Advertisers and Their Agencies: Time for a New Commercial Detente.

The following is a speech made at the International Advertising Association in Beijing on May 10th addressing the issue of the changing nature of our business and the relationship between advertiser and agency. @robnorman

It was the best of times; it was the worst of times

Today I wish to address the changing dynamics of the relationships between advertisers and their agencies. I have no expectation that all will agree with my perspective but hope that it is received as a reasonable point of view worthy of discussion.

I work for GroupM, a media agency. That’s the context. That’s the source of my prejudice. I am not a bystander but a protagonist.

I don’t wish to appear melodramatic but in some respects we stand on a precipice; we all do. Advertisers, publishers and agencies.

We have a choice of two futures; not so much black and white; more, innumerable shades of gray; in the context of the advertising industry what does that mean?

The utopian vision is of:

• A future where creativity flourishes in character and effect through being informed by data.
• A future where that same data creates efficiency and accountability for advertisers and proves the case for advertising as an investment rather than apologizing for it as a cost. John Wanamaker, an early 20 century retailer famously said, I know half my advertising works but I don’t know which half. Data can not only help us answer the question by identifying which half of advertising works but improving the value of advertising by increasing the famous 50% to 70%.
• A future where that same data creates more perfect marketplaces for sellers in which they optimize yield with greater efficiency by matching each impression and each item of content with the right prospect for the right brand at the right time.
• A future when the data that belongs to corporations and the data that belongs to the consumer are gathered, treated and used with respect.
• A future in which machines do the work at which machines excel.
• A future in which people think about higher order issues and create opportunities that drive business success.
• A future in which the creators of content; both publishers and advertisers, capture the dual dividend of efficiency and technological possibility to create delightful and valuable experiences for consumers that encourage engagement and loyalty.
• A future in which the term brand value means just that; brands are valuable, and not themselves in a spiral of declining trust.
• A future in which agencies and clients practice tolerance, in which the former are rewarded for efficiency, effort, innovation and success and in which the latter are rewarded by superior business outcomes.

On the other side of the precipice lie dysfunction, distrust, disappointment and the possible disintegration of relationships that have persisted to mutual advantage over generations:

• A future where creativity is neutered by data that counts without the accountability that comes with proper attribution between short and long term effect.
• A future where a glut of fraudulent impressions undermines trust in inventory and advertisers lose confidence in the fundamental question, am I getting what I am paying for?
• A future for content creators where the reward for great content is piracy not profit.
• A future where corporate data is used to re-price markets against the interest of that corporation.
• A future where personal data is abused or captured without the consent of the consumer or without sanction against the abuser; inviting Governments to regulate an industry which has a good record of self-regulation.
• A future in which a data oligopoly exists to beneficiate one part of the supply chain against all others.
• A future in which fragments of the communication process are broken away from the more valuable whole and destroy value while purporting to create it.
• A future in which efficiency is penalized by downward pressure on input pricing rather than rewarded by a re-investment in resource.
• A future in which relationships and functions atrophy in pursuit of short term results and at the expense of durable brands and long term business success

Nowhere is the potential for doubt more graphic than in the segment of media trading we have come to know as programmatic:

Let’s define what that means:

“Programmatic trading can take place in reserve, auction and real time markets and describes a process where inventory supply and demand is connected by buy and sell side automation and trades are executed subject to the demand and yield optimization rules set by the two parties to the transaction”.

To quote Marissa Meyer, the CEO of Yahoo “the opposite of programmatic is not premium, it’s manual.”

The only limits to a programmatic future are four fold:

1.The inventory requires Internet Protocol characteristics; the advertiser needs to serve against an impression or group of impressions

2.The seller has to determine if the optimum yield for his asset is likely to be achieved programmatically or, alternatively, conditionally on some bundling with other inventory

3.The advertiser has to determine what proportion of his budget he is prepared to trade programmatically given that it comprises only a portion of his total allocation

4.The advertiser needs to know if the costs of technology and the service that supports it are more than offset by the gain in price, efficiency and effectiveness

The road to the programmatic future is rocky but the destination is certain. That certain destination is one in which all inventory that can be traded programmatically will be, except for exceptional assets which will, as they do today, represent a discrete marketplace of the highest value.

The rocky path is the one we walk on today. A path populated by fast growing technology service entrants acting as banana skins to giants.

Those giants are agencies like ours who are building technology and data sets at considerable cost to maintain independence from sell side solutions, ingesting data from an unimaginable variety of sources and integrating the new with the old.

While traditional models persist, there are few operational dividends from partial disinvestment in those channels. If print spend decreases by 20% this does not equate to a 20% saving in staff or systems. To the contrary there is almost no such thing as a seller of print alone these days, rather every publisher has become a multi-platform distributor of both digital and analog content.

