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Research transforms advertising world

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Articles - April 2010
Wednesday, March 24, 2010

Traditional advertising is in trouble, but direct response, search marketing and web analytics are booming, and Oregon companies are leading the way.

Husband/wife team Timothy O’Leary and Michelle Cardinal have built R2C Group into Oregon’s second-largest advertising agency by focusing on direct response campaigns with measurable results.

It started with infomercials.

Michelle Cardinal ended up in the infomercial business by chance during the early 1990s, and she recognized early that this sometimes annoying and occasionally crude form of advertising offered something extremely powerful to businesses: information. Unlike the artistic vagaries of the traditional advertising world, infomercials were built on measurable results. “Everything was based on how many people called, how many people ordered, where the product sold and where it didn’t,” she says. “And it was all credit card purchases so we could track that, too.”

After learning the business in California, Cardinal moved to Portland and launched Cmedia in 1998 at a small office in Portland’s Old Town. “My first year I did maybe $4 million,” she says. “Our second year we did like $30 million. And then the third year we did something like $60 million. The growth trajectory was just amazing.”

Two recessions have come and gone, but the growth continues. Cardinal’s Cmedia merged with her husband Tim O’Leary’s Respond2 in 2005, and their combined R2C Group is expected to approach $500 million in billings this year while employing 188 full-timers and more than 200 freelancers. That makes R2C the second largest advertising agency in Oregon, behind only Wieden+Kennedy.

Unlike many advertising professionals, Cardinal and O’Leary like what they see on the business horizon. That’s because their segment of the industry is growing while more traditional agencies are suffering. Ad spending declined by 12.9% in 2009, the worst decrease since the Great Depression. Agency revenue fell by 9.7%. The industry cut 187,500 jobs over two years of recession. Advertising employment has fallen 19.1% from its peak in 2000.

At the same time, direct marketing, search engine marketing and web analytics are growing by double digits annually. So are the emerging disciplines of behavioral and geographic targeting. Google has gone from zero to $175 billion in market value in less than a decade on the power of its industry-disrupting advertising model. Rather than relying on the old adage that “half of advertising works, we just don’t know which half,” these companies offer cold, hard facts and measurable results. That makes for an attractive value proposition for businesses hoping to tap into the unprecedented volumes of data being generated constantly, to learn more about their customers, develop better relationships with them and boost sales.

The net result of these combined forces has been a radical power shift, away from the notorious indulgences of the Madison Avenue-style advertising agency, to companies with deep expertise in mining for data and turning that data into businesses intelligence.

In a recent column in Advertising Age, Steve Rubel predicted that the coming decade will come to be known as the “data decade.”

“Companies that understand how to harness [data] will win,” he wrote. “Those that don’t will perish.”

Since merging their companies into the R2C Group, O’Leary and Cardinal have acquired four more companies and set up a production studio down the street from their NW Park Avenue headquarters. They still bring in models and minor celebrities such as Biggest Loser trainer Jillian Michaels and Brooke Burke of Dancing with the Stars to produce infomercials for NordicTrack, bareMinerals, Bowflex and OxiClean, relying heavily on testimonials followed by an “act now” call to action. But that’s not all they do. They also handle a growing number of accounts for big corporate clients such as Philips Electronics, Microsoft, Chase, Novartis and JC Penney.

“We are constantly closing $3 million to $10 million accounts and we continue to do that,” says O’Leary. “But these new ones are $50 to $100 million accounts.”

When they pull in new clients unaccustomed to direct response advertising, Cardinal and O’Leary make it a point to deliver the data as quickly as possible. “My motto is, the more information we can get for clients, the more we can do for them,” says Cardinal. “When I started the company I hired programmers and we developed our own technology, which turned out to be one of the smartest things we’ve done. Now our database has $3 billion worth of media buys, from every kind of media you can think of. All traced and tracked, by category.”

Every day R2C Group sends its clients a dashboard showing where they’re spending money and the sales they’re getting in return, both the goal and the actual. That information helps the client determine where to spend marketing budget and how much to pay. It also helps O’Leary and his creative teams determine which spots are working and which aren’t. Productions are constantly being tested and tweaked based on sales results.

