Is Technology Disrupting the Advertising Agency Business Model?

Technological advances, most notably the Internet, have disrupted many industries in recent decades. Industries such as publishing, radio, telecommunications, travel, commerce, and music have been massively disrupted by technology. In real time, we continue to witness further disruption in areas like automotive, real estate, financial advisory services, education, and even healthcare. Is the second oldest profession, advertising—and specifically the agencies that control most of it—being disrupted today?

Advertising agencies are facing a whole host of technology related pressures right now. Like most disruptions before them, the “disruptors” to the incumbents often originate by serving an unserved or underserved market first, then as Clayton Christensen so famously outlined in his book, Innovator’s Dilemma, move up the value chain to disrupt the incumbent business.

Pure technology firms are threatening the agency business model, such as Google and Facebook, who both started first serving the independents and small business market that went underserved by big agencies. They now dominate the digital advertising spend and are both pursuing video/television budgets with gusto. While agencies consolidated, and grew in dominance to the point where there are only really four large holding companies controlling the vast majority of all advertising, these companies found a new and different way (search and social) to create, leverage, and exploit media, while initially serving a niche the large holding companies were not focused on. As they sharpened their skills and became better at measuring impact and conversion, they naturally migrated upstream to the larger national advertising budgets.

The consulting firms such as Merkle, Accenture, IBM, McKinsey, Bain, Boston Consulting Group, Deloitte, KPMG, and many boutique firms, often have a better grasp on technology and disruption overall given their wider exposure to all verticals and a deeper focus on all aspects of an organization and their business challenges. These organizations are also willing to invest in technology and services, which agencies historically buy only when they can bill.

Turf Wars Ahead?

Speaking of investing in the marketing cloud, CRM firms such as Salesforce and their life science partner, Veeva, are taking over the customer relationship management aspects of the business and have quickly become the preferred systems of record for all customer engagements. From that unique perch, they are branching into marketing services and also further encroaching on what has been historically agency turf.

Then there are early technologies such as artificial intelligence (AI) and augmented and virtual reality (AR/VR) that are all coming to maturation and applying even more pressure, and opportunities to partner, from companies such as IBM Watson, Google, Facebook, Samsung, and others.

Perhaps the final straw is a deterioration of trust and strains on what has typically been the agency’s strongest advantage—the client relationship. The recent ANA’s Media Report and other surveys would seem to indicate that a great deal of trust has been broken as agencies scramble to redefine their business model in the face of increasing pressures on fees and digital disruption.

Advertising has always been a balance between art and science. Agencies have excelled at the creative or artistic side. Technology has excelled at the science and measurement side. As the balance shifts toward more science and less art, the creative agency’s role will continue to be redefined by disruptive forces.

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