The agency sector simply cannot afford to disinvest as without this cross channel integration and the co-existence of old and new; the prime purpose of media agency “to allocate, optimize and attribute” is undermined which is categorically not in the interest of advertisers.

Those giants are advertisers. The biggest, want anything but a level playing field; they expect scale to yield competitive advantage. There is no benefit to the large if the marketplace does not reward volume of smartly allocated investment and smartly applied data. There is no advantage to brands built over generations if the measures of success favor short term market effect over long term brand building. There is no advantage to the advertiser in general if the exchange of data makes his strategy transparent to the vendor who is then able to manipulate the price of inventory.

Those giants are publishers and content creators; they suffer the penalty of fragmentation but few of the dividends of targeting. They suffer from the separation of audience from valuable context. They suffer from the decline in advertiser desire to build long term narratives on the back of committed consumers and their love of consistent high value content.

These entrants are Google, Facebook, Tencent and the rest but also the smart, aggressive and good actors in buy side ad tech companies; Rocket Fuel, Turn, Data Xu and Media Math who perform agency like functions in respect of a specific subset of inventory with few of the traditional constraints of advertiser and agency relationships. Then there is Invite Media now DoubleClick Bid Manager, a buy side operation now in the ownership of the biggest seller of them all, Google. Some of these companies have created value for their investors, much more from those who bought early than for those that have seen 50% declines in stock market value since their peaks shortly after Initial Public offerings. Some have yet to create value and some never will.

Almost none deliver an operating profit which in the end is counter intuitive, but the prerogative of their shareholders and their futures will depend either on an exit to an exuberant market or extraction of further shares of the advertiser to publisher money flow. Perhaps most interesting is that none of these companies sit purely on the advertiser side;as all, in some way or another, occlude the money flows from the advertiser to the publisher; the traditional principals in the advertising ecosystem. At a general level the higher the proportion of the inventory purchased from open exchanges the greater the occlusion becomes.

Occlusion: a single word that encapsulates a zeitgeist; a cipher for lack of transparency, disclosure and neutrality; words that seem to dominate the dialog of today’s media market.These words are worthy of separation and definition:

• Transparency of contract: a relationship governed by contract in which the buyer knows how the seller is compensated
• Transparency of quality: a relationship governed by contract between the buyer and seller that guarantees proof of visibility, delivery, verification and the nature of underlying inventory.
• Disclosure: a relationship governed by contract in which the buyer knows the underlying costs that comprise charges made to him by the seller.
• Neutrality; an expectation, not always governed by contract in which the buyer expects the seller (typically and agent) to act only in the best interests of the buyer

Relationships between advertisers and media sellers have always been transparent yet never disclosed and never neutral. No advertiser questioned the price of paper, the cost of a broadcast license or the investment in server farms.

Relationships between advertisers and Sarbanes Oxley compliant publicly traded agencies are transparent; almost always disclosed and, for the most part based on neutrality, or better, on informed prejudice.

These relationships have persisted despite a long history of markets that have featured “known occlusion” like agency or holding company deals. These include television in the UK, volume discounts or rebates at the agency or holding company level in many markets and, of course corporate trade or barter.

In all these cases opacity exists, in all these cases agencies attempt to move value from the seller’s book to the book they run for their clients and themselves. The sin is to leave the value on the wrong side of the table. The virtue is in the equitable sharing of the rewards.

Clients audit these transactions to greater or lesser effect, less because they think they are being cheated but more to establish if they are extracting their share of the transfer of value. This is not a new concept and one that has worked adequately in markets where supply was limited and known and ones where variables like data, technology and verification costs were a microscopic proportion of the transaction.

In a programmatic world specifically and in a digital world generally such processes are far less simple. Supply limitations have largely disappeared, data is abundant, and technology develops at a head spinning rate and the very nature of the inventory in terms of viewability, in terms of fraudulent non-human audiences and clicks raises levels of complexity that are new, and nowhere near a steady state.

This is a recipe for distrust throughout the value chain.

Disturbingly, and we believe, wrongly it’s a recipe that threatens trust in the agency at the exact moment that agencies matters most.

15 years ago paid search and Google did not exist, nor did Baidu, Tencent, Facebook, LinkedIn, Instagram, Twitter or YouTube. No ads were served, no video was delivered online or to mobile devices, there were no tablets, no smart TVs and, of course no e commerce. Now all exist, all have created new media channels, new currencies, new kinds of measurement, a new planning environment, new creative challenges and an almost infinite increase in the number of transactions executed for our clients each year .

When considered from the agency perspective this is a seismic shift in our landscape. In the case of our agency more than 30% of our global billings in markets large and small are via these channels. This demands new systems, new kinds of people and huge re-invention of our organizations.

This change is exponential and with it comes complexity and an increase in the value of agency services. The value of the agency is to look across channels, to distinguish the countable from the accountable, to look at the whole of marketing effect rather than the last click, to use technologies across multiple vendors and to navigate the shifting sands of progress and ownership, to represent the brand across device types, delivery systems and the greatest change in consumer behavior since the invention of television.

