(Warning: this post is over 4,000 words. Get a coffee)
This post in a nutshell: The business model has fractured: creativity is becoming separated from delivery. Delivery is becoming a commodity (as procurement departments are realising) and thus no longer able to subsidise creativity. This is an enevitable consequence of the social digital revolution, which is all about the separation of information from distribution, message from channel. What was once a single business is now three businesses. At one end is a high margin, low volume, insight/creativity business. At the other end is a large pool of specialist deliverers within which there are no scale advantages associated with size or aggregation. In the middle is a ‘commissioning’ business which is all about the outsourced management of creative ideas. These three businesses cannot live together within one house because they have significantly different business models (albeit it large agency groups can own the three separate houses). This is the end state, ten years down the track. Agencies therefore need to manage this separation or else the new reality will be built from the wreckage of broken business models.
It has become something of a tradition to use the post-Cannes period to reflect on the future of agencies. The standard analysis will include the observation that the boundaries between the various disciplines are collapsing (usually illustrated by the amount of PR awards being won by advertising agencies), frequently followed by some portent of the imminent death of ‘something as we know it’.
This is nothing new. For many years the power of advertising as a killer punch has been progressively eroded, driven by increasing media fragmentation and the evolution of more sophisticated consumers. This has forced brands to develop a more integrated approach: 360 degree communication was the (now rather hackneyed) buzz-word for this. And about eight years ago I remember Lou Capozzi, then global head of the MSL network, looking at the agency landscape and saying to me “it’s all become PR with zeros added to the budget” – still the best sound-bite description of what is happening that I have heard. However,what is new is the thing being called the social digital revolution, but this has also been with us for quite some years, all that is really new is the fact that brands and consumers are finally working out how to actually use all the new shiny tools.
What is missing from the debate, in my opinion is The Big Why. Everyone is looking around and describing What is going on, but very few have a cogent analysis of Why it is happening. And the lack of this Why makes it difficult to predict what might happen next, or to make plans for how to react effectively. So here is my contribution to The Big Why.
Scale: it is becoming re-acquainted with commodity and utility
I think there are two tectonic forces which are responsible for driving much of what is happening in the client / agency space: one is related to scale and the other to the separation of information from distribution (message from channel and thus creativity from delivery). Let’s look first at scale. If you stand back see what happens when the social digital revolution touches a business sector, what you will see is that scale advantages start to leak out of its business model. Being big no longer confers the sort of advantages that it used to and in-so-far as scale advantages remain, they tend to retreat back towards the cave of utility / commodity within which the big beast of scale is most comfortable living.
We should look to the music and news businesses to illustrate what happens here, given that these were the business sectors first touched by this revolution, and while they were the first, they won’t be the last. Scale has been leaking out of the music business for some years now, largely driven by the inability of the major players within the sector to retain control of the means of distribution (see second point below). Interestingly, while the sector has been losing scale advantages it has gained in scale, in terms of the number of players and content within it (again because the distribution barriers to entry have come down). The remaining (big) business opportunities within the sector are now moving towards commodity and utility, providing the aggregation infrastructures necessary to allow music consumers to manage the increased flow and volume of content within the space. Provision of music has, in effect, become a utility (see Spotify) – something that David Bowie predicted in 2002. Bowie is a very clever chap – as his longevity in the business testifies. All those who wish to remain relevant while the music around you changes should learn a few lessons from him.
Likewise, in the news business, news has stopped being a finished product and become a raw material (i.e. a commodity) – something news organisations are, in large part, failing to come to terms with. The opportunities that will evolve here are likely to be clustered around how you allow consumers to assemble their own finished news products – a function that requires very little actual news gathering and minimal human editorial input. In fact one can well foresee that much of this function will be handled by algorithms: you will simply subscribe to the news algorithm that matches your particular political or social preferences. However, the idea that the Guardian or Wall Street Journal will simply become algorithms doesn’t sit well with the current management or employees of these businesses.
What is dying is the business model that provides the thing, not the thing that the business model provides(d)
As with so many things with this revolution, what is dying here is not the thing itself (i.e. news, music or even advertsing and this thing being called content), in fact these things are enjoying an explosion in creative energy: a phenomenon Clay Shirky has labelled ‘the cognitive surplus’. What is dying is the restrictive business models that provide the thing, not the thing that the business model provides(d).
