The findings, from the Willott Kingston Smith annual survey, Financial Performance of Marketing Services Companies, which included digital for the first time, reveals only slight improvements in margins on the previous year - rising 0.6 per cent to 9.6 per cent.
Yet, while digital margins are moving in the right direction, this is quite small compared with other marketing disciplines, such as advertising, direct marketing and media planning, all of which recorded higher profits, with the exception of design.
"One might expect that, being such a new, sexy area, digital might command premium fees, but it doesn't appear to be doing that," says Esther Calder, partner at Willott Kingston Smith.
Digital was expected to perform on a par with other disciplines, which achieved margins of 12-13 per cent. According to Calder, the depressed growth is a result of the market's infancy. She says that, despite strong growth, the digital sector needs to gain confidence and recruit staff ahead of account wins, to ensure there are enough people to service the business.
"It might also be the fact that they are growing, but costs are coming in slightly ahead of incomes, which is pushing margins down, whereas more established companies might have levelled out and be running at peak efficiency," adds Calder.
Andrew Burgess, managing director of Equi-Media, one of the agencies surveyed, whose clients include FirstPlus and Western Provident Association, says the margin problems stem from companies whose procurement and marketing decisions are dictated at board level and not at a pace that suits the agency's growth.
"This is pushing firms that supply these groups to deliver in a digital area where they don't have all the skillsets in one building," says Burgess. "They have to bring them in fresh and embed them in the culture. It's costing agencies more to do it that way as they have to do it at the pace clients demand, and they aren't necessarily ready."
Burgess says agencies need to staff up early to get skillsets up to speed for when accounts arrive to avoid mistakes and boost margins. "You can have a great TV buyer or press buyer, but they won't necessarily make a great digital buyer - they have to be retrained," he adds.
"I'd say it's three-to-six months before I'd be prepared to let them loose on a client's business and it would be irresponsible to do it earlier. They could leave the cap off a search budget in Google and blow £40,000 in an hour."
However, Calder is optimistic that the next survey will yield stronger margins as more marketers announce plans to invest more in digital.
"People have been burnt once already by the whole dotcom crash and I think it has taken people a while to realise the true value that digital can add to the marketing mix," says Calder.
"I think people are spending cautiously and we would expect that, in next year's survey, those margins will have improved. I think people understand it a lot better now and are more prepared to pay the true value for work," she added.
The survey also revealed that revenues for the digital sector are already rocketing, with a 24 per cent increase; well above other marketing services. The next best performing sector was the Top 50 marketing groups, which experienced an 18 per cent increase.
While digital's revenue growth was consistent across the agencies surveyed, six agencies increased revenue by more than 50 per cent, including Equi-Media, Agency Republic, Dare, Dialogue DLKW, Green Cathedral and Framfab (LBi since its merger with LB Icon).
These results show what the market already knows - digital is outstripping other disciplines in terms of growth. The findings also highlight the need for traditional agencies to develop in-house digital services or form strategic partnerships with digital specialists to stop the inevitable revenue losses.
"Digital is growing faster than any other marketing service discipline. It is possibly taking revenue that might otherwise have gone to an advertising or design agency. For agencies that don't have an in-house capability, unless they get one or team up with a digital agency, they are possibly going to lose the revenue they might have got because digital agencies are going to be nicking it off them," says Calder.
The digital market is certainly shifting spend away from other channels. Last month, Channel 4's chief executive, Andy Duncan, said Google would overtake the TV group's earnings in 2006 and may overtake ITV's by 2008.
This year, Unilever has run several campaigns for which the bulk of its media spend went online. Coca-Cola has also invested more online and in driving traffic.
According to Tim Kopp, VP of global interactive marketing at Coca-Cola, greater integration between the marketing disciplines will be the trend next year, with digital potentially leading the pack. "What I really view happening from an agency side and a marketer side is people really focusing on one big, core creative idea and figuring out how to bring it to life - not with interactive as a silo, but with interactive as an integrator of the idea across other platforms."
Integrated agencies are bound to be winners in this landscape, says Paul Biggins, chief executive officer of integrated agency Dialogue DLKW, which offers both traditional and digital services. He says it's a model that works for clients like Halifax. The agency provides a single account team of digital and traditional experts.
"We populate the account team with whatever combination of talent is required for the account. That means it is very convenient for the client as they don't have to deal with numerous groups, agencies and teams, and rebriefing over again. It's very convenient and also good from a strategic point of view as the client has a single communication strategy that is employed across the different channels."
Calder says Willmott Kingston Smith will revisit the survey at three-month intervals over the coming year and update it. She remains certain that digital margins will increase by next year's survey: "I think the growth will be there for awhile."
- Feature, p26
Gross Income Operating Profit
Company name Year end Latest Change Latest Change
('000) (%) ('000) (%)
1 Framfab UK 31/12/05 13,913 79.57 2,177 134.09
2 AKQA 31/12/04 12,476 2.30 -216 -119.82
3 Agency.com 31/12/05 7,200 -11.49 1,146 -10.61
4 Dealgroupmedia 31/12/05 6,685 16.12 800 -41.56
5 Wheel 31/12/05 6,092 12.21 779 168.62
6 Dialogue DLKW 12/03/2006 4,731 66.94 512 2126.09
7 Rufus Leonard 30/04/05 4,697 8.20 436 138.25
8 Zentropy Partners UK 31/12/04 4,619 -1.89 -75 -109.15
9 Green Cathedral 31/12/05 4,488 49.60 -310 64.20
10 I-level 31/03/05 4,481 31.02 440 84.10
11 Agency Republic 31/12/05 4,452 52.21 821 72.48
12 Zed Media 31/12/04 3,800 17.61 358 61.99
13 Dare 30/06/05 3,752 65.36 552 132.91
14 Profero 31/03/05 3,558 21.35 212 241.94
15 Beechwood Group 31/12/05 3,504 11.45 117 169.23
16 Glue London 31/12/04 2,652 32.34 336 5.33
17 Bostock & Pollitt 31/05/05 2,608 7.37 193 -25.77
18 Equi-Media 31/01/2006 2,456 101.31 703 218.10
19 Outrider 31/12/04 2,451 32.99 826 348.91
20 DNA Consulting 31/03/05 1,631 12.10 -236 -336.00
Total 100,246 81,019 9,571 7,271
Source: Willott Kingston Smith, 2006