by Hayley Pinkerfield Revolution UK 16-Jul-07, 11:30

LONDON - Profit margins at digital agencies have overtaken those at traditional advertising agencies for the first time, as internet marketing dominates the industry.

Average operating profits at digital agencies have risen to 11 per cent from 8.6 per cent in March. Typical margins at traditional agencies are currently 10.1 per cent (source: Willott Kingston Smith’s quarterly Marketing Monitor report).

The study also reports a 10 per cent increase in income across the digital sector in the last three months, while other disciplines - advertising, PR, design, media buying and DM - have all grown by less than 1 per cent. Growing profits in digital stem from an increased income while non-staff overheads have remained fairly static.

The healthy margins reflect accelerated deals within the industry, with digital agencies selling themselves for considerably higher multiples of earnings than traditional agencies typically command. Dare Digital recently sold a majority stake (65.4 per cent) to Canadian marketing services firm, Cossette Communication Group.

Esther Carder, partner at WDS, said: “There is a race between traditional agencies trying to establish they have a competence in digital to offer existing clients, and digital agencies trying to extend their work with clients into more strategic relationships in other areas.

“I think digital standalone agencies can certainly survive if they get their cost structures and approach right.”

The most recent Bellwether report found that internet marketing spend exceeded all other media, with 21.8 per cent of companies reporting an increase. The internet now accounts for an estimated 6 per cent of total marketing spend, the highest proportion yet recorded by the Bellwether.