2023 the year the ad agencies survive
There has been a lot written about Facebook, Google, and Amazon’s take over of the digital ad industry. Sometimes referred to as The Big Three, these companies account for 85% (eMarketer, 2019) of all digital ad revenue in the United States.
Agency’s have long designated their relationship to The Big three as frenemies. The designation indicated a wariness of the Big Three’s power in the relationship, but left just enough room for the agencies to cement their role as the broker between advertisers and the platforms themselves. This arrangement made sense for the agency; it allowed for agencies to provide digital services (discovery, activation, strategy, creative, etc.) and capture the revenue associated with those activities. So while the agencies have enjoyed the linear growth in accordance with the increase in digital spend, the Big Three have grow exponentially to where they are now monopolies. Creating an imbalance of power leaving the agencies to re-evaluate the frenemy designation.
Today, we hear less about frenemy; the language has shifted quickly from cautious to defensive. There is a much less optimistic view of the agency-platform relationship. Instead of frenemies, agencies now talk about building barriers to disintermediation. This protectionist stance is a stake-in-the-ground that the relationship has forever changed. Simply put disintermediation is a fancy term for the removing of the middleman in the ad transaction — aka. the Agency.
It seems every week there is a news about the disruption agency model, but the agencies still stand. And we are in the midst of the annual deluge of articles on the end of the traditional ad agency — “Will 202X spell the end for ad agencies?” The mere fact that agencies continue every year would suggest that they are protecting themselves from further disruption. But the relity is that disruption is exponential, and it has already happened. Three numbers that prove this point:
These numbers are not closely guarded secrets, but they are not commonly shared by the platform’s themselves. We occasionally hear figures on earnings calls and through a careful web searching. While you can challenge their precision, but you cannot challenge their impact. The reality is that there are infinitely more advertiser accounts than there are buyers currently employed at agencies. The agency is simply out matched. If every single person in the US currently employed by an advertising, communications and PR agency managed 1 account they would represent 1.4% of the total accounts on the platforms.
While it is worth mentioning that all ad accounts are not created equal. A ceramic figuring company in Nebraska may spend a few hundred a month on Facebook and a top 10 advertiser may spend $10 million. The volume of accounts is staggering reminder of how effectively The Big Three have entrench themselves into the services that were once so well guarded by Madison Avenue and perhaps even more effective at reaching into pockets on main street.
The most common counter-argument is that the 1.4% of accounts agencies manage a disproportionate share of the revenue to The Big Three. This hypothesis often goes unchallenged, but it overstates the importance of a brand’s (or even the top 100 brand’s collectively) value to The Big Three. So while it is convenient and may pass without an eyebrow raise in the agency boardrooms, it is false.
In advertising, we have a tendency to overestimate the role that brands have in people’s lives so it follows that we would overstate our impact on the bottom line of The Big Three. When you consider that the top 25 advertisers on Facebook represent 3% of its revenue and the top 100 advertisers make up 6% of its revenue — agencies and brands are faced with the reality that they fear the most — they don’t matter.
Every once in a while agencies and brands raise issues against lack of transparency, negative impact of platforms on society, social issues, or unfair practices. At times, some are brave enough to take stand and pull their ad dollars from a single platform or even all three. But even if there was a highly-coordinated cross-agency and cross-holding company effort to pull ad spend from these platforms, the effort would likely go unnoticed on the balance sheet or even merit a foot note in the annual report.
Together The Big Three employ 1.5M workers — about 87% of that comes from Amazon and it being the second largest US employer. Based on industry labor reports, LinkedIn, and Wikipedia is fair to say that 215,600 of the 1.5M hold positions related to advertising, technology, or administration.
The Big Three in 2020 employ more advertising, marketing, and public relations professionals than all advertising agencies in the United States combined.
When you consider that Three Companies are now larger employers than the entire industry they serve, it is hard to think that the end of the agency may actually be here.
The more jarring point of imbalance is not the employee count, but rather the average revenue generated per employee. On average, The Big Three generate 5X the revenue per employee than an advertising agency.
To be clear, this not an indictment of the talent with in the agency, but rather it is an illustration of how effective The Big Three are at capturing value. Of course, The Big Three capture value by design — it is inherently linked to their core business. For agencies, focus has been on organic growth and capturing new clients through pitching. While The Big Three simply have to have enough staff to empty the vacuum cleaner bags that are sucking up cash every second.
When laid bare, it is clear that the future of the agency is grim. But as the title of this article suggests, this is not an article about the end of the ad agency. In fact, it is the opposite — it is an article about how agencies survives and even thrives into the future.
