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Make way for the spin doctors

Created:
20 July 2007
Written by:
Shunil Roy-Chaudhuri

In 2004, Gregory Halpern, chief executive of quoted US company Circle Group, found himself and his firm victims of a ferocious attack over the internet. A blogger accused Mr Halpern of being ‘intellectually challenged’ and ‘seriously ignorant’. The blog said Circle Group, which made chemical detection technologies, plywood adhesives and fat substitutes (it now focuses solely on fat substitutes and related products, and trades under the name of Z Trim), had released a television commercial containing false and misleading claims about one particular product. The blogger also claimed to have lodged a complaint about the commercial with the US Food and Drug Administration and the Federal Trade Commission, and said a complaint about Circle had been filed with the Securities and Exchange Commission (SEC).

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Mr Halpern was soon bombarded by telephone calls from agitated investors, and he assured them there had been no questioning from the SEC. But Circle’s share price took a hammering. Mr Halpern eventually responded by linking up with an online financial news website, which published several articles about the blogger, some announcing that the blogger was, in fact, being investigated by the SEC for fraud. Mr Halpern could then refer worried investors to that website for background on the controversy.

Mr Halpern’s response was a classic PR ploy. By getting an external website to report on the blogger, the chief executive could provide reassurance to Circle investors, as that website was considered independent of the controversy. As Lord Chadlington, chief executive of UK public relations group Huntsworth, says: “People are interested in things that are independently said. Our job is to get third parties to endorse products. It’s all about endorsement and getting the endorsement right.” And, of course, PR groups try to get third parties to endorse individual companies and party political strategies as well as consumer brands and products.

PR historically tried to secure positive endorsements in traditional media, such as newspapers, magazines, television and the radio. But the internet provides new challenges and opportunities. That’s because, unlike in traditional media, news can come out on the internet and be commented on and spread across the globe in seconds. And the scope for companies to deal with this is limited when it comes to traditional PR approaches.

In short, companies can no longer control the message in the way they used to with PR, or even with traditional advertising and marketing. Take computer group Dell. It can spend as much as it likes on advertising, but it can’t magic away the 2.85m entries you find on Google by keying in the words ‘Dell hell’. And the fact that these entries are independent only heightens the problem.

The PR industry is responding to the challenge. And, unlike some other forms of marketing, it is well positioned to deal with the internet and the blogosphere. That’s because, as Paul Holmes notes in his 2007 report on the PR sector (which was commissioned by Huntsworth), “the fundamental process of digital communications closely resembles the traditional process employed by PR professionals to earn attention for their clients”. Mr Holmes points out that PR professionals have always tried to target those people who typically influence their client’s target audience. They then related their client’s tale to those people, and depended on them to spread the story to the wider public.

Historically, those people were journalists. Now, however, they can be anyone with influence, including bloggers and so-called citizen journalists. Mr Holmes says: “They are harder to identify, and understanding their specific information needs and desires requires more work, but the process remains the same: identify them, tell them a story, rely on them to tell the story to others.” Mr Holmes adds that the lack of control in the blogosphere is precisely what makes the new media credible. He says: “The smartest and savviest marketers understand this and are already turning to PR counsellors for help.”

Indeed, in this context, Andrew Walsh, media analyst at brokers Bridgewell Securities, says that PR is rebranding itself as ‘reputation management’. He says: “Blogging exists whether you like it or not, and it’s difficult to influence it in the normal way. And all of this new PR science is, frankly, still being developed.” Even so, a key role for PR is to monitor what is being said about brands, companies and products, and make sure there is a swift and positive response to any negative comments.

Work in corporate reputation and digital communications is expected to drive PR growth going forward. The Holmes report reveals that 62.6 per cent of PR companies responding to his survey said they expected to see the most growth from corporate reputation in the next few years, while 43.8 per cent said they expected to see the most growth from digital public relations (respondents could vote for up to three areas). And most large PR agencies say corporate interest in social media (which encompasses websites such as Facebook and Second Life) was the largest single driver of turnover growth in 2006.

In fact, according to Alex DeGroote, media analyst at Panmure Gordon, the onset of the digital era means: “There’s been a sea change in PR.” And Paul Richards, media analyst at Numis Securities, notes that PR is one of the fastest growing sectors within marketing, adding: “I expect that to keep going.” Indeed, the Holmes report reveals that the global PR agency business grew by an impressive 8.5 per cent in 2006.

PR was, however, dogged by the fact that it was difficult to measure its effectiveness. But the advent of the internet has changed that significantly. On the internet you can, for example, accurately record the number of individuals clicking on to an article about Harry Potter or visiting a website with Harry Potter promotional material.

