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A New Game

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To understand the defining moments in the ad industry in 2004, and what lies ahead in 2005, look no further than that improbable celebrity, Burger King's Subservient Chicken. Since the porno hen's debut online in April, the $30,000 viral campaign has generated almost 400 million hits worldwide (1 million in the first 24 hours alone) and taken on a life of its own, spawning extensions including a 12-minute DirecTV spot and an Internet videogame.

The shoestring pitch from Crispin Porter + Bogusky became one of 2004's breakthrough executions in an industry whose standout work is traditionally more associated with lavish TV production budgets and Super Bowl buys. And indeed, it was a year of Internet resurgence generally, with ad spending jumping 26 percent through the third quarter, to $5.6 billion.

With the era of the omnipotent network TV commercial dead, and with the economic recovery taking firm hold, it is becoming ever clearer that marketers' spending patterns and use of media have changed for good. That was underscored by Procter & Gamble, the world's largest advertiser, known historically for its use of big media, following in the footsteps of Unilever and adopting communications-channel planning as a way to find new ways to connect with consumers across every touchpoint in a fragmented media landscape.

Even as marketers began reporting healthy corporate profits in 2004, Wall Street analysts argued that adspend levels weren't measuring up to what could be expected at this stage of a rebound. That may well have fueled the move to media-neutral solutions even more, with clients demanding greater efficiencies for their investment. Creative teams that five years ago were proudest of their TV reels are finding inspiration in everything from the Internet to gaming devices and cell phones, injecting a new vitality that will no doubt find more fresh outlets in the coming year.

"Subservient Chicken was something small yet significant, and probably contributed more in value than anything else Burger King did with its millions and millions in advertising. It showed you could do something that gets people talking and becomes a phenomenon in the larger culture," says David Droga, worldwide chief creative director at Publicis. "No question about it, the migration away from the 30-second TV spot was one of the big stories in 2004. What was different was [creative] people weren't saying, 'I have to have something on TV.' In the next year, you'll hear more and more about alternatives: 'Is it interesting? Is it effective?' It's become a legitimate strategic decision; it's not just about migrating to another media because everyone else is doing it."

From a client's point of view, Subservient Chicken is changing the way of looking at potential ROI on the Web. "There's nothing like experiencing the success of something like this to give you a true appreciation of viral marketing," says Russ Klein, Burger King's chief marketing officer, who echoes the fast-food marketer's tagline in explaining the use of the medium. "Subservient Chicken was a purposeful idea. It was about having it your way. The folks at Crispin Porter did a good job of putting the consumer in charge of their media consumption, and nothing is better than the Internet in doing that."

Recognizing that shift in consumer clout is the rallying cry of the new year. "It took 10 years, but 2004 was the year that the transference of power became complete," says Saatchi & Saatchi worldwide CEO Kevin Roberts. "All the successful models we grew up with don't work. It used to be brands had all the power, and then they got sidelined by promotions. Then the power was passed over to the big retailers. And in 2004, the power shifted again, as the retailers became commodified. Now it's become a consumer republic again. The consumer is boss—there's no more mass market—and is driving the flow of information."

After three years of recession-induced retrenchment, 2004 saw a return to a more dynamic economy that allowed marketers to proceed with new initiatives—a development that will only pick up steam this year. (Universal McCann expects ad spending to rise 6.1 percent to $553 billion in 2005; Zenith Optimedia, projecting from a smaller base, expects an increase of about 5 percent to $388 billion.)

"The biggest event of the year may have been that it was a time when marketers shifted from a primary focus on cost cutting to building top-line growth," observes Martin Sorrell, CEO of WPP Group.

Still, it was anything but a return to business as usual: More than ever, marketers are demanding innovation. "Clients started 2004 wanting to move ahead on things they'd been thinking about [during the downturn]," says Ogilvy & Mather worldwide CEO Shelly Lazarus. "We're seeing big brand transformations. There are greater ambitions."

Pent-up demand for change unleashed a torrent of account reviews, with some $20 billion in new business up for grabs, a 40 percent increase from 2003.

The industry hierarchy shifted, too, as WPP Group won out in the bidding for Grey Global Group in September, besting Havas, which only heightened doubts about the midsize French holding company's ability to remain independent in a universe of consolidating competitors. A stunning subtext to the Grey deal was Sorrell's ability to convince P&G to live under the same corporate roof as archrival Unilever, which may foreshadow a relaxing of conflict policies among marketers. "I tip my hat to Martin for making that happen," says Omnicom Group CEO John Wren.

