Two interesting articles in Mediapost were published yesterday with similar themes about seismic shifts occurring in the advertising industry. To summarize: The first by Gord Hotchkiss, “ Why Agencies and Clients are Calling It Quits”, posits the traditional ad agency model is no longer a good fit for clients because the “bridging” function it fulfilled in placing media and creating demand through ad creative is obsolete. The old agency benefits of economies of scale and one-stop-shopping of services no longer matter as much as speed, nimbleness and specialized skills. According to Hotchkiss, technology now allows clients to handle many of these functions themselves without the need of an agency middleman. Thus, agencies and clients are calling it quits.
Another article by Lorne Brown, “ Verizon’s Spending Spree Signals Death to the Ad Ecosystem” focuses on a different but related issue. In digital marketing, vendors providing a range of services from demand side platforms, data management platforms to viewability measurement all charge fees based on the media CPM rather than a flat-rate or enterprise license. This results in several problems for the advertisers who are ultimately footing the bill. First, it creates an incentive for media buyers to focus on the volume of media rather than quality, resulting in lots of low quality inventory. Secondly, it creates a “margin stacking” situation as each vendor adds a volume based tax onto the base CPM. It’s not hard to see how the cost of media can be less than half of the actual spending. Thirdly, all of these vendor taxes are opaque to the advertiser.
The solution, Brown says, is to create a vertically integrated ad tech stack where point solutions now provided by individual vendors are integrated by into the stack without the CPM tax. This vertically integrated solution approach is being pursued by Verizon (which acquired AOL, some Microsoft advertising assets and Millennial Media). Other tech stack providers such as Adobe, ComScore and Comcast are all pursuing this strategy.
Both of these articles illustrate how technology is dramatically and rapidly changing the advertising industry. The first article describes how technology is allowing the brands to directly fill many of the agency functions. The second article shows how this technology stack used by agencies and brands is becoming more integrated resulting in a lower cost and more transparent solution for advertisers. How this plays out in the next five years will be interesting to follow.
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