Too Many Shops, Not Enough Business

Viewpoint: Lack of Consolidation Could Kill Agency Industry

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Brian Sheehan
Brian Sheehan
In college, my economics professor used to say that the difference between too much supply and not enough is one unit. Such is the tenuous nature of economic equilibrium.

But when it comes to the advertising industry, the basics of supply and demand seem to be permanently suspended. The bottom line? There are far too many agencies chasing too few dollars.

One of the salutary effects of any economic downturn is that it's supposed to "shake out" unnecessary supply. While all agencies have surely felt the recessionary pinch in recent times, when you think about it, there have been relatively few closures. With the notable exceptions of JWT Chicago and Cliff Freeman & Partners, not many agencies had to shutter their doors during this recession.

Rather, several new ventures are sprouting from it, as top executives from Crispin Porter & Bogusky, Saatchi & Saatchi, Wieden & Kennedy, JWT, New York, and Vigilante have struck out on their own to create new offerings.

Due to this seeming inability to downsize, the industry continues to be dictated not by competition, but by hypercompetition.

That hypercompetition is manifesting itself in all sorts of ways, but none so stark as in pricing—the clearest indicator of the value agencies and clients perceive in the product. Ground zero for this economic battle is the new business pitch.

The difference with ad agencies
In most service industries, it is quite standard to do a dog-and-pony show to win business against a few of your key competitors. In no other industry that I know, however, are the key players asked to come in for credentials against their competitors (and in the ad business, this could be a starting list of 10-15), and then asked to go two or three more rounds, where they are expected to develop and present their finished product, often with no recompense. Yet ad agencies do it every day.

The most alarming part is that after all this work has been done and the winner has been notified, only then do the contract negotiations usually begin, often with the involvement of a client purchasing department that sees the agency's ideas as commodity products from a "vendor."

In a time-honored Kabuki dance, marketing directors offer the agency compassion and feign powerlessness in the face of the purchasing department. Against this backdrop, I am almost amused every time I read an article about how a trade group wants to set a new standard for the pitch process, or about an industry heavyweight banging the intellectual-property drum.

How did the industry get into such a sad state of affairs? To me, the answer is simple, and what I have stated here already: There are just too many agencies.

Let's for a moment examine it through the client lens. In most product categories, there's one market leader, followed by a number two, and then three or four other players. When it comes to agencies, though, there are hundreds of global ones, and thousands of regional and local ones. To be the No. 50 agency in the United States is to be a big boy!

To be fair, when we get to the holding-company level, there are only four main competitors: WPP, Omnicom Group, Publicis Groupe and Interpublic Group of Cos. In theory, the groups have a portfolio of agency "brands," so just like Kellogg's they can have lots of products that together own a big share. This portfolio play has allowed them to retain large pieces of business within "the groups" to avoid the cost of losing big, global businesses to other agencies. Unfortunately, medium-sized and smaller clients, who make up the biggest chunk of agencies' businesses, are not awarded on a group level.

In this oversupplied market, realpolitik rules: Clients big and small dictate the agency's margins, in a take it or leave it approach.

One only needs to conjecture what the recent media joint-purchasing agreement by PepsiCo and InBev could mean when it gets extended to their agencies. And why shouldn't it? Oversupply has priced the most powerful asset any brand can have, its brand-building ideas, as a commodity.

Whatever it takes to 'win'
The sheer number of agencies means most will do whatever it takes to "win." And with so many players, the market price and value put on ideas comes down to the lowest common denominator -- the more players, the lower the denominator. If a CEO in Singapore is willing to work on a piece of business at a loss just to keep a dot on the map in Singapore, then that becomes the price other Asian agency competitors begin working for. If a CEO in Chicago hasn't had a win lately and wants to prove that her agency is still successful, she will undercut the market for the good of morale, and her career.

And let us not forget the flood of digital agencies that want traditional business and vice versa, which has introduced yet another level of competition. On a revenue basis, Digitas is now the fifth-largest advertising agency in America.

When you think about it, the ad-agency business is a lot like the music business. Digital-music piracy is illegal. But once you have lost your ability to defend your rights and, therefore, your product's value, like the music production companies have, it draws a straight line to lower and lower profits.

Unlike the music industry, however, the advertising profession still retains a level of talent that clients do not always have direct access to, and which clients know they would not manage as well if they did. Crowdsourcing is a threat, but although it has a place for some brands, such as Doritos or Mtn Dew, it cannot take the place of professional creative ideas combined with a disciplined understanding of a brand's equity over time.

The value is there. How can it be unlocked? One way is for holding companies to do some major consolidation. Every agency that is merged provides one less agency CEO out there making bad deals for everybody. How many agencies do we need in the world? Probably about half the ones we have today.

Brian Sheehan is associate professor at Syracuse University's S.I. Newhouse School of Public Communications. He spent 25 years in the advertising industry at Saatchi & Saatchi, running offices in Los Angeles, Australia, and Japan, working with clients such as Toyota, Hewlett-Packard, General Mills and Procter & Gamble.
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