Opinion

Media agencies are structurally unsustainable

Management consultant Henry Innis believes media agencies are in structural decline. There is a solution... but the humans of adland aren't going to like it

There’s an elephant in the room when it comes to the transparency debate. The media agency model of commissions just isn’t making enough money anymore.

20 years ago, it was all rosy. Clients paid a fixed fee commission that was healthy. Then this horrible department called procurement came along. Their sole job was to focus on driving value out of the agencies — which mostly came down to putting the squeeze on their prices.

When the average agency operated on a 30% margin back then, they had room to move. But commissions have dropped more than 50% now.

Fundamentally the media business hasn’t change structure to adapt. They’ve evolved. But they haven’t changed.

Here are the types of evolutions we’ve seen to compensate for a lower fee structure:

• More hidden rebates and agency volume bonuses.

• Less experienced staff on lower salaries taking senior responsibilities.

• Movements into ‘content’ and other higher-margin services.

None of these measures solve the structural issue. Instead, they just substitute the media buying model for a poorer core product.

To me this suggests the media agency model as a buyer is in, at least in some form, structural decline.

There’s no better way to articulate this than in the death of productivity per capita in media agencies. It has declined significantly. Media agencies are no longer making good margins like they used too.

So what can they do?

I think the long-term answer requires a shift in the business. A media agency CEO recently told me 80% of his business was largely transactional — as in the act of buying and selling media.

In a programmatic market (even TV will be programmatic soon enough) that largely means machines talking to machines.

That leads to a fundamental question – when media buying is no longer about picking up the phone and booking media, is it even a human business? Do we need humans in the transactional side of the business at all?

I’d argue no. At least not at the buying level.

Lots of people are going to disagree with this. After all, it goes against the DNA of the media agency.

But turning the buying function of a media agency into a proprietary algorithm mirrors another market that saw significant changes to buying in the digital age.

I’m talking, of course, about the equities market. The equities market used to be a commission for every sale (remember the good old broker days?) years ago. Today it operates in a far leaner manner, with software at the core.

That means even taking 1-2% per trade, brokers can still make a lot of money.

Media has parallels here. Machine learning combined with programmatic likely can deliver a similar result to this.

I make this point to show that there can be money made out of buying media and tactically adjusting placements and flighting plans. But it isn’t a bums on seats model.

It’s far more likely to be a software model.

The good news?

We might be able to have a far higher margin business operating far more efficiently and effectively for clients.

The bad news?

It’s likely to be a smaller revenue business with a lot less people in it.

Interesting times ahead.

Henry Innis is a management consultant and strategy director advising brands, CMOs and executives on how to navigate the digital future, better partner with their agencies and get more value from their ad-tech vendors. He can be found on both Twitter and LinkedIn.

 

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