AAF Survey of Industry Leaders on Advertising Trends 2005

1. AAF Survey of Industry Leaders on Advertising Trends 2005 Prepared by Atlantic Media Company November 2005

2. Survey Highlights • While conditioned somewhat by rapid change and uncertainty about its impact, industry leaders are generally bullish on the state of advertising, with 64% saying the industry is in recovery. • Asked to characterize the state of the ad industry, industry leaders mainly focus on the emergence of new media that is changing traditional methodologies and tactics; as to specific business challenges, industry leaders attach greater concern to age-old industry issues such as demonstrating ROI and breaking through clutter, less on the impact of emerging technologies. • Advertising industry leaders overwhelmingly (80%) agree that DVR technology will have a significant long-term impact on the 30-second spot, and the majority (58%) either have already changed or expect to change their ad buys in response to DVR. • The share of spending for online advertising is expected to continue increasing. 2006 predicted spending surpasses last year’s forecasts for 2007 – an even faster shift to online than previously anticipated. • Industry leaders are very concerned about new media, but they remain tentative about its effectiveness as an alternative to traditional advertising methods. Blogs, podcasts and web-enabled cell phones are all seen as relatively weak in terms of effectiveness as advertising vehicles. • The importance attached to reaching ethnic markets has increased over the past year, while perceived difficulty in targeting these audiences has decreased. The “priority gap” between Hispanic and other minority populations is narrowing. • While most industry leaders (84%) report satisfaction with balancing their personal and professional lives, they also perceive careers in advertising to be more demanding than in other sectors. • The majority (81%) cite mentorship as at least important to their personal career success, and even more (96%) choose to mentor young professionals. The most important factor in achieving success in the industry is “integrity”. • But both this year and last, industry leaders have been cautious overall in their assessment of career opportunities in advertising, their perspective has deteriorated with respect to long-term career prospects and overall career appeal, and only marginally improved for attracting and retaining new talent. • The top campaigns of the year are: 1. Apple iPod, 2. Burger King, 3. Target, 4. Mini, and a three-way tie for 5.Hewlett-Packard, UPS, and Verizon. • The most admired brands are: 1. Coca-Cola, 2. Apple, 3. Nike, 4. Google, and 5. FedEx and BMW (tied).

3. Broad Range of Senior Advertising Industry Leaders Seventy-five executives from agencies, media organizations, advertiser-clients and other related firms responded to the survey; over 90% have worked in the advertising industry 11+ years; over 50% for 25+years Advertising Industry Sector (n=75) Years Worked in Advertising Industry (n=75) -Trade associations -Consultants -Public relations

4. Industry Recovery Underway, but Overshadowed by Uncertainty • Industry leaders are generally bullish on the state of the advertising industry, however they gravitate toward extremes of opinion compared to past years, perhaps reflecting the uncertain impact of the changes now buffeting the industry State of the Advertising Industry (% responding; 2003, 2004, 2005) In Their Own Words “2005 has been the first year that didn't feel troubled since 2001.” –Agency Exec “I would qualify my answer by noting the HUGE uncertainty that surrounds the advertising business and its traditional way of doing things. Changes in the media environment are rapidly transforming our standard operating environment and undermining established ways and patterns of planning and strategy making.” –Media Exec 64% say industry recovering • - Changing rapidly! • Rapidly changing as consumers • gain control of their media choices • - In flux; old ways have bottomed out • - Fractionalizing