O’Leary is as blunt in promoting direct response advertising as is the industry itself. He points out that infomercials made cable television economically viable, and they have been critical for introducing products such as DVD players and cell phones into the marketplace. For O’Leary, advertising is about selling products, and he’s got the data that proves his style of advertising works.

“Advertising was originally designed to sell products and services, and up until about 20, 25 years ago, that’s what it was about,” says O’Leary. “But over the past few decades major advertising agencies have begun thinking of themselves as artists. People coming into the business care more about what they consider their art and using that art to get a different job. It’s built this entire industry around directors who really don’t want to direct ads. Everybody is so concerned with everything except selling the product. Advertising has gotten less and less efficient.”

That inefficiency, combined with the brutal recession and the explosion of data, has convinced more advertisers to demand measurable results. O’Leary expects the shift to continue. “Everything is coalescing,” he says. “Handsets and mobile video make it even more interesting. If you look at Europe and Asia, they’re so far ahead of us on this. The cell phone is a billing unit and the format is direct response advertising. It’s a testimonial that triggers a behavior. And that behavior can be tracked. That’s what we do.”

“A revolution is coming,” says Cardinal. “People like us, we’re in the driver’s seat. Because we’ve got the data.”

Rentrak CEO Bill Livek oversees a Portland-based media monitoring empire that tracks viewing habits across all screens, from cable and satellite television to mobile TV devices.

Around the same time Cardinal began building her database in Old Town, a Portland-based video distribution company called Rentrak was also investing heavily in technology with the goal of reinventing itself as a media intelligence specialist.

Rentrak got its start selling videotapes to thousands of mom-and-pop video stores using a profit-sharing model that rewarded the stores, the Hollywood studios that produced the tapes and Rentrak. The company began tracking rentals on behalf of the studios more than 20 years ago and it has been honing its tracking and measuring capabilities ever since. Today the company monitors video on demand, box office receipts in the U.S. and Europe, cable and satellite television, and mobile devices. It has taken away Nielsen’s former business of measuring box office sales for the movie studios, releasing the list of the top-grossing movies weekly. It has also developed a “stickiness index” that monitors TV viewing second by second to show exactly who is watching and when. In a typical day, Rentrak’s system takes note of a billion channel switches recorded by set-top boxes on televisions.

“Whether someone is watching a movie on the big screen or renting a video, or getting their entertainment from video on demand on cable or satellite, or whether they’re watching the ABC movie of the week or Showtime or HBO, Rentrak is measuring all of those screens,” says Bill Livek, who took over as CEO last June. “We take this data from all these disparate sources and we organize it for our customers.”

When he was in his late 20s, Livek served as CEO of Arbitron, the dominant audience-measuring company in radio. He left to start a similar business that was later acquired by Arbitron and Nielsen. Now 55, Livek calmly makes the case that the Census-style data Rentrak analyzes is a more valid measure of today’s fragmented media world than the long-dominant survey-based measurements used by Nielsen and Arbitron.

“You need massive amounts of input to understand what is happening in our multi-channel world,” he says. “We’ve come a long way from a few networks to 400 or 500 program choices. And that doesn’t even count the On Demand switch.”

Rentrak sells the information it collects and organizes to television stations, networks, advertising agencies and film companies. By showing who is watching and when, where viewers come from and where they go, this research helps companies set advertising rates, plan programming schedules and learn more about audiences.

Similar to Cardinal and O’Leary, Livek is confident the coming changes in media, such as mobile TV viewed on a portable screen, will benefit the companies that have the data. He notes that Rentrak was recently hired by the mobile technology giant Qualcomm to track results on its new FLO TV service, which allows users to carry portable televisions with them wherever they go. That contract will add to the already mind-numbing quantity of information Rentrak collects and analyzes constantly.

“We’re in the right business at the right time,” says Livek.

