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Independent Agency of the Year: Avenue A

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As Adweek IQ compiled this year's list of the top interactive agencies, one thing that stood out is that those agencies that managed to last through 2001 were still around at the end of 2002. Of last year's top 10, only one has disappeared. However, it's important not to confuse survival with outright success. Overall, revenue was down 3.2 percent for those on the Top 50 list. Clearly, interactive advertising's long, cold winter of reappraisal is not over.

We at IQ have needed to do some reappraising, too. We've tweaked our definition of what qualifies as interactive advertising revenue, and restated some 2001 numbers to make our year-on-year comparisons more accurate.

And we've taken into account another important change. Once upon a time, it seemed that every interactive shop's goal was to go public. Now, the industry is split into essentially two groups: the interactive units of large ad agencies, whose goal is to integrate interactive into a panoply of other marketing services, and the independents, which choose to specialize in this still-young medium. Thus, this year, we decided to split our Interactive Agency of the Year accolade into two categories: one to reflect achievement among interactive units that are part of large agency networks, and the other to single out an independent agency that has succeeded alone even in this most challenging of business environments.

At the end of 2001, there were probably many interactive ad execs who thought the worst was over. It wasn't. With 2002 also a year of industry shrinkage, it was easy for Adweek IQ to pick the winners from the losers, such as our Independent Interactive Agency of the Year: Seattle-based Avenue A.

While most of its stand-alone competitors stumbled, this mid-sized shop, which has spent most of its six years trying to perfect the arcana of online media, posted the kind of revenue growth that clearly demonstrates that what it is doing must be out of the ordinary. (Avenue A is a division of Avenue A, Inc., a publicly traded company that also has an advertising technology unit, Atlas DMT, which it spun into a separate unit in 2001.)

Specializing in online media planning and buying in an industry that seems increasingly in the hands of integrated advertising players, the agency has nonetheless been able to prove that expertise pays. In 2002, the shop posted a 34 percent gain in revenue, excluding a year-end acquisition that will give Avenue A its first creative capabilities. In the Seattle flagship (Avenue A also has a New York office), client retention last year was 100 percent.

"We have the advantage of being able to focus all of our intellectual capital on digital marketing," explains vp/media Maggie Boyer. Adds New York office president Jim Warner, "I think it's very easy to get distracted by a lot of things."

Its 2002 new business wins included Solomon Smith Barney, pharmaceutical company Forest Laboratories, Terra Lycos dating service Matchmaker, and five other clients in travel, consumer products and financial services. But more impressive, when one considers that for the first three quarters of 2002 Internet advertising was down 18 percent, Avenue A managed to get existing clients to put more money into online media. And there's only one way to accomplish that: by proving that oft-maligned online advertising can be worth the investment. "A lot of our clients started accelerating their spending rapidly in 2002," says Clark Kokich, president of the Avenue A unit.

In that statement, Kokich is pretty much alone among his peers. More common, given the advertisers who experimented with the medium early on and got burned, was to scale back the budget, and kill or maim interactive shops as a result. The top 10 U.S. advertisers devoted a piddling 1.1 percent to Internet advertising in 2002, according to CMR.

Avenue A's numbers become much more impressive when it comes to comparing its performance to its competitions'. Modem Media saw its interactive marketing revenue drop by 30 percent last year; Digitas, 13 percent; Organic, which at press time was on the verge of being acquired by Omnicom, 29 percent. (For a list of the top 50 interactive agencies and their 2002 revenues, see page 36.) Nearly three years since the dot-com bubble burst, 2002 still came with steep revenue declines for many interactive shops, which were already coming off a devastating 2001.

Thus, getting to prosperity wasn't easy for Avenue A. For better or worse, the company lived the entire dot-com saga, from promising startup in 1997, to pre-IPO hotshot in 1999, to Wall Street darling when it went public on Feb. 29, 2000, closing that first day at $72—233 percent above its $24 per share offering price. Its market cap at the close that day was in excess of $4 billion. (Today it trades at about $2.70 per share, about the middle of its range for the past 12 months.)

