It's A Gloomy Day For The Large Advertising Giants

Advertising agencies are under pressure to change inefficient old habits from their business.

IN BUILDING the world’s largest advertising company over the past 30 years, Sir Martin Sorrell, chief executive of WPP, has weathered two recessions and survived a global financial crisis. His firm nearly went bankrupt in the early 1990s. Now he must make his hardest advertising pitch yet, to convince the corporate world that image-making agencies like his are not dinosaurs on the brink of extinction. - from the "Mad men adrift" article

The world’s advertising giants are struggling to adapt to a landscape suddenly dominated by the technology of Google and Facebook. Client advertising spendings are cut down due to the capabilities of smaller advertising companies. Online Consultants with digital expertise such as cinch and ProjectDevs are competing with large agencies; knowing they too can connect with consumers using several advanced marketing tools and less expensive independent marketing services. We now live in a world where the spread of viral content has become the least expensive route to a successful company brand.

The advertising giants have conventionally made much of their money from huge fixed contracts with clients, which lock in long-term business relationships. Their holding-company structures include famous ad agencies that design and make ads for TV and other media, but also a host of other businesses that bring in the bulk of their revenue, such as media-buying contracts, digital services, brand consulting and public relations. Google and Facebook on the other hand, make it easy for firms big and small to advertise on their platforms and across the internet via their powerful ad networks. The American advertising market grew tremendously last year, but only because of the tech giants. It is estimated that Google and Facebook each accounted for more than $5 billion of growth in advertising spend, and for almost 90% of online ad growth. All forms of conventional advertising, apart from outdoor, are now down to a record minimal.

The second attack was the rise of ad-free space for consumers. Netflix and Hulu have declined ad viewership globally. This hurts the giant advertising giants because their biggest clients which include the manufacturers of consumer goods, beverages and pharmaceuticals, use television the most. Planning campaigns and creating 15-30 second spots for television is a high-margin business that the agencies dominate. In America, television advertising sales fell by $4.9 billion in 2017 which is roughly 7.3% according to Magna Global, which is owned by Interpublic. That is the biggest drop in a non-recession year within two decades.

Third, Amazon’s e-commerce strength have weakened the distribution muscle and pricing power of the advertising giant's biggest clients. The America start-up company Dollar Shave Club, significantly dented the market share of P&G’s Gillette brand in just a few years, forcing competitive price cuts. Consumer-goods companies are responding to such margin pressure by cutting spending with these large agencies. P&G has cut agency fees and production costs by $750 million in three years and expects to cut at least another $400 million.

In 2016 an advertiser trade association issued a report accusing the agencies of using vague practices to extract higher margins. Holding firms strongly disputed the findings, but the report prompted many clients to review their contracts with agencies and insist on more transparency. The efficiency of targeted digital ads that are easily within reach, means companies can spend less for the same outcome in branding.