So how then does the agency survive. It is easier said than done, but in order to usher the next era of prosperity agencies have to think like The Big Three and start capturing data with each interaction. WARNING: As you read the below, you may desire greater specifics. To be fully transparent, I have generalize the ideas as to not conflict and out of respect for the companies I currently serve.
Create an asset from information
Whether an ad agency is 100 days old or 100 years old, it has created something. This something could be a pitch deck, a report, raw data, or campaign ideas. There are digital and physical artifacts of the work that agencies create have potential value. But within most agencies, these artifacts are collecting dust. Instead of trying to increase the value of the artifacts agencies in general are happy to foot the bill for archiving and retaining the information in physical storage or cloud storage that costs money.
Creating value from these assets is not easy, but it is possible. It all comes down to taking the time to collect and codify the assets that increase their value. Let’s take for example, a creative agency. As a whole creative agency generates far more campaign ideas than it sells. In agencies today, these campaign idea live in two places both equally inaccessible. The first location is a shared or local drive where it is unlikely to ever be opened again. The second is in the mind of the create talent that came up with the idea or for the creatives that heard it. These campaign ideas are in effect dead only to be revived if someone is willing to do the hard work to find them.
You may be asking where is the value in a bunch of campaign ideas that didn’t sell. If you think like a tech company the value reveals itself in two ways:
- Recognize value: First is the recognition that the value of those ideas is relative to the business challenge or client so every dead idea has a chance at being sold.
- Create efficiencies: What if every idea ever considered was made accessible to every member of the creative team. The agency can generate efficiency through more efficient means of producing the next idea.
Find value in every interaction
Every single ad agency employee is kicking off a ton of un-captured value. The Big Three do this with mind-boggling efficiency. They track billions of consumer interactions, package those interactions into buyable features that in turn generate revenue.
I am not advocating for employee surveillance or employee tracking, but rather creating healthy habits that increase the value of the artifacts and the content that is being created. Currently agencies treat every pitch deck, every client presentation, and advertisement as a disposable — for the most part they are used once, or they are inefficiently recycled. A slide from one presentation gets lifted and re-purposed, or a product shot is used for a particular campaign.
An example of how an agency might create value out of its creations is to create data from the thing it creates; an advertisement. Every ad has embedded within in it vast amounts of un-captured data. In the ad production supply chain here are examples of the types of data that can be captured: who generated the idea, the names people who produced the asset, the names of the client(s) who bought it, the channels it was distributed. And within the ad itself: was the ad designed to drive purchase or branding? Was there a person in the ad? Was the person male or female? What was the background image or setting, what was the duration or the colors used, or the size and presence of the logo.
This information alone may be seem trivial, but this information has value. This value can be realized in the third imperative.
Diversify revenue sources with newly created assets
You were warned that the examples above were purposefully generalized, but that does not mean that they are not actionable. The key here is scale. The more that is captured the more value there is. Here are two examples of how to diversify revenue sources and break free from the traditional holding company model.
In the example of the creative agency recycling dead ideas. The agency has potential to create a subscription for clients to see all the forgotten ideas. If packaged as a digital subscription for a small monthly fee clients would get access to sift, sort, and read ideas. The agency would collect incremental revenue for its subscription while simultaneously creating a potential flywheel effect whereby clients come back and ask to bring old ideas to life. The kicker is that the agency could capture information through the subscription on which ideas clients click on, which ones they view, or read more about providing valuable information on the ideas they like and dislike for the next campaign the agency presents.
In the second example, we talked about capturing information throughout the supply chain. Specifically in generating information about the ad. The possibilities are many for new, sustainable sources of revenue.
The agency could create a data-as-a-service model where clients are charged for the associated meta data to include in their performance models. The agency can create a premium reporting service where the agency increases the cost of its performance reporting service by integrating the new data into its analysis. So instead of counting clicks and impressions on The Trade Desk, the clients get to see the clicks and impressions on ads that feature millennials or ads that have feature lifestyle imagery.
These ideas are hard to imagine, but simple to implement. At their core they are built on the premise of what has made The Big Three so powerful — they generate data that can be repackaged and resold at a high margin, a margin that far outpaces the current model within agencies.
To sum up this longer-than-expected article. I will just say this. There is a strong future for the ad agency. They just need to recognize that their unique advantage over smaller individual creators is their scale and ability to maximize the potential of that scale by embedding value of the artifacts they produce by generating data from the things they create — there is a market for it and the future will be won by the agencies that focus on creating data as much as they focus on purchasing it.