Both the following are true:
- It’s a brave new world for holding companies. New competitors, fee structures, and technology requirements are forcing change to the old service models.
- The fundamentals of agency groups are as strong as they were before the digital disruption. Tech fragmentation is helping rather than hurting.
At the Association of National Advertisers financial management conference this week, marketing procurement agents heard a range of speakers discuss the present and future of agency holding companies. One highly anticipated panel promised clarity on trading desks, and the CEOs of those programmatic buying hubs did not disappoint, offering a spirited defense of their practices while pledging to embed staff directly with operating agencies.
Pivotal Research analyst Brian Wieser also addressed the room, making a strong case that agencies are insulated from potential usurpers like Google, IBM, and Accenture by rising fragmentation and client confusion.
“Many investors think technology will disintermediate services. I disagree with that,” said Wieser, who comes to investment research by way of stints with Interpublic Group and ad tech firm Simulmedia. “For the agency group as a whole…I would argue social media in particular, but fragmented media in general, is arguably the most important thing for agencies.”
The sheer number of vendors, exemplified by the LUMAscape, creates extra labor (hence, fees) for agencies. But perhaps more than that, clients depend on their agency account managers to vet the dozens or hundreds of vendors – both media and tech – using a strong base of knowledge to filter pitches. That cognitive dependency preserves the agencies’ importance – even if the payment structure still needs to be sorted out.
Wieser: “The client can only socialize so many different ideas. That navigation that the account person at an agency offers to help the client is the one thing that can never be replicated by technology. It means there’s a real strategic rationale [for agencies to exist].”
So far so good. But that’s not to say the encroaching services layer at many tech companies is a fake-out. Demand side platforms like Media Math, analytics giants like IBM, and other big vendors do pose a competitive threat with their ballooning cadres of services staff whose function is to help clients manage their platforms. In some cases, these firms are taking business once managed by agencies – either by automating it or servicing it directly.
But their platform bias keeps agencies comfortable. “It’s the opposite of the technology disintermediation story,” Wieser said. “As media and marketing gets more complicated, the reliance marketers will place on agencies will only grow. And that is a very bullish long term prospect for agencies.”
Shifting Payment Structures
Meanwhile new compensation models are evolving to adjust for downward pressure on agency margins and the rising measurability of media spend. But the jury is still out on whether they’ll take hold.
According to a new ANA member survey on agency compensation, while 49 percent of global marketers now offer performance-based incentives, new methods of payment such as value-based remuneration are only used by about 4 percent of marketers.
The shift to success-based payments is happening faster in the U.S. than overseas. The report stated, “Global marketers are considerably more likely to base incentive criteria on metrics such as media delivery, brand perception, digital delivery and copy testing, and far less likely than in the U.S. to employ sales metrics as a success criterion.”
Of course it’s the job of client-side procurement specialists to keep agency costs as low as possible, but sometimes this can backfire. Wieser points out, and AdExchanger sources have confirmed, that some agencies have accepted contracts that effectively reduce their take to zero – merely because it would look bad to lose a client.
“Some clients think that’s a good thing, but are they going to get the level of service? I’m doubtful.”
From a capital expenditure standpoint, agencies are puny compared to the most hotly covered startups. Wieser says, “It’s remarkable to think if you take all the agency holding companies, added up all their M&A and all their capital expenditures, it still won’t add up to what Facebook will spend this year.”
Still, despite client procurement efforts, the likes of WPP, Omnicom, and IPG manage to preserve profits. They do this with new buying models – such as the trading desks – as well as by removing competition through consolidation. Fewer parties in a contract bid means higher prices, generally.
“Given [there are] only four or five holding companies that could possibly be involved in any given pitch, you end up with something resembling stability of the margins. I observe this tacit agreement, not that the agencies get 15 percent commissions anymore, but that they get 15 percent margins,” said Wieser.
Wieser is bullish on the practice of trading desk arbitrage, a sore point for client procurement types. “I think it’s a good thing. It’s fine for agencies to make more money. Are they allowing you to accomplish your goal better now than you accomplish your goals previously? That’s what’s important.”
By Zach Rodgers
