For survivors of the irrational exuberance of the late '90s, prosperity these days is calibrated in degrees of cautious optimism. The timing of the economic recovery has been the year's most defining issue, and while there's plenty of evidence of a U.S. advertising upturn, there's a fingers-crossed sense of fragility accompanying it.
Following the psychological plunge from the giddy highs of the dot-com stock market to the numbing depths of recession and war, that's to be expected. What is unprecedented and unsettling is America's new cold war with Islamic extremists. Even as we return to a more normal business cycle, no one is altogether confident, given the now-persistent threat of terrorism.
"We're still defining the new sense of normal," says Ken Kaess, CEO of DDB Worldwide. "What we do and how we do it will change. We tend to react to the economy. A lot can still change; foreign policy can change. I'd say things are getting better rather than returning to 'normal.' "
By most measures, things are getting better. After three years of one of the worst industry downturns ever, the recession bottomed out in 2003. Holding companies, which began to see an uptick in U.S. organic growth at the end of 2002, posted healthier increases and sustained momentum. Surprisingly bullish economic data has recently fueled the American stock markets, already buoyed by the return of corporate profits. Even the weak dollar, problematic though it is, provides some benefit in that it makes U.S. exports cheaper overseas.
But even as the larger economic picture brightens, the industry is confronting new difficulties that are here to stay no matter how well the country emerges from recession. 2003 saw the rise of the procurement function at client organizations, a trend only accelerated by tough economic times among marketers negotiating fee-based compensation. And it was also an unusually busy year in Washington, with legislation affecting media ownership rules, direct marketing and spam e-mail.
Those pressures from outside the industry are compounded by ones from within: The dominance of the traditional ad agency as the architect of client strategy has come under attack in an increasingly fragmented world of media, marketing services and branded content. At the same time, the role of industry holding companies is changing, with their CEOs getting more involved in new-business development and compensation negotiations, both traditionally the unquestioned domain of ad agencies. And it's clear that the squeeze on agency profits has become as much a fact of life in good times as bad.
"We need to stop whinging and change with the times," asserts ZenithOptimedia CEO John Perriss. "I can't think of a major client or agency review this year where procurement and marketing got no better than a parity vote at best, or the marketing people got a secondary vote."
The industry's failure here, he says, is in engaging procurement executives. "We misunderstood this to be about negotiation," Perriss explains. "It's not; it's about disclosure and [clients'] rationalization of the situation. Agencies may say, 'I need 2.5 percent to make my margins.' The procurement people say, 'Why? What are your costs? What kind of interest are you making on the float of our cash?' because that's the way procurement people work with other vendors. They're very into your business, and if they see things they find inefficient, they say, 'We'll help you better manage your process.' "
Further complicating those discussions are the growing ranks of compensation consultants, some of whom are blamed for being overly intrusive in the kind of information they request. Benchmarking is becoming common practice.
Bob Liodice, CEO of the Association of National Advertisers, says he doesn't believe marketers should ask for details like individual salaries, but he argues their procurement people are entitled to know what they're paying for. "I'm a big believer in transparency," he explains. "When you take the mystery out of the numbers game, then you take the doubt out of it. Marketers don't wonder if they're getting hosed; suspicions disappear. They can see whether the costs and expenses being applied against a client's business are acceptable. In turn, they can determine what the work is worth and what it costs; they can determine fair value and fair return to agencies."
In determining that value equation, many in the industry believe ad agencies aren't doing enough to promote the worth of their services. DDB's Kaess, chairman of the American Association of Advertising Agencies, made this a rallying cry in 2003. "Clients ask, 'What value am I getting for my investment?' and we've been unable to come up with quantitative results," he says. "We've come up with qualitative measures but not the hard-and-fast business results. We need to develop econometric models to do this."
Count some legislators among the ranks of dissatisfied clients: They sponsored a reauthorization bill this fall that would oust Ogilvy & Mather from the White House's anti-drug media campaign, a sign that lawmakers intend to rein in an effort they feel has run amok. (Officially, the Office of National Drug Control Policy says its decision not to renew Ogilvy's contract has nothing to do with the legislation, which is still pending.)
That bill capped an active 12 months of legislative scrutiny of marketing and media issues. And next year promises to be busy as well. Already, presidential hopeful Sen. Joe Lieberman has called for a probe into the marketing of junk food to kids, joining the growing ranks of critics trying to link the country's obesity problems to marketing.
