Social Media Threatens the Corporate Ad Agency

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by: Scott Goodson

The corporate ad agency has been around since J Walter Thompson founded his company in 1864. After WWII, American and British agencies opened offices in cities around the world to advertise products to greater number of consumers. In the 50s TV transformed the industry and money made off the TV was astronomical. Smaller players were gulped down. Medium size players were merged and expanded all in the interest of maximizing profit derived from the expansion of TV advertising.

"Ok, ok," you say "enough of the history lesson". Trends in advertising, the economy, and the rise of the internet are all transforming the industry in ways never before seen and at a pace that is leaving many faces flushed. Most of the corporate agencies have been punished on Wall Street. IPG is down around $3.68 per share.

Emerging innovation driven agencies are influencing things beyond their size, doing huge campaigns with greater efficiency and doing things faster and with more flexibility while the corporate agencies do what they can to protect their revenue from TV advertising.

The Financial Times today reports that two-thirds of advertising agencies are not prepared for the industry changes prompted by social networks and new forms of digital media.

“The Institute of Practitioners in Advertising, which will publish the “Social Media Futures” report compiled by Future Foundation next week, has warned that advertising agencies face growth of just 1.2 per cent a year by 2016 if the industry fails to tackle the changes to the media created by sites such as Facebook, YouTube and Twitter. Social networks enable consumers to pass on information about products and services, and recommendations from friends are more influential than traditional forms of advertising.”

The article goes on to quote Moray MacLennan, chief executive of M&C Saatchi Worldwide:

“The current downturn will accelerate these trends in agencies as everyone is looking to innovate and stand out from the crowd.I don’t think [social media] is a replacement for paid-for media, it is just going to be a challenger for [consumers’] time and attention.”

Social networks themselves are still figuring out how to make money from advertising on their sites. Pricing for generic banner advertising on social networking is relatively low compared to other sites, because their users are logging in for communication rather than commerce.

In this brave new world, advertising’s most prized accomplishments are suddenly being seen as corporate milestones of a bygone era.

Will the legacy corporate agency model survive in its current form? A few remain competitive. Some are doing better than others. Most continue to derive much of their revenue from TV advertising.

Corporate agencies in the industry have reacted to the collapse of the traditional model by laying off staff and restructuring. Taking traditional advertising’s place of course is the internet. The net is the media to be reckoned with and to build the marketing business of the future around. Among the most significant aspects of this transformation is the fact that the web does not offer the same financial booty TV advertising once did.

So how will the large corporate agency be able to sustain itself on the business model being born in January 2009?

Clients have changed and what they’re demanding of an agency has fundamentally changed. Clients have seen how nimbler and more innovative agencies can do what the big guys do more efficiently. In these economic times, they can certainly capitalize on the problems confronting the corporate agencies.

For someone like myself who runs an independent agency, the challenge is sustainable growth. And this is where the legacy agencies have always had one considerable advantage. They have been able to rely on long-term relationships for consistent revenues. But these days, with all that’s going on, clients are more open to alternative agencies – agencies that they may never have considered for a huge account.

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