With a strong economy and flush consumers, the big advertising companies in the U.S. were already anticipating a good year in 1999, but they hadn't scripted this: $3.1 billion in advertising by Internet start-ups and a further wave of spending by bricks-and-mortar companies.
Ad industry analysts say that trend isn't expected to slow anytime soon for the top-tier global ad concerns, all of which reported double-digit increases in revenue for 1999.
Adding significantly to these companies' growth is increased investments in businesses that provide nontraditional advertising services-everything from public relations and database mining to direct mail and interactive consulting.
With all the hype surrounding the ad dollars spent by dot-coms, it might seem that the Internet is all that is driving the ad companies' bottom lines. In 1999, though, dot-com advertisers were a small piece of the overall dollars spent on traditional advertising, including TV, radio and print-that $3.1 billion compares with $87.5 billion in U.S. spending by all advertisers, according to Competitive Media Reporting. Dot-com spending accounted for less than 2% of the ad companies' overall revenue.
But Lauren Rich Fine, an analyst with Merrill Lynch, said the dot-com spending was particularly important last year because it was a "total gift that no one saw coming." She estimates that Internet companies will spend as much as $7 billion in 2000 on traditional advertising, as successful dot-coms increase their outlays and new online companies begin spending, even as some other existing dot-coms cut back or die off.
Overall, ad spending world-wide is expected to increase by 7.6% to $46.4 billion in 2000, according to veteran media forecaster Robert Coen of McCann-Erickson Worldwide's media unit, part of Interpublic Group of Cos.
Although positive about the ad climate this year, Ms. Fine sounds a note of caution-not about dot-coms but about consumer goods giant Procter & Gamble Co. and its rival Anglo-Dutch Unilever, both struggling to boost sales.
Both companies indicate they will be spending more on advertising this year, Ms. Fine notes, but if they face bottom-line pressures and start cutting their marketing budgets, it could signal a pullback by other consumer companies as well.
Among ad-industry leaders, Omnicom posted a 20% revenue increase for 1999, while Interpublic's revenue rose 15% and Britain's WPP Group saw a 13% spurt. Omnicom, based in New York, is the parent of BBDO Worldwide and DDB Worldwide. New York-based Interpublic's flagship agency is McCann-Erickson. WPP Group owns Ogilvy & Mather and J. Walter Thompson.
Among the smaller ad agencies, New York-based Young & Rubicam and Chicago-based True North Communication, the parent of FCB Worldwide, each reported double-digit revenue growth of 13% for 1999.
Net income for all the biggest companies also rose in 1999. Omnicom saw its net income increase 30%. Interpublic, on the other hand, posted a 3.9% increase in net income after accounting for a charge associated with merging two of its advertising agencies. Without the charge, Interpublic's profit would have risen 21%, the company said. WPP reported an increase of 23% for its net income for 1999.
True North, which took a charge in 1999 after folding pieces of its Bozell Group into its flagship agency, FCB Worldwide, reported a 42% increase over 1998. Ms. Fine considers the company an "interesting stock to play" and says True North has "almost clawed their way back."
Even if there were a slowdown in ad spending in 2000, Karen Ficker, a senior analyst with ING Barings, said, the multi-national companies should be able to withstand it because they have invested in "recession-resistant" marketing -services companies that provide public relations and direct mail to clients.
Ms. Ficker said ad companies were hit particularly hard by the recession in the early '90s because they relied almost solely on traditional advertising at the time. Since then, advertising companies have been building up their nontraditional ad services to offset any potential downturn in traditional advertising predicted for 2001.
"It's a very different business model today," Ms. Ficker said. "We think the momentum will come from other areas. It will come from nontraditional and outside the U.S."
Only about 10% of Interpublic's revenue, for example, came from nonadvertising services six years ago, the company says. In 1999, these businesses accounted for 40% of Interpublic's $4.6 billion in revenue. About 53% of Omnicom's $5.1 billion in revenue for 1999 came from marketing services. Young & Rubicam said 52% of its $1.7 billion in revenue came from marketing services.
Spending on advertising and marketing services in Europe, Latin America and Asia is also expected to increase this year as countries loosen regulations on industries including telecommunications and electricity, and become more amicable to marketing tactics such as promotions and direct mail. Ms. Ficker expects multinational companies to expand their marketing-services businesses, specifically direct mail, in Latin America, where there is now a postal routing system to handle it.
The foreign ad market also is shaping up. McCann-Erickson's Mr. Coen said in a December report that overseas advertising is expected to increase by 7% to $231 billion over 1999's spending, compared with an increase of 5.3% over 1998's spending. One key to the growth is Japan, the world's second-biggest advertising market after the U.S., which is expected to show "real growth" again after a decline in ad spending in 1999, according to Mr. Coen.
James Dougherty, an analyst with Prudential Securities, said a small change in Japan can mean a big boost to the bottom line of the advertising agencies. "If you go from being down to being up 1% or 2%, it makes a big difference to world-wide trends," he said.
Kathryn Kranhold, The Wall Street Journal. April 3, 2000.
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