The advertising industry post (prompted by WPP’s 2017 financial results)

Sometimes the most straightforward posts take the longest to write. When I started on this one last week the big question in the minds of people who watch the big advertising conglomerates is are WPP numbers a company problem or an industry problem?

Fortune Global Forum 2013

WPP is looking to simplify its structure with a view to becoming a more agile and transparent business from a client perspective.

Or as it was put in the New York Times

WPP plans to accelerate a programme to simplify the business by aligning digital systems, platforms and capabilities to provide bespoke teams for its clients as opposed to the different agencies that currently compete with each other to win contracts.

Other conglomerates, notably Publicis had already started on this path when it started realigning the group under the ‘Power of One’ vision. WPP is bigger with a fuller offering and wider range of specialisms than many of its peers, no one can be under the illusion about the size of this undertaking.

Let’s talk about the tectonic plates shifting around beneath the feet of ALL  the large advertising and marketing combines:

  • Interpublic Group (IPG)
  • Omnicom
  • Havas
  • Publicis
  • WPP
  • Dentsu

The tectonic plates are:

  • The Four
  • Amazon
  • The decline of brand marketing
  • The new competition
The Four

The Four is a label that Professor Scott Galloway put on Apple, Amazon, Google and Facebook. All of whom he considered to be monopolists that created value for their shareholders by putting the ‘real world economy through a shredder.

In this case I would swap out Amazon and Apple for Alibaba and Tencent, but the allusion to a quartet of horsemen portending a digital apocalypse is a useful allegory for the advertising and marketing sector.  Amazon deserves a section of its own later.

Galloway’s predictions of their destructive power led to an accurate prediction of WPP’s share price tumble this week. (see the video below)

Correlation does not prove causality however — it doesn’t mean that he got the right numbers for the right reasons.

Depending whom you believe Facebook and Google are responsible for 90 percent of online advertising growth outside of China. This represents a massive concentration of media power. It has implications for the creative and planning functions of an agency. Google and Facebook also run much of the advertising technology that purchase are made on. This has decimated much of the advertising technology sector and made it harder to differentiate media planning and buying based on the technology stack.

1707 - ad industry

L2 came up with this research last year based on Google and Facebook revenue targets. If they hit their numbers they would be treating around 14,193 jobs. But it would mean that the corresponding projected number of jobs lost in the advertising industry would be roughly the equivalent of every man and woman around the world employed at vehicle maker Nissan. And that’s just 2017.

L2’s calculations don’t take into account China where the advertising industry has been digitising at a much faster rate than in the west with the bulk of growth going to companies controlled by Tencent or Alibaba.

Given that most of the agencies within WPP and its peers operate on a billable hour model; this represents a considerable potential loss of value. Since the number of people directly equates to revenue.

The consolidation of online media also means that many clients will look to take back control of their media planning and buying process. The argument goes something along the lines of ‘a consolidated media landscape allows for consolidated buying by a global media trading desk due to the inherent simplicity in suppliers. The data comes from the inhouse data management platform and the media vendor (Facebook, Google, Tencent or Alibaba)‘.

The always on creative needed to fuel this process is also being increasing done in inhouse studios, in partnership with their creative agencies as a kind of hybrid model.

This is what Marc Pritchard meant when he talked about taking back control of Procter & Gamble’s marketing as part of a process to save $1.2bn by 2021.  In the latest financial results, WPP claimed that their media buying margins had not suffered – only creative had.

Amazon

At the time of written Jeff Bezos is worth about 112 billion dollars, or just under double the annual defence budget of the UK for 2018. Amazon impacts the advertising and marketing industry in multiple ways.

It is starting to become a big player in online advertising in its own right. I think it would be fair to say that this competition to Google is welcome for the marketing conglomerates judging by Sir Martin Sorrell’s commentary on the likes of CNBC.

Amazon has decimated the high street. Toys R Us, Borders Group, Tower Records, Radio Shack, Maplins are just some of the names which have disappeared. It took a good number of years for people to realise that retailers are locked in a zero sum game when Amazon competes against them. Amazon has unique access to exceptionally cheap capital via its shareholders. There have been companies who have beaten it back like Alibaba’s Taobao and TMall in China. But the company has built up a huge amount of retail power and decimated brands that would have been advertising agency clients.

