Are big advertising agencies too big to fail? Well, we saw what happened to the banks.
For 40 years the advertising industry has been consolidating to the point where five holding companies now account for 70% of global industry revenue. They have seemed unstoppable due to their endless resources. But paradigm shifts in the industry and new technology have leveled the playing field.
Shares of WPP, Omnicom, Publicis, Interpublic and Dentsu declined substantially in 2017; and just this month, WPP CEO Martin Sorrell announced a decline in earnings and a subsequent $3.6 billion loss in market value.
A Citibank analyst recently told the Financial Times that “The ad holding companies are seen as being vulnerable and disintermediated. Their performance suggests there is something wrong. If the market is growing then they should be growing too, but they’re not.”
While holding companies are bleeding revenue, the latest Ad Industry New Business Report showed that boutique and digital agencies are gaining on legacy shops.
As the Founder and CEO of PK4 Media, we are experiencing the profound shift in the advertising industry first-hand.
Here are 4 Reasons Big Ad Agencies Are Not Too Big to Fail:
- BECAUSE THEY ARE BEHOLDEN TO THEIR HOLDING COMPANY NOT THE CLIENT: Large ad agencies must maximize profit to prop up holding company stock prices every quarter. At the same time, the advertising industry has become hampered by fraud and hidden fees. Juniper Research predicts brands will lose $19 billion to ad fraud in 2018. Meanwhile, programmatic trading desks may charge up to 20% in hidden fees, according to IAB. Uber, for example, recently sued an agency owned by Dentsu for $40 million saying they were sold fake clicks. Without any shareholders to satisfy, this has created an enormous opening for privately owned agencies to offer unprecedented transparency when it comes to both fees and fraud.
- DIGITAL SURPASSED TV FOR THE FIRST TIME: In 2017, digital beat television for the first time. While television will always be a critical platform, we now live in a world where consumers own an average of 64 devices. Consumers are demanding a seamless customer journey across all platforms and McKinsey found that companies that optimize the consumer journey increase revenue by up to 10% annually. The larger agencies — who have decades of processes in place — have been slower to respond. Smaller agencies — particularly those with proprietary technology that can reach consumers across all platforms – are able to show greater ROI on relatively smaller ad spends. As an example, WIX.com — who ran Super Bowl ads for three straight years – focused on digital instead this past February despite an increase in marketing budget.
- THEY ARE BIG BUT LACK AGILITY: At large companies, ideas get bogged down by arduous approval processes, bureaucracy and executive egos. By the time legal gets involved and signs off the opportunity has been missed. Technology has advanced to the point where campaigns must be monitored and adjusted in real-time to maximize performance. As Jeff Rosenblum — who did a great documentary on the changing landscape in advertising – correctly noted, “Large agencies have typically been in business for decades. An agency that is saddled with legacy skills, legacy expenses and a holding company that enforces a minimum net margin every quarter can have a difficult time generating and executing groundbreaking ideas.” As the way the world consumes information changes rapidly, agencies that are nimble can be a step ahead of a larger but slower conglomerate.
- TECHNOLOGY LEVELED THE PLAYING FIELD: Twenty years ago, maybe even 10, smaller agencies really could not compete against industry leaders for Fortune 500 clients. Today, companies like ours have produced proprietary technology that reaches more people on every possible channel imaginable. The highly targeted nature of technology-led campaigns means that return on ad spend can be achieved in a much more efficient way.
Advances in digital advertising and technology have lessened the advantage larger ad agencies once enjoyed. It has given boutique and mid-size independent agencies that opportunity to compete for the largest clients. Whichever agency gets retained, brands should demand transparency, integrity, and settle for campaign performance that is above industry average.