As ad spending drops, media agencies face turmoil

NEW YORK (Reuters) - The U.S. and Europe will be hit by increasingly severe cuts in advertising spending by marketers, some of who have already begun demanding media agencies lower their fees as one way to cut budgets, according to a top executive of advertising giant Interpublic Group.

"We certainly, on a global basis, are going to see a reduction in advertising budgets. That's a certainty," said Nick Brien, chief executive of Mediabrands, which has responsibility for Interpublic's media agencies Universal McCann, Initiative, Magna, J3 and a handful of others.

Speaking at the Reuters Media Summit on Thursday, Brien said the advertising business could face major shifts over the next two years as clients cut budgets, demand higher return-on-investment, put advertising accounts into review, or seek to pay lower fees to agencies.

But he also cautioned that predictions about ad spending are becoming less bankable since turmoil in economies and stock markets worldwide mean forecasts can become outdated nearly as quickly as they are issued.

"I've got forecasters looking at this on a daily basis, it's moving so fast," he said. "A month ago, I would have said flat spending year-on-year, and now we're looking at a modest decline."

Instead of monthly forecasts, Brien's researchers are now updating outlooks every week.

"No one can give an accurate sense of what's going on next year," he said. "A lot of that depends on the automotive industry. A lot of it depends on how technology fares. Is finance going to stay out of the year?"

Nonetheless, Brien pointed to the United States and Europe as markets with the bleakest outlook, while he sees China, Mexico and Brazil better weathering the storm.

Brien, previously worldwide chief executive of Universal McCann, took over his role at Mediabrands in July, giving him management responsibility over agencies that handle billions of dollars in spending for clients such as Johnson & Johnson, Microsoft Corp, Home Depot and Sony.

Fallout from the financial and economic turmoil is already being felt within advertising and media agencies, Brien said. As corporations are taking a hard look at their marketing budgets, for instance, they are more frequently looking at moving advertising work from one agency to another.

Brien said, "If the business sector is having a very difficult time, we're seeing a greater appetite to discuss or review. Not because of performance, but because someone is looking for value."

Fees are also under closer scrutiny, Brien said.

"If the fees are 2 percent of the spend or 3 percent of the spend, I can potentially drive huge value on the 97 percent that I'm spending," Brien said. "So my argument is let's not attack the 2 percent or 3 percent."

The downturn in advertising will also force agencies and media companies to prove that various types of advertising -- from print to broadcast to Internet -- really pay dividends for marketers.

"I think we're going to see marketing change. We're going to move from what has been a relatively easy mentality to 'throw enough at the wall and see how much of it will stick,'" he said. "Now we're going to move much more toward rifle-like accuracy."

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Paul Thomasch; Editing by Phil Berlowitz)