5. Evolution of Media Driving Two “Separate” Industries When describing the state of the advertising industry, the majority talk (without any specific prompting) about the seeming segmentation of the ad industry into traditional versus new (i.e. online) media platforms The State of the Advertising Industry (selected responses, open-ended question) Old Versus New Media “There continue to be many new and unique ways to spend ad dollars today, so traditional media will continue to see an "erosion" of market share, while new forms of media will show slow growth...overall the spending is probably still steady, just ‘different’.” –Media Exec “We are seeing two industries today - traditional industry is recovering slowly or going sideways, while the new digital/online industry is growing and expanding very quickly. The only issue is if the traditional industry can take advantage of this new growth.” –Agency Exec “Growth seems to be shifting to interactive media with softness continuing in all of the traditional media platforms. Is the increase on interactive spending and "branded entertainment" coming at the expense of the existing media? It appears this may be the case.” –Media Exec “While traditional media continue to struggle, online advertising is showing impressive growth. To me this says advertisers are willing to increase their budgets but are looking very carefully at three questions: how do I better segment and target my audience; what is the true ROI on this investment; and, how do I attract new audiences to my marketing message?” -Media Exec Industry Retrenching “Agencies need to reinvent themselves to again become valued partners to senior client management.....their value is now marginalized.” -Consultant “Spending is recovering; however, agencies are having a harder time securing long-term commitments from clients, monthly retainer fees, and a reasonable level of profitability on accounts.” -Agency Exec “Advertising industry is losing it's credibility, business leaders think less of the effectiveness of advertising, agencies have lost their place in the inner circles of American industry.” -Consultant

6. Multifaceted Challenges, Coming from All Directions Industry leaders do not view any one challenge as singularly important, but see the industry as facing an array of challenges, all of relatively high importance; concerns related to technological change are trumped by longer-standing concerns such as ROI Responding to Challenges Most Important Business Challenges* (score on 5-point scale) “Implementing blogs into the overall communications plan.” -Media Exec “We are trying to provide higher levels of expertise in the new media channels and tactics, in response to changing consumer behavior and client needs.” –Agency Exec “There is and always will be continual change in the advertising/ communications industry. Our goal is to remain knowledgeable regarding industry trends and be proactive in meeting those challenges so we can most effectively and efficiently deliver information to the customer.” -Client “We are getting up to speed on non-traditional ways of reaching out to the consumer in terms of media and are constantly improving our techniques for understanding and acting on unique consumer insights.” -Agency Exec *only the first five challenges were asked in the 2004 survey

7. DVR’s Impact Unquestioned, But Extent Still Unclear Over the past three years there is growing consensus on the transformative long-term impact of DVRs on the :30 spot, with 80% seeing a significant impact and only 11% citing limited-to-no long-term impact Anticipated Impact of DVR Technology on 30-Second TV Spot (% responding; 2003, 2004, 2005) Death of the 30-second spot and dramatic transformation of TV advertising paradigm Significant growth of sponsorships, product placement, and other non-traditional formats, but 30-second spot will remain Limited prospects for technology reaching critical mass of penetration, and therefore only limited impact No significant long-term impact (i.e., TiVo threat is over-hyped) cornerstone of TV advertising Don’t know/other

8. DVR Already Impacting Ad Plans • 58% of industry leaders have already changed their ad plans in response to DVR or plan on doing so in the near future. Have you made any adjustments to your own (or your clients’) ad plans/buy-ins due to DVR technology? (% responding) Reacting to DVR “We are focusing on how we can use technology to enhance the :30 and enhance the overall messaging for the client. It is not a case of either/or; it is a case of innovating to follow the consumer.” -Agency Exec “Substantial increase in use of Direct Response Television and interactive tools to better establish response patterns and ROI.” -Agency Exec “Have reduced television buy considerably. More to come unless rates come down to reflect lost viewership.” -Media Exec 58%

9. Where the Dollars are Going • The percentage of media budget allocated to online ads continues to rise; the 2006 budgets expected to be almost 19% - more than the 17% projected for 2007 in last year’s survey, indicating a faster shifting to online than previously predicted Percentage of Media Budget Allocated to Online Ads (average of all responses) +32.6% +69.8%

10. Perhaps Tradition Isn’t So Bad • Perceived effectiveness of non-traditional advertising tactics has declined overall in the past year, with industry leaders tentative on the effectiveness of these tactics (and new media) as a whole, rating them in the lower-middle range of a five-point scale Effectiveness of Non-Traditional Advertising Tactics as Alternatives to Traditional Methods (score on 5-point scale) Effectiveness of New Media as Advertising Vehicles (score on 5-point scale) Single-sponsor buyout of media* e.g., Target and The New Yorker Cell phone text messaging e.g., AT&T Wireless used for “American Idol” Advertainment e.g., Burger King’s Subservient Chicken Online affiliate marketing* e.g., The Budget Fashionista and Old Navy Guerilla marketing e.g., Le Tigre static-cling stickers placed around New York City Content sponsorship e.g., Sony Pictures of “Nip/Tuck” Product placement e.g., Coke on “American Idol” Video-to-video e.g., Cadillac SRX 3-minute ad DVD-based marketing e.g., custom published DVD “brochures” 2.9 *new category; 2004 data not available