Amazon has become the default search engine for buying things. This has already displaced up to 20 percent of Google searches depending on whom you believe. It also means that they can place imitation goods and private label goods against branded products.

Amazon has got great data. Amazon has data at the centre of its business what consumers like, what they don’t like, what sells well on marketplace resellers. This has driven a number of the product decisions:

  • Increasing customer basket sizes
  • Expanding into new areas by screwing over marketplace resellers
  • Focusing their efforts on private label products which directly impacts branded products across categories. Amazon Basics is the most obvious private label to consumers, but there are many more where the link isn’t so obvious

Depending on your brand category the answer may be:

  • Owning your own retail chain like Apple or LVMH’s DFS Group
  • Direct sales and subscription services have piqued the interest of FMCG brands like Dollar Shave Club

All of this impacts the advertising sector. For more information on the power of Amazon, I can recommend Scott Galloway’s The Four.

The decline of brand marketing

The relative decline of brand marketing has been driven by a number of factors, some of these factors are good and some aren’t.

Let’s talk about the good reasons first of all.

  • ‘Performance marketing’ driving customers directly to a sale has been transformed by the rise of modern online advertising techniques including search advertising and retargeting. Retailers can zero in on intent to a much greater degree than shopping television or direct response print adverts ever could. Google and social media have turned into reputation platforms which then displayed below-the-line spend from the likes of public relations agencies. This was happening at a time when journalist employed by publications have declined; implying a natural progression
  • At least some consumers can’t be reached through traditional media channels with sufficient frequency for brand advertising. Social media, online video and banner ads make sense as part of an omnichannel approach

The bad reasons:

  • The focus on ROI rather than profits has meant that a balance longer term brand building and shorter term sales has fallen out of kilter. Marketing then becomes a reductive process. To use a farming analogy; its like moving from arable farming with crop rotation to slash and burn. This is particularly noticeable in the way private equity management has affected fast moving consumer brands under its control. Zero-based budgeting is seen as a source of cost cutting rather than ensuring the efficient and effective use of marketing resources
  • Digital first strategies – for many marketers this has meant a move from media-neutral, let the communications problem define the channels used to a digital dogma. I make my living with digital media, but I recognise the flexibility required in thinking to deliver an effective strategy

It isn’t about one approach over another but finding balance that works for sales now and in the future.

The new competition

The rise of digital advertising has seen business services expand ways that we couldn’t predict. Advertising agencies like Ogilvy understood the potential for digital early on. Consultancies were focused on systems integration and the use of technologies to change business functions. As they became interconnected internally and externally; the progression into marketing made sense.

A reduction in creative budgets caused marketing agencies to move into areas like service design. Consultancies have looked to inject creativity into their values and skills set by mirroring the kind of acquisition strategy that built the marketing conglomerates.

In the meantime technology companies, notably Adobe have treated marketing like any other business function with a sale conducted at the c-suite level just like Oracle or similar. In many respects this move is understandable as companies use a data management platform (DMP) to derive audience insights and improve their digital marketing. This isn’t vastly different from historic data warehousing and data mining applications.

The enterprise software companies allow large companies to do internally what they have previously asked media agencies to do.

More information

WPP raises spectre of adland stagnation – Breakingviews (paywall)
WPP Vows to Do Better After Weak Results, Nervous Outlook Send Shares Plunging – The New York Times (paywall)
I Cannes – L2 Research
P&G brand chief vows to ‘take back control’ from agencies | FT (paywall)
Sorrell admits creative is hurting more than media as WPP shares plunge | CampaignLive (paywall)
Amazon is threatening Google’s ad space monopoly, Martin Sorrell says | CNBC

Five for Friday | 五日(星期五) | 금요일에 다섯 가지

Things that made my day this week:

A cheap facsimile of the classic Nokia 8110 managed to upstage the launch of of a range of premium Android phones at MWC.  Nostalgia is powerful, but I don’t think what’s going on here. I could see this as a weekend phone allowing consumers to wind down at the weekend and go cold turkey on the app economy.

nokia8110traditionalblack3 png-257014-original

I think that the model of a single form factor based on common reference designs is broken. Apple managed to elevate the build quality of all smartphones as contract manufacturers moved towards an armada of CNC machines and advanced manufacturing. But in the process, the common designs, common components and new baseline in product integrity has homogenised and commoditised Android handsets to such a decree that only scale and advertising budgets are differentiators.

