Leonsis: Exactly. We’ve created a matrix that looks at traditional media versus new media to illustrate this point. Traditional media is broadcast in nature, and new media is highly targeted, personal, and granular. Traditional media is unaccountable, new media is very accountable. Traditional media is one dimensional, you know, “Here’s my ad,” and new media is multi- dimensional because it adds words, pictures, and sounds. And traditional media is one-way, and new media is two-way and interactive. Redgate can put together a new media program that will make your company’s message dance. THE RED HERRING should hire us. (smiles)

The Herring: Perhaps. (frowns) How do you think new media is going to change the economics of the advertising business?

Leonsis: When you look at the big picture, advertising agencies are operating under a business model that is ass-backwards and 250 years old. Agencies don’t get paid to make advertisements that sell products. Agencies get paid by the media companies like CBS and Time Warner to run their clients’ advertising on their mediums. The best deal under this model is for an agency to develop a single ad campaign and run it for three years. This is exactly the opposite of what new media allows. New media demands daily updating, tracking responses, real-time dialogue, and placing a value on the content. So there are two things we want to do. We want to work with ad agencies to teach them how to break the code on new media so they can get their clients digitally fit to take advantage of all the emerging new technologies. The other thing we want is a piece of the rock. When we develop interactive shopping environments on Macintoshes and CD-ROMs, for example, we will forgo the production fee in exchange for a share of the income stream generated by the product.

The Herring: So what capabilities must an advertising agency master in order to be competitive in the 1990s?

Leonsis: It needs to understand all the different technology weapons, and be able to creatively integrate them in whatever form makes the most sense for its clients. And no matter what combination you use, it has to be highly targeted, interactive, and highly accountable if you want to be competitive.

The Herring: What was Redgate’s strategy behind its merger with America Online (AOL) other than making you a multi-millionaire?

Leonsis: AOL’s charter is to digitize content and deliver it over a narrowband medium and provide interactivity and a sense of community between its huge and rapidly growing base of subscribers, now at one million. Redgate’s skill sets are more multimedia and broadband in nature. We really understand consumer behavior, advertising, direct marketing, and transactions. When Steve Case [AOL’s CEO] and I began talking about combining our two capabilities, we saw how we could create a dynamic new medium that combines the traditional online service with interactive advertising and transaction processing. So now we’re in the position to create the next MTV or CBS.

The Herring: MTV?

Leonsis: Yes. Essentially we are really no different than MTV. We take other people’s content, we put a look and feel over it with our own navigational software, and we deliver it over other people’s pipes. For instance, Redgate and AOL were the first two of four partners to announce that we will be delivering our wares over cable modem.

The Herring: In the final analysis, what pipe will the multimedia vendor use to deliver its content?

Leonsis: The race is whether cable companies will actually provide phone services, or whether phone companies will provide content and cable services. It really doesn’t matter to the network programmer/content developer like

Redgate. Narrowband, personal computers, and CD-ROM are merely the training wheels for the broadband interactive network. Once the mythical switch is turned on, Redgate will be right there will all our clients. And we will win because we will have had several years behind us of learning about what customers want from their interactive services, how marketing dollars and transactions flow, and what development tools work best.

Mark Kvamme

CEO, CKS Partners

The Herring: Describe some interactive marketing services that have real value today?

Kvamme: Interactive marketing services?

The Herring: Or whatever you want to call them. We’ve been grappling for the right buzz word. At least we didn’t call it cyber advertising or something stupid like that.

Kvamme: Some agencies claim they have gone interactive if they offer an 800 number response service. (laughs)

The Herring: Yeah, we’ve talked to a few of those folks. But I think you know what we are talking about.

Kvamme: We provide a wide range of interactive services for our clients. On the low-end, we can produce interactive CD-ROMs which deliver information about a company’s products or services. We refer to CD-ROM as the low-end because its fixed and one-way interaction, that is, there is no way for the user to get more information after they have viewed everything on a given CD. In the online area, we offer two levels of services. The first is where we create an electronic forum for our clients within an existing online service such as American Online or the Internet. Once we create these forums, our clients can then go in and change and update the information the forum offers at any time. The second level of service is where our clients actually have live operators standing by monitoring the online activity and assisting users to navigate to the information they need. This is becoming a very hot area, and represents a point at which I think interactivity starts to become very, very interesting. The next level of interaction we see is similar to what I’ve just described, but instead of working in a text-based or keyboard-based environment, you are actually engaging in peer-to-peer video conferencing.

The Herring: How long is it going to take before that kind of service is real?

Kvamme: You can do it today over company networks. We are doing it between our offices, and we will soon be doing peer-to-peer conferencing with our clients. What you need to do is wire every computer in your network with ISDN, so you can send your video images over the network without dragging it down, while still sharing files using Ethernet. Intel, Compression Labs, and PictureTel all have great stuff that can help you achieve this type of network integration.

The Herring: How about interactive TV?

Kvamme: We see two levels of interactive marketing services for the TV. One of which we call in-band interactive, where you actually send the interactive signal within the existing broadcast single. Our client, Zing Systems from Englewood Colorado, is actually in this business. Zing’s products allow people to receive signals from their television through the vertical blanking interval, and send information through normal telephone lines through their special modem called the Zing dialer.

