This document discusses the challenges that traditional advertising agencies face in adapting to the digital marketing landscape. Some key points: 1) Advertisers and agencies apply traditional practices without understanding digital norms, creating inefficiencies. 2) The digital space requires different skills, talent is scarce, and relationships between costs have changed. 3) Agencies must determine the right service model for their clients' needs around production, strategy, buying, and more. 4) Compensation models are moving from retainer-based to include more performance incentives and output-based scopes of work.

1. 3P Track October 9 2011

2. “Advertisers and their agencies are facing an increasing challenge, which…often creates friction, inefficiency and waste in client/agency relationships as traditional players on either side, or both, apply traditional practices (or expect traditional outcomes) without an understanding of very different Digital norms and economics.” 2

3. Client Perspective May not understand requirements to deliver digital marketing programs Simplify and standardize processes for managing agencies: Same compensation framework Same metrics (effective commission rate, blended hourly rate, etc). 3

4. Digital Reality More labor-intensive Different set of skills Demand > Supply for certain talent Historical relationship between cost of “creative” “production” and “media” no longer relevant 4

5. Digital Reality The right agency model to deliver value Getting compensated Maximizing profitability 5

6. Agency Model 6

7. Digital Agency Service Model Production Media Strategy and Planning Media Buying Brand Strategy Creative Multiple Channels: Website, SEM, SEO, Video, Social, Email, Mobile, etc. Build/Partner/Outsource? Specialist/Integrated? 7

8. Digital Agency Service Model Production Media Strategy and Planning Media Buying Brand Strategy Creative “One of the smartest things we did was build an in-house production capability. Having said that, I don’t know if we would do it today.” President, Leading Digital Agency 8

9. Digital Agency Service Model Production Media Strategy and Planning Media Buying Brand Strategy Creative Quality Control Understand Client’s Technical Infrastructure Commoditization Investment required given expanding range of options 9

10. Digital Agency Service Model Production Media Buying Media Strategy and Planning Brand Strategy Creative 10

11. Digital Agency Service Model Production Media Strategy and Planning Media Buying Brand Strategy Creative Operating Margins In-house: 19.2% Outsource: 16.5% 11

12. Digital Agency Service Model Media Buying Production Media Strategy and Planning Brand Strategy Creative Operating Margins In-house: 18.5% Outsource: 18.0% 12

13. “The Newest Ad Agencies: Major Media Companies. Marketers Increasingly Bypass Traditional Business Model” “Google, Omnicom Partnership Redefines Digital Advertising” “Hearst Buys iCrossing For $325 Million” 13

14. Clients Media Planning and Buying Strategy and Creative Production "If I were an agency, I would be really worried about being disintermediated. More and more, agencies are almost in the way sometimes.“ Ad Exchanges Ad Networks Media Companies Search Engines Becky Saeger, CMO Charles Schwab 14

15. Clients Media Planning and Buying Strategy and Creative Production Ad Exchanges Ad Networks Media Companies Search Engines 15

16. So, What’s the Right Agency Model? Client Requirements Media Consolidation Production Volume Agency CoreCompetencies Culture Ability to Differentiate Quality Price $$$ Growth vs. Margin Erosion 16

17. Compensation 17

18. of Marketers utilize retainer/project fee combination Increasing use of performance incentives 18

19. Compensation Educate/Define SOW Budget Presentation Utilize Performance Metrics to Demonstrate Value 19

20. Output-Based SOW Traditional Digital Create development and production of one :30 TV Spot One full-page, four-color print ad Website Enhancements: Strategy, Architecture, Wireframes 20 Landing Page Designs & Code Executions 20

21. Scope of Work 21

22. Scope of Work 22

23. Scope of Work Develop 4 Landing Pages 23

24. Scope of Work 24

25. Scope of Work 25

26. Scope of Work 26

27. Budget/Proposal “Marketer perceptions are that digital agencies are more expensive, when in fact, the expense is simply related to outdated perceptions about agency fees as a percent of media and/or production spend.” Digital Campaign $250,000 $0 $1,000,000 $1,250,000 25% David Beals 27

28. Budget/Proposal 28

29. Managing Profitability 29

30. Attendee Survey 30

31. Profitability Model Full-time / Freelance Staff: Recurring / Project Revenue Client / Agency Labor Mix 70% / 30% Profitability by client/service Adjust for owner’s distribution Employee utilization > 80% 31

32. Profitability Model Rent: 8% Revenue RSF Per Employee $175 32

33. Agency Example Subpar profitability on key digital services Client/Agency Labor Mix: 54%/46% Billing rates do not cover overhead 33

34. Agency Example 34

35. Educate/Define SOW Budget Presentation Utilize Performance Metrics to Demonstrate Value 35