Amazing selection of music from the sound tracks of classic kung fu movies over at Shaolin Chamber 36.

Roni Size talks about the music that influenced him

Frank Herbert talks about creating the science fiction epic Dune

digitalethnography | Field Note Painting Booklet – done by Xinyuan Wang, a UCL social anthroplogist in a lower tier Chinese city. Ms Wang wrote a really good monograph on social media in industrial China.

Oprah time: The Four: The Hidden DNA of Amazon, Apple, Facebook and Google by Scott Galloway

Galloway is known as the founder of L2 and as a perceptive commentator on the digital economy (well as perceptive as anyone is with a bank of researchers behind them). He admits freely in his book that his fame was due to years of effort, advertising spend, researchers, script writers, video editors and studio time.

The Four

The Four is Scott Galloway channelling Malcolm Gladwell; explaining for the average man:

  • How Google, Facebook, Amazon and Apple make their money?
  • How the digital economy is affecting the overall economy?
  • What are the negative aspects of their effect on the digital economy?

Galloway does a really good job of surfing the media and policy wonk groundswell against Google, Facebook, Amazon and Apple.

As a digital marketer the book won’t tell you won’t know already know.  I found it a bit disappointing given the role that Galloway and L2 play in the industry.  Secondly, Galloway has already covered all the territory repeatedly in his media appearances and opinion editorials over the past year. He has left little unsaid that would be considered an exclusive for the book

As a digital marketer, if you want your family and loved ones to understand what you do for the living and the major issues that are shaping your job Galloway’s book is a good option.

I like: Josh Tenebaum MIT lecture on building machines that see, learn and think like us

One of the better presentations on the current state of machine learning that I have seen. There is the interesting academic / commercial divide in terms of likely outcomes. Industry isn’t going to create that general purpose artificial intelligence that everyone is writing about. The academic research is very far way as well. In many respects the over promise and under-delivery would be familiar to AI research pioneer Marvin Minsky. Minsky lived through a number of AI booms and AI ‘winters’ when the hype was deflated.

Despite Tenebaum’s reality check on the industry we still see commercial AI concept films created to sell clients on the future promise of a general purpose AI. Agencies and technology companies doing this are only hastening the rise of another AI winter.

Oprah Time: Dark Satanic Mills by Marcus and Julian Sedgwick

dark satanic mills

I grew up with British dystopian science fiction with a fascistic bent. From the numerous franchises within 2000AD magazine to Alan Moore’s V for Vendetta.

The tone of these stories was set by a UK dealing with:

  • Decolonisation and trying to work out its place in the world
  • Economic chaos due to inflation, a shrinking manufacturing base and globalisation
  • A battle of elites against working people
  • The rise of right wing populism
  • The rise of racism 

It sounds rather similar doesn’t it?

The Sedgwick brothers Dark Satanic Mills fits right into this very British genre of graphic novels. The illustration style is similar to the stark black and white kinetic styles of 2000AD or Moore’s From Hell. It should be of now surprise that the jacket copy was written by Pat Mills of 2000AD. It almost felt like the baton was being passed on to the next generation.

The book has a premise that is similar to the body of work in 2000AD. It taps into Moore, channeling not only V for Vendetta, but also his love of mysticism. William Blake’s Jerusalem and The Bible fit into a post-apocalyptic backdrop. Blake fits the bill perfectly: his association with the English identity often misused by ‘patriots’, his innate distrust in systems and of organised religion make his words the ideal foil.

The heroine Charlie is a dispatch rider who ends up in possession of a manuscript that will expose the populist government and the religious zealots it uses as a paramilitary force.

The religious zealots called the Soldiers of Truth are a chimera of Britain First and the droogs in Kubrick’s film adaption of A Clockwork Orange.

Charley ricochets around an England where rational thought, tolerance, logical analysis and experts are enemies of the state. It echoes Michael Gove‘s

“I think people in this country, have had enough of experts.”

Without giving too much more away, the story finishes in an ambigious way leaving Charley and the authorities open to a future largely unwritten. Again the ambiguity of a post-Brexit future is an obvious analogy. The fact that Dark Satanic Mills was published in 2013 makes it feel curiously prescient: a parable for our times.

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