Agency performance - Digital makes agency profits sing

Media agencies are experiencing unexpected prosperity, but is it all down to online? asks Ian Quinn.

When media owners, at least those in traditional sectors, are suffering tumbling revenues and facing the ire of shareholders with their chief executives' heads on the chopping block, it is curious that their trading counterparts, media agencies, appear to be sailing through the choppy recessionary waters relatively untroubled.

That at least is the evidence of the latest report on media agency performance from business adviser Willott Kingston Smith, which shows a 13.4% rise in operating profits at the top 30 media agencies, accord-ing to their latest financial results.

Profit margins at half of the agencies shot up to more than 15%, with an average of 18%, close to the elusive 20% set as a target recently by the IPA, and well ahead of their creative agency cousins.

These figures do not necessarily reflect current economic conditions, as some of the agency financial reports date back to December 2004. Yet, last month's Bellwether Report, which showed that marketing budgets are on the rise for the first time since 2005, suggests that media agencies may continue to prosper.

Cliff Ireton, partner at Willott Kingston Smith, claims media agencies are recovering after what he describes as a "fairly tough" period. "There are reasons to be cheerful in what are better, but still not brilliant, economic conditions, and I suspect that the current advertising climate is actually better," he says.

Digital factor

Yet this is where the report's authors part ways with those who have a much more downbeat outlook. Ireton points out that the agencies that have seen their business grow the fastest are those that have invested most heavily in digital, but others believe that without digital there would have been no growth at all.

Adam Smith, futures director at WPP investment arm Group M, has produced a report predicting that revenues in display advertising will rise by just 1% year on year in 2006, to around £12bn, half the increase Group M had previously forecast. That compares to an increase of 9% in 2004 and 4% in 2005.

Although Group M forecasts a 5% increase in media revenues next year, up from its previous prediction of 4.4%, even that figure is not entirely rosy. "I don't think there are any great expectations of a revival," says Smith. "It's all internet. If you took that out, the growth is zero."

Sector decline

Government ad spending alone was down by 6% up to the end of September, according to figures from Nielsen Media Research, with the public sector representing 5% of all ad expenditure.

COI Communications, the Government's marketing arm, slashed its TV spending in the period by nearly a third. The TV market continued to see major cutbacks by top advertisers in October.

The latest figures for commercial radio are no better, with revenues in Q3 expected to have crashed by more than 7%. The average decline across sectors in the total ad market to the end of September was 3%, showing how much it is relying on online, which itself is dominated by search.

Willott Kingston Smith's report shows that media agency profit margins grew by an average of 3%, with several of the top 30 reporting operating profit margins on gross income in excess of 20%.

Media agencies have been quick to downplay such claims over their prosperity. One executive describes the findings as "ludicrous" if subjected to closer scrutiny. "Companies can make numbers say what they want them to say. They are almost a complete waste of time," he says.

The way agencies report figures varies massively depending on whether they are privately owned or not, which makes drawing firm conclusions notoriously difficult.

David Pattison, chief executive of PHD and president of the IPA, says 2006 will see the weakest industry growth since 2002, but gives the report a guarded welcome. "It's positive that turnover is growing and some companies are making better profit margins. Because ITV is such a big part of the industry and has been having a bad time, commentators tend to think the whole advertising industry is having a bad year. The truth is that agencies are reacting to the digital world."

But while digital agencies may be achieving spectacular growth, profit margins for digital specialists, according to Willott Kingston Smith, are way below those being reported by traditional media buying outfits, reflecting salary inflation that is "unsustainable" according to one online boss.

With digital seemingly the only way for media advertising to grow in the immediate future, agencies will ignore it at their peril, or there will be no hiding place, even in the most upbeat financial report

REPORT FINDINGS

- Gross income in the top 30 media agencies increased by £25.9m (8.4%) to £334.5m.Independents outperformed groups and public listed companies, with improvements in gross income of 12.4% compared with 7.6%

- Independent companies achieving growth of 25% or more included online specialist I-Level (up 31%) and AMS Communications (up 32.7%)

- WPP's MediaCom and MindShare were among those with the biggest increases in operating profits, with MediaCom UK's operating profit increasing by £1.9m (38.9%) to £6.7m and MindShare Media UK reporting an operating profit of £1.3m, an increase of £1.5m on the loss of £261,000 reported in the previous year. Fellow WPP agency Mediaedge:cia UK also reported an operating profit of £630,000 this year, compared to a loss of £1.7m in the previous year

- Independents saw turnover increase by 6.8% compared with 5.4% for group-owned companies, although operating profits for groups increased by 13.7% compared with 11.1% for the indies, because the bigger networks have been able to control costs better

- Independently owned companies reported increased staff costs of 11.1%, compared with 6.2% in those owned by networks.

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