• by Maarten Albarda , Featured Contributor, January 26, 2015

Last week I spent time with a number of senior media agency execs from several different markets, and discovered that their challenge is daunting.

The current media agency income model heavily relies on fees. These fees are typically calculated on the basis of full-time equivalent shares of people working on a piece of business, plus overhead and other costs of running an account. There’s often a pay-for-performance or other incentives included to drive the agency to deliver.

This model is being challenged by fast and furious changes in the media world:

The media-buying process is increasingly automated. This is good news for agency bosses, who will be able to reduce headcount (if you’re a media buyer: brush up your resume and skills beyond Excel!). The bad news is, many other parties, some of whom are not agencies at all, are offering competing technology solutions. Think of marketers buying white-label programmatic and RTB solutions to manage RTB/programmatic in-house. Or think of BrightRroll and TubeMogul. Any technology company is a potential competitor.

The other part of the bad news is that agencies (and competitors as outlined) will not be able to drive the same kinds of revenues and profits from algorithm-driven media buying as with traditional media buying. There’s already a race to the bottom going on in programmatic, and the end is not yet in sight. Just think of the print media industry, generating an ever-growing share of digital ad sales, but with revenues generally so much lower that they will never, ever compensate for losses in traditional ad sales. Agencies might be facing the same problem over the next few years.

The obvious answer for agencies is to prop up the front end of the process with, for example, strategic advice that focuses on integrated communication strategies. Big data and analytics play a key role here.

But the truth is that many agencies do not (yet) have the kinds of people and systems in place to deliver these types of services. There's also the pesky problem (as discovered through WFA research) that marketers believe that they’re the best people to do this type of planning -- while, yes, agencies believe they are  the best-suited for the task. Neither marketer nor agency believe that the other party can do it. So there is a bit of a credibility gap here.

The other challenge is that agencies would have to attract top analytics and math talent, a group of people in short supply and high demand. Agencies will be competing with the financial world and the tech world, both of whom pay (according to research from last year) two to three times the starter salary of a media agency.

And here, too, there are more competitors positioning themselves at the front end of strategic marketing. Creative agencies frequently sell a proposition of a big idea coupled with integrated strategy, a claim that is gaining a lot of credibility. Bain, Accenture and other consultants claim the strategic space, too.

So there you have it. The profitability of media buying at traditional media agencies is being challenged by lower revenues and broader competition. The front end is not necessarily a given as replacement for that lost revenue. What would you do?