Six weeks after that IPO came the NASDAQ crash, and in May 2001, Avenue A's denouement: the company slashed staff by 20 percent, letting go 75 people, and decided to drop a dozen unprofitable clients, including marquee names such as Starbucks and Nordstrom. From 2000 to 2001, revenue declined by one third, dropping from $39.2 million to $26.2 million. But the company managed to slightly narrow its net loss, and the bite-the-bullet approach had almost immediate results. "We decided that we were going to cut to the point that we [would] be profitable," says Kokich of the decision to drop both staff and clients. While making a profit matters, Kokich still sounds pained when recalling the layoffs. "It's not fun," he says. "It's a horrible experience."

While the obvious conclusion of the firm's—and industry's—fall is that clients felt interactive just plain wasn't worth the investment, eventually some of Avenue A's clients began to think otherwise. "This was the year we really needed to prove that online does contribute," says Jean Pundiak, senior e-marketing manager for heartburn drug Nexium at AstraZeneca Pharmaceuticals. In late 2001, Avenue A convinced Nexium to be one of three advertisers to participate in a trial of a new online ad model on The New York Times' Web site, nytimes.com. Pundiak credits Avenue A with finding "opportunities for us to be the first to try something out."

The model—which New York Times Digital refers to as a "Surround Session"—would allow advertisers to "own" a consumer visit to nytimes.com by having targeted visitors receive ads almost exclusively from one advertiser during individual sessions on the site. Devised as a way for online media to achieve reach, the model, it was hoped, would allow advertisers to go into deeper detail about their products than the typical online advertising could. As with much of what Avenue A does, the agency wanted to make sure that the experiment held more than just the "gee-whiz" factor. Embedded in the trial was a study by online ad researcher Dynamic Logic, which looked at such measurements as brand awareness and message association to judge effectiveness. The results were that Surround Sessions had four times the lift of more common online ad buys in message association and purchase intent, and three times the lift for brand awareness and favorability. Pundiak gives the agency credit for taking the time to figure out whether the experiment had worked. It was "certainly a lot of work on Avenue A's part," she says.

But to Avenue A, knowing how the ad performed is the whole ball of wax. It's a constant game of plan, execute and optimize based on the results, a process that seems to make Avenue A staffers perform more like a group of online advertising scholars than planners and buyers. "We have always led with data, analytics and to some degree, ideas," says Boyer.

The agency approached AT&T Wireless about getting hired with the pitch, "Set aside some money. See if it works," according to Bryan Trullinger, director of e-commerce marketing at AT&T Wireless. Two years later, it is still a client, and Trullinger gives Avenue A credit for not getting wrapped up in the flashier aspects of the ad biz. "Decisions are kind of academic decisions," he says of Avenue A's process. "There's real data and real math."

Avenue A translates its intensive data-crunching into a leadership position in the battered and bruised online ad market. It has held three client summits, giving them an inside peek into what Avenue A knows about the online ad business. As of last month, it has supplemented that with an online publishers' conference, which drew more than 200 executives, including many of the industry's big guns, such as Bob Sherman, president of interactive marketing at America Online; Martin Nisenholtz, CEO of New York Times Digital; and Jim Spanfeller, president/CEO of Forbes.com. Not every competitor could do that.

Of course, Avenue A has never been like other online agencies, which is both a blessing and curse. True, the company's focus has allowed it to be a superior online planner, buyer and data-cruncher. But being the only agency that focuses on media, and media alone, can, executives admit, make Avenue A the odd agency out when it comes to winning clients who would like interactive creative and media wrapped into one neat package.

Thus, the company rounded out 2002 with the acquisition of Philadelphia-based interactive agency i-Frontier, with which it shares several clients. Agency executives are quick to emphasize that the company will continue to operate separately, lest anyone get the idea that Avenue A would lose focus.

"It will not change Avenue A's positioning," says Avenue A Inc. CEO Brian McAndrews. "But we do have clients who want to have creative coming from the same place."