Feature

Evolve or die

As digital agencies look beyond their core service offerings to increase revenues, Media Week looks at the five principal agency business models and finds out what distinct services each of them offers to clients.

Evolve or die

Digital has scaled the corporate ladder in recent years to reach discussions at boardroom level, where it forms a core part of businesses' corporate and marketing strategies.

Agencies have not only driven much of this change but also responded to it, developing their specialist services and broadening out into new areas. Examples include digital media specialist I-Level, which last year launched a social media arm called Jam, and this year set up an affiliate network with launch clients including Orange.

Mark Creighton, I-Level's managing director, says: "Services are broadening in line with the way people are engaging with digital. Our service offering is changing in response to that."

Justin Taylor, interaction partner at MEC Interaction, says: "The internet is a traditional medium now - it's much more stable than press and radio. Digital agencies have to broaden their services to increase revenues."

Ajaz Ahmed, chairman and founder of creative specialist AKQA, adds: "It's interesting that the historically higher-margin media buying businesses are now aiming to compete in the same space as the lower-margin creative agencies. The business model for media buyers is reliant on scale, while creativity relies on imagination."

Matt Simpson, head of OMD Digital, also notes this shift: "There has been mass commoditisation in the market. People are looking for other ways to make money and demonstrate how good they are, not just around volume buying."

Media Week has identified five principal digital agency models. They are (in no particular order): the traditional media agency with a digital arm, the digital media specialist, the digital creative specialist, the search specialist, and the full-service digital agency. And there are ever-more cases where the lines that delineate these models are blurring.

But does the increasingly generalist nature of the digital agency threaten the survival of those that remain ensconced in their niches?

Not necessarily, reckons Owen Jenkinson, marketing manager at Sony PSP. "I'd still advocate using specialist agencies who truly understand their particular niche," he says. "However, this usually means spending more time and money, which are often luxuries you don't have."

The recession might be here, with all the belt-tightening that entails, but digital is one of the few media forecast to grow, with UK internet ad revenues poised to reach £3.64bn in 2009, according to ZenithOptimedia.

Nevertheless, no one expects the next year to be easy and many observers of the digital agency world envisage some of the smaller players dropping out of the marketplace - either through closure or acquisition by larger players.

However, Gavin Ailes, deputy managing director of The Search Works, reckons a period of consolidation is not imminent. "If you'd asked me six months ago, I'd have said, 'sure', but now there doesn't seem to be much appetite for it," he argues.

Opinion differs as to which agency model is best-placed to survive. Pete Robins, co-founder of digital media specialist Agenda21, says its clients, which include Totaljobs.com and Ministry of Sound, would "fundamentally" not want to work with a big agency. "It comes down to service," he explains. "If you are client number 127 at a larger agency, you could be client number three in my business."

I-Level's Creighton reckons the search specialists will find circumstances particularly challenging. "Some will survive," he says. "But others will disappear over the next 12 months, because the way they are remunerated has become a problem."

However, Chris Perry, managing director of full-service agency Avenue A/Razorfish, believes the search model is strong. "There are opportunities to expand," he says. "Search agencies have a very strong way of working - using optimisation and analytics - and the ability to use search as a platform to understand and drive demand is a central plank for them."

Perry sees some search specialists broadening services and selling to bigger players, a view echoed by Grant Whiteside, technical director of Ambergreen. "Companies with a history and expertise in search have the natural capacity to step into new areas," he says.

But Graham Darracott, managing director of full-service agency Graphico, reckons the search specialists' days are numbered. "Running a search campaign in isolation doesn't work," he says. "Search has to be integrated with everything else the brand is doing, hour by hour."

AKQA's Ahmed is confident that all five agency models are resilient in principle. "The best agencies will continually reinvent themselves to ensure they remain relevant to clients," he says.

"Any agency that stays the same in our industry will be passed by very quickly, and there are many examples of that. We have to continually redefine what we do."

THE MEDIA AGENCY - OMD Digital

OMD Group Digital, comprising OMD, Manning Gottlieb OMD and OMD International, has a broad digital offering. Sarbanes-Oxley US regulations prevent OMD from divulging unaudited financial information, but Media Week estimates its annual digital billings amount to about £100m in the UK.

Services offered by OMD include digital media strategy and planning and buying across display, paid and natural search and affiliate marketing.

The agency does not action on-site activity, but it is investigating providing this service. OMD is also increasing its capabilities in social media and reputation management.

OMD Digital employs more than 100 staff, with recent high-profile appointments underlining its continued investment in digital expertise.

This year's hires include new head Matt Simpson, previously director of digital communications EMEA at Starcom; Mark Mitchell, appointed head of search at OMD Group; and Will Smyth, the agency's new digital planning director.

The division's client portfolio includes Virgin Media, Vodafone, and Channel 4, which recently moved to OMD from specialist Profero to consolidate its digital and mainstream media planning and buying.

In addition, this month its parent picked up the £650m Renault/Nissan account across EMEA.

Simpson believes the media agency model is best placed to weather the economic storm.

"The market is about to become extremely aggressive," he says. "For the past five or six years, there has been enough business to go around.

"But now, everyone is worried about where the next pound is coming from. Media owners are getting tighter on payments and clients are looking at whether they use one agency rather than four. It is easier to be a larger agency - it can be tough for the hand-to-mouth outfits."

Some other media agencies with notable digital operations include: MediaCom (Media.Com), Carat (Carat Digital) and ZenithOptimedia (Zed Media)

THE SEARCH SPECIALIST - The Search Works

The Search Works has dominated the UK's search market for the past three years, with billings of more than £88m - £10m more than its closest competitors combined. Gavin Ailes, deputy managing director, is bullish about the company's prospects, citing a recent PricewaterhouseCoopers report that found search marketing accounts for about 58% of digital media spend.