In addition, Procter & Gamble, the global fast-moving consumer goods giant, now has hard data to measure the return on investment (ROI; defined as the incremental net sales generated from the incremental net dollars invested in a particular PR campaign) from public relations activities. P&G spokesman Damon Jones said that, out of around 11 categories (which include television advertisements and in-store advertising), PR almost always ranks in the top three, in terms of ROI, across a variety of product areas (such as baby care and household cleaning). Mr Jones says: “PR is a very effective tool for us. Our investment in it has increased in the past few years.”

Furthermore, Paul Bates, media analyst at Charles Stanley, says the fragmentation of the media resulting from the proliferation of television and radio channels, as well as from the internet, means: “You don’t get the same bang from your buck as you used to by running an advertisement during Coronation Street. So you find your market in other ways. Some has gone to the internet, but some has gone to the PR industry.” And Mr DeGroote believes that PR only accounts for 2-3 per cent of marketing budgets. As such, there seems plenty of scope for growth.

Mr DeGroote also says turnover growth for UK PR groups is typically exceeding cost growth, implying there’s real scope for rising profits. And, as PR groups are relatively small companies, there’s also some take-out potential from larger groups seeking to benefit from the industry’s strength. Despite all this, however, the major UK-listed PR companies (Huntsworth, Chime Communications and Next Fifteen Communications) collectively trade on around 12 times forecast adjusted earnings for 2008, on an equal-weighted basis. PR companies are cyclical, so they would look set to be hit should global economic growth falter. Even so, that lowly PE rating does not seem to square with the industry’s attractive prospects.

In short, as Mr DeGroote says: “My hunch is that PR has moved up the value chain of marketing services. And, if that’s the case, then investors will cotton on to that too.”

[BOX: Three PR groups benefiting from the digital revolution]

Huntsworth

Huntsworth is the world’s largest quoted PR group, with an extensive international network. It is the most broadly based UK-listed PR group, with interests across the fields of finance, politics, technology, healthcare and consumer brands.

Its annual report reveals that Huntsworth is using social networking, including blogging and podcasting, to assist clients in finding their way through the new media landscape. And the group says new media is a large driver of growth in the healthcare, financial, consumer and corporate sectors.

Significantly, at a time when the media sector is shifting away from mass-market audiences into more fragmented niche groupings, Huntsworth has evolved methods of reaching targeted stakeholder groups. Unsurprisingly, Huntsworth runs reputation management programmes that monitor what’s being said about organisations and provide early warning alerts.

Meanwhile, subsidiary The Red Consultancy launched a new media division, called Shiny Red, in 2006. Shiny Red is a joint operation with commercial blogging group Shiny Media. And in the US, Citigate Cunningham now utilises social media to manage the interplay between old and new media.

Chime Communications

Chime has well-developed political and country PR divisions. It has been, under the guidance of chairman Lord Bell, one of the pioneers of promoting countries, such as the interests of Saudi Arabia in the US. But it also has a full gamut of other PR activities, including financial PR. Chime goes deeper than Huntsworth and Next Fifteen into non-PR marketing services, including creative agencies and media buying businesses, making it something of a mini-marketing services conglomerate.

According to Lord Bell, Chime is integrating digital communication into all of its communication plans. And through its Bell Pottinger subsidiary, it is involved in reputation management across several sectors. Indeed, Bell Pottinger has a web-mapping business that offers clients analyses of online comments on their brands. Furthermore, as part of its three-year plan, Chime plans to leverage high-growth sectors, including digital communications.

Chime is encouraging its clients to merge some of their marketing and communications activities, to gear them to the web 2.0 world. In fact, the group recommends that these activities should be reconfigured into ‘brand newsrooms’, which can work with the media on a daily basis.

Next Fifteen Communications

Next Fifteen is mainly focused on the technology space, but also has general consumer clients. It is small, but well spread internationally, with head offices in the US and UK, and also offices in the Far East. Mr Walsh says technology is a particularly strong sector for PR. He also says client-agency relationships with technology businesses tend to last longer than with some other sectors, as you need quite a lot of industry knowledge to be able to work in that field.

In the annual report, chief executive Tim Dyson stresses that, thanks to the internet, traditional marketing techniques are becoming less effective, while bringing new opportunities for PR. The group’s research business, Context Analytics, has tools to help organisations analyse how they are viewed in the blogosphere. Next Fifteen also assists companies in managing their own blogs, either corporate blogs or those of company executives.

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