How is this effect likely to affect the agency sector? The agency sector has always had two components to it: channel (i.e. media buying and campaign delivery) and message (i.e. ideas and creativity). Of these two, media has been the area where scale has always been more important and creativity has had scale thrust upon it, largely to force it to conform to the scale requirements of mass media / mass market campaigns. To an extent this has always been a rather forced marriage and its imminent demise (see below) will allow creativity to go its own way, removed from the constraints of scale, and for media / channel to devote more attention to becoming a commodity or utility via becoming an infrastructure or process – something we are already starting to see in things such as real-time media and media trading. While the creative side of things can become liberated by its separation from channel, it will not be immune to the scale problem, largely because of the extent to which this problem will affect the brands who are its clients.
For brands, being big has become harder, largely because being smaller has become easier
For brands, being big has become harder, largely because being smaller has become easier. To date, brand marketing has played on both sides of fence. Brands have been able to extract the scale advantages of being a commodity, (operating in mass markets, using mass production techniques and mass media channels) while positioning themselves as being in some ways superior or unique. In effect, the art of brand marketing has been about creating a perception of uniqueness around a commodity product. Communication has been the way in which it this has been done. The products or services themselves may be largely undifferentiated or similar to commodity, unbranded / own label offerings but premium positioning has been created through consumers’ experience of the layers of communication that have been built around the product. In effect, consumers of branded products have been paying a form of consumption tax which has been spent on buying Porsches for creative directors and lunches for marketing directors.
The problem now is that, what I call the premium myth is becoming harder to maintain as alternative offerings emerge and consumers themselves become connected and smarter and thus able to find and evaluate these offerings, or stress test the genuine premium-ness of the offerings of so-called premium brands. For example, look at what Airbnb and Trip Advisor combined are doing to the hotel sector. They are allowing individuals to compete with major hotel chains and forcing the big players to live up to their brand (grand) promises.
A one-size fits all markets approach is fast becoming a liability
Large brands, who provide the base load of fee income for the agency sector, are now finding they either have to be big in a very small way, or small in a very big way. Either way, being big doesn’t carry the clout that it used to. A one-size fits all markets approach (which was always something of a compromise) is fast becoming a liability thus eroding the advantage of the larger agencies who are basically set up to deliver this, while also creating a space for boutique creativity. Size is becoming re-acquainted with commodity and, as with all commodities, associated with high volumes and low margins. Longer term, this could have some profound implications for brands and brand owners, especially P&G-type brands that operate in low interest categories that have always had to invest heavily in marketing activity to inflate interest and keep commoditisation at bay. If you want to be big, you may have to look to other areas such as purchasing, trade relationships and genuine NPD (as distinct from NPD simply designed to create superficial ‘innovations’ that merely provide an excuse for a new ad) as the scale advantages associated with marketing as a discipline melt away.
Everyone decries the intervention of procurement departments into client / agency relationships, resulting in the driving down of margins. But all procurement departments are doing here is drawing attention to the fact that what agencies are delivering is becoming a commodity – or needs to be delivered as such if it is to reconcile the fact the ever decreasing returns ‘conventional’ agency services deliver no longer justify the margins they allegedly require to deliver them.
The social media revolution: separating information from distribution
Apologies, these last few paragraphs have become something of a ‘what’ analysis. We all basically know this – so to return to the ‘why’. In many ways the scale / commoditisation / fragmentation issue is really just a symptom of what I think is the most important driver of change, which is the separation of information from distribution (message from channel). This is really what the social digital revolution is all about.
This is the thing that is destructive of business models, because the business models (for both agencies and brands) are founded on the idea of their being a marriage between information and distribution. Break the relationship and you break the business model. The reason this is so momentous in its potential implications is that this is a marriage first created 600 years ago when Gutenberg created the printing press and moveable type. From this point on, message became wedded to channel and because the channels were expensive, channels (silos) were the dominant partners in this relationship. Their expense also dictated that they could only be used cost–effectively to communicate with audience-sized groups of people. This had a whole host of implications for how the information business became structured and the rise within it of large institutionalised players, be they media owners or brands (scale again). At a more fundamental level it is why marketing became a channel and audience game and was responsible for the creation in the first place, of the now collapsing channel-based silos.
