After an economic upswing that lasted nearly a decade, companies around the world today face a recession-ridden economy. The slowdown, aggravated by the terrorist attacks in September and the war in Afghanistan, is forcing executives to think about new ways to do business and discover opportunities. In an attempt to learn – and share knowledge about – how companies in different industries view the situation and are responding to it, Knowledge at Wharton will in the coming issues present a series of one-on-one conversations with senior executives in industries ranging from marketing and venture capital to software.

Our first conversation is with Randall J. Weisenburger, executive vice president and chief financial officer of the Omnicom Group in New York City, arguably the world’s largest marketing communications holding company with more than $6 billion in revenues in 2000. Its portfolio includes 1,800 advertising and marketing firms in 108 markets around the world, and Omnicom’s affiliates serve some 10,000 clients including corporate leaders in almost every industry. Weisenburger, who worked for First Boston’s mergers and acquisitions group after graduating from Wharton in 1987, later headed up the merchant banking operations of the New York City-based investment firm, Wasserstein, Perella. He joined Omnicom in 1998.

Knowledge at Wharton: What’s happening in the advertising and marketing industry these days? What major trends do you see?

Weisenburger: There are trends, but when we talk about them, people assume that everyone is doing the same thing – which isn’t true. So first, I’d like to explain what I mean by a trend. If 50-50 means no trend, the trends we see are 55-45, not 100-0. When you deal with things on the scale and breadth we do, we get to see a broad picture, but it’s blurry. The trends are often slight changes in things that have been around for ten years and will be around for another 20 years.

One clear trend is that the world has been affected by acquisitions. Big companies are out to buy the smaller ones. Another clear trend is that people are trying to manage their brands globally because companies see more value in a global brand. You get more economies of scale if you have a strong global brand than if you have a series of regional brands. A third trend is that the means of communication are getting more and more segmented each day. The ways, means and pipes of those communications are getting fragmented at a much faster rate than the increase in demand for marketing services. Media spending is growing at, let’s say, a nominal GDP rate but media channels are being fragmented at multiples of that rate.

Knowledge at Wharton: What implications do these changes have for firms in the marketing and advertising business and for their clients?

Weisenburger: These trends have major implications for issues such as pricing. For example, in the U.S. at least, it used to be that if you advertised on the three major national television networks (ABC, NBC and CBS), you could cover 85% to 90% of whatever area you wanted. Today, advertising on those networks can get you just 45% to 50% of the people. That means if you have a broad-based brand, you need to work on segments as well as the whole, and that complexity becomes difficult to manage.

In addition, more marketing communications vehicles exist today. Companies also face more complex issues in today’s world than they did in the past. Our objective is to provide a broad base of marketing communications skills to companies. For example, employee communications is an important issue, though people don’t often think about how it has changed because of international mergers. CEOs may face a situation where 15% to 20% of the company workforce does not speak their language. It’s difficult to get these employees aligned behind the company if you cannot even speak to them. U.S. companies now have employees all around the world, including the Middle East. But how does the CEO speak to them about what’s going on in the world today?

One way to work around these issues is to organize international teleconferences, develop videotapes or presentations and distribute them through newsletters, websites or employee portals. Translating material, however, can be particularly challenging. Sometimes a company may get someone to translate the words of a message, but the person reading it at the other end may not understand it at all. Not understanding a message is actually better than misunderstanding it. One thing, though, is clear: the CEO is certainly not talking to those employees. That’s the kind of challenge that many more companies face today than they did before. That creates opportunities for our industry.

Knowledge at Wharton: How has the recession affected your industry?

Weisenburger: Predominantly we have seen a complete falloff in dot-com spending, which had grown from 1998 through 2000 to a substantial 4.5% to 6% of the total marketing spending in the U.S. That very quickly went back to zero. On its way up, it had some implications – it increased pricing for certain types of mass media, and that increase pushed certain advertisers out of the market. Those companies tested other forms of communication because they could get a better return on their investment there.

When ad spending by the dot-coms fell, it also affected spending in the high-tech and telecom industries. We saw major spending cuts in those categories. Other industries did not cut ad spending significantly, but we did see a great deal of caution. People did not want to make big commitments. CEOs who made commitments in March saw the economy going south in June. The first reaction of many companies was to cut down on everything that wasn’t absolutely nailed down. It was like the U.S. Federal Aviation Authority’s decision to ground every airplane on Sept. 11. Most companies had an attitude of, “Ground it all, we’ll figure it out later.” Now many are in the figuring-out mode about what they and their competitors are doing. Gradually, though, people are coming back into the marketplace.

Knowledge at Wharton: Have these changes affected the way companies think about the economic model of marketing?

Weisenburger: The economic model of marketing has changed. CPM [cost per mille, a yardstick of pricing in the advertising industry – ed.] prices have dropped. There are a lot of deal opportunities in the market. What they are and how big they are is hard to pin down because the situation is not straightforward. But the incidence to buy in some cases has come down even further.

Most advertising, with the exception of new product introduction, is aimed at getting someone to choose one product over another. The goal is not necessarily to get someone to buy a product that the person did not think of buying before. Consider an example. Let’s suppose that out of a thousand people, 500 had the inclination to buy something, and you paid a certain amount of CPM. If by advertising that product you could go from 500 to 550, that’s a pretty good result. But if the incidence to buy goes from 500 to 100, and the CPM gets cut in half, that math doesn’t work very well. That is what the airlines, the hotels and others in the travel industry have been facing after Sept. 11. Their advertising is not going to make a lot of people go to events.

