Death of Advertising Agencies

Death of Advertising Agencies

Advertising agencies are dying.

Hedge funds are shorting the world’s leading advertisers. Shares of WPP have fallen 10% this year. Hedge funds have made a $2.2 billion bet against Omnicom.  

What’s happening?

The internet is transforming marketing. Modern marketing is fundamentally different from the world that big agencies grew up in. 

Quick history. Volney Palmer opened the first ad agency in 1841. Instead of dealing with thousands of newspapers, advertisers could deal with a single ad agency. Agencies simplified the advertising process — a 1-stop shop for advertisers. 

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Agencies don’t just place ads. They create them. Over time, agencies such as WPP and Omnicom have scaled this expertise across their client base.

Agencies were built for a mass media world with limited media outlets. Agencies focused on the top of the funnel. Maximum reach. Maximum awareness. Maximum distribution. 

Agencies thrived when there was poor data, imprecise targeting and limited shelf space. Only big companies could survive funnel inefficiencies. Customers were artificially loyal. Products appealed to the median customer. With no alternatives, consumers defaulted to what they knew.

Media has fragmented. Power has shifted to search and social platforms. There’s unlimited shelf-space. Consumers can by anything, at any time. Brands can super-serve niche audiences. Direct to consumer models are unbundling big brands.

This trend will continue. Modern advertising is a duopoly. Google and Facebook are attracting all the growth in the U.S ad market. Superior to their competition, they’ve spawned the decline of large agencies.

Big brands are struggling. Some stats: 

  1. In the past 3 years, over $17 billion in sales has evaporated from the 10 largest U.S. packaged-food companies.
  2. 90% of the top-100 CPG companies lost market share in 2015.
  3. Gillette’s share of the razor market fell from 70% in 2010 to 54% in 2016. 

Companies are shifting their attention away from the top of the funnel and towards the middle of the funnel. Even the smallest companies have premium design, commerce and advertising capabilities. 

They’re tracking consumers with personalized content, they're following them across the web, and they're re-targeting them. 

Branding and performance marketing have converged. Ad optimization is a daily habit. 

Brands:

  • A/B test every ad
  • Track every advertisement
  • Are developing in-house ad capabilities
  • Evaluate customers with engagement data
  • Use real-time data to iterate and improve creative

The best brands move at the speed of the internet. An example: Nike should prepare for Tiger Woods’ next win. Next time he wins, Nike should run a short, social media-style documentary on his comeback right after the tournament ends. 

 Tiger Woods

Tiger Woods

Responsiveness is key. Hard to do that on TV. Easy to do that on social. 

Agencies think in 3-6 month timelines. Brands need to execute in 3-6 hour timelines.

Marketing is moving away from traditional advertising and towards peer-to-peer recommendations.  Customers are the best form of advertising.

Glossier has mastered this. Roughly 80% of their growth comes from peer-to-peer recommendations.  And they bought an advertising agency last week.

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On social media, ads compete directly with entertainment. Attention is zero-sum and there's an abundance of free content.

Advertising and entertainment are essentially the same thing. The best agencies blend marketing and content creation. They look more like media companies and less like traditional agencies.

The internet changed the playing field. It’s easier than ever to start a company but harder than ever to scale one. 

Short the big agencies.

And bet on targeted brands.