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Bigger agency, bigger problems

The agency world is all abuzz over last week’s big news that Omnicom and Publicis have called off their $35 billion merger. The New York Times noted that one of the main objectives of the now-failed deal was to combat Google and Facebook:

The deal was also seen as a response to the technological transformation of the industry, where the collection and sale of the personal information of millions of consumers is rapidly growing in importance. That business is competitive, with technology companies like Google and Facebook using their huge repositories of user data to place ads, in many cases bypassing the traditional agencies. Those agencies are under pressure to deliver more value for their customers.

Big agencies like Omnicom and Publicis are faced with an innovator’s dilemma: 1) Embrace digital advertising, data, ‘provide more value’ and face a sharp decline in revenues and profits; or 2) Ignore digital and become obsolete. So which path would the merger have taken? Far from creating a highly innovative, data-driven company that Google and Facebook would welcome with open arms and clients would appreciate for its new focus on delivering value, my bet would have been that creating a bigger agency would have led to a myopic rejection of the emerging reality of a digital-first world. In this respect, not merging may be the best thing to ever happen to Omnicom and Publicis.

That said, it’s unlikely that any Big Agency is truly ready to embrace a digital-first model where, instead of $200 million branding budgets across print, radio, out of home, and TV, clients ask for $2 million testing budgets in digital, to be followed by traditional branding only once digital proved itself. In such a scenario, the $24 billion in annual revenue that Omnicom and Publicis did in 2013 might be more like $2.4 billion – still not bad, but not enough to justify their collective 130,000 employees. Given that the Big Agencies are all publicly held, it’s unlikely that shareholders would tolerate massive declines in revenue in the name of transitioning to digital-first.

Big Agencies’ Kodak Moment

The dilemma facing Big Agencies reminds me of what has happened to Eastman Kodak over the last twenty years. In the late 1990s, Kodak was on top of the world – its market cap was $25.05B in 1996. Today, Kodak’s market cap is $1.05B – a decline of 96% in less than 20 years (and close to what Facebook paid for Instagram!). Of course any consumer with a digital camera or an iPhone knows the reason for this fall – Kodak was unable to transition from the print (or “traditional” photography) age to the digital age.

Many argue that Kodak failed because it – and its shareholders – was unwilling to let go of a dying high-margin business line and replace it with a growing but low-margin line. Avi Dan writes in Forbes:

Ironically, Kodak did not fail because it missed the digital age. It actually invented the first digital camera in 1975. However, instead of marketing the new technology, the company held back for fear of hurting its own lucrative film business, even well after digital products were reshaping the market.

Merging two giant agencies to become an even bigger agency does not solve this problem

The lesson of Kodak’s debacle is that scale does not work as well as it used to. It stifles innovation, and leads to excessive corporate atrophy. Companies, no matter what size they are, should behave like a small company not a bigger one.

Technology Kills Bloated Service Providers

Big Agencies are not alone in facing an existential threat from technology. Indeed, Big Law (giant corporate law firms) is getting crushed by technology, outsourcing, and more agile small firms. Travel agents have been replaced by Kayak and Travelzoo; and real estate brokers are under threat from upstarts like Redfin and ZipRealty.

Twenty years ago, to achieve national scale, an advertiser’s only choice was traditional media, and Big Agencies were the only service providers with the resources to create complicated media plans, TV commercials, and multi-city print and out-of-home campaigns. Today, advertisers can purchase billions of impressions and clicks without an agency at all (or perhaps with a nimble digital specialist). Put another way, Big Agencies had a very profitable monopoly on advertising, but that monopoly has been broken.

A few years ago, I saw Reed Hastings, CEO of Netflix, give a talk. An audience member asked him why Blockbuster failed to see the imminent threat that Netflix represented. When Netflix launched, Hastings said, they only had 1,000 titles, and it took a couple of weeks to get a title delivered to a customer. Blockbuster, on the other hand, had 10,000 titles in every store and guaranteed availability of new releases. What Blockbuster failed to see is where Netflix was going. Today, for example, Netflix has more than 100,000 movies, many of which are streaming and available instantly. The rest is history.

It’s hard to give up fat margins and monopolies. The attempted merger of Omnicom and Publicis was an attempt to keep the good times rolling, not an effort to bring data, transparency, and “more value” to clients. Like Kodak, Blockbuster, and countless other companies before them, Big Agencies will likely fight their new reality to the bitter end.

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