Last year, WPP redefined the role of the holding company from that of a financial mechanism to that of a brand closely involved in new-business development—a change that may have implications in coveted reviews, like Intel's, this year. Marketers like HSBC, Nestlé, Samsung and Intel sent out requests for proposals to holding companies, sources say, and Sorrell says he's merely responding to their needs. His philosophy paid dividends in the big HSBC and Samsung reviews. "Martin Sorrell has had a very clear vision about this from the beginning and is putting WPP completely in the forefront," says J. Walter Thompson CEO Bob Jeffrey. "He goes into these pitch meetings with clients and emphasizes that WPP is a parent company, not a holding company. Given the fact that clients are facing more and more pressure to show ROI, we can give them economies of scale."

But don't expect all holding companies to take this approach. "I don't believe holding companies can service clients in advertising and marketing services," says Omnicom's Wren. "There are no creative people at Omnicom and WPP. I don't buy into it; I don't support it. In a business where we're telling clients to support their brands, we should be supporting our operating brands. There is a real distinction between WPP and Omnicom. I don't go win new business for my agencies. Martin Sorrell seems to win all the new business for his companies. We're two different cultures."

Adds Publicis Groupe CEO Maurice Lévy: "How can you deal, at a group level, with conflicts? WPP has a policy that might impair their ability to support their operating units. WPP has to support them, not compete with them."

Sorrell declined to comment on those assertions.

While WPP pursued the industry's remaining big fish, Toronto upstart MDC Partners trolled for smaller, creatively driven shops that were looking for an alternative to the large holding companies. After making nine acquisitions last year, including Kirshenbaum Bond + Partners and Cliff Freeman and Partners, CEO Miles Nadal plans to be even busier in 2005.

"The era of big agencies with institutionalized client relationships, which produce mediocre results with limited ROI, has gone by the wayside," Nadal contends. "The most innovative ideas come from smaller, entrepreneurial firms. Big spend doesn't mean big results. So, in 2005, I think we'll see more account movement and bifurcation of media. The firms producing the most innovative ideas will get the creative assignment."

MDC's CP+B snagged the $350 million Burger King account, while mcgarrybowen picked up $300 million of creative work from JPMorganChase, and davidandgoliath held on to its $270 million Kia account.

"You're seeing more big marketers get involved with smaller, funkier agencies," says New York industry consultant Joanne Davis. "The push for innovation is unprecedented. Marketers are looking for ideas that are smarter, faster, better. They're saying, 'If TiVo is true, how can we get into gaming? How can we leave messages on cell phones?' "

Digital recording technologies are, in fact, still only a fledgling force (Nielsen estimates DVR penetration at 4-5 percent of the U.S. market). But their implications are potentially huge. Consumers who use DVRs watch TV in a radically different way, viewing outside the shows' time slots and skipping commercials. Small wonder that mobile phones are fast becoming the "third screen" for marketers, alongside TVs and personal computers. Last summer, Warner Bros., Nike, Anheuser-Busch, McDonald's and Kellogg's began running campaigns that featured or were entirely based on a cellular element. The Mobile Marketing Association estimates that the money advertisers spend on cellular marketing will increase from less than $1 billion in 2004 to $5 billion in 2006.

Furthermore, the promise of product placement in videogames and marketers' use of downloadable Web games may be soon realized. Two years ago, for the first time, videogame sales exceeded Hollywood's box-office receipts, and while young men spent 12 percent less time watching TV, they spent 20 percent more time playing games, according to Nielsen Media Research. The $12-billion-a-year videogame industry is still trying to track product-placement effectiveness. Last year Nielsen Entertainment tackled that issue by partnering with Activision to develop measurement standards for audience behavior and demographics. Also, Massive Inc. launched what it calls the first videogame advertising network, linking space across different games.

The timing is right: The Yankee Group expects videogames will generate nearly $260 million in advertising revenue by 2008.

Even the radio industry began to take new competitors more seriously, as subscription satellite-radio service Sirius signed Howard Stern in October. Stern's arrival suggests the medium may be about to expand beyond its niche status; his fans should migrate across media with him, as has Stern's mentor, Mel Karmazin. In his previous roles in commercial radio, Karmazin built Infinity Broadcasting and Westwood One into industry powerhouses.

Not surprisingly, some industry analysts are now questioning the longer-term outlook for mainstream media companies and their valuations. Given the boost of the Olympics and political spending last year, Merrill Lynch's Lauren Rich Fine expected that advertising growth could have exceeded U.S. gross domestic product in 2004, while it appears to have only kept pace. "Client spending has been more muted than what would customarily be expected at this stage of the recovery," she says. "Marketers are no longer working with budgets that are growing faster than GDP, so they have to find integrated ways to make ad spending more efficient. It raises the question as to whether advertisers have permanently substituted less expensive, with possibly better return, spending into the mix, like the Internet, local cable and direct marketing."