The marriage between news and paper was always a marriage of economic convenience, rather than a love match
Wherever we look, we see this separation cutting business models in two: where The Thing is being separated from the means of delivering The Thing. Take newspapers for example. News (information) is being separated from paper (means of distribution). In fact, we can now see that the marriage between news and paper was always a marriage of economic convenience, rather than a love match. Looking at the music business again, the information (music itself) is no longer imprisoned within expensive distribution formats such as CDs. It is important to recognise that this divorce changes the nature of the information as well as just its selection of distribution partner. Not only can information find the distribution means for which it is best adapted it can change its own nature, now that it is freed from the constraints its distribution partner placed upon it. Probably one of the reasons that the businesses most affected thus far have been music and newspaper publishing is that a music track was actually very poorly adapted to the distribution medium of vinyl or CD: likewise, news is very poorly adapted to the medium of paper. But, now they are liberated, both music and news can go and do their own thing. And that means they can change. The concept of a music album is a creature of distribution, which is why it is dying. Likewise, news doesn’t have to live in 500 word segments or 30 second video packages, or even be defined by concepts of newsworthiness that are themselves shaped by the economic requirements of news media and its need to attract an audience-sized group of viewers, readers or subscribers.
This doesn’t necessarily mean the end of the media, it just means that mediums (channels) have to go and find the roles for which they are best adapted. The print medium won’t die, it will just loose most of its content, and be forced to court the content for which print is best adapted. In business parlance, distribution media will have to return to their areas of core competence.
Con-tent is defined by its requirement to be con-tained (within a channel), but we no longer live in a world where information requires containment
This is one of the reasons we have to be very careful with this thing we are calling ‘content’. Con-tent as a word and as a concept is defined by its requirement to be con-tained: to sit within a channel. Water flowing out of a tap is not content. It only becomes so when you put it within the restraining distribution medium that is a glass (or a channel that is a pipe). In a world where restraining distribution mechanisms are dying, you have to question whether content itself is a concept which will continue to have relevance. We no longer live in a world where information is constrained and contained within pipes or containers. It therefore cannot be con-tent because it cannot be con-tained. Content also requires an audience, but audiences are hard to find in the new social digital space. Audiences are a function of the expense of the channels that information used to sit within. There is now no longer a requirement to be part of an audience if you want to received information (even that which was designed for an audience in the first place). The new world is the world of the individual, not the world of the audience.
At an even more fundamental level, this separation is changing the nature of trust. Trust used to sit within channels: we trusted information because we trusted the channel (institution) that delivered it to us. But now information is being separated from its channel and thus separated from its source of trust. As a result, trust is shifting from institutions to transparent processes. We trust information, not because of the channel it sits within, but because of context or process that surrounds the information. We don’t trust a tweet simply because it comes from Twitter, the Twitter channel confers no trust upon the information that sits within it. But this doesn’t mean we don’t trust tweets, we simply need to understand more about the context of individual tweets. Likewise we don’t trust Wikipedia as an institution (channel) in the same way we trust Encyclopaedia Britannica, we trust its individual entries only in so far as we trust the process that is Wikipedia. This is what is driving the rise of communities and defines why communities will become the new media. Communities are all about process-based trust. When you trust a comment on Trip Advisor, you are not really trusting the person who has made the comment, so much as the process that is Trip Advisor and the context within which that person is making their comment (i.e. that they have already experienced the thing you are interested in).
End of theory. What’s the future for agencies?
Anyway – enough of the theory. Getting back to the future of agencies. The separation of information from distribution doesn’t simply mean the destruction of silos. The silos simply represent delivery channels. What is happening is that creativity is becoming separated from the means of its delivery and silos are not so much collapsing, as becoming empty and redundant. We can already see that clients are asking agencies to deliver ideas which are not constrained or defined by the means (channels) by which that idea will be delivered. In the first instance these requests may have been framed within the context of integration, driven by cross-channel or multi-channel ideas. Clients wanted ideas that could live in many channels and agencies could respond to this by adding channel competencies to their mix. But this client pressure was simply a reflection that the clients themselves were still largely channel-based in their thinking and internal organisation. In the integration world an idea was defined as being something that could sit in a range of channels, rather than being something that transcended channels.
Great ideas will define for themselves the way in which they will be delivered, rather than being defined by the way in which they are delivered
But clients are starting to realise that the strength of an idea is not defined simply by its ability to be multi-channel or integrated. In much the same way that information can now select for itself its preferred means of distribution, great ideas will define for themselves the way in which they will be delivered, rather than being defined by the way in which they are delivered. This is a problem because to date clients have never really had to pay for ideas: agencies give them ideas for free because they make the money on the delivery channel. This problem can only be resolved by the recognition that what agencies once did, as a single business with a single business model, is now becoming two businesses with two business models. One business is all about delivery – which is a high volume, process-based, low margin, commodity game: the other is about creativity, which is low volume, one-off, high margin game.
