The Advertising Agency Business Must Change

The advertising business as we know it is outmoded for the world we live in today. Think about it: it was founded to get messages to consumers who were scattered over many different forms of media: print, TV, radio, billboards. We did not have a very good idea of where those consumers spent their time, so companies like Procter and Gamble and Ford outsourced the reaching of customers to advertising agencies. Advertising agencies developed relationships with many different media outlets to get the best “deal” for their clients on a media buy. It wasn’t a core competency of a CPG company to spend its time buying media, so that became the agency function.

Simultaneous with the buying of media came the growth of the “creative” function, or the design of messaging appropriate to each different media outlet. As companies grew bigger, their agencies had to become bigger as well, and when they went global, their agencies went with them. Brand building on a global scale was a difficult job, aggregating many different media outlets, messaging changes, and even language problems. Most of you aren’t old enough to remember the big mistake Chevy made when it tried to introduce its Nova vehicle in Latin America: it was ignorant for the fact that “Nova” meant “No go” in Spanish.

But then came the internet, and for the past two decades the internet has been aggregating consumers in the same way ad agencies used to do. The aggregation was speeded up substantially by the growth of Google as a universal search engine, and then by Facebook with its two billion users.

So much of the advertising dollar is already spent with Google and Facebook that ad agencies are going to have to redefine their purpose. It is no longer to aggregate consumers through widespread media buys: advertisers who are looking for reach can now go directly to Facebook and Google.  And those who are trying to build brands can take their creative function in house.

That’s why WPP reported such mediocre results on its latest earnings call, and also why it recently made an investment in Gimlet Media, a podcast publisher.

Another problem for traditional ad agencies is that their largest clients have always been consumer products (CPG) and retail, and both of those industries are changing. As they move to digital, brand building will become the most important aspect of advertising, and agencies will have to re-ignite their creative capabilities and try to find a way to make money from them, rather than from media buys.

Agencies that began as digital pure plays, and don’t have the legacy infrastructure that goes along with print and TV, will have less of an adjustment. But if you think about it, what’s going to happen in advertising is what already happened on the publisher, or content side: many agencies that are top heavy and can’t restructure fast enough will go away. WPP’s entire business model was built for a pre-internet world. The big behemoths won’t go away for a while, but their revenues will come mostly from their digital side, and they will have to learn to build digital brands.

Who has built a digital brand so far? Facebook. Google. Amazon. Digital companies. The rest will have to struggle to catch up.