Today’s column is written by Jim Spanfeller, founder and general manager of The Daily Meal Ventures Group, a tronc company.
Let me start by saying, no, I don’t think agency media-buying groups will become extinct. But it now appears very likely that agency media-buying groups must change radically to stay in existence.
The good news? Radical change is a well-known state for these companies. Perhaps they will even go back to a business model from the past – more on that in a moment.
The world is a very different place for media planners and buyers than it was 10 years ago. In large part, the buying groups drove these changes as they looked for ways to improve margins in a very competitive landscape that evolved rapidly.
It has been discussed many times now, but as clients pushed agencies for increasingly lower fees, the profit margins for creative all but disappeared, and margins on media planning and buying became razor thin. For digital work, those margins often went negative. It was a very tough development at precisely the time when digital was exploding as a percentage of overall spend.
In response, the agency model began to change quickly, but there was a resounding lack of communication around half of the changes and overwhelming communication around the rest. Certainly, the move to programmatic using big data to buy audiences vs. environments has been well documented. A whole industry grew up around this, and today a big percentage of the business is transacted this way.
Much less transparent – at least until the ANA’s report of a few years ago – were the core reasons for these changes (margin) and the underlying methods for realizing those goals.
It has been said by many others that complexity drives margin, and this has proven to be very true for the media-buying groups. Is it not oxymoronic that at the very time fees were being squeezed, most holding-company margins were expanding?
It is also a well-worn axiom that free-market capitalism always drives to efficiency. And while that process can be raged and slow at times, it is inevitable.
Today we are beginning to see the effects of our industries move to efficiency and, as a function of that, transparency. The statements from Marc Pritchard, Procter & Gamble’s CMO, and his and others’ actions are an initial testament to this.
Many of the last men standing in the ad tech space are pivoting to SaaS models so that they can assist marketers in taking advantage of their growing understanding of the digital world brought on by this transparency.
In a world of transparency and with it less complexity, what will become of the current agency business model? More clients will bring programmatic activities – or at least part of them – in-house, and these activities will not be limited to just digital buys. As a result, less spend will flow through the agency model, which will, in turn, impact the clout that these groups wield in the marketplace.
Some will suggest that agencies will become much more tech-centric. Certainly, we hear this a lot in agency pitches and the like. But technology is a different core competency than creating, planning and buying media. It is hard, and it moves really fast.
Pivoting an entire segment of the advertising value chain to be tech companies is not impossible but it is improbable. It is why the ad tech business burst on the scene in the mid-2000s, at precisely the time agencies were looking for a new business model. It is more likely that, once again, a new business model will be needed for agencies.
Marketers need advertising agencies though, and I would suggest that there is wide acceptance of this thought throughout members of the ANA. There is a real and deep value exchange between marketers and agencies. Already some of ANA’s leadership have suggested that the drive to lower fees may have gone too far.
While I do not believe programmatic on open exchanges is a productive way to push a marketing message to anyone, let alone a specific segment, I do believe that the underlying tech and infrastructure that has been built over the last decade has real value and will prove to be meaningful in how our industry moves forward. At some point soon, I would postulate that we will see a dramatic improvement in the ROI of programmatic activities as their limitations becomes clear and we better understand the value of different data sources.
I would also predict that media-buying groups will go back to a more tech-enhanced version of their previous model, rather than completely tech-driven. They should be experts on not only platforms but also individual media properties. The value-add here is not simply connecting some pipes together but providing rather truly meaningful insight into making messages work with the highest degree of efficiency possible for specific media options, regardless of whether they were platforms, categories, affiliated networks or individual brands.
I think that this model will be so much more valuable to marketers that they would be crazy not to pay more for it. We see the proof already in small ways when a marketer stops to compare open exchange buys against targeted programs. The latter shows a much greater return on investment when that return can be measured around truly meaningful KPIs such as sales or real brand lift.
And the pipes that have been built will help in all this. We should be able to use them to take a good percentage of the transactional costs out of the system, as opposed to what they have been used for so far, which had the effect of pushing current transactional costs in the system to a level not seen at any time in history.
Media companies also need and want agencies to prosper. When the partnership between marketer, agency and media property works, it is a wonderful thing.