"Advertising is a persuasive medium, but advertisers have a right to sell their products. How do you decide what's a bad food?" wonders Wally Snyder, CEO of the American Advertising Federation. "Food advertising is already heavily regulated by the FTC. You'll see a lot more attempts on this front next year, but I don't think the FDA, FTC or Congress will place burdens on advertisers."
If the pace picked up in Washington, the impetus for creative risk remained sluggish on Madison Avenue. Steve Blamer, CEO of Grey Global Group, North America, made improving creative at the packaged-goods agency a top priority. No stranger to the rigors of testing and client bureaucracy, even Blamer says the recession has done him no favors in that effort.
"The environment we're just coming out of allowed the process to kill great creative," he says. "With all the qualitative and quantitative testing, it could take six to nine months to get work approved. People were looking at spreadsheets to help a [marketing] guy make a decision. You had much more 'cover your ass' behavior."
While the hype this year trumpeted media as the industry's new creative outlet, some argue the death of the ad agency, and its ability to connect with consumers through traditional creative means, has been greatly exaggerated. "One of the most significant events of the year for me occurred on June 21, where in the space of 24 hours, 5 million copies of a book, printed in 52 languages, were sold, and within the next seven days, 875 pages of dense type was devoured by the people who bought it," says Andrew Robertson, CEO of BBDO North America. He points out that the Harry Potter series relies on a technology-printing-that has hardly changed since 1450, and that its appeal transcends age, gender and culture. "Harry Potter restores your faith that compelling content will engage people everywhere from Idaho to Iran," he says. "That's a lesson for us about communications."
Mostly it's been a year of doing more with less, for less; a period of maturing expectations in the wake of the dot-com era. No one expects to be fat and happy anymore-which is not necessarily a bad thing.
"Obviously the industry has had to become more cost-conscious, because clients have become more cost-conscious," says WPP Group CEO Martin Sorrell. "After living through the South Sea bubble-the 10-year bull market where you only had to stand up to be successful-more difficult economic times have separated the wheat from the chaff."
Those more cost-conscious clients have started to shift their focus from reducing spending to driving top-line growth. U.S. corporate profits, a key trigger to client investment in advertising and marketing, are starting to return. That's good for increasing revenue at industry holding companies, clearly, and for their share prices. Recently, the ad sector has outperformed larger U.S. market indices.
"Global ad agencies are derivative plays on corporate profit growth and are very sensitive to changes in cyclical outlook," says Joe Stauff, an ad analyst at SoundView Technology Group.
Even so, Wall Street observers like Lauren Rich Fine see a new development among clients that may slow industry recovery. Says the Merrill Lynch analyst: "We have sensed a change in how ad/marketing budgets are perceived internally. Advertisers have expressed that the ad budgets are now another cost item versus an investment in growth. The tension between these two seemingly contradictory factors could be the difference between a good year and a great year in 2004."
Fine expects autos and media to continue to be strong sectors next year, while pharmaceutical and household products and cosmetics will make healthy contributions to growth in ad spending.
There is much to be hopeful about as the ad industry anticipates a quadrennial boost, plus the prospect of the economy benefiting from the policies of an incumbent president seeking re-election. Fine expects U.S. ad spending to rise 5.8 percent, an estimate that falls between forecasters like Perriss, at ZenithOptimedia, who is looking at a 5.1 percent rise, and Universal McCann's Robert Coen, who expects an increase of 6.9 percent
In another bullish sign, The Conference Board just revised its year-end forecast sharply upward, projecting that gross domestic product growth will hit 5.7 percent, making 2004 the best year, economically, out of the last 20. The Board also expects corporate capital investment, which rose by only 2.7 percent this year, to climb 11.7 percent; consumer spending, which has remained strong throughout the downturn and grew by 3.2 percent this year, should increase at a 4.7 percent pace.
All of that assumes a year without a catastrophic event. But while the new business reality is one of caution, it also is one of adaptation and perseverance. "The Iraqi war, SARS and the overriding issue of terrorism have created a year of uncertainty. Despite all of these major issues, we have seen the world economy, particularly in the U.S., showing very positive signs of growth," says Maurice Levy, CEO of Publicis Groupe. "The fundamentals of life don't change. I never believed the threat of terrorism could kill off hope. The taste for light is far bigger than the threat of terror."