"Search is the most exciting place to be," he says. "We can get down to the bottom line on any given activity and show true value to clients."

The agency provides its clients - which include The Body Shop, Legal & General, Lastminute.com, First Choice and Comet - with a raft of search services. Ailes points out that the agency is broadening its remit - last year it was bought by TradeDoubler, adding display and affiliate marketing to its offerings. However, Google's plans to remove the best-practice funding scheme will force agencies to recoup that lost revenue through their existing client base, meaning Ailes's forecast for the next 12 months is cautiously optimistic.

"In 2009, we will see a lot of expansion of technology within the tracking arena that will allow genuine de-duplication of digital acquisition," he says. "In terms of growth, digital will continue to grow in 2009 and will take the benefits of other marketing areas being cut.

"The talk of the market is that search would be the last thing to be cut off a client's media schedule, so we're not seeing much of a downturn."

Other notable search specialists: Steak, Bigmouthmedia, Greenlight and Latitude

THE DIGITAL MEDIA SPECIALIST - I-Level

I-Level, which has annual billings of about £100m, focuses on providing clients with strategy and implementation across all digital disciplines, from search and social media to mobile, IPTV, data and affiliate.

Managing director Mark Creighton, who presides over about 140 staff, acknowledges that clients are placing greater emphasis on accountability and efficiency, which can be exploited through search and affiliate marketing. I-Level is also seeing a greater demand for community engagement work - everything from protecting brand reputation to providing customer service.

In response to client demand, I-Level opened affiliate network Pan this year and social media arm Jam in 2007. The latter enables the agency to understand what people are saying about a brand before deciding whether to act on that information. And the strategy is paying dividends.

Creighton says: "Jam is activating segments of the fast moving consumer goods and pharmaceutical markets that have not traditionally spent money in digital, and this is opening doors for us."

I-level's clients include the COI, William Hill and Orange, which it retained in a review held earlier this year. Recent new business wins include Beck's, Sony's search business, Bayer Consumer Care, Turner Broadcasting, Lovefilm and the BBC.

Creighton adds: "Businesses are going to be under pressure. I don't believe anyone is going to stop marketing, but clients will ask different questions of the channels they use. If you can listen to clients and demonstrate how accountable a channel is, then the people who can answer those questions will be the winners next year."

Other notable digital media specialists: Harvest Digital, Unique Digital (acquired by Syzygy in March 2007) and Aegis-owned Diffiniti

THE DIGITAL CREATIVE AGENCY - AKQA

Independent creative agency AKQA employs about 800 staff in six offices across the world - in London, Amsterdam, Washington DC, New York, San Francisco and Shanghai.

The company turns over approximately $150m (£98m) annually, with the UK's 350-strong office accounting for about £27m in revenue.

The business is run by co-founder and chairman Ajaz Ahmed, who believes the marketing industry is undergoing massive change, resulting in agencies with a digital heritage evolving into integrated communications partners.

"Digital agencies tend to be more in tune with consumer insights and how media is evolving, so they are able to act fast on new ideas that provide a good return on investment," he says.

AKQA offers advertisers six main services: interactive experiences, e-commerce, search and analytics, interface design, new product development, and content creation and distribution, provided through AKQA Film.

Clients include Nike, Unilever, Orange, Sainsbury's and Sky. The past month has been productive in terms of winning new assignments from existing clients and acquiring business from new ones, with wins including Heineken, Jamie Oliver, Coca-Cola and Greenpeace.

Ahmed describes the agency's momentum as "strong", following AKQA's best quarter on record. He is confident about the agency's continued success, despite economic pressures.

"The agencies that will survive are the ones that add significant, measurable value to clients' businesses," he says.

"It's important to remember that the internet accounted for only about 9% of global ad spend in 2007, so there is still a huge amount of growth available."

Other notable digital creative agencies: Glue, Dare and Poke

THE FULL-SERVICE DIGITAL AGENCY - Avenue A/Razorfish

Chris Perry and Neil Miller founded the now Microsoft-owned Avenue A/Razorfish as DMA Communications in 1995, a time when the term "digital marketing" was met by many with either a raised eyebrow or downright befuddlement.

Since then, the company has grown into a full-service agency with 200 UK staff, billings of more than £17m and turnover of more than £22m.

Avenue A/Razorfish is now one of the largest full-service digital agencies worldwide, employing 3,000 people across the globe, with offices in countries including China, Japan, France, Germany, Australia and, most recently, Spain.

"We can offer everything from e-commerce technology for the release of the iPhone for O2 to advertising as an agency of record for clients such as Asda and McDonald's," Perry explains. "Media planning and buying is also in that mix."

Many Razorfish clients are global, such as Weightwatchers and Samsonite. In the UK, the agency provides McDonald's, 02 and Asda with full-service digital work, while it handles the creative for advertisers including NSPCC and Oxfam. Other recent wins include Bmibaby.

Perry reckons the full-service model is more than sufficiently robust to survive the coming months. "Clients want to have both strategic thinking and the ability to deliver," he says, citing McDonald's as a client that wanted to whittle its digital roster down from six to one.

Expansion in the last few years has been "stellar", with a year-on-year increase of 50%. "This year will be nearer 20%," Perry says, adding that pitching is not slowing. "There are many opportunities in terms of how clients gear up to take on the new economic environment."

Other notable full-service digital agencies: LBi, Sapient and Profero.