I’ve been speaking with a lot of executives at digital agencies lately and with the exception of a handful of shops focusing on media and search; very few appear to be making money. I’m not talking about revenue – I’m talking about profit.

How can this be when ‘digital is the future’ and ‘the 30-second spot is dead’ — two phrases that have become an echo chamber for obvious things – you say?

At first blush, it doesn’t make any sense.

The top 100 advertisers in the U.S., who represent 41 percent of total advertising spending, shifted about $1 billion last year from TV and newspapers to the Web.

Overall media spending in “measured” categories (TV, print, radio, Web) by the top 100 advertisers was flat in 2007, with 0.3 percent growth to $61.3 billion. But spending on Web display ads rose 33 percent to $4.2 billion.

Further, The Kelsey Group forecast global Internet advertising to reach $147 billion in 2012.

These are reasons for digital agencies to celebrate, right? Yes.

But with a softening economy, smaller marketing budgets, an increased focus on ROI and demand for buzz-worthy campaigns (and awards) now reaching a feverish pitch, the stakes for these same agencies to achieve fame on behalf of their clients have never been higher.

This pressure has pushed our industry into an arms race — a horrific game of one-upsmanship – whereby each agency tries to outdo the other with bigger and more heretical ideas and digs a deeper hole for itself in the process. By giving consumers the ability to customize pizzas online and t-shits with headlines from CNN emblazed on the front and back it has become virtually impossible to make money in the digital agency business these days.

You see, no one on the agency side has ever built these newfangled applications before so it’s nearly impossible to properly estimate the production costs associated with them. Unfortunately, clients don’t want to hear such heresy and continue to demand tightly defined scopes of work that account for every dollar and minute spent on their accounts.

This is where the proverbial ball of yarn unravels for most digital agencies. They unwittingly commit to timelines and budgets because of pressure from the outside and get hosed in the process.

I applaud my brethren for their work and innovation. I’ve never been more proud to be in this business. My only wish for them now is to own up to the complexity of the ideas they’re proposing to clients so that we can all facilitate an open, honest dialogue about the time and money it takes to produce big, game changing movements. Only then can digital agencies achieve both fame and fortune.

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