For those who want to be negatively pre-disposed towards the agency industry, there are always tangible factors to point to. Pressures of procurement on pricing power, increasingly unfavorable payment terms and the seeming disloyalty of marketers towards agency “partners” expressed through regular reviews are among the concerns that practitioners face on a daily basis. And then there is the seemingly graver threat of disintermediation as characterized by the replacement of agencies with software-driven alternatives or the risk that marketers bring agency functions in-house.
Two separate news items out last week involving two of the world’s biggest marketers provide additional fodder for these latter concerns, although we think there is little to read into these threats at an industry level.
First, Ad Age reported that Procter & Gamble wants to buy 70-75% of its US digital media programmatically by the end of 2014. However the figure is defined it would likely represent several hundred million dollars in annual spending. This is important to digital media owners, as many of the publishers that P&G tends to buy from do not yet offer media sales programmatically. More importantly in context of the disintermediation topic, P&G is reportedly among a small number of brand-focused marketers which buy programmatic media in-house, using a system called Hawkeye rather than its primary media agency, Publicis’ Starcom MediaVest Group.
Second, Bloomberg News reported that Apple is bringing more of its advertising in-house, hiring creative executives including one from Apple’s incumbent agency, which sits inside of Omnicom’s TBWA. Per the article, Apple is producing more of its TV commercials in-house (important as Apple’s advertising budget is heavily skewed towards TV). By varying reports the account employs ~600 individuals and ~$1bn in annual spending (all $ are US). On these figures it is reasonable to estimate $100mm in annual revenue associated with the creative account for Omnicom.
Clearly these items are negative for the agencies involved. But are they omens for the broader industry? We think not. First, we recognize that growing numbers of brand-based marketers either operate or are establishing in-house trading desks for the digital media they buy programmatically. While there is some logic to this approach for many marketers, there are real reasons to doubt its durability for most.
Encouraging specialist professionals to relocate (as they tend to live in markets such as New York, San Francisco or Los Angeles, where relatively few large brands are based), securing ongoing capital investments to operate in-house trading desks, maintaining awareness of best practices that the larger agency trading desks will possess and overcoming the challenges involved with integrating in-house buying efforts with those performed by the traditional agency are among the challenges involved. And of course, it is harder to fire an in-house agency than one which has been outsourced. Over time, we only expect a minority of brand-based marketers to eventually bring programmatic trading in-house.
The news on Apple also appears idiosyncratic. Earlier this year, Court documents provided emails expressing Apple’s dissatisfaction towards TBWA. Shortly after this news emerged, Apple indicated it would add digital agencies Huge (IPG) and AKQA (WPP) to its roster. The timing was anything but a statement of confidence in Apple’s relationship with Omnicom. While we do not know how permanent this change is, many of the issues involved with bringing programmatic buying in-house apply to creative work too.
Our view on agencies remains positive at an industry level. Agencies retain unique competencies in socializing ideas among marketers’ organizations and in executing against increasingly fragmented media choices. So while there will always be new ways to automate (and possibly separate) different functions the agencies perform, it won’t likely be the work that agencies do distinctly well. This means agency spending should generally grow faster than media spending as the services they offer become increasingly specialized and important to advertisers underpinning our positive industry view.