The Herring: We recently visited a Dutch company called HyperCom which

has developed a software package and TV card which allows you to network computers using CNN’s broadcast signal.

Kvamme: Cool. The second level is, of course, the information highway stuff, which we refer to as an out-of-band interactive service because you are actually sending information and interacting over a fiber or cable line, or whatever it ends up being. It is my belief that it will probably take five, seven, maybe even ten years before more than twenty percent of the households are hooked up to this kind of network. So, anyway, we have carefully positioned CKS to participate in all these different areas of interactive marketing. (Pause) Is this part of the question?

The Herring: Sure.

Kvamme: O.K. To take advantage of all these opportunities, we’ve divided up the company into the three different areas. The first is our traditional advertising and marketing area, where we do all our product packaging and printed collateral. The second area is CKS Interactive, where we produce online interfaces and electric forums for our clients. It’s my belief that in the future much of a company’s brand identification will come across in the way they design their electronic interfaces. And the third area is CKS Pictures, which is set up to create and edit video content very quickly and cost- effectively. [Editor’s Note: CKS Pictures was initiated when the company bought Apple Computer’s television and video production studio in 1993 for an estimated $6 million.]

The Herring: It seems to us that the advent of content on demand, and cheaper video production, will dramatically change the economics of the television advertising business.

Kvamme: Absolutely. I strongly believe that much of the content development in the new one hundred-plus channel paradigm will be sponsor driven. For example, our client Ziff-Davis can now afford to create its own informational shows by contracting agencies like CKS. Right now, cable company executives run around giving each other high fives when they reach a 0.8 or maximum 1.0 rating. When we hit one hundred and fifty channels, a programmer will be hustling for a 0.2 rating.

The Herring: Television programming will then become more highly targeted like the magazine business, and the advertising opportunity will also become more targeted and cheaper as a result.

Kvamme: Exactly. But at a 0.2 rating, you have to deliver your program much more cheaply. That’s where digital production and editing makes it all possible.

The Herring: Any final advice for those of us trying to survive the digital information revolution?

Kvamme: The first thing to remember is that whoever has the information wins. There is so much information out there, you have to put in place the systems that allow you to quickly get to the information you need to make the important decisions. We have our own custom program, built on a 4th Dimension database, that tracks all the information in this company digitally. The second principal is to embrace change, because change is happening faster and faster. At CKS we have to reinvent the company every six months. It’s funny, when I was back at Apple, I always expected change to happen faster than it actually did. As I am getting older, change is happening faster than I thought it would. It’s really weird.

Dave Carlick

Senior Vice President, Poppe Tyson

The Herring: What area of interactive advertising do you think has the most commercial potential?

Carlick: I find the online service personally the most interesting, and believe it will have the most dramatic impact on the commercial world because it has the potential to become so pervasive. You can just dial up the information you need from anywhere at anytime.

The Herring: Do you think there exists a sustainable consumer demand, or is there a risk that it will be a passing fad like the CB radio?

Carlick: The demand for online advertising is overwhelming! And the reason that this demand will remain strong is because online advertising satisfies two economic forces. One force I call instant gratification, and the other force is what I call enlightened self-service, or sales robotics. (Pause) Now you are supposed to say, “So, Dave, what exactly do you mean by the forces of instant gratification and enlightened self-service?”

The Herring: So, Dave, what exactly do you mean by the forces of instant gratification and enlightened self-service?

Carlick: Instant gratification is what the consumer wants, and enlightened self-service is what the advertiser wants. In the current advertising paradigm, there is a lag time between when an advertisement generates consumer interest, and the time the consumer gets his information. Even if he responds to an 800 number, he still has to wait until his brochure arrives in the mail. When you shop online, the consumer is provided instant access to the information he wants about the boat, the car, or the stereo he wants to buy. Information on demand! And instant gratification will always win over delayed gratification. So that’s what’s in it for the consumer. What’s in it for the advertiser is that he lowers his cost of sales by making the delivery of information about his products much cheaper and more efficient. It’s like the ATM machine delivering cash. Who would have thought twenty years ago that we would drive up and get cash out of a machine! The same revolution is happening in the gas station. Now you put in your card, pump your gas and drive through a car wash and you’re done. The old paradigm is where a guy comes out, washes your window and, in the process, messes up your car, hands you back your credit card all greasy, and charges extra for full service. Today, the customer does all the work and he’s happier with the deal. All of my clients want to accomplish this with their sales channel. They want to deliver information quickly so the consumer can make his purchasing decision, without the burden of funding an expensive sales force and distribution channel. If an advertiser can satisfy his customers’ impulse for instant gratification through the use of an online service, then it will be a more efficient seller than its competition. This is where we are taking our clients.

The Herring: But haven’t people really just begun to appreciate the potential of using an online service to promote and sell their products?