Another business that’s bucking the downward trend in advertising is search engine marketing, which uses web analytics, optimization and paid search ads to help businesses get found online. Leaders within this industry, such as EngineWorks co-founder and vice president Kent Schnepp, say the reason it’s growing is simple. “Search engine marketing is the most quantifiable and measurable form of advertising today,” he says.

Schnepp and co-founder and CEO Sean McMahon met on a mountain biking trail and launched EngineWorks in Portland in November 2005. McMahon says the company employs 17 and grew by 50% in 2008 and by 55% in 2009, doubling its business during the recession.

“More and more companies today are shifting more and more money away from traditional channels,” he says, “for two very good reasons. One, when an individual is seeking an actual business, they are going to turn to a search engines. And 80% of people never go past the first page of results. We achieve first page results for our clients. The second reason companies are putting more money into this channel is because it is extremely measurable. We can show you had a $10,000 budget with us in the month of January and you made $49,000 off that. We also collect information for our clients that helps them build their marketing strategy across all media.”

That’s quite a different model from the one McMahon originally built his career on, as a recent MBA graduate managing brands for Anheuser-Busch in Northern California. “That was a ton of fun,” he recalls, “Twenty-seven years old, single, Bud girls, Clydesdales, stock options, the whole deal.”

Twenty years later McMahon talks about marketing in very different terms. He got into Internet marketing in Eugene in 1999 as a co-founder of TrafficLeader. As he explains it, that company grew profitably while so many dot-coms failed around the turn of the century because TrafficLeader embraced the new model of cost per click rather than the old model (still the standard in the world of television advertising) of cost per impression. In other words, he was an early adopter of the idea that getting ads seen (the long-standing approach for companies such as Anheuser-Busch) has less value than generating quantifiable leads and sales.

“Our value proposition was, we’re not going to capture eyeballs, we’re going to send you customers,” he says. “One of our first customers was Victoria’s Secret. They didn’t need more people showing up at their site to look at girls in bikinis. They needed more people to show up at their site who were interested in buying nylon stockings. We helped them achieve that.”

TrafficLeader was acquired by Seattle-based Marchex for $8 million in cash and stock in October 2003. McMahon’s share provided him with the capital to start up EngineWorks and build on what he has learned about making the transition from the art of brand building to the art and science of results-based marketing.

EngineWorks co-founders Sean McMahon and Kent Schnepp doubled sales during the recession as more companies sought low-budget returns through search engine marketing.

Doubling your business over two years is one thing. Doubling your business every year for four years in a row is something else. That’s what G5 Search Marketing has done in Bend under co-founder and CEO Dan Hobin.

Hobin’s strategy with G5 has been deceptively simple. His niche is narrow and deep, focusing on three industries with a constant churn of new customers: self-storage units, senior care and multifamily apartments. His approach is geographically targeted, using a software platform specified for local search. His team’s mission is to drive new traffic to the client’s site, to improve the number of purchases made at the site, to track all leads back to their source, to monitor which leads turned into sales and to optimize based on findings. As with Schnepp and McMahon, he sees his ability to prove empirically that his system works as his competitive advantage.

“We’re the leader in our three verticals because that’s all we focus on,” he says. “We deliver a really good solution for our customers because we understand what they need. Our client retention rate is 93%.”

Among the data points G5 employees monitor are calls to 800 numbers, coupons with bar codes, search terms used and pathways to and from websites. “We put a call number on our website so when someone calls that number it goes through our system and we track and record those phone calls,” says Hobin. “Then we can say, ‘This is how many calls you got from your ad. If they come from Google it’s one number, from Yahoo it’s another number, Facebook it’s a third number.’ And we can track the number back to the source.”

Selling self-storage units and renting out apartments may not be the sexiest advertising in the world, but it plays well into the methodical, results-based form of advertising that Hobin and his team specialize in. Since the company’s launch in 2005, G5 has built its client list to 160 firms and grown employment to 55 full-time jobs, earning recognition from Inc. magazine as the 146th-fastest-growing private company in the U.S.

