This year has already been christened a breakthrough year for mobile marketing, a promising medium that, with 2 billion cell-phone users worldwide, is one of the largest distribution channels on the planet. And the ad industry's biggest players are dipping their toes in previously uncharted waters: P&G Mobile Ad Lab is rolling out 35 mobile-based programs through the end of the third quarter; Pepsi is launching mobile video ads this summer; and Jeep is considering extending its Web miniseries, the Mudds, onto mobile phones.
They are compelling examples of how the biggest mass marketers are looking to get closer to their customers—in their pockets and purses, right next to their wallets. The good news? Holding companies with strong specialist offerings are well placed to cash in on these faster-growing, higher-margin businesses. The bad news? Their flagship ad-agency networks are finding it harder and harder to justify their roles as lead marketing advisers.
Much has been made of clients' shifts in spending toward marketing services, the industry's largest and fastest-growing segment, which is expected to hit $455.7 billion by 2010, according to Veronis Suhler Stevenson. Marketing services disciplines—cast as the more durable and dependable sibling of agency darlings with their Super Bowl ads—are increasingly taking the lead within holding companies.
Last week, long-struggling Interpublic Group finally offered some good news about improving domestic organic growth.
Yet those gains were driven not by any of IPG's high-profile agency networks but by increases in public relations and branding businesses at its Constituency Management Group unit.
In December, Publicis' $1.3 billion acquisition of Digitas suggested a new era in which the French company was positioning digital media as mainstream, on par with its other networks. While that shift in the balance of power is apparent at the holding-company level, there still appears to be denial at the operating units. Agencies overestimate their relevance to marketers, as those clients are already relegating them to a more fractionalized role, according to findings from Forrester Research. In a recent online survey of 141 marketing and agency executives, an overwhelming number—93 percent—believe their contributions drive their clients' marketing success, while only 63 percent of marketers feel the same way.
Industry observers feel that gap keenly. "Agencies don't have the kind of across-the-board influence they had 20 years ago," says consultant Joanne Davis. "Clients have so many other sources of learning now."
Spending aside, another telling yet overlooked detail demonstrates that the traditional agency has already lost its place at the head of the table. The marketing communications business is labor intensive, with more than half of revenue coming into marcom companies paid out to cover costs. So, trends in industry employment levels provide a valuable clue to the overall state of the business. According to an Adweek analysis of Bureau of Labor Statistics data, the head count in marcom companies is almost back to its historic peak from December 2000, before the Internet meltdown sparked industry recession. Staffing levels at agencies, however, aren't even halfway back to those previous highs (see sidebar). From 2000 to 2005, ad spending grew only 1.7 percent, according to Veronis Suhler, compared with an 8 percent rise for marketing services, the latter increase even more notable because it came off a larger base.
Aside from providing a measure of growth dynamics, the contrast between the respective recoveries in staffing levels underscores the increasing competition between traditional and nontraditional. Because of the severe contraction from 2000 to 2003, ad agencies have a shortage of employees with three to seven years' experience. Those midlevel staffers are needed to handle growing new business, if the recovery continues to take root. So, going forward, ad agencies and marcom specialists will be competing not only for new assignments but for midlevel staff as well. This could set off a round of salary inflation throughout the industry, resulting in pressure on profit margins, which at the first sign of a revenue slowdown would stimulate a new round of staff reductions.
The gap in agency/marketer perception is most pronounced when it comes to dealing with changes in consumer behavior and with Internet advertising, according to Forrester. Less than 60 percent of clients think their agencies can help navigate the changing consumer landscape, while 80 percent of agencies believe they are well prepared to do so. About 95 percent of agencies think they are well equipped to handle the Internet, while only 45 percent of marketers agree.
According to a retail marketing executive who participated in the survey: "Most senior ad execs appear more comfortable with conventional channels, which they claim are 'integrated' because they've tacked on a Web site." Adds another CMO: "Client-side marketers are better at managing integrated campaigns and being media agnostic."
At the 4A's Media Conference in Las Vegas last week, Procter & Gamble CMO Jim Stengel opened his remarks not with an ad campaign from one of his roster shops but with a clip of his own avatar's visit to Leo Burnett's office on Second Life. Stengel said the ad industry has improved somewhat in keeping up with consumer behavior and the Web, but added that goal is largely irrelevant. "We can no longer measure success in keeping up, because keeping up is not possible," he said. "What we need is a mind-set shift."
Judging by the survey, clients are not counting on ad agencies to deliver it. Interactive and digital are the areas in which marketers most often seek specialty shops, according to Forrester. Perhaps more surprising, nearly 60 percent of respondents cited "creative" as the next main reason to outsource work.
Marketers in the survey also said that while agencies still wield influence over a majority of their budgets, 76 percent of them admitted they do not measure the return on investment of their lead agency relationships. Some 69 percent said they feel ROI is too difficult to measure. Therefore, developing better metrics and accountability may be one way for agencies to hold their ground.
Participants in the Forrester survey say public relations is the third most useful area in which to employ an outside specialist. PR is currently one of the hottest areas of marcom, with spending up 12.5 percent to $3.35 billion in 2006, according to Veronis Suhler. "In an environment of clutter, public relations is a higher-quality deliverable. It brings third-party validation," says James Rutherfurd, svp at Veronis Suhler. (Rutherfurd adds that custom publishing, which grew by 29.1 percent in 2005, is another vibrant sector. It now generates more ad revenue—$28 billion—than the consumer magazine industry, with $20 billion.)
It is shifting media technologies and preferences that are exposing major weaknesses in traditional agencies which continue to struggle to adapt. Saddled with legacy structures, agencies have been slow to acquire the skills in emerging channels.
Still, one marcom advocate does not rule out the continuing influence of large agency networks. "Look at [Omnicom's] traditional agencies. Their results aren't hurting because of DAS," says Tom Harrison, CEO of Omnicom Group's Diversified Agency Services unit. "I don't see general advertising going away. It continues to add value to the general mix."
DAS's own performance belies that optimism about the longevity of agency networks. During Harrison's nine years in senior management at DAS, those operations have quadrupled in size, with that inflow of dollars often coming at the expense of traditional ad spending. DAS and DAS-related entities—marcom companies aligned with Omnicom agencies—now contribute 59 percent of Omnicom's revenue, compared with about 36 percent when Harrison came into the job.
Yet Harrison says history can be a guide. "With the Internet, five years ago we said it would replace advertising, but it didn't," he says. "People realized it was just another channel."