By the same token, this also creates a lot of opportunities for some other companies. If their incidence to buy has not changed but the cost of advertising gets cut in half, they can take advantage of that. Companies like ours hopefully can help them figure out how to do that by taking opportunities to clients and showing them how to increase the efficiency and effectiveness of their marketing programs. If they don’t do it, their competitors will. And if their competitors do it, they had better do it too – or they will lose.

Knowledge at Wharton: During the Internet boom, lots of people believed that a website could use the advertising on the web as its basic revenue model.

Weisenburger: It was a fallacy then, and now it has been proven to be a fallacy.

Knowledge at Wharton: Can you explain your view of that fallacy and how that economic model for dot-coms has played out? Can advertising help create a sustainable business model for an Internet site?

Weisenburger: Some dot-coms do have a sustainable revenue model, but most don’t. Now that the IPO and venture capital markets for dot-coms have gone away, some companies have a much greater probability of success than others. Let me give you an example. Take Amazon. It was a good idea. The company spent a lot of money educating the world that they could buy a lot by simply entering a credit card number on a website, and they gave users a lot of tools. In the process, Amazon spent a lot of money just breaking the ice for other online retailers to follow. Amazon got a huge valuation – which was probably too high. But attracted by Amazon’s valuation, another 10,000 online retailers developed their own websites. In response, Amazon had to adopt a cost-cutting model – of selling products for less. Now, people may believe that the Internet is a cheap medium, but it’s not a cheap medium at all. In fact, it’s fairly expensive – but it is a convenient medium. Frankly, from my standpoint, I’d be willing to pay 20% more [for a product I buy off the Internet] because I can buy it at midnight when it is convenient for me, rather than from nine to five, when I am working. I also can’t get Amazon’s selection in the bookstore in the town where I live.

So for a lot of reasons, online retailing makes sense. Price may be one of them, but it’s not necessarily the best one. Cost-cutting models don’t take that reality into account. Online retailers may believe that they are trading the real estate cost for the cost of a few servers – and that one is going to be a lot cheaper than the other – but it may not be. Technology costs money. Now if you throw $1 billion of equity behind a company, until it runs out of equity it can support a cost-cutting model. But when the equity runs out, that company will have to find a model that works and migrate to it – and then it may have a sustainable business.

Knowledge at Wharton: What implications does this have on the advertising front?

Weisenburger: Some dot-coms believed that if they spent enough money, they could develop content that was interesting enough to bring lots of traffic to their websites. They also hoped that they could sell that audience to advertisers for more money than it cost to create that content and the delivery mechanism. The delivery cost of the Internet, however, is not free. To believe that it is free is a fallacy. If it were, we would not have television or newspapers or radio or billboards. We would have a very clean society and just walk around with hand-held computers.

But total media spending is going to grow like GDP. You can cut it up a hundred ways, a thousand ways or a billion ways. But if you cut it up a billion ways, the value of that is not enough to support content that is interesting for anyone to go. A lot of people talk about targeting and one-to-one marketing. In theory it sounds great. In execution it doesn’t work yet for a variety of reasons. You might be able to do a little bit of very minor targeting. For example, you might be able to do some negative targeting – which involves eliminating the people you don’t want as opposed to narrowing in on people that you do want.

Let’s say a website has a million unique users a month. That’s a very big website; not too many have a million unique users a month. Each user may have 50 page views, so you may have 50 million page views a month. That sounds really big. An advertiser may say that sounds great, I don’t mind hitting that audience two or three times a month with my ads, but I’m not going to hit them 50 times a month. Now let’s start segmenting those users. How many of the users are men? Does that cut the numbers in half? Maybe I only want men older than 24 but younger than 36, with a certain income level, and so on. Once you start cutting up those million viewers into 10 sets, which is not terribly targeted, you have 100,000 of them. There’s still 50 views each on average, but you only want three. That’s a really high friction cost. The friction cost would be 15% or 20% the cost of the advertising, whereas in broadcast television, the friction cost is probably 3% to 4%. You are getting a much larger audience. That’s the trouble with web advertising. People have not been able to figure out its effectiveness well. So a lot of work needs to be done.

I think it’s going to take some time to figure out effective economic models. Websites with advertising-only economic models will disappear when the equity runs out. They will cut costs until a lot of their infrastructure is gone – and though they will fight tooth and nail until the last minute, ultimately those websites will go away. That will increase traffic on the websites that survive. Those websites may go to a model based on a combination of advertising and subscriptions. If they get a large enough audience, that may work for a 100 or 200 sites or some specialty sites around affinity groups. If you are an auto racing fan, you may be willing to pay $2 or $5 a month for a website with really interesting material on that topic. Just advertising revenues around that topic would not let a company maintain such a site.

Knowledge at Wharton: Does this mean that only websites that narrowly define their content will survive?

Weisenburger: Not necessarily. It could work for larger sites too. For the Wall Street Journal, MSNBC or CNN, their websites are a byproduct of what they are doing in print or on television. My son watches football on ESPN and then goes to the website to look up the statistics on every player. And he does both at once – it’s an interesting dynamic. So for websites like that to work, they must either be complete byproducts of other media, or they must have a combination of subscriptions and advertising as independent revenue streams for the creator of the content. The quality may suffer in such cases. For example, if you watch the Golf channel, half the time it looks as though someone shot the picture with a home movie camera – and they probably did. If they improved the production quality of the show, though, the audience is so limited that they couldn’t get enough advertising revenue to have it pay off. If they have free equity it may work for a while, but when that dries up, that model may not work.

This does not mean that the Internet does not work. The Internet is in all our lives: e-mail, supply chains, brochureware, communicating with your employees, collecting financial information, specific transactional information – and all that is quite interesting. It’s just not quite what people dreamed it would be.