Thinking About The Marketing Services Company Of The Future

Michael WalrathMichael Walrath is the former CEO of Yahoo!'s Right Media.

I recently argued that the dramatic rise in demand side services is a step toward a next generation marketing services model. Or said another way, the agency of the future is going to look very different than today’s version. If this is the case, it would seem logical that today’s agency holding company powerhouses will evolve to own this space. With due respect to Publicis, WPP, Omnicom et al., I just don't think that’s the way it’s going to happen. Of course, this is colored by my opinion of what it’s going to take to win and build the marketing services company of the future:

  1. A truly and completely integrated approach to solving advertiser’s marketing challenges.
  2. Technical excellence and an unstoppable drive to innovate.
  3. Efficient use of advertisers marketing budgets.

An Integrated Approach

Holding companies are able to offer major advertisers a set of broad services today. That is one of their greatest assets. Less impressive today is the level of integration of those services. The holding company structure creates silos, political agendas and internal disruption. Despite some significant efforts in these areas I haven’t seen enough evidence that the holding companies are committed to breaking down these silos to bring a truly integrated perspective to clients. Sure the integrated perspective exists at the highest level of the holding companies, but it’s not trickling nearly deep enough into the organizations today.

The holding companies could of course change the organizational structure of their companies, compensation and incentives etc. Perhaps this would be enough to create a more integrated perspective. Like most re-organizations, I would expect any truly transformational effort in this area to fail. I’ve seen enough reorganizations to believe that the hardest thing to do is break down an existing company culture. You can change management, reporting lines, the mission statement and anything else you can think of. But, in the end, you need to change the way that people behave, and even harder – the way they think. This particular hurdle will be too high for today’s holding companies. They have a massive pool of very talented people – many of whom are so embedded in the silos that they’ve lived in for years that they will not be able to adapt to a new model. To make the type of structural and cultural change I’m talking about will require risking the loss of many, many very talented people. In my experience, these are the types of risks that executives and managers are most afraid of during times of great change.

Technical Excellence and an Unstoppable Drive to Innovate

Imagine this conversation:

  • Superstar Engineer: "I’ve been thinking about making a change and considering new opportunities."
  • Superstar Engineer’s friend: "Oh yeah, what are you thinking about?"
  • Superstar Engineer: "Well, I’ve got a really interesting offer from Google/Microsoft/Facebook where I can go work on some really big problems. I’m also looking at a couple early stage startups that I think are doing some really interesting stuff and could be the next big thing. Finally, I’ve been thinking about going to work at one of the big agency holding companies…"

Cue screeching needle on the record sound effect. How often is that last sentence really part of that conversation?

I’m certain that there are some very smart people working at the agencies, but I don’t know a single great engineer who has ever chosen one of them over the great tech companies, or agile innovate startups. Part of the challenge here is that holding companies really can’t claim to be building technical innovation engines. They outsource huge pieces of an integrated marketing platform to partners (the latest agency/DSP love-fest is exhibit A.) Without a clear commitment (this is possible) and a track record of real innovation (this is much harder), it is going to be nearly impossible for the holding companies to achieve technical excellence or create real innovation through products and technology.

Efficient use of Advertiser’s Marketing Budget

At Right Media, we used to talk about the amount of force that’s being converted to thrust. What we meant was – how much of our energy is being directly converted into product innovation, go-to-market efforts, as opposed to internal process, etc. If I were a CMO, I’d be asking a similar question. How much of my ad dollar is actually going to advertising? It’s not as simple a question as it seems.

On the surface, the holding companies can answer – "almost all of it, you know how slim our margins are!" However, on deeper exploration it’s not nearly so simple. It is true that the agencies take a very small piece of the budget however the cuts being taken from the ad budget beyond the agency are potentially enormous.

I recently heard an agency exec joke: "When you add up all the taxes on the media budget, it’s more than what’s left for media." By taxes, this exec was referring to additional services being layered on after the ad dollar leaves the agency. The taxmen are anyone who gets between the ad dollar and the publisher or site on which an ad appears. In could include:

  • Creative, Planning, Ad Server/Analytics, Verification/Quality, DSP or SEM/Optimizer, Networks, Ad Exchange, Yield Optimizers.

This is by no means a comprehensive list, but you get the idea. Even if each of these is taking 5% of the media we’re talking about a 35% tax rate for ad dollars. I think we all know that the tax rate of each provider is significantly higher than 5%, and that there may be others in the mix as well.

