new york In retrospect, it's hard to imagine anyone, least of all the major ad holding companies, longing for the days of irrational exuberance, when investment capital was thrown at everything with a Web address. But as the summer of '06 winds down, it's becoming clear that a new kind of tech-fueled exuberance is taking hold. The question is whether, this time, it's rational.
In the past few months, Publicis, WPP and Interpublic have begun taking small stakes in new communications platforms, from video game publishers to social networks to broadband video providers. The hope is to foster relationships with these new players and help guide their development of ad models, while gaining a glimpse into how the digital media landscape is evolving.
Last week, WPP announced a $3 million investment in WildTangent, a Seattle-based company that publishes online video games, and another, undisclosed investment in Visible Technologies, a consumer-generated content tracker. The No. 2 holding company also took a stake last month in LiveWorld, a social network provider.
IPG in June struck a $10 million deal for a .5 percent stake in social networking site Facebook. Publicis has taken equity in startups in exchange for consulting services provided by Denuo, a new-media futures unit set up in February. Tim Hanlon, svp of ventures at Denuo, would not disclose the unit's full portfolio, but it involves at least six early-stage companies, including broadband video player Brightcove and Lightningcast, a video ad firm acquired by AOL in May. Denuo has stakes in more experimental platforms, too, like consumer-created ad platform Vitrue. Thus far, Omnicom has remained on the sidelines.
"In some respects, there is a headiness that's very reminiscent of the late 1990s about the possibilities of technology, the mania surrounding it," said Hanlon.
Back then, while the majority of the action was big deals to acquire Web shops, holding companies also spread their bets on a variety of tech firms, including some that in retrospect are head scratchers.
In 1997, WPP invested in Peapod, the online grocery business, seeing a potential gold mine of consumer purchasing data. While not much came of the investment in Peapod, which teetered on the edge of bankruptcy before Royal Ahold bought it in 2001, others were prescient. WPP took a stake in Advertising.com, which grew into the largest Internet ad network, and Visible World, which enables Web-like ad targeting for TV.
But this time around, holding companies are making smaller deals, using them to scout for clients and themselves how digital media is evolving while not risking much capital. Hanlon said the relationships that arise from Denuo's involvement with new companies, some of which he readily admits will fail, provides "a flank strategy" for Publicis.
Some startups are OK with ad companies using them as test labs, looking instead for "advisory capital," according to Dave Madden, evp of sales at WildTangent, which has recently built an ad network for Web games sites. "VCs are financial people and they can give great advice, but the reality is we're an emerging media type and advertising is going to play a significant role," he said.
By the same token, ad companies see an opportunity to help shape new media opportunities. In the case of IPG's investment in Facebook, the deal is predicated on the two companies collaborating to find methods to tap into the power of social networks, said Bant Breen, evp of strategic development and innovation at IPG. "To build the type of [ad] models that will work for our clients, we're finding it much more effective if we work closely with them to develop those models," he said.
The investment is less a bet on a particular company than on an important emerging sector, Breen added, in this case social networking. Similarly, WPP hopes to get deeper knowledge of emerging platforms for its agencies and clients, said director of strategy Mark Read, who expects to make three or four more investments this year. He points out that, unlike the dot-com days, WPP has invested in more mature companies: WildTangent is eight years old and LiveWorld is 10.
"What we need to do is embed the learning and expertise of these companies in our existing businesses so they have great ideas to bring to their clients," he said.
But such a focus could end up hurting both parties, argues Brad Burnham, partner at Union Square Ventures, a New York VC firm that backs ad-related tech companies. Unlike venture capitalists, which concentrate solely on their portfolio, investors like ad companies are in a completely different business, with investments serving only as a sideshow. "They're going to overpay and not manage the investments as closely [as] if they were professionals," he predicted.
None of the deals involve preferential treatment for their agencies, said ad execs. Some question then whether an equity stake, particularly a small one, provides much benefit. "In some cases, these are very, very small," said Rich LeFurgy, a board member at four ad-tech startups who is raising a digital media venture fund. "I'm not sure a good strategic relationship wouldn't be just as powerful."
Read points out that investments can catalyze activity within the holding company's agencies. In the aftermath of the LiveWorld deal, for example, several WPP agencies have begun discussions for it to build social networks for clients. "It's not necessary, but it helps build a closer relationship," he said.
For startups, the question is how closely to align with a particular holding company. Madden said the company's ties to WPP would not keep it from working with other agencies, but he acknowledged the issue was a concern prior to the investment. "These holding companies are not individual agencies," he said. "It's not a competitive investment at all. We weren't choosing one over the other, per se."
Hanlon is skeptical the financial investments will amount to much, because they are likely to get lost in the shuffle. And the structure of holding companies will prohibit them from shaping the newest communications vehicles, he argued, unlike Denuo, which is apart from the agency structure. "You're going to see a lot of reactive activity," he said. "Agencies tend to be reactive organisms. Proactivity is not in their charter, despite what they might say to clients."