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15 July 2009

Facing the break boundary: how advertising agency models no longer work.



I attracted a lot of traffic recently to this blog from some comments I made on AdAge on the commoditisation of agencies. One of the things I said was that the traditional agency model was no longer relevant and agencies needed to either adapt or die. And as the makers of a new season of MadMen announced this week its to premiere in the fall, I began to look around for some new thinking on the traditional agency model and found, as market analysts might say, there’s not a lot of guidance. So here’s mine:

1. The agency model as we know it now well over 70 years old and is tied to media types whose basis was honed during the 1930s and 1940s. Agencies are now at a significant break boundary.
2. On the basis of measured spending alone, there is a question over the continued viability of agency models as billable spends are in significant decline across all segments, except digital, research and PR
3. The full service agency model is no longer a differentiator
4. Increased concentration of agency ownership into massive global networks enshrines the traditional agency model to it's detriment
5. Vertical integration of the agency model and its assumption from within by client organisations foils agency growth expectations
6. Enhanced technologies disintermediates agencies and enables client side assumption of agency value add services on a lower cost basis
7. The increasing ineffectiveness of traditional agency work is a direct consequence of a fractured and media environment

Now let’s look at the foundation of all this sturm and drang.

1. The traditional advertising agency model is dying because traditional media advertising and marketing is in state of extreme fragmentation and change.
What we are seeing is what media theorist Marshall McLuhan described in his seminal 1967 work Understanding Media what economist Kenneth Boulding called a "break boundary, a point at which the system suddenly changes into another or passes some point of no return in its dynamic processes” .

Understanding Media 38

“One of the most common causes of breaks in any system is the cross-fertilization with another system, such as happened to print with the steam press, or with radio and movies (that yielded the Talkies). Today with microfilm and micro-cards, not to mention electric memories, the printed word assumes again much of the handicraft character of a manuscript. But printing from movable type was, itself, the major break boundary in the history of phonetic literacy, just as the phonetic alphabet had been the break boundary between tribal and individualist man.


In the last ten years we have seen a number of significant break boundaries as traditional media forms, in particular, newspapers and magazines, largely abandoned by both readers and advertisers in favour of screen based digital delivery of both content and advertising alongside increased usage and proliferation of connected screen based devices.

While many agencies have tried adapt to this with development of digital arms, media planning and more recently, social media – the traditional agency has distinctly failed and is failing. The “MadMen” of the synonymous television series are now mere nostalgia.

2. In the first quarter of 2009 measured ad spending in the US declined by 14%.

MEDIA SECTOR
Media Type (shown in rank order of 2009 spending) % CHANGE

TELEVISION MEDIA -9.7%
Network TV -4.2%
Cable TV -2.7%
Spot TV -27.5%
Syndication - National 0.2%
Spanish Language TV -15.4%

MAGAZINE MEDIA -20.5%
Consumer Magazines -19.2%
B-to-B Magazines -25.5%
Sunday Magazines -23.7%
Local Magazines -25.3%
Spanish Language Magazines -20.5%

NEWSPAPER MEDIA -25.5%
Newspapers (Local) -25.1%
National Newspapers -28.5%
Spanish Language Newspapers -21.6%

INTERNET (display ads only) 8.2%

RADIO MEDIA -26.2%
Local Radio -26.8%
National Spot Radio -31.7%
Network Radio -11.2%

OUTDOOR -14.6%

TOTAL -14.2%
Source: TNS Media Intelligence 2009

According to TNS, the old media triumvirate of radio, newspapers and TV are the most heavily impacted. The global financial crisis has had a more profound effect on the advertising and marketing industry than predicted, a survey released in February by the US Association of National Advertisers revealed 93 percent of companies were identifying cost savings and reductions as opposed to 87 percent in a similar survey conducted by the ANA six months previously. Further, 37 percent of respondents planned to reduce budgets by more than 20 percent, up substantially from the 21 percent of respondents in the first survey. The top five areas where marketers planned to reduce costs or expenditures in marketing and advertising efforts were:

i)Departmental travel and expense restrictions (87 percent, versus  63 percent in the previous survey)
ii)Reducing advertising campaign media budgets (77 percent, versus 69 percent in the previous survey)
iii)Reducing advertising campaign production budgets (72 percent, versus  63 percent in the previous survey)
iv)Challenging agencies to reduce internal expenses and/or identify cost reductions (68 percent, versus  63 percent in the previous survey)
v) Eliminating or delaying new projects (58 percent versus  61 percent in the previous survey)

In this respect, agencies can no longer rely simply on expanding revenues from media and production budgets. The likelihood that these budgets will return to pre-GFC levels is unlikely given a number of break boundaries have now been crossed.