This dynamic, more than any other, should convince us that there’s going to be a sea change in the marketing services space. These are not sustainable economics. This is a market ripe for disruption, and markets ripe for disruption provide tremendous opportunity for all participants.

The marketing services company of the future will consolidate the fragmented services into an integrated offering. This is going to happen much more organically than you think, through a focus on products and technologies that integrate offerings. Sorry "roll-up" fans – that’s not the answer – integrations don’t work, especially when there are multiple offerings being crammed together. For the advertiser, this means less money going to "taxes". For the marketing services company, this means expanded margins and more profits. For the publishers, this presents a huge opportunity as increased efficiency and effectiveness will help open the floodgates of pent-up ad spend just waiting to come online.

I’m not betting on today’s holding companies to be the agencies or marketing services giants of the future. Of course, I could be underestimating the ability of these companies to evolve – and right or wrong, this is going to take a while to play out.

It is not lost on me that my entire argument is based on the assumption that someone else is going to come along and do it better. Next time I’ll talk about how hard it is going to be for someone to do just that, but why I think somebody will.

9 Comments

  1. Well said Mike. It will be interesting to see how the technical excellence component of your thesis plays out. Since technology as core competency traditionally creates exponential differentiation between competitors, we could see a dramatic change in the marketplace where the current status quo of relative parity in the competitive dynamic of agency service companies is upend. My bet is that it is slow then out of control fast process.

    Anyway, enough theory. Back to selling ads...

    Reply
  2. Darren Herman

    Mike, so who will "win"? What's said above IMHO is fairly accurate and being talked about throughout the industry but until someone steps in and creates a model that "works", then this is what we resort to.

    I do maintain my belief after seeing it thru for years now that a DSP or like unit can exist but needs to exist in an organization that is agile enough to utilize it. I do believe as well that the outsourced DSP is here today because everyone will dip their toe in the water but if it is going to become strategic, there is going to be a lot of building or buying in 2010-2012.

    You are one of the smartest men who understand technology and marketing, what's your roadmap instead of telling us what doesn't work?

    Reply
    • Michael Walrath

      darren - thanks for the comment. I think there was more about what will work in here than what won't. It's not in a roadmap format, but rather a set of principles that would be required for someone to win big here. In the next piece I'll discuss why it's going to be so incredibly hard for anyone to do this (huge opportunities are hard to realize).

      Reply
  3. I agree that marketing services will come from smaller companies with compelling ideas backed up by clever technology. Innovation from within a holding company model is incredibly difficult, although it can happen in certain niches. In retail, Blackhawk Network began as "Safeway Marketing Services" a skunk works that tried a bunch of different initiatives before building a $6 billion business distributing gift cards in the grocery channel.

    Companies will have to reconsider what constitutes marketing and focus on what changes consumer behavior. Ultimately, companies spend money on marketing to drive incremental revenue, and the services that can deliver on that promise will meet with great success. Strange niches like gift cards -- which create new store visits and predispose consumers to spend more money on higher margin items -- will continue to expand and grab a bigger share of marketing budgets.

    Reply
  4. Nice piece, Mike. IMO the "taxmen" get rolled up by ad servers, one of which is OAS (WPP)...I wouldn't count out the holding co's yet...

    Reply
  5. Terrific commentary Mike! Agreed. There are too many competing interests within the holding companies and their operating agencies to serve the best interest of marketers. Right on regarding the lack of "Technical Excellence" and limited "Drive to Innovate" which has created huge opportunities for agencies and solution providers outside the holding companies.

    Reply
  6. What an exciting market we are in when everyone agrees that publishers execute poorly today, advertisers execute poorly today (compared to everyone's common vision of the future), and middle-men are gouging all parties. Ripe for value creation!

    Reply
  7. Great piece Mike. I was having a tweet discussion with @mediamath about transparency and asked the question, that if the DSP has am agency as a client, does the end client have the right (our should they) to get performance data from the DSP. If ad networks emerged as solving a problem for the agency in aggregating lots of inventory from smaller publishers, they also helped create a new one by disconnecting the true media cost from the cost that the client ends up paying. The current idea of replacing networks with"trading desks"that just move that margin to a different player is a big step backwards.

    What if there was a code of conduct related to reporting where we all had to show the real share that gets passed on? In countries that have VAT or value-added tax, businesses have to show how their raw material costs relate to the finished goods prices. Whether this is for taxes or not, online media today is fast more opaque that it should be. Electric data systems are always found to be able to support more middlemen because of lower transactions costs vs offline systems but precisely for that reason there needs to be a standard of disclosure.

    Reply

Add a comment

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>