If the quadrennial factor didn't meet some expectations, it exceeded others: It gave rise to one of the nastiest, most negative presidential campaigns ever from Democrats and Republicans both. Nonetheless, a presidential victory was delivered, touting a moral high ground. Not that the pro-business Republicans' strengthening hold on Congress is much of a benefit for the ad industry, which this year faces attention on issues ranging from obesity and food marketing to DTC pharmaceutical advertising and privacy matters. "We find we have strong supporters and strong detractors on both sides of the aisle," says Dan Jaffe, svp and head of the Washington, D.C., office of the Association of National Advertisers.

Back in the holding-company world, the new year also brings speculation about management changes at Interpublic Group. The future role of CEO David Bell is unclear. His contract is up in March, and Michael Roth, the former MONY Group CEO who was named IPG chairman in June, has been increasing his operating role, sparking internal expectation that he may become CEO as early as the first quarter. (Bell and Roth did not respond to interview requests.)

IPG is fast losing ground in one of the industry's most dynamic, fast-growing sectors—media. In November, WPP's MindShare unit won Unilever's $1.25 billion European media business, taking the lion's share from IPG's Initiative. Just three weeks earlier, IPG's Universal McCann lost out in Nestlé's $1.5 billion media consolidation to two other roster shops, WPP's GroupM and Publicis' ZenithOptimedia, following a review. (UM had handled more than $400 million in Nestlé business in the U.S. and Latin America.) IPG's media shops began losing their hold on bedrock clients in December 2003, when Publicis' Starcom MediaVest Group snatched $350 million in U.S. Coca-Cola billings from UM. And while companies like SMG and WPP's GroupM pitch as discrete media holding-company units within their parent structures, IPG has yet to create a similar umbrella for its media units.

But many don't expect the big media consolidations of last year to continue at the same pace. "The last three or four years, the economy has been tough, with corporations reorganizing, restructuring, rationalizing, outsourcing, selling off units, laying off people and downsizing," says Steve King, worldwide CEO at ZenithOptimedia. "The basic structure and alignment in marketing has been mostly unchanged. Now marketing is being looked at the same way other business processes are being scrutinized. You have presidents, CEOs, even procurement people asking if there are more effective ways to communicate with consumers and get better efficiencies."

King isn't expecting to see the same level of activity in consolidation of media accounts in 2005, but he doesn't expect client focus on costs to wander either. "Media is an area procurement people can run through their slide rules more easily," he says. "It's a transactional business they can understand more easily than creative."

If IPG was the pioneer in defining the holding-company model, Paris-based Publicis has been among the most recent to successfully build it, after some early setbacks with former partner True North. Going into 2005, Publicis Groupe—which didn't even exist until 2000—is emerging as a major force to be reckoned with. It demonstrated its growing media prowess after winning a share in P&G's $2.5 billion communications-planning consolidation. And it is fast becoming one of the most honored holding company at creative shows.

The company's track record stands in contrast with its rival across town, Havas. After its expensive $2.1 billion purchase of Snyder Communications in 2000, Havas subsequently pared down its global ambitions and failed in its bid for Grey and may now have gone from acquirer to prey. French corporate raider Vincent Bolloré, who acquired a 20 percent stake in Havas last year, has just said he is using nearly two-thirds of his holding in the company to back a new $271 million loan that could enable him to buy even more shares. Bolloré has yet to make his intentions known to the company.

Additionally, Havas is under review from two of its largest clients, with Volkswagen (held in part at Havas' MPG unit) looking at consolidation of $1.4 billion in media billings, and Intel (at Euro RSCG) putting some $300 million in global business up for grabs. Jim Heekin, in his first year as CEO of Euro, says the agency was able to finish the year with a $380 million net gain in new business despite the clouds gathering over the holding company. "The biggest issue [about Bollore] has been one internally," he contends. "Clients bring up the uncertainty less than I expected. There's a sense the agency is doing better."

If Havas should be put in play, the obvious white knight would be Publicis. But Lévy, who took a pass on Grey, isn't eager to fan such speculation. "In the industry consolidation game, we have chosen to invest in the quality of the creative we produce and in our operations," he says.

Havas could find help elsewhere, as was made apparent in the interest in Grey among private equity firms. "There are tons of private equity investors out there looking for deals in this industry, mostly in specialty areas of marketing communications," says Abe Jones, a principal at investment bankers AdMedia Partners in New York. "They feel they can add value in a number of years and then spin off the company to the public or sell to a larger firm."

That interest from sophisticated investors —who may have once been dismissive of an industry whose assets go down the elevator every night—betrays the increasing value of marketing, regardless of where it touches consumers. Last year, as marketers shifted their focus back to sales growth, one thing remained certain, even as the industry explored any number of new directions: "The power of differentiating ideas has become paramount with clients," says Mike Burns, New York vice chairman of Saatchi & Saatchi. "The commercial ideas we create have become as powerful as industrial innovation."