Digital Shops Begin to Feel the Effects of the Economy

NEW YORK None of the ad world, not even the high-growth areas in digital, is immune to the ill winds blowing through the global economy.To be sure, online advertising is not in recession, which is classically defined as three straight quarters of negative growth. Still, spending in many areas of digital marketing has declined sharply. Forecaster IDC last week predicted online ad spending would decline in the first quarter, the first time that's happened since the industry recovered from the dot-com bust in 2001.But there are still some hopeful signs. Direct-response tactics like search remain in relatively high demand, for instance. Clients continue to shift budgets to digital channels, according to agency executives and publishers. And consumer habits are still shifting to digital channels, said Karsten Weide, an analyst with IDC."This is a function of the overall economy, it's not a function of online advertising," he said.If there's one area that's struggling, it's display advertising. Display ads have a classic supply-demand problem: there is an overwhelming glut of ad impressions on the market. According to comScore, U.S. Internet users saw an estimated 345 million display impressions in December 2008, the latest month it has figures. Ad networks have filled the void for publishers, leading to a race to the bottom. Ad network CPMs were a mere 60 cents to $1.10, according to an Interactive Advertising Bureau and eMarketer study.That's meant lean times for many publishers. Gawker Media last Sunday folded its Hollywood blog Defamer into its flagship Web property Gawker, the sixth blog it has closed, spun off or merged with Gawker. The Washington Post plans to shut Sprig.com, its environmental offshoot. The biggest sellers of display ads -- Yahoo, AOL and Microsoft -- all reported sharp declines in their banner businesses. That's likely to continue through the year, according to Weide, as brand managers risk toppling media-mix models if they didn't scale back online."Nobody wants dramatic changes in marketing departments," he said. "The savings they're being asked to make are so great that they have to take money out of display, even if they don't want to."Digital agencies are seeing a steadying of business following a steep drop in the fourth quarter, when budgets froze. Since then, the economy has worsened -- or in the words of one agency CEO, "fallen off a cliff" -- leading to even longer sales cycles and a return of shops undercutting on price. What's more, clients aren't eager to make commitments, which means even agencies that have fared better than expected so far are cautious about the back half of 2009."Clients are not giving a ton of visibility so it's hard to figure out the entire year," said Liz Ross, U.S. president of Tribal DDB, part of the Omnicom Group. "There's a high level of anxiety out there."Corporate America's cautionary attitude has already affected some shops. For Microsoft-owned Razorfish some big Web-build projects worth $2 million to $3 million were put on hold late last year. That led to Razorfish laying off employees at some offices to account for shelved projects and pullbacks by financial services and auto clients."We went from a world where we [couldn't hire] enough people to all of a sudden it was a client cutting its budget," said Clark Kokich, Razorfish's CEO.Some high-flying shops have trimmed their outlooks. Independent AKQA, which enjoyed 40 percent revenue growth in 2007 and 22 percent in 2008, now expects a more modest 10 percent expansion in 2009. Even that's dependent on the economy not worsening significantly.Yet the shop is still hiring, noted Tom Bedecarre, AKQA's CEO, and clients are still shifting budgets to digital media. Challenging environments tend to separate the weak from the strong, he said, since boom times often make every shop look successful."The herd gets winnowed out," said Bedecarre. "Agencies will close, some will get weaker and there will be more consolidation."

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Digital Shops Begin to Feel the Effects of the Economy

Brian Morrissey

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