First published in Marketing in 2007, this piece looked at how agencies were responding to the growth of digital. The City certainly took the view that they weren't. The piece points to clients; ultimately it's demand from them that will spur agencies to action, and in 2010 we're still seeing a skill shortage on the client side resulting in investment shortage on the agencies' side.
Last week, a gaggle of marketing services’ great and good gathered at Merrill Lynch’s offices near St Paul’s to hear the city’s view of their future. Research Analyst Toby Reeks set out some unpalatable truths for the ad business.
Over the past seven years, share prices of the major European networks have slipped against the FTSE all share index. Reeks’ analysis showed that organic revenue growth had slowed, profit growth had been driven by cost-cutting, and he particularly singled out creative agencies as inefficient – in terms of their ability to convert revenue to profit.
Perhaps most concerning from a strategic perspective was his observation that whilst marketing services groups are seen to some degree as a hedge for investors against media fragmentation, there are no real internet plays.
What he’s saying is that from an investor’s perspective, a strength of the agency sector is that their success isn’t tied to the performance of any individual media businesses, but to the overall media consumption of consumers. In other words, they’re media neutral. Except they aren’t, because they’re failing to create traction in digital.
It’s got to be pretty significant when a major deal like the acquisition of Digitas by Publicis is welcomed with the words “some costs should come out there”.
Is that all there is? Is the agency sector’s future as an investment going to be driven by cost-cutting, or can they reinvent themselves to meet the challenges of the (mainly digital) future?
The IPA commissioned a report from the Future Foundation, which was published in late 2006. “The Future of Advertising and Agencies” looks at how the brand and media environment might evolve, and how the agency might look as a result in 2016. The report concludes that brands will increasingly be merged into all sorts of media content, from search to gaming, and that marketers’ focus will shift to gathering data about consumers and interacting with them on a permission-only basis. As this happens advertising will mutate into the editorial and consumer space, and the 30-second TV commercial will become increasingly anachronistic.
The reinvention of agencies around the new ways that consumers interact with brands and media is going to demand new approaches, new processes to support them, and new ways of paying for them.
The vigorous debate that’s taking place in the agency community reflects what agencies feel they should do to meet the challenge of the new consumer. But agencies aren’t paid by consumers. Right now, they’re paid by advertisers – and this means that their development will (and should) be governed by what their market will demand.
So whilst agencies are criticised for their reluctance to change, at least in part this is a reflection of the demands that are (or aren’t) being placed on them.
But the Advertiser/Media/Agency/Consumer debate that’s raging amongst agencies isn’t being reflected in the marketing community. Whilst some marketers are driving ahead, leading and executing change, there’s still no broad debate on what they expect and demand from agencies. Why? Because they’re just getting on with it.
Agencies’ challenge is to persuade both marketers and the investment community that they can add value in this environment. Future-gazing reports are all very well, but this change isn’t going to happen overnight. Agencies need to be alive to the opportunities that exist today, to the changes that have already happened. They need to learn from the approach of the marketing community, and just get on with it.
Without a track record of investment in their own future, agencies are going to continue to look like a poor deal to the city. And whilst a ten year strategy might be interesting, the harsh reality is that it’s what agencies do in the next year that’ll make the difference. Because without action now, both clients and the city will pass them by.