I actually think there are three business models which will emerge and the construction industry provides the template. The creation of a large building involves three separate, but related competencies: the architect to come up with the creative idea, the structural engineer to make the delivery of that idea a reality and a builder to actually make the building. These businesses need to be conversant with each other, but because they all have different business models they can’t really exist as a single business. The construction of a brand will be similar. First you will need tier one people to come up with the ideas and you will need to pay them to do this. Making it clear that this is a separate function and separate business will assist in this process because as long as it is seen as being part of a delivery offering, the temptation will always be to try and get it at a discount. Remember, a procurement department could never have commissioned a Rembrandt portrait. Procurement departments can only see a picture as paint and canvass because they will never have a model that can attach a number to whatever it is that makes a Rembrandt different to the tragically sad offerings of George W Bush.
Media buying is ahead of the game because it separated itself from creativity 20 years ago
Second, you will need tier two organisations that can manage the delivery of an idea. This function will be all about real-time process management and making the most of what scale efficiencies remain. To an extent, media buying is already at this place mostly because it separated itself from creativity more than 20 years ago. What these agencies will really provide is the outsourced management of creativity in much the same way that Accenture provides the outsourced management of IT. A large part of the function will involve the commissioning of ideas and then the assembling of delivery teams, but not owning the deliverers. Unlike with creating a building, it is unlikely that the actual builders can be contracted under a single large contract, mostly because scale advantages won’t exist at the delivery level. This final aspect of delivery is likely to be comprised of a whole host of ‘boutique’ craftspeople or technicians operating as independents or as small businesses and this will therefore define what the second tier agencies need to do, which will thus be an integration, project management and commissioning role.
Third, as already mentioned, delivery or activation will be done by a third tier comprised of delivery specialists. This will be a volume game, in the sense that this will be where most of the people in the sector actually live and where there will be a wide variety of choice. It will be a low margin game only to the extent to which someone other than the practitioners themselves seek to extract a margin from it. For the individual practitioners, margins will still be respectable simply because they won’t have to carry the same burden of costs that were laden onto them when they lived in large agencies and had to pay for the creative director’s Porsche.
In this new arrangement the only area where scale advantages will persist will be in the tier two ‘structural engineering’ or ‘commissioning’ layer. The players in this space will look the most similar to the agencies of today. A large part of the client relationship will be held at this level and despite the creative importance of the ideas architects, the client interface with the architecture level may be minimal (in much the same way as creatives are often kept away from clients currently). In fact it is quite possible that the ideas architects will be commissioned by the structural engineers as much as they go and pitch for client business directly. Therefore, what we currently think of as agencies will morph into commissioning and integration businesses, surrounded at one end by a group of independent (or quasi-independent) creative specialists and at the other end by a cloud of independent specialist deliverers. What is currently delivered as one business will have fractured into three.
Create separation in a managed way, rather than fall apart in chaos
What might all of this mean for a Martin or a Maurice? At one level, not a lot in the short-term. It would be foolish to try and completely re-structure a business such as WPP or Publicis into these three sets of disciplines or functions, especially since it is questionable as to the extent to which all three functions can easily live under one umbrella. However, in terms of making current decisions, it will be important to recognise that this position is likely to be the end destination some years down the track. In preparation for this it will be a good idea to start to identify where the opportunities for separation exist, so these can start to be teased apart in a managed way, rather than falling apart in a chaotic way.
There is a template for this if we look at what happened more than 20 years ago when Saatchi & Saatchi spun out its media buying department into a stand-alone agency, Zenith, which had the freedom to work for both Saatchi and non-Saatchi clients – probably the single smartest business decision the Saatchi brothers took. This move created the independent media sector as we now understand it and Zenith (now Zenith Optimedia) still remains a successful company within the Saatchi (now Publicis) portfolio. In today’s context, this means thinking about spinning out creativity as a separate function.
Most ‘creatives’ are too wedded to a delivery discipline to become ‘new creatives’
It also means re-thinking the nature of creativity. The new definition of creativity will also encompass insight and will therefore draw to it as many planners as it does traditional creatives. Indeed, many of the people that currently live in creative departments are not actually sufficiently creative in that their skills and mind-set are too wedded to a delivery discipline. These people are more like master-builders – they will end up living within the delivery specialists. None-the-less, scattered across any large agency organisation like WPP or Publicis, there will be suitable people. Pulling them all together may be difficult and indeed undesirable in that it may bleed their ‘home’ businesses of necessary skills, but there is surely an opportunity in the short-term to start to identify these people and package their skills in a way which can become a separate offering, even if they still ply the majority of their trade back in their home agency. As much as anything, someone needs to start the process of allowing clients to see the value in buying creativity and ideas as a stand-alone service. It is also quite possible that a ‘new creative’ consultancy will emerge from the independent agency sector (since, unlike with media buying, scale is not a consideration) and once the template is established, others will follow suit.
