CLOSE-UP: LIVE ISSUE/THE COST OF DOTCOMS - Gloomy forecast fails to burst the internet bubble. Shops are quick to say that the beancounters may be wrong

The dotcom share crash of the past few weeks is far from the beginning of the end for the internet business boom. However, as aficionados of Winston Churchill might mutter, it looks like the end of the beginning.

The dotcom share crash of the past few weeks is far from the

beginning of the end for the internet business boom. However, as

aficionados of Winston Churchill might mutter, it looks like the end of

the beginning.

The days may well be gone when a bored loafer with an active imagination

could whip up an online scheme over his or her cornflakes, draw up a

business plan in front of Kilroy and be out looking for an ad agency by

the mid-afternoon. Whether the slowing of the internet gold rush should

be cause for wailing and gnashing in the ad industry, though, remains to

be seen.

The accountancy group Willott Kingston Smith, for one, predicts much

tearing of hair in the near future. With an accountant’s traditionally

dour focus on the real bottom line, these spoilsports pointed out last

week that the dotcom-induced boom in advertising revenues could prove a

dangerous illusion.

While agencies have been gobbling up dotcom accounts left, right and

centre, a drastic increase in average salaries has been pushing up their

employment costs at an equal rate. The result is that advertising

agency’s profit margins are the lowest of all marketing services.

Agencies have worked to trim the boats by the careful control of their

non-salary overheads but a collapse in the dotcom boom could expose

over-inflated salaries and require some stringent restructuring to

preserve profitability.

As the budding Mark Wneks of the ad world would happily agree, there’s

no argument about the increase in salaries over the past 12 months.

Whether agencies have had any alternative is more open to question, as

is whether the outlook for dotcom accounts is really as bleak as WKS

seems to think.

’The new advertisers have grown the market and led to a shortage of

talent,’ Amanda Walsh, the managing partner of Walsh Trott Chick Smith,

says. ’The other problem is losing people to dotcoms. Agencies and media

owners both struggle to match the salaries they can offer. Agencies look

like they’re growing but the increase in salaries means that they’re not

necessarily benefiting.’

Although the WKS report suggests that media independents have been far

more successful in holding down employee costs, the media independents

themselves seem less convinced. The salary bite, it seems, is affecting

everybody. ’I think we’ve lost more people to the sector than creatives

have,’ MindShare chief executive, Mandy Pooler, says. ’Anyone with media

in their job title can just walk into that arena.’

In one sense, the market corrections of the past few weeks could go a

long way towards alleviating WKS’s doom and gloom predictions by

relieving the pressure on employment costs. ’The healthy aspect of it is

that not every 25-year-old thinks he can go out and become a

multi-millionaire,’ Pooler says. In some respects, agencies might well

be breathing a sigh of relief at the slumping share prices of QXL and

However, that’s not to say that extra money spent on fitting agencies

out for the digital era will have gone to waste once the dotcom

floodwaters subside.

’I don’t even classify the money we’ve spent on bringing in specialist

skills as an overhead,’ says Pooler, who tempted Jed Glanvill from BBJ

last week to head MindShare’s new dotcom division. ’These are sound

investments for the future. We mustn’t confuse the City’s fads and

foibles with the reality that a profound change has occurred. If

anything the internet has been under-hyped.’

What seems certain to increase over the next year is the distinction

between dotcoms. As certain online operations, such as Lycos and Yahoo!,

establish themselves as the blue-chip stocks of the new-media age and

traditional established clients develop more ’clicks and mortar’

operations on the web, agencies will find themselves battling over a

smaller number of key accounts online, much as they do with traditional

companies. The value of spotting a potential success story early will

also increase but the time and money wasted on backing a loser will

become even more telling.

’You have to balance fleetness of foot in backing the right company with

sensible commercial criteria for judgment,’ says Stephen Carter, the

chief executive of J. Walter Thompson, which has established a separate

company, digital@jwt, to offer strategic consultancy for clients moving

into new media. ’Agencies have been forced to move from the position

where they’re pitching for business to the other way round. We’re

looking for people with a long-term interest in establishing powerful

brands in their market. Agencies of all sizes are, essentially, small

businesses and we’re all only three calls away from bankruptcy.’

Though size may not matter in some respects, Carter is also quick to

point out that bigger could well be better when it comes to picking up

quality dotcom accounts. ’The larger agencies are gaining most,’ he

says. ’The dotcoms need quality advice very quickly and they often want

to outsource all of their marketing. This is an advantage for larger

marketing services providers because they can provide more and they have

greater horsepower.’

As in the offline arena, there are many smaller agencies that are

confident of proving such an assumption wrong. ’We built up a reputation

for quick response with the work we do for Channel 5 and that makes us

very attractive to dotcoms,’ says Walsh, whose agency’s recent wins

include Streetsonline and Wowgo. ’I don’t think you need a specialist

digital division. Instead, it’s very important that every single person

in the agency is up to speed on the whole world of dotcoms.’

Whatever their tactics, agencies large and small do agree that the

dotcom explosion has given advertising a confidence boost that WKS’s

predictions are unlikely to change. ’It’s reinforced what is important

about what we do,’ Pooler says. ’And with interactive TV and digital

radio starting to happen, this is just the beginning.’

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