Students at the Business School of Buckinghamshire New University* have been set an assignment: what does the media agency of the future look like? Vic Davies, a course leader at the university, thinks the answer is agile, constantly learning organisations; fleet-footed and adept at meeting the challenges of a new era in marketing. A description that is everything WPP (WPP) is not.
Over the past few years, the UK’s largest marketing company has been scrambling to turn digital. In fact, in 2017 it bought 25 new businesses, 13 of which had an online or mobile focus. But for all its portfolio realignment, 58 per cent of WPP’s business is still non-digital. In an era when over half of the world’s advertising budget is spent online, that's a problem.
But WPP isn't facing these challenges alone. Many traditional ad holding companies have been rushing to bulk up their online operations, a challenge that has negatively affected the bottom line at companies such as Communisis (CMS), Dentsu and Omnicom. French group Publicis shook the industry when it revealed it wouldn’t be attending the 2018 Cannes Lion Festival of Creativity to help “save money”. Cannes’ owner, Ascential (ASCL), saw its shares stumble in response.
But the UK does play host to a raft of companies that fit Mr Davies’ description. Taptica (TAP) – a company with a market capitalisation of roughly £250m – has shifted away from traditional advertising channels and now generates 91 per cent of its revenue from mobile. RhythmOne (RTHM) has an automated ad buying platform which makes up the majority of group sales, while the creatively named Big Sofa Technologies (BST) owns software that helps the world’s biggest brands use video to analyse human behaviour.
But even for the most novel marketing companies, growth hasn't been easy. In 2017, the London Stock Exchange’s media subsector fell 2 per cent against a positive market. The problem for fleet-footed advertising companies is that the marketplace is already pretty crowded. And while the new age of advertising brings with it plenty of opportunities, only the companies that can stand out from their peers can hope to gain anything.
Digital disruption
Sir Martin Sorrell, founder and chief executive of WPP, isn't one to shy away from discussing the challenges facing his industry. In 2017 he took to the stage during four separate company results announcements to describe the “significant shift” in global marketing that has caused a protracted decline in WPP’s share price. Then, earlier in January, he put pen to paper to inform readers of Wired magazine of the threat Amazon (US:AMZN) poses as it strives to become a major marketing platform.
Jeff Bezos’ ‘everything store’ is the latest company causing waves in an industry that has already been upended by US tech giants. The rise of digital search and social platforms, “notably Google and Facebook”, has caused top-line growth to slow across most traditional marketing disciplines, according to Sir Martin. These two sites now account for three-quarters of the digital advertising space which, in turn, makes up more than 50 per cent of the total ad market. Last year was the first that digital ad spending overtook that of TV: online reached $209bn (£152bn) worldwide — 41 per cent of the market — while TV brought in $178bn (35 per cent of the market), according to media buying firm IPG.
This seismic shift to a digital and mobile ad landscape dominated by tech companies has wide repercussions for agencies and media buyers. The reason: Facebook (US:FB) and Google (US:GOOGL) have made it easier for companies to buy advertising space and target certain demographics, so there's no longer a need to use traditional media agencies. In the heyday of advertising, media executives would win client business, design an advert, film it in an exotic location and buy space for that ad on TV, newspapers and magazines. Scale was important as the big agencies offered the best rates and thus advertising giants with many different agencies in their grasp were well placed to win new business.
Digitisation has lessened the importance of scale. Today the ad market is dominated by programmatic buying where companies use algorithms to automatically bid for specific advertising slots on websites. This means “any [ad company] can start up and be as effective as anyone else, if they have the technology, the talent and are transparent with their clients”, according to Richard Costa D’Sa, group development director at small-cap digital ad group Be Heard (BHRD). Large traditional advertising groups aren't only being threatened by tech giants such as Facebook and Google, but the plethora of small advertising agencies that can now bid for big programmatic contracts.
Where is my money going?
Programmatic advertising has also demanded better transparency between media agencies and their clients. “With the growth of programmatic, the ecosystem has become overcomplicated, with too many middlemen between the advertiser and the viewer, all taking a cut of the business,” explains Fiona Orford-Williams, an analyst at Edison Investment Research. Some research has suggested that for every $1 spent on programmatic advertising, only 11.5¢ actually makes it to the publisher. “Yes, it's cheap, but the true costs have been obfuscated.”
Mr Costa D’Sa has met clients who only want to work with ad companies that show exactly where their money is going. Ollie Gandy, clients services director at boutique media agency Yes&Pepper, which boasts clients such as Disneyland Paris and Sky, agrees: “We’re not precious about our ideas... transparency with the client is very important.”
Client fears about not being able to monitor what agencies do, or control exactly where their ad might end up is “part of the rationale for clients moving [advertising] in house,” says Vic Davies at Buckinghamshire New University. According to data gathered by the Institute of Practitioners in Advertising (IPA) this, compounded by a squeeze on consumer spending, has slowed growth in company ad budgets to their lowest level in five years.
To make matters worse, management consultancies have started to expand their reach into the marketing industry. Sir Martin at WPP may be disparaging of the creative ability of the likes of Accenture and Deloitte Digital, but there's no denying these companies are winning business from traditional ad agencies.
What next for marketing?
The latest Bellwether report from the IPA isn't particularly optimistic. The survey concluded that the continued consumer spending squeeze means ad spending among UK companies is set to rise by just 0.3 per cent in the next year, compared with 8.6 per cent in 2017.
That said, tech dominance is expected to keep the digital ad market expanding, particularly once internet marketing platforms have proved that they have the capacity to build brands (a quality still missing from their list of capabilities). Agency Group M forecasts 11.3 per cent growth in digital, compared with 4.3 per cent in the overall advertising market. And, while “dominance of the so-called FANG stocks (Facebook, Amazon, Netflix, Google) shows no signs of abating,” according to Ms Orford-Williams, opportunities for small marketing groups, outside of the major holding companies, continue to grow. “M&C Saatchi (SAA) has shown how good ideas can be replicated in different geographies; Mission Marketing (TMMG) is showing how collaboration can deliver for clients; Be Heard and The Marketing Group (US:TMG) (which has also recently launched a blockchain-based agency) are at an earlier stage of building their groups, selecting agencies to broaden their client offering.”
Mr Gandy, at Yes&Pepper is also optimistic about the future. “Agencies are finding ways to do things that they used to have to say no to.”
