/// Digital Is Winning The Battle, But Is Advertising Losing The War?
The major advertising holding companies just posted an uptick in organic revenue growth for Q1, 2013, on the heels of a modest growth in 2012, the slowest since the 2009 recession. With a wobbly U.S. recovery, a U.K. on the brink of a double-dip recession, and a Eurozone that’s gasping for air, things seem quite bleak on Madison Avenue.
Its against this background that Ad Age points out in a recent article that advertising is increasingly becoming a dominated by digital agencies.
Digital agencies are growing 40% faster than ad agencies and now account for one third of all communications spending. They are adding to their workforce and hiring talent even faster than their revenue growth rate requires, anticipating more and more growth. Their workforce is growing 3 times as fast as ad agencies.
It’s clear is that the digital agencies, like most “new” and entrepreneurial companies are in investment mode, hiring vigorously in anticipation of more work; and ad agencies are acting more like mature businesses do, minimizing investment in assets, their workforce.
The rejiggering of the agency scene and the growing predominance of digital agencies makes advertising more measurable and more accountable, as marketers have long demanded, but this also raises new challenges for the industry as a whole.
Digital work can be more labor-intensive and less profitable because it’s more diverse and less standardized than traditional work done by the ad agencies. And many digital engagements are on a project-by-project basis, which are less lucrative than AOR assignments. The industry, which has been under a financial squeeze for a decade, is likely to face more headwind as “traditional” budgets shift to digital.
As the traditional advertising segment stops growing and eventually starts to contract it will face a share game, where one would have to take business from competitors in order to grow. Agencies will also have to rethink their business model, invest in business development, and seek new revenue streams.
With less profitable digital agencies dominating the makeup of the holding companies and with tepid growth in developed markets, the holding companies will be looking for new sources of revenue.
They are moving beyond the BRICS and acquiring agencies in lesser ad markets, in what Goldman Sachs termed “the Next-11”, countries like Indonesia, Egypt, Turkey and Vietnam. They are also increasingly competing for consolidated accounts by drawing on resources across the holding company, in what is known as “holding company pitches.” WPP in particular is a strong proponent of this “team” approach.
However, holding company wins often require discounts to advertisers, and that can hurt profitability further.
The bottom line is that in years to come the advertising industry will need to become smarter about the bottom line. They will have to become more efficient, rethink its compensation approach, and experiment with different models of delivering value.
Forbes – Avi Dan, Contributor