Ad Industry Value: Up or Down?
Posted by Mary Beth Kemp on May 16, 2008
Last week, while France, I, and indeed nearly the rest of Europe enjoyed long, bank holiday weekends, Ad Age heralded digital as the savior of agencies in their 64th Annual Report. Sure, digital is a great ride. And now, with marketing services, drives up to half of the billings in the top 4 groups.
But has digital really been as good as all that for agencies’ business?
Digital requires a different business model, often very different expertise and specialized competencies. Add to that the complexity of good digital marketing, the blinding innovation of the digital space…and the last minute technical glitches that no one seems impervious to, pushing up time spent and project cost.
But agencies didn’t have a choice, right?
I had an interesting discussion with a former collegue, the head of an international agency within a large group. We were speculating as to the overall value of the advertising industry. Has value been destroyed or created? Is advertising a more valuable industry than it was 30 years ago?
And we worried that increasing pressure on costs coupled with the continuing need of lots resources - junior and less expensive - was driving a negative spiral. Among other things, this spiral makes it hard for agencies to hire people at their just value, often driving the best young graduates elsewhere (as client-side marketers, or to another industry altogether).
The ad industry has lost its spark.
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re: Ad Industry Value: Up or Down?
Mary, you're right and I wish this wasn't the case in our industry. I couldn't help but nod my head in approval when I read this sentence:"Among other things, this spiral makes it hard for agencies to hire people at their just value, often driving the best young graduates elsewhere (as client-side marketers, or to another industry altogether)."I chose my position because it fostered creativity and passion, two ideas that I take close to heart.I wonder if passion is missing in our industry...http://datainsightsideas.com/post/35181811
re: Ad Industry Value: Up or Down?
@'The ad industry has lost its spark.'Completely agree, i believe that one factor that also contributes to this is the gradual change in perception from 'an agency being an equal/ partner' to 'vendor'; this applies to both sides (agency and clients)
re: Ad Industry Value: Up or Down?
Thanks for your comments.Without crying over spilled milk, as my mom would say, why and how did that move from partner to vendor happen? And more importantly, what can agencies do to move the dial back - if anything? Any thoughts?
re: Ad Industry Value: Up or Down?
I think that the challenge lies in breaking the barrier between digital and offline advertising. If digital agencies are only digital, they will only be considered as technical and design supplier... and you can always find a cheaper one regarding technology in Bulgaria, India, China, ... No wonder that leading web agencies in France such as Fullsix (and don’t get me wrong they do a really good job) are losing money.On the other hand despite traditional advertising still keeping the main share of the marketing mix, it is losing ground each year to digital and alternative marketing. The few big traditional players that have succeeded in integrating digital will probably win both the digital and traditional business of their competitor agencies that have not.Therefore I think that digital players should be quickly moving up the food chain and integrating strategy and traditional advertising skills. No brand is going to offshore their UK or France marketing strategy to an Indian or Chinese firm... on the contrary to their website development. In the web world, they are trained to adapt quickly and be constant learners. I bet that some of them will follow this path and will go after big agencies traditional business. This is the only way they will get paid good enough to survive and thrive... and to hire and pay talents properly...Then developing efficient and smart multicultural and international capabilities is another way to go. Despite leaving in the EU unified market, I am always amazed about the strong differences existing from one market to another. Very few players can assist they client on different market. In the cosmetics and luxury market there is a strong demand for agencies able to deal with Chinese, Korean, Japanese, Middle East and Russian strong developing markets... Even the big advertising players that only offer poor coordination and very expensive fees are not always up for the job…Finally conceiving tools and platforms that offer real added value and proven measured ROI is another way to avoid competing only on prices. Creating platforms to monitor brand use and abuses online, to manage Search Engine Marketing, to seed and distribute digital branded content on the growing number on social media, to better track and optimize ROI on banners campaigns, to panel consumers and co conceive or co market products and services, to connect influential consumers and brands...At least these are the approaches we have been trying to follow for the past few years at Vanksen Group (http://www.vanksen.com) and we have grown from 25 to 100 employee ( 14 nationalities) in just 1,5 years... This is just a start and critics may say that today small achievement is no proof or guarantee for tomorrow's success… but I think passion despite being required is not enough… innovation is key.
re: Ad Industry Value: Up or Down?
