Michael 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:
- A truly and completely integrated approach to solving advertiser’s marketing challenges.
- Technical excellence and an unstoppable drive to innovate.
- 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.