With I-Shops Growing Up, Holding Companies Emerge

Since its $160 million acquisition of Modem Media was finalized in mid-October, Digitas has been managing client conflicts and alleviating costs through a holding-company structure. The new Digitas Inc. umbrella brand comprises two agency networks, Digitas and Modem, allowing for the former’s Microsoft and AT&T accounts to coexist with the latter’s IBM and Sprint businesses.

“As long as the two agencies remain separate, I think everything is fine,” said Digitas Inc. chairman and CEO David Kenny. “People are accustomed to holding-company models that work.”

Forty-four years after Marion Harper formed the first advertising-agency conglomerate, Interpublic Inc., the interactive-marketing sector is following suit, with digital holding companies such as Digitas Inc., Isobar and aQuantive being created.

“It does show that the interactive-marketing sector is more accepted and more developed,” said Troy Mastin, an analyst at William Blair & Co. in Chicago. “It’s sizable enough—yet mature enough—that it warrants some of these actions.”

“It’s a natural extension of a business model that’s shown to work,” said Chris Penny, a senior research analyst at Friedman, Billings, Ramsey & Co. in Arlington, Va.

In July, Aegis Group formed a holding company of sorts, called Isobar, to house its interactive assets. Like Digitas Inc., Isobar is made up of two networks, an arrangement that allows for conflict management and provides a clear interactive partner to Aegis’ general media brands. (In the U.S., the networks are Carat Interactive and Freestyle Interactive.) Another example is aQuantive, which was created in March 2003 as the parent of Avenue A, i-Frontier and AtlasDMT.

“We found ourselves with three different brands—all strong, powerful brands with good equity with their clientele and prospects—and we felt we needed a separate name for the parent company to distinguish it from the brands,” explained aQuantive president and CEO Brian McAndrews. “The businesses have separate P&Ls and are managed separately and are really designed to serve their specific client needs.”

Digitas Inc.’s agency brands are also managed separately, with Laura Lang heading up the 1,100-person Digitas and Martin Reidy leading the 400-staffer Modem.

Though Kenny expressed confidence in the company’s client-conflict management, a September filing with the Securities and Exchange Commission cautioned that “while nothing has been finalized, there are initial indications that a few clients may need to shift agency affiliation, which may result in teams shifting agency affiliation as well.” In response, Kenny said, “Your responsibility with the SEC is to warn of any and all possibilities regardless of the probability, but I think of any risk associated with that seems to have been managed well.”

An AT&T rep reaffirmed the company’s relationship with Digitas, and a Sprint rep said the merger has not affected its ties to Modem thus far. A Microsoft rep declined comment, and an IBM rep did not return calls.

For many i-shops, a holding-company strategy can be a best-of-both-worlds scenario. “A two-brand strategy gives us a lot of flexibility, and we need to execute that right now,” said Kenny.

For one, the agency networks can cross-sell their strengths. Digitas’ direct-marketing capabilities might appeal to the client base of interactive-only Modem, for instance. And while Digitas and Modem house competing clients, they share others: General Motors, America Online and Delta. Another common client, Charles Schwab, has consolidated its interactive business at Modem to further distance it from Digitas’ American Express business. Digitas had handled the potential conflict by servicing Schwab out of San Francisco and AmEx from New York.

As to whether any further consolidation of business will follow, Kenny said, “When we go into ’05, there might be a couple of discussions.”

Another plus to a holding-company model: the elimination of redundancies. Digitas Inc. said it expects annual cost savings of $4-5 million relating to duplicate public company costs, facilities and other back-office functions, with the full effect of that likely to be realized in third-quarter 2005.

As for aQuantive, it’s a “next-generation holding company,” according to McAndrews. “There are are benefits to that structure, but we’re kind of the next generation because the areas that we’re in are all high-growth areas that have tremendous potential in the digital age,” he said.