Leaner and meaner; Advertising agenciesTechnology has made life harder for admen, but they will not disappear
GAUGING THE STATE of health of the advertising industry is easy: just stroll along the waterfront in Cannes when the admen hold their annual gathering in June. These days the prime beachfront tents are occupied by technology companies like Google, whereas once-storied agencies, such as Ogilvy & Mather, are relegated to dark, signless buildings, away from the sun and sand. Lee Bristol, a senior executive in the early days of Bristol-Myers Squibb, a pharmaceutical company, once said he could sum up an adman in five words: "Yes, sir! No, sir! Ulcer!" Now advertising executives are even more stressed by the twin afflictions of increasingly stingy and independent clients and powerful new competitors.
Margins have become slimmer across the industry, both in creative services (coming up with slick ads) and in media-buying (securing the spots where ads run), which has been hit by real-time bidding. The four large holding companies--WPP, Omnicom, Publicis and IPG--own agencies that do both.
Miles Young, the boss of Ogilvy & Mather, is putting on a brave face, claiming that technology has been a boon to creativity and enabled agencies to come up with ideas and campaigns that would not have been possible before. But there are probably more agency bosses who see their martini glass as half empty.
Coming up with an enduring campaign like "A diamond is forever" used to keep an agency nicely fed and watered for almost an eternity. Jeff Goodby at Goodby Silverstein & Partners fondly remembers the "three and out" era, in which agencies would produce three ads apiece for print, TV and outdoor and get paid handsomely. Digital media are much bittier and the pace is much faster. Brad Jakeman of PepsiCo, a drinks company, says his firm used to give agencies between four and six months to produce a piece of content and would pay between $700,000 and $2m for each of them. "Now we need an agency that can produce content in days, with each piece costing $10,000-15,000," he says. Clients are also working with fewer agencies. Until fairly recently General Motors was using 70 agencies to advertise its cars; now the number is down to three.
The rise of the internet and ad-tech services has encouraged some large advertisers to set up their own ad-buying departments. Technology firms, including Adobe, Oracle, Salesforce and IBM, offer software that can do some of the things agencies used to charge for, though Brian Wieser of Pivotal Research Group, which studies the industry, says this probably accounts for only 5% of the ad-agency business.
The mad men know they have to hire maths men, but putting two and two together can be harder than it sounds. Clients want their agencies to be tech-savvy, but Bob Ivins, Mindshare North America's chief data officer (a new role at agencies), has lamented his industry's "Bermuda triangle": "Ideas vanish out of thin air because they are brought down by the lack of talent, infrastructure and business model." This summer the only interns Mindshare hired in America were maths experts--and it can be hard to attract the best talent without the pay of Wall Street or the glitter of Silicon Valley. This is true even in China. An advertising-agency boss in Beijing says that talented engineers want to work for electronics companies.
Safety in smaller numbers
Now agencies are looking for salvation in mergers. Last year Omnicom and Publicis announced plans to merge to become the world's largest advertising holding company. The deal fell apart earlier this year because of personality clashes, but more consolidation is likely. Sir Martin Sorrell, the boss of WPP, predicts that within five years there will be even fewer independent advertising firms. Michael Roth, the boss of IPG, says matter-of-factly: "We're the next one to be consolidated."
The ad-tech firms are gleefully forecasting the imminent demise of Madison Avenue's middlemen, but they may be wrong, for two reasons. First, ad tech has introduced so much complexity into the business that clients may want to hold on to agencies for advice, and agencies' creative services are likely to remain in demand when brands are having to churn out so many different pieces of content.
Second, the prediction that technology companies like Google will start to compete head-on with the agencies is likely to prove wrong. To provide full client services they would need to hire thousands of new employees, for limited gains. Google's margins this year are expected to be around 50%, whereas WPP's are forecast at just 17%--and that is for the largest and one of the most successful advertising agencies. Perversely, the agencies' mediocre returns may protect them from being wiped out by nimbler competitors. Their tents in Cannes may no longer have the best views, but the admen will still be there.
last updated february 2017