11. Reaching Out to Everyone The relative importance of reaching multicultural audiences has increased over the past year, and the perceived difficulty of targeting/reaching these audiences has mostly decreased; the “priority gap” between Hispanic and other segments is narrowing Importanceof Reaching Minority Markets (score on 5-point scale) Difficulty of Reaching Minority Markets (score on 5-point scale) -gay/lesbian -other affinity markets -various segmentations beyond race: lifestyle, psychographics, interests

12. An Industry that Demands More from Its Employees • While only 16% of industry leaders cited dissatisfaction with their balance of personal life and career, 66% said that the demands of the advertising industry are higher than those of other sectors Satisfaction with Balancing the Demands of Personal/Family Life and Career (% responding) Demands of Ad Industry on Personal Life (in comparison to other industries) How have you balanced personal and work commitments? “It is not easy, but when you love what you do and love your family you work hard at making it work.” -Consultant “I have only two hobbies -- my job and my family. Unfortunately, there just isn't time for anything else.” –Public Relations Exec “I haven't. The job always seems to win out.” -Agency Exec 52%

13. I’d Like to Take All the Credit, But… • 81% of industry leaders said that being mentored was at least “important” in their own personal career success; only 11% say they were never mentored at all Importance of Mentorship to Personal Career Success (% responding) On Mentorship “Young people always need help and training. The problem with the agency business is simply that it doesn't take this very seriously, which is amazing considering the greatest asset an agency has is its people.” -Agency Exec

14. Seeing the Value in Investing in Tomorrow’s Leaders • While 81% say that mentorship was important to their own careers, 96% of industry leaders mentor young professionals on at least an occasional basis; only one out of seventy respondents said s/he never mentors others On Mentoring Others “Mentoring women is especially important given their lack of presence in senior ranks.” –Advertiser/Client “Providing interns an opportunity to work on ‘real life’ projects which provide results for their portfolios is important.” –Media Exec “Patience is the key. Learning can be two sided. For the older generation we can learn new technologies from the younger generation, and the older generation can teach skills that have been learned via experience and not taught in a text book.” –Advertiser/Client “I have taught advertising part-time for the past 24 years. This has given me an opportunity to be in tune with the next generation, admire their new technology abilities and use my teaching as a recruiting tool. I always hire former students before an unknown, and I am always available for referrals for other agencies to my best students.” –Agency Exec Do You Mentor Young Professionals? (% responding)

15. No Simple Recipe for Success, But Lots of Common Ingredients Attributes for Success in the Ad Industry (score on 5-point scale) What Has Determined Your Success? “Integrity, creativity and quite simply a love for the advertising agency profession.” -Agency Exec “Not taking ‘no’ for an answer and always coming back with—’well, how about we look at it this way--that way--this other way’." -Agency Exec “Building and empowering a strong team of committed professionals.” –Media Exec “Strong belief in the importance of advertising to the growth of the American economy.” -Agency Exec “Diversity management. Helping the industry to diversify its employment ranks.” -Agency Exec “Opportunity to work with a great organization that resources you along with great people who support you is critical.” -Agency Exec - Persistence, persistence, persistence! - Loyalty - Competitive instinct - Intelligence - Resiliency, resiliency, resiliency

16. Less Optimistic About Careers in Advertising While both this year and last, industry leaders have been cautious overall in their assessment of career opportunities in advertising, their perspective has deteriorated in two key metrics Health of the Advertising Industry in… (score on a 5-point scale) On Advertising Careers “Lack of work/life balance, burnout and tight staffing… are going to threaten the industry's ability to keep and attract top creative and strategic talent. Number one challenge, especially as the industry morphs, is that we need great people to lead the future.” –Agency Exec “Investment (dollars and time) for training is almost non-existent; the people below us aren't being adequately trained to replace us.” –Agency Exec

