The shifting structure of the sector: dis-integration and fragmentation

The shifting structure of the sector: dis-integration and fragmentation

Traditionally, the work of an advertising agency¹⁵ had fallen into three broad functional areas: account management (planning, research and client handling), creative services (idea generation, graphic design and copywriting) and media planning and purchasing.

Account planning and research provided information to enable the agency to propose an advertising strategy to its clients. Because the strategy governed all subsequent activities and spending, the quality of the planning function was an important differentiating factor between agencies. Client handling focused on building and maintaining a bridge between the planning, creative and media buying functions within the agency and the client’s own organisation. The client handler was the ‘face’ of the agency, presenting ideas to clients and guiding them through the decision-making process. The personal trust generated and maintained by the client handler was therefore crucial in gaining and retaining clients. Account planning, research and client handling typically accounted for 35% of the cost of a campaign in the early 1990’s.

Creative services occupied a unique position in the agency’s business model, playing a huge part in creating and boosting the reputations of everyone involved, and accounting for some 45% of the costs of a typical campaign. Agencies wished to appear creative and adventurous in their approach, as this was an important area where a unique, qualitative advantage or differentiation could be established over competitors. Since agencies were often founded and run by creatives, the creative function received close attention and was often regarded within the advertising industry as the defining characteristic of an agency.

Although sometimes seen as a Cinderella function alongside the more glamorous creative services, media buying proved its worth by securing savings for clients purchasing media space, with the best departments achieving savings of as much as 20% on their clients’ media spends. Size mattered in media buying, as the largest agencies enjoyed negotiating advantages simply by virtue of buying in bulk, although individual negotiating skills also played an important part. In 1990, media production and other overheads accounted for about 20% of a typical agency’s costs.

Traditionally, these three functional areas – account management, creative services and media buying – were integrated within the advertising agency. While creative ideas might win the account, the old integrated advertising agencies billed clients primarily through a commission on the media space they bought for clients, offering media planning alongside purchasing. It was customary for agencies to be remunerated with a 15% commission on media they purchased on the client’s behalf. However, by the early 1990’s the commission was increasingly open to negotiation by clients, taking the average rate below 15%, although traditionally, agencies did not compete with each other overtly on price.

But this well established structure was overturned during the 1990’s. These years were characterised by the unbundling of media planning and buying from strategic and creative services. No agency of any note in any major region had a media planning and buying capability in-house by 2005: these were run as separate businesses, albeit typically beneath the umbrella of agencies’ parent companies. The result was that the global media buying market was concentrated in the hands of 11 major players (see Exhibit 8) who jointly controlled close to 60% of the worldwide media market. With the exception of Aegis’ Carat network, all of these media buying networks were in the hands of the five major marketing services groups.

In 2005, in the U.K. at least, unbundled media buying companies were delivering superior operating margins to other marketing service businesses (see Exhibit 9) and had surpassed advertising agencies in 13 of the last 15 years (Exhibit 10). Also, the one ‘pure play’ global media services provider, Aegis, generated operating margins of 16%: at the top end of the range amongst the global marketing services peer group. Nonetheless, some media buyers and agency principals felt that unbundling might at times have led to a loss of strategic coherence between the generation of creative ideas and media planning.

Allied to the trend away from vertical integration, on the horizontal dimension the industry had continued to consolidate as the three traditional majors, WPP, Omnicom and Interpublic, had continued their agency acquisition spree. While Interpublic had latterly declined amidst a wave of accounting scandals and subsequent trading difficulties, Publicis had sprung up (against most people’s expectations) to take Interpublic’s place at the top table with the acquisition of BCom3 as well as Saatchi & Saatchi. By 2005, approximately 40% of worldwide advertising expenditure was controlled by the top five groups¹⁶ (Exhibit 11).

With media now fully unbundled, further restructuring of the value chain was starting to occur with the rise of niche specialists in areas such as brand strategy, communications planning and web design. Here the U.K., while by no means the largest advertising market (Exhibit 12), was in some respects setting the global pace. In London, Soho’s renaissance as the ‘Athens of Marketing Services¹⁷’ was plain to see as a diverse and vibrant community of start-ups and spin-outs took root (Exhibit 13), with new types of firm covering the new needs and niches of the sector.

The major marketing services conglomerates had been tracking this trend. Some had continued to prosecute their generic strategy of acquiring quality niche players in all parts of the landscape. For example, in 2005 WPP listed over 130 subsidiary companies in its annual report. These include consulting and ‘below-the-line’ (i.e. direct marketing and promotion activities) as well as ‘above-the-line’ mass-media advertising. In 2005 WPP completed 29 acquisitions, 12 of which were agencies in developing and emerging markets and 19 of which were specialist digital, quantitative and advertising investment management companies¹⁸.