In 2009 I graduated college and began working at a company called PHD. PHD is a digital media agency, owned by a holding company with the almost-fake-sounding name, Omnicom. I was an assistant media buyer. I was 21. I lived in a basement in Bushwick, Brooklyn for $650/month with 5 friends (2 of whom owned a nightclub and 3 of whom played in a band). I was constantly entertained by sales reps. I spent most Friday afternoons in a buzzed stupor from lunch. I was criminally underpaid to live in one of the most expensive cities in the world.
The Digital Agency
Over the past 20+ years, as advertising on the internet gained in popularity, a proliferation of agencies sprung up to help advertisers make sense of a dizzying array of new metrics and mediums. A new Mad Man was born. To give you a sense of the landscape, there are:
- Media Agencies: They research where display ads should be placed, negotiate with publishers for rates, and buy ads.
- Creative Agencies: Typically refers to agencies who design the display ads or produce the pre-roll, post-roll etc. video content.
- Design Firms: Design websites or apps for advertisers.
- Strategy/Branding Firms: Generally help advertisers set a strategy for a particular goal. For example, say Coors want to target the Hispanic market, a branding firm may help determine the demographic, product, marketing strategy, etc.
There are far more categories that have niche specialties, like those that focus solely on customer acquisition on Facebook. Plenty of these agencies overlap as well. Over time, a few main holding companies have come to dominate the space, buying up these agencies and approaching advertisers with a one-stop shop for their digital advertising needs.
A Changing Landscape
The past 10 years have been challenging for these agencies. To start, their customers, the CMOs of major advertisers, have seen their roles begin to change. CMOs of companies like P&G – the largest advertiser in the world until 2017 – were traditionally provided a budget and tasked with building a brand. Their top line revenue would prove their success. The digitization of the marketplace has changed that. Today, they’re judged by their brands’ efforts in customer acquisition, retention, and return on capital.
Advertisers are also aiming to cut costs and reduce wasteful spending. For example, P&G, who spent $7.1B on advertising in 2017, recently cut media spend by $200M. Earlier this year, they announced that they would take more media buying in-house, away from agencies. Why? They contend that the move allows for cost savings, eliminates wasteful ad spending, protects their brands, and allows them to take immediate action on under-performing campaigns.
The social media platforms have also made it much easier to work directly with them on campaigns. They have invested in client-side tools that allow for campaign creation and modifications. They have also built teams devoted to big advertisers, seeking to take away the share of ad spend that historically went to agencies.
Behind The Numbers
Personally, I’m not surprised that P&G and other advertisers are less-than-thrilled with their agencies. Revisiting my post grad experience, the work we did was…not hard. We worked from spreadsheets that were created while I was still in college. We selected publishers based on where their sales reps took us to dinner. We had one data scientist whose sole purpose was to attend new business pitches. The agencies were a pressure cooker of 20-somethings experiencing quarter-life crises. These were not places to build careers.
A New Threat Looms
Amidst a landscape that has become increasingly difficult for digital agencies to navigate, a new threat has emerged: the management consulting firm. Firms like EY, Deloitte, and Accenture have taken aim at advertisers’ marketing budgets. Their quickest point of entry has been to gobble these agencies up. And if we look at the size of these firms versus the agencies they’re seeking to acquire, it doesn’t look like much of contest.
For example, let’s look at Accenture. Their market cap is just under $120B.
Now, let’s look at WPP, whose agencies include the famed Ogilvy, and Young & Rubicam, the agency on which Mad Men was based.
Their market cap sits at just over $14B.
It’s clear who has the bigger war chest here.
Beyond spending power, I believe that the increasing sophistication of the CMO role has lent itself more to the top-tier MBA, and less to the MFA. Today’s CMO is likely swayed more by the financial return promised on a given ad campaign and less by the emotional response that campaign solicits. Much of the work of digital agencies has been commodified and automated away. The size and scope of these consulting firms will produce cost savings that advertisers will be hard pressed to resist.
The future of the digital agency looks grim. However, I do believe that one point of differentiation may still exist. The agencies that are able to produce truly groundbreaking creative work will remain. Advertisers will require these works less frequently, but will put more stock in the individual productions, as these will serve to capture the hearts and minds of consumers.