Will Digital Cause Agency Shrinkage?

NEW YORK The increased automation of advertising routed through the buying systems of companies like Google and Microsoft will likely produce significantly altered agency models, according to a key AOL executive.

Dave Morgan, evp, global advertising strategy at AOL, said media shops have a faltering business model, with armies of comparatively low-paid digital media buyers propping up a layer of high-priced executives from the traditional side of the aisle.

The inefficiencies created by this approach are no longer tenable, and current trends will yield “leaner” agencies well versed in using digital-buying platforms, he said during a panel discussion at an investment-banking conference here on Monday.

Case in point: The major ad holding companies missed out on aQuantive as it pieced together an agency, technology and network business that eventually fetched $6 billion from Microsoft last May. The holding companies not only passed on buying aQuantive, they never made moves to emulate its structure or operations, he pointed out, relying instead on more traditional approaches.

“Not one of them had the guts to pull the trigger and do it,” he said.

One exception, he noted, was WPP Group, which broke from the ranks of its peers by making a series of digital acquisitions, including the $649 million purchase of 24/7 Real Media, an ad network and technology company.

Jason Klein, president and CEO of the Newspaper National Network, seconded Morgan’s assessment. It has become clear that pulling apart media from creative has “failed” because of the silo mentality it creates across the board, he said. “It is amazing how ill equipped the agencies are to deal with what’s in front of them.”

The gloomy outlook for agencies came amid signs that the economy is sliding toward recession.

Linda Gridley, the CEO of conference sponsor Gridley and Co., said the slowing economy would hit ad holding companies, although continued spending shifts from their traditional agencies would likely be mitigated in a quadrennial year featuring both the Summer Olympics and U.S. presidential elections.

“We’re pretty bearish on the traditional models,” she said.

Despite the pessimism, Morgan stressed that AOL is not looking to go around ad agencies and convince clients to buy directly from the company’s various networks such as Advertising.com, Tacoda, Quigo and Third Screen Media.

“We’re not Google,” he said. “We need agencies. Unfortunately, the don’t have a profitable business model now.”

“They’ve got overpaid television folks and underpaid online people,” he explained in a later interview.