Why Ad Agencies and Media Companies Should Hunt for the Next Instagram

Social Media Is a Godsend for Traditional Players, but They Need to Invest Now

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Social media shouldn't remain solely the province of companies launched since Justin Bieber hit puberty. In fact, traditional ad agencies and media companies have the chance to catch the internet wave they may have missed by aggressively becoming players in social media.

Ad agencies of all sizes are already mobilizing to crack the social-media code for themselves and their clients. David Jones, newly elevated CEO of Havas Worldwide, recently disclosed that his firm now employs 2,000 people who are focused on social media. And, Jon Bond, a big-agency veteran turned CEO of social-media agency Big Fuel, believes that eventually ad agencies will use social media as the engine that drives the rest of their business, putting social media on the front-end of their offerings.

Smart publishers across the media landscape -- general-interest, enthusiast and B-to-B -- understood the essence of community a century before the term social media was coined. Moreover, the rich interactivity that digital technology allows between publisher and readers has advertisers clamoring for new ways to harvest that community.

They also provide something to socialize around. Reality-television producer Mark Burnett has defined social media as the "electronic water cooler" and believes that some television programs will soon be interactive as they are aired. Actors and directors are already tweeting through select episodes, enhancing the standard lean-back experience with a lean-forward layer of community and dialog.

Every day, it seems, there are new entrants into the market that point the way for more traditional media companies.

One new addition is InstaGram, a photo-sharing site, started in 2010. My 22 -year-old daughter, Liz, is a member (her handle is "NewYorkCity") with almost 25,000 followers. Several weeks ago when gas prices were climbing around the country, CNN asked InstaGram members to post photos of gas prices from their local gasoline stations. Then, CNN presented the vast array of gas prices from all around the U.S. as a collage, easily allowing comparison by location. Is there any reason why this business couldn't have been started by a media company, say Popular Photography, a magazine with a circulation of almost 400,000? InstaGram's claim to fame is that it is on a faster growth trajectory than Facebook was at the same time in its development.

Tenka, launched in October 2010, allows users to find and share deals in your city -- it's linked to Facebook, allowing easy distribution to friends, and shows which of your friends have accepted what deals. Could a newspaper in a local market have done this? Absolutely.

One obstacle for ad agencies and media companies in launching their own social endeavors is technical competency. The best social media companies use technology to establish audiences and engage with them efficiently. Monitoring discussions across the internet, for example, needs a technology application.

Another challenge is hiring the right people. Many of the best young executives no longer find ad agencies and media companies as attractive as they once did. Digital start-ups have displaced them. Or, a lot of the smartest executives are choosing entrepreneurship over corporate jobs.

One way for ad agencies and media companies to avoid these obstacles is to buy rather than build. Acquiring a social media platform could be a win-win for buyer and seller, since the buyer gets technology expertise and entrepreneurial executives and the seller gets the advantages a partnership with a big company brings: client relationships, distribution, etc. I usually recommend structuring these deals so that the entrepreneurs get a partial payment when the deal is struck and another payment in a year or two after building the business -- much faster than they could have on their own -- with the backing of the buyer's financial and operating resources.

Despite the challenges, I strongly advise our ad agency and media company clients to become more adept at social media. Valuations for anything called "social media" are sky-high because of the strong growth possibilities these businesses possess. Buddy Media, a social-media agency, has raised $38 million since it launched in the fall of 2007, and $30 million of that came into the company since 2010. WPP, for example, made a $5 million investment in Buddy Media.

Could some of this valuation pixie-dust rub off on the traditional agencies and media players? If social-media-fueled growth takes hold, then yes. And given the various strategic options they face, perhaps the best way to transform a traditional media company is to jump on the social media bandwagon.

Reed Phillips is the co-founder and a Managing Partner at DeSilva Phillips, a New York investment bank specializing in media.
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