In many ways the response of media agencies has been remarkable and many clients recognize that the speed of change in our business may match or exceed that which they have experienced in their own.

Today we have a business that sits at the nexus of content, technology and data. We create and fund the creation of content to build new supply, we build and integrate technology to take advantage of the supply that exists and we invest in both the creation of original data and the integration of the data torrent that is a by-product of the digital age. Currently GroupM has API links to our own data marketplaces from 150 different companies in the US alone. The investment that requires and the multiple of that investment in even the 25 biggest markets in the world is immense.

For the most part clients have welcomed this but many have not welcomed the evolution of the media agency business model particularly when the agency is perceived to have “crossed the line” from agent to supplier of inventory and from user of technology and data to provider of technology and data. They believe that both have the potential to compromise disclosure and neutrality. They are right; but not necessarily right to think of this in a binary, that is to say negative, way.

Our perspective is that disclosure and neutrality should be treated on their merits, not on principle:

They should be subject to contract rather than an always fragile legacy definition. Most importantly they should be assessed in the context of creating competitive advantage for the advertiser.

This requires due diligence:

• Does the inventory create an advantage for the advertiser by guaranteeing prices or outcomes?
• Did that inventory get acquired as a consequence of a business risk that that the advertiser would not take on his own behalf, perhaps because the agency had a better view of the supply and demand dynamics of the market; perhaps because the agency had madea technology investment that the advertiser could not?
• Is the technology favored by the agency fit for purpose regardless of the ownership of that technology?
• Does the agency, or its parent own data of its own creation that can effectively increase the value of inventory to the advertiser?
• Has the agency demonstrated professional integrity in its use of your data during the tenure of that relationship?

We would contend that if a significant amount of the above is true then a new kind of trust or detente emerges, not a religious trust in a supposed natural order of things but a commercial trust that the shared pursuit of market share and profit is to the common good.

We would further contend that clients have extensive experience in the evaluation of both inventory in terms of price, quality and value and in the tools used to optimize it.

For a generation they have used advisers to help them iteratively evaluate both. They indicate their satisfaction with contract extensions and performance related incentives and their dissatisfaction with penalties that may include the agency’s fees and more, and ultimately via reviews that rarely end up either with a retained incumbent or with a higher price of service. They do this because of the competitive nature of our market.

It’s possible, however, that those advisers, most practitioners from a pre-programmatic age have not evolved as quickly as the complexity of the markets they evaluate.

Clients are less familiar with contracting for, or operating, the technologies that underpin today’s media processes.

Some companies have been highly prescriptive about their choice of media technology vendors but few, if any, others actually operate such platforms in house and the providers themselves are less than keen on providing a managed service. They both look to agencies to fulfil that function, to being expert across platforms, to integrate those platforms with other tools and provide an environment that attracts staff to their operation and their broad view of the media ecosystem.

Agencies have succeeded because of this holistic view and through the ability to deliver across geographies and above all through their will to tilt the playing field in the direction of the advertiser. They need resources to do that. Twice as many people are employed in financial services as there were prior to the Big Bang in that industry. Whilst it’s true that technology eliminates jobs in some sectors it actually creates new ones in others, as blunt instruments are replaced by sharper tools and dumb luck or inadequate research is replaced by data informed science.

The industrial age and now the technological age were and are characterized by different human and commercial dynamics:

The media industry is no different. Since the first day advertisers asked for pricing guarantees from agencies, contracts freely entered in to, the client agency relationship was altered forever.

• It’s not about neutrality
• It’s not even about disclosure
• It is about transparency and contractual adherence
• But above all it’s about effectiveness

Every agency knows that success is conditional on value created, so reward them for that and don’t impale entrepreneurial spirit on the stake of occlusion.

The alternative is stark; without agencies as intermediaries advertisers are taking unnecessary risks:

• Risk of losing flexibility on technology choices and the ability to migrate at the speed of change.
• Risk of establishment of a steady state where no such state exists.
• Risk of losing visibility on the success, failure and progress of new and existing competing platforms.
• Risk of losing a point of view that is not sell side centric

In conclusion I would say this. It’s time to start trusting each other again, don’t trust blindly, don’t trust without advice but maybe accept in principle that an agency can be in business for itself and in business for you.

If that becomes the future state then we know that we can step off the precipice into a place of trust, transparency, financial prosperity, accountability and measurement and, join forces against the fraudsters and the pirates, that present the real systemic threat to our businesses which remains connecting brands and brand experiences to consumers via platforms and content that are creating dynamic new engagement and distribution opportunities for those messages.

Rob Norman, Chief Digital Officer, GroupM @robnorman

Photo: Leo Ma/Flickr, used under a Creative Commons license.