Ad Agencies and The Perfect Storm – Adv Giants Like Ogilvys Are Facing the Biggest Challenge in 50 Years

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by: Idris Mootee

I’ve seen a few downturns and what happened to ad spend. In most cases ad-spending plunges 8-12% when there is a slow down, but I think this time is little different. I was having lunch with a friend who is the CEO of a vertical content and search company in California and we’re talking about this subject and we shared the same opinion. Digital media will be a shining star in this downturn.

This downturn will be a perfect storm for the agencies. Many are not properly geared up to deal with the digital age especially the very big names. Ogilvy’s announced to cut 75 jobs from its NY headquarters (around 4% of total workforce). Most of cut comes from Ogilvy One which is the DM and interactive arm. Yes, it has always been treated as an “arm” and there were never any vision of serious investments in it. Their largest clients including Dove (they did some good work for them) and IBM are moving money to branded content and digital initiatives. Anyway they were never considered a key player in the digital world. Ironically, they produced one of the best campaign for Dove which is an exceptional piece of work.

Bob Greenberg (co-founder and ceo of R/GA) who is a pioneer in the advertising and communications industry for decades (R/GA was named Creativity’s Interactive Agency of the Year for 2007 for creating integrated marketing campaigns) pinpoined exactly what was the problem with the ogilvys of the world. This is what he said in Adweek:

“When a single TV spot or print ad used to be able to simultaneously drive awareness, consideration and preference, marketers got a lot of value out of this ad. But now the best ads can do is start the consideration process, which more often than not is happening online. And although a punchy line might trigger awareness, it plays almost no role during consideration. Here, the “rational” experience of brands trumps the “emotional” delivery of a clever tagline or visual. Yet ad agencies have almost no experience in the former and way too much comfort in the latter. Even when they develop online campaigns, traditional agencies tend to approach the Web as just another place to deliver a metaphor. So instead of creating useful tools, applications, demos, customer support communities or streamlined ways to complete a transaction, they fall back on familiar stunts and gags, such as viral videos.”

Ogilvys is also facing another test. WPP (Ogilvy’s parent) is considering to refinance its $570 million debt and will put pressure on Ogilvy’s and other agencies to reduce its staff to cut costs. Not sure if this helps as it reduces their ability to compete, so they are locked into a no-win game. Expect the same for other big agencies in the group (JWT, Wunderman). The industry expects the bigger ad-spend cut will only come in 09 and not this year due to three reasons: US election, Olympics in Beijing and the European football championship. Many expect a 0.5% to 1% additional growth to ad-spend. 09 will be the tough year. Although this will not be like the ad-spend downturn. There is still a big gap between the time people spend online as a fraction of their media consumption (about 1/5) and the fraction of marketing budgets spent on the internet (about 7.5%). Many companies are trying to narrow the gap, which will sustain internet advertising during a downturn. My clients are moving from 6-7% to 12% to as high as 23%. Search advertising will continue to grow. The internet’s interactivity and engaging nature make it the best means of generating sales-driven campaign–whereas TV is best for long-term thematic. Those who work in the digital space will not have any problem at all. That is because the internet has allowed greater accountability to advertising. It is al about measurable results. Marketers can now prove that a click on an online ad can generate sales.

Investment analysts disagree about ad-spend in 08. UBS predicts that expenditure on ads will increase by 5%, whereas Goldman Sachs forecasts that it will decline by as much as 5%. (Who says you can trust any economist) At least everyone agrees on one thing: underlying growth in ad spending will come mainly from emerging markets and from emerging digital media. Emerging markets now represent 1/5 of global expenditure on advertising. Developing countries can add as much as $50 billion in new ad-spend in the next 3-4 years whereas developed markets will add only $38 billion.

Let me make a prediction. IPG (currently valued at a little below $4 billion (Omnicom and WPP are both cap at $14.5 billion plus and minus) will be bought in 6 months. This is a very poorly managed holding company but own some crown jewels. This is a “buy” at the current price for Publicis or Havas. Probably Havas I think. Anybody cares whether there will be only 4 or 5 agency holding companies left?

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