin.Catharine P. Taylor is a contributing editor to Adweek Magazines.AT A GLANCEREVENUEInteractive revenue up 17 percent to $84 million (est.) BUSINESS WONAmerica Online, AT&T Wireless, Pfizer, Time Warner CableBUSINESS LOSTAmerican CenturyWIN/LOSS PITCH RATIO18 of 30 (est.)HIGHLIGHTSHired Martin Reidy from R/GA, won additional business from Microsoft and GM, launched Allstate sites, promoted Amex Blue via rich media.

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IQ Interactive Quarterly: Independent Agency of the Year - Digitas

Catharine P. Taylor

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Catharine P. Taylor