Simplicity may be the essence of genius, but it's not the essence of advertising. And that's to the good because complexity is going to save not only the ad industry but also the ad agencies that populate it.
If ever an industry were ripe for disintermediation, it's one with agencies in its very title. It's the industry that literally began as agents of newspaper ad space.
These agents would buy ad space for clients, pay the chosen newspapers 85% of list price, then turn around and bill their clients the newspapers' full list price. The resulting commission system, whereby the 15% kept by agencies served as compensation for their creating and placing clients' ads, left everybody happy for a very long time.
But it evolved in a way that ultimately served agencies best. This became obvious, to clients at least, after ad budgets ballooned to accommodate the commission-generating bonanza of television.
Small wonder the industry, which currently generates about $500 billion a year in global revenue, has attracted interlopers. Michael Ovitz, the co-founder of Creative Artists Agency LLC, hijacked the Coca-Cola Co. account for a while in the early '90s. Ari Emanuel, who heads William Morris Endeavor Entertainment LLC, has been making noises about a similar end run through his talent agency's two-year-old Lverage division.
Nothing, however, disturbed Madison Avenue more than the specter of digital giants Google Inc. and Microsoft Corp. The former made waves by acquiring digital ad server DoubleClick Inc. for $3.1 billion in April 2007; the latter by acquiring digital marketer aQuantive Inc. for $6 billion a month later.
Whither, then, the disintermediation? Well, it turns out the elimination of intermediaries first requires that they no longer contribute to the value chain. Or, put the other way, it requires the value chain to maintain all its value without the disintermediated middlemen.
The truth is that ad agencies stopped being mere agents years ago. They're really consultants, as well as creators, whose brief includes leading clients to just the right marketing decisions.
As Pivotal Research Group LLC, a New York-based equity research firm, puts it in a recent overview of ad agencies: "As marketers have come to face more and more choices for their marketing strategies, they increasingly rely upon external and ostensibly neutral partners -- such as agencies -- to both filter ideas and support the socialization of initiatives or process changes across the broader organization. This factor is the most critical one which explains why agencies face no credible threat of disintermediation from technology-driven marketing or media platforms."
Brian Wieser, Pivotal Research's agency analyst, furthers this notion with the claim that digital media is actually "increasing the importance of agencies and service providers as filters and navigators of ideas. As such, the agency sector is literally a 'digital dividend' on the application of technology to marketing."
The preservation of agencies can only be good news to dealmakers. Advertising's top global holding companies (WPP plc, Omnicom Group Inc., Publicis Groupe, Interpublic Group of Cos. and Havas SA) are on the prowl to expand in regions and in disciplines. They're also not averse to snapping up upstarts encroaching on their most coveted clients.
The growing perception that Google and Microsoft will never develop into real competitors -- "not least because digital media companies will want to retain their margins (significantly higher than those for agency services)," Wieser says -- appears to have emboldened agencies in pursuit of M&A.
FastCompany.com in November 2010 declared advertising under attack even from "agency expats." Exhibit A was Victors & Spoils Inc., a crowdsourcing startup in Boulder, Colo., which taps into a loose network of 6,000 individuals for a range of ideas that a lean team inside the agency then fashions into cost-effective ad campaigns.
The article played up the fact that V&S was founded by a respected industry veteran, who managed to woo such clients as General Mills Inc. and Oakley Inc., seemingly by just opening his alternative agency's doors. And though it failed to foresee the majority position Havas took in V&S this month, the article did quote Interpublic CEO Michael Roth as to why, exactly, this would happen: "We have to be ahead of the curve in all areas. We'll do it by investing in or partnering with these new types of companies and making them part of our offering."
Richard Morgan covers media for The Deal magazine.