“I don’t know if we’ll grow 100% again this year,” Hobin says. “But we’re hiring about two people per month on average.”

There’s the narrow world of targeted niche search marketing, and then there’s the ever-expanding world of tracking people through the digital realm.

Before Google was a company, much less a verb, Portland-based Webtrends was a pioneer in the then-brand-new discipline of web analytics. The company has seen its ups and downs over 17 years, including the daunting challenge of competing with a service offered by Google for free, but if the future of marketing lies in turning data into intelligence, Webtrends is well positioned. Few companies have more capability to mine digital data and organize it for marketers.

“Our company has grown well beyond the confines of web analytics,” says Jascha Kaykas-Wolff, vice president for marketing. “We’ve finally reached the promise of the corner store marketer, where I knew who you were when you walked through my door, and I knew that you always order these kinds of shoes and this kind of food and I always had it ready for you. I can scale that now because all of that information is digital. I can go out and find more people who are like you, at a scale that’s never been available before.”

Kaykas-Wolff is just 34, but his résumé is already well padded with stints at MTV, Yahoo and Microsoft. With wire-rimmed glasses, jeans, a sports coat and a white dress shirt with a glaring pink handkerchief in his pocket, he exudes confidence and energy as he describes the vast potential of the burgeoning field of behavioral targeting, the art and science of studying people’s behavior online to better target them with relevant advertising. Most people think of Google or possibly Facebook when they think of behavioral targeting, but Webtrends has been in the business longer, with a roster of 7,000 paying clients ranging from Microsoft and the New York Times to Coca-Cola and the Obama White House.

The product they’re selling is deep intelligence on the people who visit their websites, both in aggregate and as individuals.

“Our technology allows us to see very easily what our clients’ customers are doing on their websites, the segmentation of those customers, where they’re coming from, the time of day they’re visiting and their demographic composition,” says Kaykas-Wolff. “This allows the marketer to run experiments with different groups of people. It also allows a business to reach you as an individual, depending on how much information you’ve given us, so we can target specific content for you.”

With its most recent acquisition in July 2009 of Seattle-based Widemile, Web-trends has grown to 360 employees. The company is owned by a San Francisco-based private equity firm, Francisco Partners, and has dismantled and rebuilt its senior leadership team in Portland several times over the past few years. Kaykas-Wolff says the company has maintained profitability and growth through the transition and is gearing up to capitalize on the accelerating proliferation of digital data made possible by constant advances in processing power and data storage.

“Everything is becoming digitized,” he says. “No matter what the channel, if it has digitized data we will be able to monitor it.”

Scroll down the rather meager list of Oregon businesses that are growing quickly in this economy and you’ll find a significant percentage of them are blazing trails in data mining and digital marketing. Portland-based Jive Software, the social media powerhouse, recently bought Filtrbox, snapping up software that lets companies track and monitor social media comments across the Web in real time.

Aereus Network Tools of Springfield is developing customer relationship software for small businesses to help them “track everything about their customers,” as founding CEO Sky Stebnicki phrases it.

What these companies share is an ability to strip away the curtain and turn at least some portion of advertising from art into science. But is the American consumer really guided by rationality? There is no shortage of evidence to the contrary. All the data in the world won’t explain the Zhu Zhu robot hamster phenomenon, the persistent success of Wieden+Kennedy’s Nike campaigns or the enduring global popularity of Coca-Cola. One of the most lucrative U.S. exports, after all, is entertainment. Even the most hard-core adherents to the performance-based wing of the advertising industry concede that there will always be a role for the creative art form of building brand awareness for a mass audience. But that tradition is being challenged as never before.

“The future will be in web-enabled TVs and mobile devices and social media,” predicts O’Leary. “The ads will be links that viewers can click for an immediate transaction. It’s going to be way more direct and way more efficient.”

That could make for a difficult future for the modern-day Mad Men who specialize in bottling magic in the form of creative campaigns and selling it. But it would be very good news for data geeks who prefer to pull back the curtain and take a closer look at whether what is being sold really is magic, and whether or not it works.



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