Matt Greitzer of Razorfish posted a thought-provoking piece on the evolution of the ad agency business last Friday over at MediaPost. In his post, Matt talks a lot about how the ad business was wed to a business model of creative + ad buying, and attempted to add value by its ability to make better (i.e. cheaper via volume-type discounts) ad purchases for their client… and then marked up the ad buys by 15%.
Obviously this model is challenged by online ad networks, where anyone, regardless of their volume, can purchase the same online ad unit at auction for the prevailing price. As Matt says:
In an auction-based environment like search, or the budding ad exchange field, buying clout is meaningless. Creative is still important, but what’s even more important is campaign optimization and segmentation, the effective use of which enables the creation of highly qualified audiences independent of the media on which those audiences are found. The media themselves are now interchangeable (feel free to debate me on this last point). Optimization and segmentation require people and technology, and the relentless downward push on agency commissions causes the agencies themselves to under-invest in both.
This got me thinking. Under-investment in technology may end up killing a number of ad agencies, but the forces that cause this sort of under-investment make a lot of sense when put into the context of the agencies’ business models. They can only charge a certain percentage above the end media buy. Their customers have decent visibility into the markup that any give agency is charging. And there are numerous other providers who could claim to offer a similar other service (in other words, it is a very competitive space.) Where is the ability to charge the customer more for a technology purchase? Or, who within the agency has the power to cut the margin on a particular piece of business to buy technology? I’d imagine that there would need to be a solid mandate from the top…
When technology innovation fails to come from within an industry it is sometimes thrust upon an industry from outside. The Google example is over used to the point of being a cliche, but it is true that the company has really challenged the way advertising works. I’ve very excited to see where the next wave of change in the advertising world comes from. I’m not convinced it will be from the agencies…