However, this spinning out of creativity is a necessary, but not sufficient step. It simply creates the tier two environment within which the future agency can emerge, which is as a business which provides the management of creativity as an outsourced function. The templates here are the consulting companies such as Accenture. These companies call themselves consultancies, but they are not. They provide the expertise necessary to outsource the management of the provision of information technology. This expertise is largely in process management, the real technical (creative) knowledge lies with the developers of the systems these companies sell. Likewise, project delivery is often managed by contractors. The good news, from an agency perspective, is that Accenture has shown that there is good money to be made in the outsourced management of a business function. The more tricky issue is that the model for outsourcing the management of ideas, by the very nature of ideas-people, is likely to be harder than commissioning and managing geeks – which is what Accenture does.
The third tier is the one area that is currently in the state of most advanced construction, largely as a result of agencies shedding head-count in recent years. There is now a huge number of experienced people operating as freelancers or coalesced into small, boutique operators and it will not require too much effort to provide the infrastructures to allow these either to link-up with each other or to operate on a more efficient / formal way with commissioning agencies. I suspect that even today, many clients would be surprised to learn just how many of the people they are dealing with when they deal with agencies are actually not permanent agency staff.
It is also possible that within large agency groups, delivery can be packaged up into smaller specialists which can which can operate more independently with significantly lower costs (see earlier note about Porsches) and be responsible for finding their own revenue rather than being dependent on being fed by large network clients. This may, of course, involve working for ‘rival’ tier two agencies. An agency therefore becomes a much looser structure, acting as a host for specialist units, rather than trying to aggregate specialist units into larger structures – which has tended to be the direction of travel to date because of the assumed (but now increasingly redundant) cost efficiencies of operating at scale. You can also suggest that big brand owners, such as P&G, will also have to reorganise themselves into much looser structures, where scale and coordination efficiencies are created in areas other than in marketing.
The key is to not make the Kodak mistake
The current agency groups, to a certain extent, still have time on their side. There is the opportunity to experiment. However, the key is to not make the Kodak mistake. Kodak saw the digital future coming and it started to innovate to find the sorts of products and services that would thrive in the digital photographic future. Kodak was one of the first companies to develop a digital camera for example. Kodak’s mistake was a failure to recognise that at some point, the business model of its core business – i.e. chemicals, cellulose and paper, would eventually collapse. Kodak never built its innovations into business models, largely because of a fear that these would cannibalise their core business. But their core business got eaten anyway and they were left with nothing but dusty prototypes.
So, in summary.
- Scale is leaking out of both the agency sector, but especially out of the world of the big brands that supply the base load of fee income for large agency groups. This requires a recognition of what is, and needs to be delivered as, a commodity separate from a recognition and delivery of, what is a high margin specialism.
- As the social digital revolution separates information (message) from distribution (channel), so creativity is becoming separated from delivery and also changing in its nature now that it isn’t defined by the delivery silos /channels it used to sit within. Agencies therefore need to identify and spin-out this new creativity, so that it can be sold as a separate, high margin product, removed in most part from the clutches of procurement departments (Rembrandt v George W Bush etc. etc.).
- The margin problem at the other end of the scale needs to be addressed by shedding the costs associated with ownership of delivery specialisms. There are no longer scale efficiencies in this space, so the costs of delivery aggregation are no longer valid. In so far as large agencies can continue to own delivery businesses, these businesses need to be liberated to find their own way in the world and potentially work for ‘rival’ commissioning agencies (in much the same way that Zenith worked for ‘rival’ clients).
- Within the middle space a new business needs to be founded, based on the concept of the outsourced management of ideas / creativity. This concept will mostly only be relevant to large clients, smaller ones sourcing ideas and delivery direct from the specialists. These businesses will be formed out of the remnants that remain from existing large agencies, once they have spun out insight / creativity and delivery specialism.
This isn’t going to happen overnight, but this is probably what the sector will look like in ten or 15 years’ time. The only real choice the sector faces is the extent to which it can manage the move to this end state, rather than having this built out of the wreckage of failed business models.