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Industry Outlook 2001 -- Information

Advertising

Just last summer, the advertising industry was having a total blast. TV's Survivor, all the rage, was creating a rich platform for new commercials. The Pets.com Inc. (IPET) sock puppet and other Internet icons were still among the living, generating buzz and cash. And magazines were so fat with ads you needed a forklift to pick up the mail.

A few months later, that dot-com advertising bubble has gone the way of the sock puppet. Just as companies are planning their ad and marketing budgets for next year, news that the economy may finally be slowing is hitting hard. And that has thrown a whole lot of cold water on the advertising industry. Now, instead of planning showcase ads for new network programs and crafting clever mascots for hot new e-tailers, admakers are bracing for a tough year. "You'd have to be blind not to see what's coming," says William L. Katz, president and CEO of agency BBDO New York. "The indicators are saying `slowdown."'

Since the mid-'90s, the advertising industry has seen strong growth, often in the high single digits each year. But in recent months that streak has cooled, and experts are now revising their original forecasts for a smaller gain. Michael Russell, an analyst at Morgan Stanley Dean Witter, thinks total spending by companies on ads will grow about 4.5% in the coming year, to $166 billion, although his projections change markedly when he takes the Web into account. Growth in that case could be 7%, he says. But few industry leaders, watching the current trials and tribulations of dot-com companies, are banking on the Internet to bail them out in 2001.STINGY CLIENTS. Big clients have already factored the changing climate into their business plans. In November, DaimlerChrysler (DCX) informed magazine publishers that it wanted to pay the same ad rates in 2001 that it did in 2000. And even under these terms, the auto maker did not guarantee that it would maintain its former spending levels. Experts expect other car companies to be similarly stingy in the coming year.

The economy may be the biggest threat to the ad industry in 2001, but it's not the only one. Labor politics also loom large for ad agencies. Barely off a 175-day strike by advertising actors, the industry now faces a potential strike by TV and film actors and writers, whose contracts are up in the summer of 2001. While not directly connected to the ad industry, if these writers and actors fail to come to new terms by late May, the fall television season will be threatened and the value of ad time will slip.

Another damper: the loss of dot-com dollars. For the past two years, agencies have enjoyed a huge windfall from the Internet economy. Newly founded e-businesses, looking to build brands in a hurry, shoveled money into advertising. Old Economy competitors fought back with ads of their own. This year, as the online community has run short of cash, there's far less money for advertising. And what remains of dot-com ad budgets is often funneled to cheaper tactics, like e-mail newsletters and guerrilla marketing. "Marketers have learned from last year's experience," says Marissa Gluck, senior analyst at Jupiter Media Metrix Inc. Expensive advertising is out of e-style, she posits.ESCAPING THE AX. The news is not all bad. Many of the biggest ad agencies are now owned by well-diversified parent corporations that are cushioned against just such a downturn in ad spending. At Omnicom Group Inc. (OMC) and Interpublic Group of Cos. (IPG), for example, more than 50% of company revenues come from the more recession-resistant marketing sector. These services, which include direct marketing and public relations, are cheaper than high-profile ad campaigns and therefore less likely to get the ax at the first sign of slowdown. And some traditional ad sectors, such as radio, are looking quite strong for 2001.

Ultimately, though, the Internet's volatility has left most ad agencies looking down the barrel of smaller ad buys and fewer clients to make them. Admakers may find that the hardest sell they make this coming year is of their own services.By Ellen Neuborne in New YorkReturn to top


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