17. What are the Strengths and Weaknesses of the Advertising Industry? • Selected responses to an open-ended question “Ideas are our strength. Being scared is weakness.” –Agency Exec “Strengths - great creativity and innovation; to lead the curve of media and popular culture. Weaknesses – burnout; stretched and limited resources; clients who do not treat us as partners; inability for us to prove the ROI of our work.” -Agency Exec “Creativity and innovation is its strength. Slowness to respond to changing consumer and media environment is its major weakness. We need a new paradigm! Less defensiveness about change!” -Agency Exec “General decline in the impact the industry has in client relationships at the ‘C’ level of corporate America is the Achilles heel of this industry.” -Agency Exec “Strength: Ability to adjust and adapt to new technologies and utilize for advantage. Weakness: Image problems as pushy peddlers and proliferation of ad clutter.” -Academic “Weakness: Slow to change to realities of new media environment. Internet and search ads change the way marketers must think about how they engage consumers.” -Media Exec “Agencies are slow to change which has lead to many boutiques and freelancers. Inability to get the image of the advertising industry to a positive perception. Creative is getting better all the time. We embrace youth and enthusiasm.” -Agency Exec “The strengths are in multicultural nuances. The weaknesses are in habitual versus ‘out of the box’ problem solving; issue versus opportunity thinking.” -Media Exec As a Career Path “Strengths...no other professional services industry has demonstrated now and over time the ability to have creativity and ideas, and to connect with consumers’ weaknesses....not known for being a good career path, either in compensation or in supportive environment.” -Advertiser/Client “Strength - considered to be an exciting industry; weakness - inability to make significant progress in the area of multicultural hiring, retention and promotion.” -Ad Trade Association Exec “We're a creative industry and entry level positions will always be easily filled; but we need to pay employees better so that we can retain the good, smart ones.” -Agency Exec

18. And the Winners Are… Most Successful Campaigns of 2004-2005 (top responses, open-ended question) Defining Campaign Success • Apple iPod • Burger King • Target • Mini • Hewlett-Packard, UPS, and Verizon (three-way tie) “In my view there was only one...and it wasn't merely an ad campaign...it was and continues to be a masterful, integrated multi-media/multi -platform assault on the ‘music’ culture that has single-handedly transformed the company, the music industry and the music consumer on a global basis ... making ear buds the ultimate symbol of hipness. And there's no end in sight...the fun has just begun as podcasts, books, video and gaming continue to expand the game. And no. I'm not an Apple stockholder.” –Agency Exec on Apple iPod “Break-through work that leaves the competition in the dust, elevates the brand to icon status, and delivers outrageous returns to the corporation.” -Agency Exec on Target, Mini and BK “Did a great job promoting something new and innovative, as well as launching a new product category, with an entirely breakthrough creative approach.” –Media Exec on Apple iPod, Swiffer, JetBlue “Campaigns that are effective across several mediums. –Consultant on Aflac, Apple iPod and Verizon 2004’s Top 5 1. Apple iPod 2. Mini 3. Citibank 4. MasterCard 5. Target, Volkswagen, & Cadillac

19. Icons of Advertising Success Most Admired Brands (top responses, open-ended question) Most Admired Industry Leaders* (responses, open-ended question) • Coca-Cola • Apple • Nike • Google • FedEx and BMW 2004’s Top 5 Howard Bell Bill Bernbach (2) David Bradley Leo Burnett (2) Tom Burrell Jay Chiat Lee Clow Peggy Conlon Jerri DeVard Stan Freberg John H. Johnson Shelly Lazarus (2) Maurice Levy Sallie Mars Renetta McCann (2) David Ogilvy (2) Keith Reinhard Stan Richards Liener Temerlin Ed Vick Mary Wells Lawrence (2) John Wren 1. Nike 2. Coca-Cola 3. McDonalds 4. Apple 5. Budweiser *these names are reported as they were given/spelled by the respondents of the survey