Silicon Valley vs. Madison Avenue

If you spend too much time in Silicon Valley you’d think that the technology industry — with Google leading the charge — already owns the future of advertising. But don’t count out Madison Avenue just yet — they may be responsible for perpetuating the imbalance between media time spent online and ad dollars spent online (double digits vs. single digits), but all that may be about to change. Take the announcement today of Publicis’ acquisition of Digitas

- THE MERGER OF DIGITAS WITH Publicis’ interactive media assets creates a new digital media powerhouse, the likes of which has not been seen on Madison Avenue before. The resulting organization will have the global resources of Publicis’ multinational marketing services network, as well as the media-buying scale to compete in a sector where the power has been steadily shifting to the major portals and search players.
- “This allows us to work with Yahoo, Google and Microsoft in a different way, because we are clearly the biggest player in digital media now,” boasts David Kenny, chairman-CEO of Digitas, who emerges from the deal with responsibility for leading Publicis’ overall digital media strategy.
- “We can really scale up with the portals in a way that has not been done yet. Nobody has the media scale and the global reach we have now. Those are the two main structural things we gain from this.”

Kenny says Digitas had already been developing the means of leveraging its estimated $1 billion in annual digital media billings on its own–but coupled with the digital media-buying clout of Publicis’ shops, will triple or quadruple its market presence virtually overnight.

Everybody is betting on online video advertising and the prospect of taking a big bite out of the $67 billion TV ad market. The key ingredient here is the creative. Anyone can pick up a video camera, but creating compelling video ad content is not as easy as creating compelling text ad content. And Madison Avenue is starting to wake up to the fact that they can’t just bring TV ads online.

Here’s an excerpt from an interview with Jamie Tedford of Arnold Worldwide, whose clients include brands like Volkswagen, Fidelity Investments, Timberland, and RadioShack:

- Advertisers think, `We’ll just put our existing TV spot up, and it’ll become viral.’ A lot of marketers are learning quickly that the rules for what makes something viral are a totally different set of rules.
- Video also gets passed on because it’s surprising, funny, new, comical, sexy, or provocative. People want the currency of having found something first.
- Many clients have a more traditional view: `Here’s the product message I want to come through, and if you can get some entertainment in there, great.’ Now, you’re asking someone to discover this on their own, and figuring out what would make a consumer forward it to a friend.

The whole notion of viral video “advertising” is disruptive even to the disruptors like Google — Google ads still need to ride along with content, which is why they bought YouTube. But when ads become fully fledged entertainment, they don’t need to ride along with content. They don’t need to be in Google’s ad system — you can just post the ad content on YouTube for free:

If YouTube is overtaken by Google’s monetization, Madison Avenue will find other platforms for distribution — video distribution platforms will become (and to an extent already are) a commodity. (The idea that you can “own” the “community” will also be disproven, I predict, but that’s a topic for another post.)

The big structural issue to be resolved is the separation of “creative” from “media buying” that has taken place on Madison Avenue over the past decade or so. With online media completely changing the game, some ad agencies are recombining these functions, even as Google and others in Silicon Valley position themselves to disintermediate the agencies. It may be that media buying agencies are more vulnerable than the creative agencies, because Google has sent the ball rolling downhill towards the commoditization of media buying, with national advertisers developing their own platform with eBay. If that happens, the power may resides in the hands of the “creatives” — somebody is going to have to create all of these online video ads.

The credit rating service Fitch issued a fascinating report this week on the evolution of Madison Avenue in a digital media world

INFLUENTIAL CREDIT RATING SERVICE FITCH Wednesday issued a report indicating that Madison Avenues' biggest players face some considerable challenges - the erosion of the traditional TV advertising marketplace, the continuing fragmentation of media and a corresponding consolidation of media services, a shift from traditional advertising to "below-the-line" marketing services, the reintegration of creative and media services, and the threat of "disintermediation" from advertisers dealing directly with online services - but are generally better positioned than the rest of the media industry to weather some big changes in the years ahead. "The rapid evolution of the media landscape has required that ad agencies adapt their offerings in favor of the new media alternatives that are gaining acceptance with clients. As advertisers get more comfortable with the measurability of online media, they will likely continue to demand the same transparency and accountability from their agencies," warns Fitch, adding, "They will increasingly expect agencies to demonstrate return on investment (ROI) to justify expenditures on agency work."

The report, which focuses on the market trends and financial issues facing the industry's big agency holding companies - Interpublic, Omnicom, Publicis and WPP - indicates that the majors are moving quickly to adapt to these changes, and are effectively reengineering there services and product offerings to deal with a rapidly changing marketplace.

One of the biggest organizational developments, Fitch says, is the reintegration of media and creative services. Citing Interpublic's recent realignment of media shops (Initiative and Universal McCann) with brand agency networks (Draft FCB and McCann WorldGroup, respectively), and Publicis' integration of Arc Worldwide with Leo Burnett, the credit agency said it believes that agency holding companies, "that fail to develop tighter coordination are at risk of client defections to other [holding companies] or upstart agencies that can deliver integrated solutions to clients."

The report also predicts that big agencies will continue to be challenged by shifts in the media marketplace, especially the attrition of the traditional TV advertising markets, but says media services operations are actually better positioned than their creative department/agency counterparts to adapt.

"Media planning and buying may be somewhat less affected by these shifts in the short run, but the creative arms of agencies have historically generated meaningful profits from television advertising are more exposed," Fitch cautioned. "If the 2006-07 [network TV advertising] upfront did signal a long-term decline in the importance of the upfront, then companies that have already aggressively shifted their business mix toward marketing services will be best positioned. Omnicom and WPP have been the most aggressive in driving this shift as marketing services make up well over 50% of their revenue stream, while Publicis and Interpublic still derive a larger proportion of their revenue from advertising."

But the biggest potential challenge faced by Madison Avenue ultimately may be its fastest growing form of new business: digital media, especially the Internet.

"In 2006, several major advertisers announced they were forming a consortium to experiment with auctioning television advertising inventory in the U.S. Another potential threat is from the key internet players such as Google, Yahoo and MSN," Fitch says, noting that such players so far have focused on expanding advertising services to the "long tail" of smaller advertisers that might not otherwise employ traditional advertising agencies. That was a strong reason for both Interpublic and WPP Group to invest in automated online advertising and media services provider Spot Runner, WPP chief Martin Sorrell said during the recent UBS media conference in New York.

"So far, major advertisers typically buy their Internet advertising with one of the [holding companies'] buying operations acting as intermediary. There is the potential for the Internet companies to try to move up the value chain to deal directly with advertisers," warns Fitch. "These developments, and others described previously, continue expose agencies to potential to the risk that certain functions may get commoditized or that agencies themselves could be disintermediated in this broad media transition toward more consumer and advertiser control."

(Publishing 2.0, MediaDailyNews)