The Future Of Media Agencies Is Looking Very Grim Indeed!

In this thought piece, the advertising editor of Business Insider, Mike Shields, grabs a large bucket of petrol and pours it right on the “media agencies are f@cked” bonfire. In this challenging article, Shields says brands are increasingly recruiting their own data/media/strategists and cutting the middleman – the media agency – out of their slice of the pie…

Note: This article is written in the context of the US market. You can read the article in full at Business Insider here.

A few years ago, Booking.com, a hotel e-commerce site owned by Priceline, worked closely with a media-buying agency to figure out where to allocate its ad budgets.

“We’d have meetings where we’d sit down and say, ‘We should put this much on YouTube, this much on other sites,’ et cetera,” Pepijn Rijvers, Booking.com’s chief marketing officer, told Business Insider. “And then three months later we’d ask, ‘How’d we do?’”

But Booking.com is about to cut out that middleman, and it could have big implications for the advertising industry.

This week, thousands of top executives from the media, advertising, and marketing industries will touch down in France for the annual Cannes ad festival. There, these bigwigs will receive awards and look to ink major ad deals. Yet hovering over the proceedings are questions about the future of the classic ad-agency business.

In recent months, Booking.com has hired data scientists and researchers and other digital-media-buying experts. By the end of the year, all Booking.com’s digital-media buying will be done in-house.

According to Rijvers’ there are two reasons for the change: speed and data. And the more outside companies involved, the more that structure gets in the way of adjusting digital ad campaigns on the fly, which ultimately costs the company money.

“I would not like to have meetings with long decks of data,” Rijvers said, who recalled trying to set up “meetings with 30 people at agencies that take a week and a half to set up.”

“We have way more data than the media agency has. I’d make a very strong case that anything that generates data, you need to own as a business. You cannot have anyone else be the expert.”

Booking.com is representative of a new wave of marketers. These are brands born with the internet, and they don’t have decades of history running massive national television and magazine campaigns shepherded by traditional ad agencies. They don’t rely on selling their goods at Walmart or Walgreens or the local car dealer. Instead, they have direct relationships with customers and live and die on data.

That means they have a very different take on advertising than traditional marketers like Procter & Gamble or General Motors, and that should scare the ad agency world.

The pressure is mounting

The ad industry loves its clichés. “Content is king.” “Everyone’s scared of Google and Facebook.” “I’m a thought leader.” And these days, everyone loves to repeat the line “The agencies are so screwed.”

Though they usually use a different word at the end of that sentence.

There’s little doubt that traditional agencies — the companies that write and produce those brilliant Super Bowl ads and buy the media space to showcase their work — are under fire from several fronts.

• More marketers such as Booking.com are taking their data-driven, transaction-oriented ad buying (e.g., programmatic ads) in-house.
• Some brands, like Chobani and Pepsi, are occasionally doing the same with their creative, or are outsourcing the making of their ads to smaller upstarts.
• Consulting giants like Accenture and Deloitte are investing in the ad world.
• Facebook and Google are raking in a disproportionate amount of new ad spending, and both are building more agency-like functionality.
• Companies like Vice and BuzzFeed are making content for marketers and distributing it.

‘Agencies are said to be like cockroaches’

Still, the agency business will be hard to kill. According to Ad Age, US ad agencies reeled in over $US48 billion in 2016. And the industry employs 200,000 people. So it’s not about to disintegrate overnight.

But growth in this business is undoubtedly slowing. The ad-agency holding company WPP recently posted its slowest growth rate in years, The Wall Street Journal reported. Similarly, Omnicom Group provided markedly cautious guidance for the near future.

“There’s little question that there are tougher times ahead,” Brian Wieser, senior analyst at Pivotal Research Group, told Business Insider. Wieser laid out the risks facing the ad-agency holding-company giants, which have enjoyed strong growth in recent years from their media-buying agencies. That may be slowing dramatically, because of marketers squeezing their budgets and reduced demand, among other factors.

“Agencies are said to be like cockroaches,” he said. “But even in a nuclear winter, cockroaches may have a tougher time.”

Yet even as advertising has been disrupted by macro trends, such as software-driven ad buying, agencies have proved fairly resilient. “People talk about whether agencies … and this function [they serve] will still exist, but there are a lot of people involved here,” said Brian Lesser, North American CEO of the ad-buying giant GroupM, at a conference hosted by the trade company VideoNuze.

