• by Dave Morgan , Featured Contributor, January 17, 2008

Are ad agencies and agency holding companies destined for some significant changes in 2008? I was part of panel discussion earlier this week at the Gridley Conference in New York that addressed that issue, among others facing the media and marketing services industries. The consensus of the panel was yes; structural changes are coming to the industry, and we may very well see some of them start playing out in 2008.

 

The crux of the discussion was that the holding companies have not been able to change as fast as the landscape has changed around them. I, particularly, called out the challenges that agencies and holding companies face in responding to fast-paced change and the digital demands of their clients, and the inflexibility of their current capital structures and business models. In my view, we are at the dawn of a new era of agencies and agency business models, and the faster they get here, the better it will be for all of us involved in the industry. Here is some of what I think will change:

 

• New competencies - In the recent ANA, IAB and 4A's study on the Marketing & Media Eco-System 2010 conducted by Booz Allen, brand marketers identified their most critical needs in marketing today to be the acquisition of consumer insights, behavioral targeting and brand strategies. They are looking for leadership from agencies, not just execution. This is good news for agencies, but will require that they make significant investments in competencies and technologies to deliver these insights, targeting and strategy capabilities. Over the past year, we have seen WPP buy 24/7 Real Media and Publicis buy Digitas, but it will probably take much more. Let's not forget that it was Microsoft that paid $6 billion for aQuantive, not a marketing services company.

 

• Supply chain - the supply chain of online media planning, buying, sales, delivery, optimization and measurement is a mess. There are billing problems. Inventory projection problems. Inventory reservation problems. Ad serving discrepancies. Ts & Cs. Invoice discrepancies. It frequently costs agencies more money to run campaigns than they can ever hope to recoup from their clients, and it certainly has an enormous impact on agency profitability. This is bad for everyone. This has to be fixed -- or agencies won't be able to provide the focus and resources to digital channels commensurate with the audience attention that these channels receive. This is not just an agency problem. It is an industry problem, and, most important, it is a media seller problem. The IAB is now providing leadership here. Media sellers must sort out this mess and free up agencies to focus on what they do best, not spend 20% of their manpower reconciling online media invoices.

 

• Talent - Service businesses run on talent, and when those services involve the Internet, technology or data and marketing analytics, that talent is in extraordinary high demand and expensive. Digital marketing may not command the lion's share of ad spending today, but it will at some point in the not-so-distant future. This means investing in that talent now, knowing that it won't fully pay off until the future. Obviously, this is hard to do in digital media buying, since the margins are so thin and the projects aren't always very scaled, but that is the cost of market entry. Of course, it may mean using geography as an advantage. Some of the hottest ad agencies today are not in one of the traditional media metropolitan markets. The Martin Agency is in Richmond, Va. Crispin Porter is in Miami. Wieden Kennedy is based in Portland, Ore.

 

• Business models - With the loss of the old-media commission structure to fund operations, agencies must be much more creative in their business models. "Cost plus" fee models are very much in vogue for media planning and buying, but make it very hard to run the business (not the earlier bullet about the need to invest in expensive talent). Some digital agencies, like aQuantive and Digitas, were able to build very powerful business models scaling on data and technology and process. Everyone needs to do this now. Bidding Cost Plus in a competitive world generally means very little "plus" and very little profit. It is what "job shops" do. It is not sustainable for supporting vibrant agencies.

 

• Capital structures - As they are currently structured, most of the marketing services (read: agency) holding companies are structured not unlike merchant banks. They operate entirely off the cash flows of their subsidiaries, with very little synergy or structural cost savings. This makes it very hard for them to make heavy capital investment in strategic areas, and virtually impossible for them to run unprofitable businesses in the hope that someday they might become profitable. This is not a problem for media sellers. Their entire business models rely on making investments in content or distribution assets and then reaping the reward over time. Their capital structures are designed to support substantial amounts of debt to accomplish that. That is not the case with holding companies, and virtually everyone agrees that they will need to restructure their capital structures soon. Of course, as public companies, this is very hard to do. Most likely, we will see some or all of them go private to restructure. If the private equity and LBO (leveraged buy-out) market was still as frothy as a year ago, this would happen sooner. With capital more expensive, this might take a year to two to happen, but happen it will.

 

• Mindset - Agencies are an essential element in the marketing ecosystem. Advertising cannot exist in a large way without them. I cannot imagine that either marketers themselves or media sellers will ever be able to build and effectively deliver the kinds of strategy, creative and delivery services that agencies provide today. They are crucial to the process, but don't always drive their businesses that way. Whereas media sellers and technology companies are generally pretty aggressive about staking out positions in future markets, agencies and marketing services companies seem to be much more timid. Part of this may be the requirement that they "follow" their clients as much as they try to lead them, but it is this mindset that needs to change if agencies are to control their future. Those like aQuantive, Digitas, Modem Media and Beyond Interactive were built on risk, but their stories are the exceptions, not the rule, in the industry. That needs to change.

 

Why do I care about agencies? Because I truly believe that brand advertising will never fully develop online without them. They are essential. They need to be profitable. It is incumbent on all media sellers and complementary intermediaries to make this happen. Automation and self-provisioning tools in the planning, buying, optimizing and measurement of online advertising may appear to some as ways to replace the agencies, but all they do is help improve the supply chain. Someone needs to help marketers manage strategies and brands and campaigns and media vendors. Tools will never replace people here. Tools will help support people. What do you think?