Media Report: Might Makes Right

There’s little room for small and mid-size media shops alongside the giants

Want to open a media agency? Don’t bother. Wherever there’s business, no matter what the size, there are behemoths ready to crush the smaller players. Or digest them when they get troublesome.

Even their most ardent supporters acknowledge that, while there are nooks and crannies in the U.S. marketplace where some can survive, all but a handful of midsize shops and the majority of the smallest media specialists are an endangered species. Or, as media consultant Erwin Ephron puts it, “They’ll survive until they’re bought.”

Some recent examples: In 1996, Roger Schaffner launched Palisades Media Group in Santa Monica, Calif., with Miramax as a flagship client. He prospered on that foundation until the end of April, when the $180 million advertiser abruptly pulled its account and gave it to Publicis Groupe’s Zenith Media.

A week earlier, entertainment buying specialist Independent Media agreed to end its lawsuit (and waive a $7 million judgment) against Aegis Group’s Carat for allegedly using proprietary information gleaned during merger talks to win Independent’s $120 million New Line Cinema business. Why? Carat bought Independent for $7.3 million.

Relatively modest spender Nasdaq launched a media review for its $15-20 million account this spring, and even that was limited to big players: WPP Group’s MindShare, Havas’ MPG and $1 billion independent Horizon Media, among them. No account, it seems, is too small for the big shops. Last month, after a review, plumbing manufacturer Toro USA awarded its $1 million media buying business to MindShare’s Atlanta office.

Even the man generally acknowledged as the father of U.S. independent media buying thinks the odds are stacked against a small or midsize media agency today. “I love the business, and I’d be back in it if I thought I could make a living,” says Dennis Holt, founder of Initiative Media predecessor agency Western International Media. “But it’s gone from a handshake business to an ‘I can’t trust you’ business, [and] consequently, the margins are gone.”

Competing against the global resources of the big media networks is all but impossible for most smaller shops. Horizon CEO Bill Koenigsberg says he wouldn’t think of launching a shop today the way he started Horizon in 1986—with a Rolodex and ambition. The only way it would work in 2003, he says, is if he had financial backing. How much? Well over seven figures, Koenigsberg estimates: to pay for the research tools, talent, general syndicated media research, capital intelligence and infrastructure that are the sine qua non of life in a land of giants.

It wasn’t supposed to be this way. Until the past year or so, conventional wisdom was that consolidation would shake out into two tiers: the big shops, with mega-clients spending $100 million or more, and a thriving midsize-agency community that would snare the $20–50 million clients concerned about service and the level of talent they’d receive at a global giant.

The first shoe dropped: 14 agencies—the smallest billing $1 billion, the largest more than $10 billion—control the lion’s share of U.S. ad spending. But the other shoe seems to have gotten lost somewhere. The middle ranks are shrinking, not growing. Only a handful of agencies billing $200–500 million are left, including Empower MediaMarketing in Cincinnati, R.J. Palmer and Corinthian Media in New York, and a few others. And some have rethought their mission.

“There was the hope that a midsize tier would emerge that would provide balance in the market,” says John O’Connor, senior partner at Los Angeles search firm Select Resources International. “But media in general is misunderstood and too often treated as a commodity. And if you have that mentality, then big is better. Period.”

“The big shops sell one idea consistently: bigger is better,” adds Bruce Silverman, former managing director for the Western region at Initiative Media and now president of WongDoody in L.A. “I think they have persuaded many, many advertisers that that is true.”

Naturally, big shops agree. “It’s not going to stop,” predicts Bill Cella, CEO of IPG’s negotiating unit, Magna Global. “No matter what size your budget is, you need the best communications architecture you can get. … Media boutiques will be few and far between. The freelance buyer isn’t a thing of the past, but they’re being more and more challenged.”

“Unless you want to be relegated to buying local car groups or furniture groups, [the biggest agencies] are where it’s at,” adds Thomas Bridge, president of media audit firm MMI in St. Louis, which works with more than 150 agencies. “The only thing small shops are good for is if a client has a heavily franchised system, it can get topspin with the local stations. But that’s about it.”

Indeed, while smaller clients still hire small shops or even freelancers, the hoped-for bonanza for midsize companies has not materialized. From 2000 through the present, Adweek reported on 15 media reviews for accounts billing $20-49 million, and 17 for advertisers spending $50-99 million. The smallest shop to compete in any of those reviews was Horizon, at $1 billion in billings.

