Troubled Times For Ad Agencies
Over the past 20 years, agencies—in particular, ad and media shops—have faced a rapidly changing landscape. Scott Galloway, professor of marketing at New York University’s Stern School of Business, coined the term the Four Horsemen to refer to Amazon, Apple, Facebook and Google: the four companies who, in many ways, have taken over the reins of traditional media and the advertising industry. To put their growth into perspective, the Four Horsemen together grew by 20 percent in 2016 while the US economy as a whole grew by just 2 percent. It’s no wonder that ad execs are worried.
In addition to the rise of tech giants, several other key factors have affected agencies in recent years:
1. The number of in-house ‘agencies’ grew.
In the United States, the Association of National Advertisers reported a 58 percent growth of in-house teams between 2008 and 2013. The catalyst was the global economic recession—after all, it is usually cheaper to localize, translate and distribute material from within an operation. In-house production has also become much easier, thanks to technological evolution. High-quality print, video and other visual content can be produced with fairly simple, cost-effective hardware and software. For many types of execution and maintenance work, agencies are just not needed anymore.
2. The compensation model became outdated.
In the Mad Men era, advertising agencies worked within a commission-based compensation model. Very lucrative indeed, but unsustainable in the long run. Brand owners wised up in the 1980s and gradually forced their agencies into a flat-fee model, often based on the number of people assigned to an account. As the digital revolution caused advertising to become ever more fragmented and complicated, a saturated market of agencies began pitching against each other for the same amount of finite work, adding another source of downward pressure on agency remuneration.
3. Agencies don’t know how to calculate their added value.
For many years, ad agencies avoided the analytics business. Instead, creativity, awards and the bottom line reigned supreme. As Michael Farmer, author of Madison Avenue Manslaughter: An Inside View of Fee-Cutting Clients, Profit-Hungry Owners and Declining Ad Agencies, puts it: “Agencies continue to cling to the notion that clients want creativity and service. What clients really want is shareholder value.” Agency executives have largely been deaf to the economics of their contributions. But in the 1990s, shareholder value became a driver of management consulting success and, at the same time, of the marginalization of ad agencies.
4. The best talent is moving elsewhere.
The creative agency, once the only game in town for the best and brightest talent, is losing its allure, supplanted by the bright lights of Silicon Valley. Tech companies like the Four Horsemen often offer better salaries, more flexible working hours and a plethora of other perks that even the biggest agencies find impossible to compete with.