“And understanding a client’s needs and determining exactly how to translate that into a media plan … we’ll always occupy that space,” Lesser added.

Things are undoubtedly changing

Jordan Bitterman, chief marketing officer at the Weather Company, logged two decades at agencies. He says they will survive but their scope will shrink.

For one thing, he said many big marketers’ overall businesses are struggling. Look at the retail industry, for example.

“This is just the new reality,” he said. “The problems roll downhill. Marketing is going to feel it early and often.”

Bitterman sees more marketers using smaller agencies and vendors on a short-term basis as needed. Need some social videos? Hire a specialist for a few months.

“The days of a full-service advertising agency offering full service to every client are gone,” he said.

Booking.com’s Rijvers agrees. He still works with several creative agencies as needed, but adds: We’ve “moved away from retainer relationships,” he said. “They are predicated on a predictable future.”

There’s not much that’s predictable about media and advertising these days. But Bitterman says there’s a role for a smaller agency. Marketers still want agencies to coordinate all the different things they have going on at one time. And they will always need an outsider’s perspective. “Strategy and ideas never go out of vogue,” he added.

Trust issues

Agencies’ operational structures are one thing. Relationships, of vital importance in the marketing world, are another.

The ad-agency industry is still reeling from last year’s bombshell report from the Association of National Advertisers, which found that cash rebates and “other non-transparent practices” to be pervasive in the US media-buying world. Essentially, the report, conducted by independent firm K2 Intelligence, found that ad agencies were buying ad space for their marketing clients, and not being open about what they were spending and how much money they were making.

And since no names were named, the effect made everyone a suspect.

“The tension has been heightened,” said Andrew Altersohn, CEO at the ad-tech company Adfin. “That’s led to an aggressive evaluation of in-house options.”

In other words, many marketers are saying, If I can’t trust my agency, I’ll have to take things into my own hands.

Examples abound. Chobani has its own creative officer. Netflix and L’Oreal have brought more of its ad buying in-house. Western Union has consolidated its agency roster from over a dozen partners, in part because it wants to have a tighter rein on its spending,

Libby Chambers, Western Union’s chief strategy, product, and marketing officer, told Business Insider that the company is contemplating a full audit of its ad buying, to make sure it’s running ads in safe, cost-effective places on the web. “Now we can hold somebody accountable,” she said.

Yet brands need to be careful what they wish for when they take on agency work, said Charles Cantu, CEO of the ad-buying company Huddled Masses. “In a visceral sense, this is something they want,” he said. “The reality is, some are prepared for this and some are not.”

Meanwhile, the ad-agency trust issues play into consulting companies’ hands, said one 30-year agency veteran. Those companies have a reputation for being straightforward and are all about driving business results.

“These kinds of companies get access to decision makers and are tied into financials,” said this executive, who did not wish to comment publicly.

Change is tough

Wieser of Pivotal Research said that big ad agencies are trying to evolve. Publicis’s acquisition of the digital-ad company Sapient — which boasted of prowess in consulting — in 2014 was a step in that direction.

Jon Mandel, a media consultant who logged three decades in the agency world, including a stint as CEO of the ad-buying firm Mediacom, said it would be very difficult for classic ad agencies to change their ways.

“They are still set up for fighting the last war,” he said. “They haven’t really set themselves up for the future war. Instead they are trying to eek out gains from a model than needs to change, while always trying to upsell clients on services.”

Rosemarie Ryan, another longtime traditional agency executive who know runs the creative-consulting firm Co Collective, put it in even more dire terms.

“Facebook and Google are the new agencies,” she said. “Look who’s taking over the beach at Cannes.”

The future

Wieser was not predicting total agency destruction, particularly given ad agencies’ entrepreneurial nature and constant ability to reinvent themselves. He cited the emergence of search-centric agencies in the early 2000s, mobile agencies a decade ago, and other specialty shops more recently.

“Agencies are good at moving onto the next big thing,” he said.

For example, that might mean building specialty practices for marketing via artificial intelligence, or virtual reality.

“What I can’t tell you is whether the next new thing they focus on will be as profitable as the old business.”