Carlick: You’re right. It reminds me when I started in this industry back in 1977, when I worked for one of the first personal computer software application companies. We made a general ledger system software for CPM computers. We used to dump the software on big eight inch diskettes that really flopped and stuff them into baggies with the manuals, like dope dealers (laughs). It was a hobbyist world. As soon as some real practical applications, such as accounting systems, word processing, and spread sheets came along, I could see how this was how we were going to work, write, and think. But, at the time, if you would have given someone that golden vision, and then sat them down in front of a computer and told them to type an “A” prompt, then type a “dir” to access the directory, and a “pip” to copy a file, they would have thought you were nuts! Seventeen years later you have a very polished, consumer savvy software industry. We are just beginning to click on to the online business.

The Herring: What kind of creative talent do you need to recruit to set clients

up with an online service?

Carlick: This is a terrifying transition for the advertising community to go through. Right now the languages used to bring up an online service are a lot like PostScript. They are C-like, and very difficult to use. It isn’t quite like it is in desktop publishing, where applications such as PageMaker and Quark that allow users to perform very, very complex PostScript commands by just pointing, clicking and moving. As of today, we are contracting out the programming portion of the service. But we have found this to be unsatisfactory. The programming portion of the business is as integral to the creative process as the graphics and the words.

The Herring: Are there companies that you know of that are creating the Page Makers and Quarks of the online business?

Carlick: We are watching companies like Mosaic which are developing languages and scripting tools you need in order to be efficient in this area. I think the development of these tools are keeping pace with the demand for the services, so I don’t see the need to get out on the bleeding edge and create our own tools.

Martin Nisenholtz

Senior Vice President, Ogilvy & Mather

The Herring: What would you consider Ogilvy & Mathers’ competitive advantage in the interactive marketing service world?

Nisenholtz: Well, you may not know this, but we’ve been at this for about eleven years. I joined the firm in 1983 essentially to found a unit to get our clients more involved with interactive technology. This was back in the videotex development days, a movement that eventually failed, but has been reinvented in the form we now refer to as the online service. So our principal advantage is that you can count the number of arrows in our back. More specifically, I believe there are two parts to our competitive advantage story. First, we can either provide work-for-hire services and help our clients work through the interactive equation, all the way from understanding the options to helping them build their interactive distribution channel. Or, in some cases, which are confidential, we can actually develop an equity or joint venture arrangement with a client to build an information product or service with. The second piece, concerns the role we play as consultant and creative developer. As an example, we have worked with AT&T for the last five years for their R&D efforts in the broadband arena.

The Herring: Ogilvy may have had an “interactive” unit since 1983, but haven’t interactive services just gotten to the point where they can be meaningfully implemented by your clients?

Nisenholtz: No, I don’t think that’s true. We began creating interactive sales software, for instance, in the mid-1980s. This software could be used by both the company selling the products and their customers. For example, we developed the first interactive software for a financial services institution when we worked with Equitable in 1985. In may have been, in fact, the first interactive software ever produced. I’m not going to categorically state that it was, but it was certainly one of the first. This was a truly interactive tool built for the consumer marketplace.

The Herring: That might be a little bit of a stretch.

Nisenholtz: I think what you are referring to, potentially, is two observations that are in fact true. One, there has been a steady broadening of consumer interest in the online service arena. And two, because the whole interactive area has been so over-hyped, clients have become more interested in it. But while the growth path of online services has been very nice to watch, I would

caution that there are about 4 million online subscribers which represents only about 2% of the households in America.

The Herring: What do you consider the most valuable interactive marketing tools on the market.

Nisenholtz: Obviously, direct marketing has always relied on interactive media. The 800 number is a form of interactive media, and so is the postage- paid reply card. Those services are provided by our main agency, and they will always be important. My group works exclusively in the digital arena, and we offer a whole other set of interactive marketing tools. On the narrowband side, we address the PC user needs with CD-ROM and software products, as well as online services on a even narrower basis. But that stuff is pretty mainstream. Outside the mainstream, we played around with the PDA market. But there are not enough users for that area to make sense yet. On the broadband side, we have probably done more work than all agencies combined. Broadband includes interactive television and fast data rate types of services, which include some work using a PC as a hookup.

The Herring: Is Ogilvy’s international presence an advantage when you are out pitching business against the regional firms?

Nisenholtz: Absolutely. While CKS and Ted’s group, Redgate, are good companies, they don’t have Ogilvy’s international breadth, or their ability to truly leverage large programmatic, integrated marketing concepts. At least I don’t think so. We are part of a major, major international agency, and most of our clients use that capability to their advantage.

The Herring: But are their natural downside’s to trying to coordinate your work within a big agency?

Nisenholtz: Sure. One thing we have on our side is that our interactive group is organically grown within the agency, so that helps because we all trust each other. But, I will tell you, nothing is harder than getting an account person to trust you with a big client, because there is major money involved, when we are trying to put together what appears to be a tiny little interactive project. However, that’s where our organic development clearly works to our advantage. I have more tenure than most of the account representatives working with the big clients. There is no agency out there right now that is comparable to us in the interactive arena. We’ve seen every presentation, and we know what its like to work with almost everyone. And to tell you the truth, we see 99 out of 100 people fail. So we are more discriminating than others. We are just not going to go out there and sign up for the next hyped-up opportunity.

T