Q&A with Jeff Lanctot, Chief Strategy Officer for Interactive Ad Agency Razorfish

Earlier today, I spoke with Jeff Lanctot, chief strategy officer for Razorfish, one of the world’s biggest interactive agencies, about advertisers’ mentality in the face of a prolonged downturn.

Yahoo just laid off 10 percent of its workforce, and the bad news keeps coming. How are your clients reacting?

Most are doing contingency planning. They’re very well aware of the economic turmoil we’re facing. They’re trying to figure out what the impact will be on their businesses specifically. As part of process, they’re doing scenario planning: if we cut here, what does it mean? If we cut there, how will that affect us? There’s a flight to accountability right now.

And are they arriving at any answers? What’s been working best for them?

Those channels that are most accountable and that can prove ROI are doing best. You can look at search as an area that will fare well. It won’t be immune to all the turmoil, but it will fare better than most because it’s demand fulfillment. Someone is raising his hand and asking for help in finding a product. I also think direct response advertising will do okay.

Really? I sort of thought display ads aren’t working after all.

In the display ad business, click-through rates have been low for a long while. But we tend to not put a lot of weight on click through, because though sometimes people won’t click on an ad, they’ll respond later to learn more. It’s a hard problem analytically, but if a retailer has a display ad, even if it’s not clicked on, it builds familiarity with its brand. That’s sort of how ad exposure works together online.

What’s clearly not working, or, at least, won’t in the harsh economic climate we’re entering?

One interesting place to watch is the ad network business. It’s been a real boom time for them, and frankly, it’s been an easy business in which to succeed. There are probably more than 300 ad networks up and running and they aren’t differentiated on technology. It’s all about arbitrage; they buy inventory for a low price and sell it for a higher price and add little value in between. I think there will be  real shakeup in that business over the next year. In a downturn, it becomes imperative for people to become more efficient, and in an efficient marketplace, I don’t think there is room for these players. I’d guess that dozens and dozens of ad networks won’t make it through the next year.

Which of your clients have already frozen or slashed their budgets?

Well, I talk with a lot with heads of sales of different publishers, and beginning in Q2, I was hearing pretty consistently, across all categories, that Ford and Chrysler and GM were pulling back their ad budgets. And that’s gotten progressively worse in terms of pullback of spend. Financial services firms have, unsurprisingly, steadily scaled back throughout the course of the year. And now, over last month, every product category is taking a new look at budgets for the fourth quarter and for 2009.

What kind of a dip are you anticipating? Have you heard any firm numbers?

I haven’t yet but my sense is that given the current state of the economy, unless there’s a rapid recovery, there will be flat spending.

All things considered, flat doesn’t sound so bad.

Well, that’s the best case scenario, though I think that’s plausible. The momentum had been so strong online, 20 percent growth year over year, that to see a flat year next year would feel like a real pullback. But there is a movement from more traditional media to online, and that will be somewhat of a counter to the economic impact that we’re seeing.

Surely in small ways, Razorfish is already being hurt. Would you mind sharing an example of how it’s being impacted?

The turmoil has impacted different client groups in different ways. So, for instance, we work with a national retailer who’s a large online advertiser and has a large catalog business. In the fourth quarter, they cut marketing expenses, except that their newest catalogs had already been printed, so that was a sunk cost, and the TV ads that they’d booked some time ago were commitments they needed to keep. So though it’s been a strong channel of performance for this retailer, they cut online.

Yikes. So the flexibility that online offers advertisers could really come back to haunt the industry.

It’s a blessing and a curse, the ability to optimize. If you’re forced to cut your budget, online is the easiest way to do it, and I think we’ll see some more cuts in the fourth quarter. But because you can optimize and because there’s more flexibility than in print or TV, I think online will stack up quite well as we move into 2009.

In the meantime, which types of sites of performing the best for advertisers?

That’s a tough question. I hate to say it depends on the client but that’s the true answer. Obviously Yahoo reported disappointing results yesterday, and I don’t think it’s the only big branded property that will be hit. What we’ve seen over last year is the number of sites that advertisers are spending money on has grown, so the barriers to entry to create an ad-supported website are very low. You can be up and running in an hour. The result is that supply has grown more quickly than demand, so publishers that were depending on higher CPM priced inventory have really suffered and will continue to suffer. As advertisers realize that they have to be more careful with every dollar spent, they’ll go to alternative websites that provide a meaningful audience at a lower price.

What about social networks? Seems like they haven’t been able to connect advertisers and consumers effectively yet.

You know, I think that Facebook and MySpace are the victims of the expectations of VCs and the business press as much as anything else. We look at those properties and see a new kind of consumer behavior, and whenever there’s a new behavior, it’s important to be patient. It takes iteration, a lot of testing, a lot of back and forth between advertiser and user and website to decide what’s a fair exchange. We do know that the traditional strategy of banner ads — high-volume, low-cost inventory — is ineffective on social networks. We also know that there are passionate users on those sites and if a brand can become part of conversation, it can very effective for brand. Nike, during the Women’s World Cup, had a very subtle page that provided information about the athletes and video and was a good participant in the community but was very clearly a community that was run by the fans of the Women’s World Cup team. So we can find those examples, but we’re not to the point where we can say: well, there’s the ad model. We’re still learning.

I hate to ask, but are you planning layoffs?
When I talk about our clients doing contingency planning, the trickle-down for us is once they’re settled on their needs from us, it obviously influences our planning. It’s premature to react now until we have a better sense of how our client’s services will be impacted, but I think 2009 is going to be a tough year.

You’ve been through this before, during the last downturn. Any lessons learned?

Well, we did have to go through layoffs in 2001. We had to part with clients who were suffering. But what we learned is that downturns provide opportunities for companies to take advantage of weaknesses in their competitors. We think that there’s a chance to grow bigger and strong over the next year. We did it once before.

How, exactly?

By focusing on the fundamentals of our business and our core clients, we realized we could ride it out. Our biggest, strongest clients — Fortune 500 companies like Levi’s, McDonalds, and Starwood Hotels — are leaders in their categories because when there are downturns, they continue to take advantage of competitors’ weaknesses. So if we can align ourselves with those marketers, we’ll benefit, too.