Two points raised in the author’s consecutive posts: “Value” and “Why/How”.VALUELet’s start with value, or actually, the inability of the holding company model to create corresponding value. Now there are a lot of ways to measure value, and for this exercise, let’s look at market cap/employee and revenue/employee. Why? Because these are tangible, real measures of “value.” And let’s use the figures available in yahoo for, say aQuantive and WPP. Why aQuantive? Because the company is a digital marketing services provider; they own/operate Razorfish, a successful web marcom developer, and therefore a “near or direct competitor” to the core creative services offered at a place like WPP.***************************************************************a. Market Capitalization (or what the market sees as the cash value of a business):aQuantive’s (AQNT) Market Cap/Employee: To be fair, let’s use the monthly trading price midpoint PRIOR to the Microsoft acquisition, which would radically skew the numbers: $25/share (versus the $66.50 acquisition price). Doing the math simply, AQNT held a pre-merger market cap of approx 2.28 Billion, and they employed about 2100 people. Market cap/employee = $2.28 Bil/2100 or $1,085,714; rounding $1.1 million.WPP’s Market Cap/Employee: Current market cap is listed as $14 Billion, with 102,000 employees. Market cap/employee = $14Bil/102,000 or $137,450; rounding $140 thousand.So, AQNT generated a market cap cash value that was 8 times ($1.1MM/$140/M) WPP’s on a per employee basis.b. Revenue (or the money received for what the company sells):OK. SO let’s change the variable to revenue, and calculate for revenue/employee, which may perhaps bring things into more perspective.AQNT’s Revenue/Employee: YE 2006 (prior to 2007 merger) revenue was approximately $450 Million and with 2100 employees, this calculates to: $214,286.WPP’s Revenue/Employee: Current FY revenue is $12 Billion, and with 102,000 employees, WPP generates about $118,000 in revenue per employee.In this calculation, AQNT generates about twice the amount of revenue for each employee deployed.******************************************************************Conclusion? It’s quite clear that a digitally-focused marketing services provider has the ability to not only generate far more sales/revenue than a legacy company like WPP (and IPG, or OMC, etc) – but they are far better able to generate real market value. And that’s different, very different from the routine platitudes mouthed by legacy agency chiefs about “adding value to their client’s businesses”. In this case, which is not extreme, AQNT generates EIGHT TIMES the business value of WPP per employee. Which means of course they are not only more valuable; they are better able to recruit talent, better able to make investments in their continued growth and business model, better positioned to provide innovation to their customers thereby further growing their business, etc.HOW / WHYAnd now to the second question originally posed: WHY? Why such divergent and different valuation levels – why is AQNT 8 times more valuable than WPP, on a per employee basis?There are two answers to this question:First, AQNT is NOT 8 times more valuable than WPP. It’s about 20 times more valuable. Because that’s what Microsoft was willing to pay to acquire the company.Second, AQNT owns and sells their own “intellectual property” (IP) in the form of software and code and business process. WPP sells, primarily, low value manpower and in their core operations; the company has no IP to sell. Even their recent digital acquisitions provide little incremental tangible value to their large legacy operations.Now there was a time when the legacy nameplates acquired by WPP developed and sold IP, and they were paid a lucrative commission for these services and products, but that was a long time ago. And to the ending question above, about where is the way back from this dismal place?It would help tremendously if we DEFINED what the traditional ad agency business actually is today: this is a low value, linearly scaling manpower business, which sells outsourced swing staff for below their clients’ own replacement cost.OK, so now that we know what the business is valued at and what it is, what should we do?
re: Ad Industry Value: Up or Down?
I enjoyed the post and the comments regarding increasing pressure on costs and how that prevents agencies from hiring people at their value.The latest RainToday.com research, Fees and Pricing Benchmark Report: Marketing, Advertising, and PR Industry 2008, examined fees and pricing challenges, issues, and trends in the industry and found some interesting data that demonstrates an overall positive financial position of ad adgencies, despite the economy:* Two-thirds of firms have seen their fees for services increase at least some in the past two years.* What has influenced the change?We asked firms to write‐in the top three factors that influenced theirfee increases, decreases, or stability. The analysis of their commentary follows.Top factors for increased fees. The top factors influencing the firms whose pricesincreased up to 15% were:1. Competition/Market Conditions2. Company Improvement/Experience/Reputation (also known as brand)3. Costs/OverheadThose firms with the highest price – increases 16% and greater cited:1. Company Improvement/Experience/Reputation (also known as brand)2. Clients’ Perceived Value3. Competitive/Market Conditions* RainToday.com asked survey respondents: What are the top three factors that have allowed you to increase your fees?“Cost of overhead increases (rent and utility increases), new hires, and equipment purchases.”“Inflation, employee costs, business investments.”“(1) Salary of staff writers going up every year, (2) costs of producing our products, (3) increased value of our product.”“Cost of living increases, competition raised fees, no resistance from clients.”“Expanding skill set, demand in the market,client's who can afford higher rate.”“More experience, more diverse portfolio, more visibility and credibility.”“Ability to prove that work impacted sales for previous clients. As firm becomes more established, we can increase prices basedon internal sense of our own value.”Just a few findings that I thought might interest you.