3. The mass commoditisation of the full service agency model is now increasingly contributing to its decline. The "full service" agency model is an anachronism belonging to 1950s MadMen, when creative and placement were the two axis under which an agency billed. The continued adoption of full service agency models are a failed attempt to roll all aspects of marketing and communication into a single place. Few agencies now succeed because now most can never competently and completely deliver on the whole service offer. Words like “360”, “holistic” and “integrated” are bandied about like some kind of emblematic imprimatur but there are 1000s of these agencies in the world and they all say and do the same thing.

4. In 2008 nearly 40% of all global advertising was managed by just four companies Omnicom ($13.359 billion), WPP ($12.27b) Interpublic ($6.693b) and Publicis ($5.1b) but according to a 2008 Harvard Business School study on concentration levels in the US advertising and marketing services (A&MS) industry concluded “the four largest holding companies captured between a fifth and a quarter of total revenue from the A&MS industry, a share that remained quite stable over the period 2002-2006. These estimates are lower by an order of magnitude than estimates often cited in the trade press.” However, the same study estimated that for US government censuses conducted between 1977 and 2002, the actual number of firms and establishments in advertising and marketing services increased at compound annual growth rates of between two and four per cent. But in 1997 long-term growth (coinciding with exponential digital growth) ended and the number of firms and establishments actually decreased from their 1992 levels. This decline continued in 2002 and continues.

So this decline in long-term industry growth is not only forcing concentration from within the industry at the network level but also to a further concentration of service offering to meet revenue expectations and as the number of firms with billable work continues to fall.

5. Increasing backward integration of marketing and advertising functions by client organisations poses a significant threat to agency survival. Last year the US Association of National Advertisers (ANA) released preliminary findings from a survey of large national advertisers and found 42 percent of ANA member firms had established internal advertising units. Cost efficiencies and savings were reported as the major reasons for pursuing the in-house route. The most effected areas, according to a 2008 Harvard Business School study on bringing advertising agency functions in-house, were technology industries (e.g., electronics, instruments) and the creative industries (e.g., publishing, motion pictures).

6. In a post on his blog in 2007 Scott Carp ex- Atlantic Monthly head of digital and founder and publisher of publishing website 2.0 announced:

“Madison Avenue should be afraid — very afraid. Online advertising is all about scaling the infinite complexity of thousands of media channels and thousands of micro targeted ad messages — yeah, like AdWords and AdSense. Sure, it’s going to be much harder for Google to pull this off with video and brand advertising, but in order for Madison Avenue to compete it’s going to have to be completely dismantled and rebuilt .

Of course, Yahoo and Microsoft (and let’s not forget WPP) are also competing with Madison Avenue — and with Google to become the ultimate vertically integrated media and advertising company .

But the game is all about scaling — and when it comes to scaling, Google will be hard to beat.”

Carp’s right on most counts. Google might be failing with YouTube but does beat agencies at their own game. Last month it even opened Agencyland, an educational portal for advertising agencies designed to educate agency staff on Google Advertising and also help bridge the gap between Google and the agencies. But Google’s global advertising system which its built on Adwords and DIY model is designed to bring a better ROI to advertisers, and for easier monetization for TV, cable, gaming and online publishers. Microsoft is already heading down the same route and places like LinkedIn and Facebook already allow users to effectively create, place and track limited but highly effective micro-targetted campaigns.

7. Not only is traditional advertising effectiveness in decline but the work of agencies themselves is being increasingly called into question. Even as far back as 2005 advertising and marketing theorist Philip Kotler predicted advertising agencies needed to transform themselves into communication agencies. Though many agencies say they have gone down this track, from the 90s its been largely media and digital agencies who have done this, while network owners have resorted to broadening skill reach usually via acquisition to offer clients the benefits of a full integrated agency network. In the end, the traditional agency, has been left largely untouched as have been the measures of its effectiveness. Awards nights for advertising effectiveness or creative design being seen to somehow assuage client incredulity over campaign success and fail. I don’t know how many pieces of creative work I have seen that lack any real ROI, even when it’s been a specific assessment criteria or when a campaign has been deemed a success largely on the basis of viewership figures alone. Set this against the granularity of data offered from digital, where every week one agency or another goes out to market with a new measure of advertising effectiveness such as Compete who launched yet another digital advertising effectiveness measurement system. Still traditional media doesn't seem to giving up. Just this week MRI in the US debuted its AdMeasure report, which aims to put magazine publishing ad effectiveness on the same level as digital.

Earlier this week Forrester Research reported that 60% of marketers surveyed would increase their digital spend by shifting funds from traditional spend. Direct mail most cited by 40% of marketers as being one being cut followed by newspapers (35%), magazines (28%) and television (12%). And while many agencies and their clients continue to create “interesting” advertising as in a recent Harris/AdWeek poll, interesting doesn’t quite equal influence. Nor purchase. Nor survival.