Why ad agencies cannot execute in the digital era

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While just about everyone in the established ad industry agrees that "the future is digital," it's clear that nobody knows what to do about it. Sometimes it seems as if the whole industry (and by that I mean both the broadcast networks and the ad agencies that make the bulk of their money creating and trafficking ads for these media) is behaving like the proverbial deer caught in the headlights of a fast-approaching car.

The basic problem isn't that the ad industry doesn't understand the importance of digital media, but that there are structural issues that make it impossible for the ad industry, at least in its present form, to respond to the digital threat in a meaningful way. Some of these issues are cultural (e.g. old ways of thinking concerning the centrality of TV in the media ecosystem), and generational (the executives in power received their training in the 1980's and 1990's, when the Internet was a dismissible, geeky toy). These problems, while difficult to solve, will be resolved when younger, more digital-literate people take the reins in the next five to ten years.

But the most serious problems threatening the future of the institution we know as Madison Avenue are inherent and practically insoluble. Collectively, they pose a far more serious, perhaps fatal threat to traditional media players that nobody has an answer to. Here are three of them:

1. Agency media buying fee structures discourage digital media buying expertise

The media buying divisions of traditional ad agencies have consistently provided a profit center for the big ad agency holding companies, by charging fixed commissions against the total media buy. For example, a $1 million media buy yields the ad agency that books it a tidy $60,000 fee, which is a lot of money for a task that takes little more work than opening up a Rolodex and making a few phone calls to one's contact at ABC, CBS, NBC, or Fox.

This kind of fee structure is great for the ad agencies booking large chunks of media, but provides serious disincentives for buying smaller chunks of media, even if this media might better serve the needs of the client by being more targeted. Because "smaller-chunk" media buying is labor intensive, and yet yields the same commission for the agency, it is quite understandable why ad agencies have eschewed it in favor of the kind of large buys that are executed on mass media such as television. To put it simply, the economics of traditional media buying encourage underinvestment in the digital competencies required to master digital media.

2. Traditional media efficiencies undermine investment in digital capabilities

CPG (Consumer Product Goods) companies are the lifeblood of the traditional ad agency-broadcast nexus. Kraft, Procter& Gamble, Unilever, and other CPG giants care less about targeting than they do about scale: their goal, after all is to sell carloads of diapers, toothpaste and Velveeta to the masses. Servicing these large clients is job No. 1 for traditional ad agencies, which will gladly recommend media that provide these clients scale (and profitable agency commissions). Even though there is enormous waste in the process, the inherent costs of mass media are low enough to make this waste acceptable to the client.

From the consumer's perspective, however, this kind of tradeoff between scale and relevancy has created a nightmare of clutter and irrelevancy that has resulted in a backlash, fueled by Tivo, against the entire mass advertising model. The consumer, unlike the advertiser or the agency, has an extremely low threshold of toleration for waste, and doesn't mind spending out of pocket for any available technology available to provide a respite from the endless tide of commercials bombarding him or her.

Ironically, then, the very same economic laws that have created and configured the advertising establishment are undermining its effectiveness, and yet traditional media, even in decline, will remain more efficient than digital media for years to come. This latter fact will ensure that nothing really changes, thus ensuring the eventual demise of the traditional mass advertising model.

3. The only technologies that ad agencies can afford to buy is inadequate

The big ad agency holding companies have taken stakes in multiple digital media in recent years, but these investments are mere dabblings. For example, in April of this year, Interpublic bought Reprise, an SEM agency, after earlier taking small stakes in SpotRunner and FaceBook. The other big holding companies (Omnicom, Publicis, WPP) have made a handful of similar acquisitions, and it's indisputable that such moves have given them front-page PR, plus the satisfaction of boasting to prospects that "we're playing in the digital space."

Look beyond the PR fluff, however, and you'll see that there's practically nothing to these investments. The acquired digital shops might collectively boast a headcount of hundreds or perhaps one or two thousand people. Compare this figure to the almost 250,000 people working for all of these holding companies, and see that the "total commitment to a digital future" is just rhetoric. If your industry was threatened with a devastatingly disruptive technology, and the response from your CEO was to make an investment of less than 0.004 percent to deflect it, I'd find another job (or another CEO) before it's too late.

Headcount alone, of course, isn't an exact index of industry commitment. Digital media, which is profoundly labor intensive, requires technology to reduce manual grunt work to manageable levels. Consequently, playing "in the digital space" requires technological expertise, and this is perhaps the ad agency holding companies' biggest Achilles Heel. None of them have the internal capabilities to build the kind of technology required to manage digital media buys, nor do they have the financial willingness to acquire any significant technology players, due in part to the high valuations of such companies. The only course they can pursue is to license technologies from those ISVs willing to do so. Unfortunately, best-of-breed technology companies do not typically farm out their "crown jewels" in this way. The result is that the only technologies that ad agency holding companies can use are those that are inadequate.

These issues are at the heart of Madison Avenue's crisis in dealing with the requirements of marketing in the digital age. Collectively, they have created an extremely dangerous situation in which the industry (at least as we now know it) may not survive. My advice to you is to be very careful when listening to representatives of the old-line ad agencies when they assure you that they provide "digital solutions." Neither the prevailing economic model powering this industry nor the record of technological execution gives me much confidence in its ability to adjust its operations to the digital era. Rhetoric and reality are two very different things, and ad agency holding companies are very good at the former, but not so good at executing the kinds of results that you and your stakeholders deserve in these complex, data-driven times.

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