Commentary by Scott Donaton

ADVERTISING ENTREPRENEURS RISE AGAIN

Instead of Crushing Them, Industry Consolidation Has Created New Niches

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There's upside to being an upstart.

The pace of consolidation in the industries Ad Age covers -- from advertising agencies to media sellers to makers of food, cars and computers -- has been

Scott Donaton, editor of 'Advertising Age.'

relentless over the past two decades. One result has been a landscape so ruled by the Megas it became inhospitable to the little guy. Agency holding companies "rationalized consolidation by saying they needed to match clients' bulk. What they really did was limit marketers' options and damp the ambitions of entrepreneurs who could no longer compete," I once wrote in this space.

Despite daunting odds
I was wrong to count out entrepreneurs, despite the daunting odds. The marketing industry is changing so dramatically that the advantage belongs not to the lumbering giants unable to adapt or innovate, and unwilling to endure the pain of restoring their antiquated business models, but to the startups developed from scratch without the built-in biases of the establishment bigs. Change has created the right conditions for new life. It's why risk-taking agencies such as Crispin and Mother lead lists of "hot shops."

The big guys understand this, and the smart ones have incubated startups and acquired rule-breakers (think Omnicom and Peter Arnell, WPP and Andy Berlin).

The focus in the general business world today is on empire-building, "even though it becomes increasingly difficult to make those empires work," said John Byrne, editor in chief of Fast Company. Empires, Byrne said, "work on volume and systems and rules that hamper their ability to be creative. They gain economies of scale and can dominate for a time, but inevitably they become less innovative and attract weaker talent. They then start refusing to take the risks that smaller shops are willing to take because they have to be bold to make a difference. There's so much opportunity for the smaller, more nimble shops to clobber the big guy."

Inability to innovate
Microsoft is an example of a giant that faces what Fast Company labels "the defender's dilemma" in a story in its December issue that dissects the software company's inability to innovate despite a $7 billion R&D budget. The company's resources are dedicated to defending its existing market position, leaving the likes of, say, Napster and Apple to decode digital music.

"The advantage is to the insurgent, not the incumbent," Byrne said.

Jeffrey Pfeffer, a professor at Stanford's Graduate School of Business, said the resurgence of entrepreneurs in a consolidated industry is inevitable, citing an academic theory known as "resource positioning."

"In beer, the industry seems to be dominated by two or three big businesses, but there are more smaller brewers and specialized brands than ever," he said. "Same thing with newspapers. Banking. Grocery. In industries where people are moving towards the center, it opens up opportunities for specialists. The big guys go necessarily for mass taste, and that leaves smaller niches unaccounted for."

The giants do have their defenders. Josh Quittner, editor of Business 2.0, which belongs to the Time Warner Empire, disputed the notion that consolidation stifles innovation. "It all depends on whether the dominant culture was entrepreneurial."

"The really big guys have the most money and the most to lose from some fleet-footed competitor," Quittner said. The solution is for big companies to create "entrepreneurial pockets" and "seed something that will ultimately replace them."

There's no choice. Quittner's magazine is compiling a list of industries under attack, and, he said, "You'd have to be a fool not to put the advertising industry at the top of that list."

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