Martin Sorrell is very grumpy about the oligopolistic power of the tech giants in global advertising.
“Google and Facebook control 75% of digital advertising. Digital advertising is about 30% of the world market. Is that an issue or not?” he asked at Davos. This is a question he will keep on repeating without ever answering directly.
They are dominant. They have too much power. They should be regulated. All this is carefully implied since he knows that in the new, digital world, his own marketing services monolith, WPP, must retain excellent relations with Google and Facebook. It would be impossible to create a strategy for any of WPP group’s global advertising clients without placing Google and Facebook’s data and platforms at its heart.
It is hard for Sorrell - and the other global media services giants, Omnicom, Aegis Dentsu and Publicis Groupe - to shout too loudly about oligopolistic power unless the spotlight’s gaze turns towards their own market positions, particularly in media buying. These global groups have a combined market share of over 70% of advertising spend in several media across global markets as they have consolidated the sector and grown organically, using their scale to win more, bigger clients.
But at a time when global advertising spending – the fundamental driver of the growth of the media services giants for 20 years - continues to power upwards, WPP has lowered revenue and profit expectations three times in the last year and its share price has fallen 27% over the last 12 months. Sorrell’s comments sound like those of a CEO whose business is facing structural pressures; a CEO who can see that the value chain has turned against him and is struggling to know what to do about it. This pressure is being felt particularly harshly in media planning and buying, a business unit that is particularly lucrative for all the media services giants.
25 years ago there was a plethora of mid-sized agencies which offered the full range of media services - strategy, planning, creative, production and media buying. I worked in one such agenc and remember the trek to visit the media buying team, a small group at the end of a long corridor in a far alcove of the building. Each agency had its own media buying team, so they had limited power when negotiating with the far smaller number of larger media owners.
Consolidation has reversed this entirely. Every media owners with brand advertising as a significant revenue stream must trade effectively with the major buying agency groups. They cannot afford not to; particularly as free web content has reduced consumer revenues. If one of the buying groups decides to hold back money from a media owner or, even worse, to cease trading with them entirely, the effect is catastrophic, decimating profitability.
The huge growth of buying power built up by groups such as WPP, Omnicom and Aegis Dentsu allowed them not just to secure better media deals for their advertising clients but also to create large, new businesses with – until recently – growing margins.
In the old days the media buying teams of agencies made profits through fee-based payment structures, supplemented by the interest that agencies accrued by billing clients quickly and paying media owners slowly. As the buying agency groups grew bigger, more muscular finance teams combined with worthwhile interest rates pushed the margins up.
Using their growing buying power, the agencies then began to negotiate harder with media owners. Not only did the agencies negotiate better rates for their clients, reducing their media costs but they also started to negotiate rebates (cash in return for hitting spending targets) and other fees from media owners. These financial benefits were not always shared with their clients, which has recently led to client demands for greater transparency and brutal criticism of agency practices by leading global clients such as Procter and Gamble. But it was great at growing agency margins.
Then the digital explosion took place. Digital advertising spend sky-rocketed, rising rapidly from single digits to account for more than half of UK advertising. This created a windfall opportunity for the buying agencies in the days before Google and Facebook asserted their data-driven dominance. Their clients pushed money into digital but had little experience of this fast-evolving, lightly-monitored world. Agencies negotiated new deals with clients, guaranteeing clients the digital advertising views they craved at a set price. The agencies then uses their buying power to steadily push down the price paid. As client money flooded in, the agencies benefited – for a period – from sensational margins.
It is easy to be critical of the media buying agencies and key figures like Procter and Gamble’s Chief Marketing Officer, Marc Pritchard have described media buying process as “murky at best, fraudulent at worst”. But this is not a simple story of agencies using growing value chain power to boost margins and take advantage of their clients. Clients have consolidated their agencies, using their buying power to squeeze the fees they pay. This has been achieved through regular, tough, competitive procurement processes. High service levels are demanded and media auditors pressure agencies to buy media space at the most competitive prices. As a result, agencies have had to become ever more creative to grow profits - and they have become very creative. Clients may be unhappy about the lack of ‘transparency’ in media buying but clients’ own actions are also to blame.
Let’s get back to Sorrell’s grumpiness.
The highly profitable buying agency model he helped create is being squeezed from several angles:
Clients demand greater transparency, have investigated the media supply chain and are tightening up contracts. This has hit some of the most profitable parts of agency trading.
As light has been shone on the dark arts of digital advertising buying and Google and Facebook take more share of digital spend, agencies’ windfall profits are fading.
Google and Facebook have a stronger position in the value chain than the buying agencies. Buying agencies cannot dream of achieving the sort of beneficial deals they now take for granted when negotiating with smaller media owners.
Some major clients have moved their digital advertising in-house. More are considering this change. The word is out that you can run fast-moving digital campaigns in-house more responsively than through an external agency for a similar cost.
Data is the new gold in media targeting and the buying agencies are, at heart, traders, rather than forensic data analysts. Their thinking is rarely built around world class data insight and Facebook and Google have a much richer set of consumer data than the buying agencies. The communications groups are fighting back - Aegis Dentsu spent $1.5 billion on buying Merkle, the US data company in 2016 – but in the data war, the agencies are fighting outside their comfort zone.
Big consulting and technology companies are using their technology and data expertise to compete for lucrative contracts in the media buying sector. This big-brained, high-level competition is built upon a different form of relationship at a more senior level than the buying agencies usually operate. By making strategic acquisitions of communications agencies this threat is growing.
What should Mr Sorrell and the leaders of the other marketing monoliths do?
When the value chain turns on you, lower margins are almost inevitable. Regulators may hold back the power of Google and Facebook, but this does not alter the business fundamentals. Buying agencies’ instincts will be to go in search of the next windfall trading profit to fix the margin pressure. This may work as sticking plaster in the short-term, but pressure for transparency is here to stay and the long-term result may be greater mistrust.
The buying agencies have grown scale and profitability through the strategy of consolidation combined with astute trading tactics. Now they face a less certain future and must address tougher, strategic decisions. This will mean:
Cutting costs and remodelling the businesses to become more flexible to client needs. Pure buying power will remain important in traditional media buying its share is shrinking and digital buying is more nuanced.
Selling more, high-value services to clients on the fee-based models that the global consultancy competitors are using. This move ‘up-market’ will mean investing in new people with different attitudes.
Refining and growing their role in creative solutions and services. A good example is Aegis Dentsu’s Storylab. This is an important role for many big clients, mixing the role of creative and broking intermediary and is a segment that is both lucrative and valuable.
Creating assets that go beyond the people. Instinctively media buying agencies start with the people because of their history. But this has created commodity businesses between which clients can chop and change. New investment will be needed to create genuine competitive advantages.
True innovation in systems, approaches and the use of data driven insight will be essential. Omnicom's Hearts and Science is exploring this path. Ex-agency people are combining with technologists and other entrepreneurs to create innovative start-ups. It is time for the buying agencies to harness more of the creativity that lies within and create services that clients genuinely can’t match if they consider moving elsewhere.
Integrating creative services more successfully into their digital offering. This is an area where the tech giants cannot yet compete. The fusion of data-targeting and fast-response creative is one of the areas where competitive advantage can be built.
My guess is that creative trading instincts will sustain profits in the short term but without significant innovation to make them more than the combination of their people, the buying agencies will become steadily less interesting to either own or to work in.