Moreover, the better-service argument that small shops were counting on to blunt their competitors’ advantages in clout and resources resonates only to a point among midsize clients.

Del Pharmaceuticals, which sells Orajel products, among others, and spends about $20 million, is a case in point. The over-the-counter drug marketer left a midsize New York agency a number of years ago for the former Western International Media because its creative agency was Gotham—like Western, an IPG shop—and president Charles Hinkaty wanted the same kind of holding-company synergy that big advertisers like Bank of America, Burger King and others now seek.

“The benefit of being with a large shop is you have all the resources and leverage they provide,” Hinkaty says. “The downside risk, which is where the small and midsize shops come in, is if you’re a medium-sized client at a big shop, you may not necessarily get the same level of talent assigned to your business.”

Western’s successor, Initiative, has kept the Del business by addressing that concern, Hinkaty says. In fact, the client did talk to an undisclosed smaller shop a few years ago but remained at Initiative. The reason? “The small shop was a very attractive option, but the tiebreaker was that Initiative was part of IPG.” (Del creative is now handled by IPG’s Avrett Free & Ginsberg.)

The Del scenario is all too familiar to SRI’s O’Connor. In the past decade, he’s competed dozens of times against the big shops as a Southern California-based new-business executive at mid-tier players (TBS and Media That Works) and as a partner in a tiny startup (PWA Media). He also experienced the other side during a stint as a rainmaker at Carat’s Los Angeles office.

Did the smaller shops’ “better service, more attention” pitch work? “Sometimes. Occasionally. Not as much as it didn’t work,” O’Connor admits. The big agencies’ resource angle, he says, is hard to counter. “In a presentation, if I’m a big agency and I have two hours, I [have the resources] to fill it with things that are new, look innovative, promise to advance a client’s goals. Things that are evidential. Those are much more compelling than great people, great client list, the things that are intangible. It doesn’t mean that bigger shops are better, although in some cases they are, but that they are more easily perceived as superior.”

“Whether we like it or not, what’s really happened is that media has been bundled [in large, autonomous specialist shops] and creative has been unbundled,” notes Carat USA president Charlie Rutman. “A lot of these smaller creative agencies have already outsourced a lot of their media, and a lot of the others are owned by big agency holding groups as well.”

Indeed, several of the top players, including Initiative, Carat and Publicis Groupe’s Starcom MediaVest Group, have divisions that partner with smaller agencies, threatening even that traditional source of revenue for smaller media shops. And these units are not small enterprises, either: Initiative Partners alone works with 60 agencies and handles about $1.5 billion in business.

“The media agency is not a small-agency concept,” says Ephron. “It tends to be a bigger-agency concept. Creative is very simple. Two guys with a pad can be a creative agency.”

The small shops that survive will probably occupy specialty niches “like entertainment or jewelry, with people who came out of those industries, have special knowledge of them, and have always been a part of the sales process of the industry they work with,” predicts Elliot DeBear, a former MPG and Independent Media executive and now senior account executive with corporate trading firm Active International in Pearl River, N.Y. But even that isn’t a guarantee, considering what happened with the Miramax and New Line accounts in the past two years.

That said, Ephron does believe that the smallest shops, with their attraction to the smallest advertisers, can aggregate enough business to survive, even if they won’t grow much. Not just because small advertisers tend to get lost in big agencies, but also because “big media shops are too TV-oriented,” says Ephron. As a perfect example, he points to the recent upfront, in which networks managed to pry a record $9.4 billion out of advertisers, largely through negotiations with giant shops that couldn’t afford to walk away from the table.

For others, hope just springs eternal. “Big shops’ pie portions might be getting larger as advertising budgets grow, but there will still be some pieces left over for the small independent,” says Jim Surmanek, head of Denver media consultancy MediaAnalysisPlus.

Still others expect that second wave of midsize shops to appear eventually. “It hasn’t happened yet, but we think it will,” says Andrew Butcher, chairman of startup MB/MG in Los Angeles. Nevertheless, MB/MG itself is a sign of the small-shop times: In six months, the shop has won 11 of 13 pitches—but only one of those clients bills more than $10 million, and all 11 combined represent just $50 million-plus in billings.

Small shops can find one consolation amid the formidable challenges, however. “I have found that people who work at smaller places just seem happier every day,” says WongDoody’s Silverman, perhaps just a bit disingenuously. “People who are happier tend to do better work.”

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