This article is excerpted from Michael Farmer’s forthcoming book Madison Avenue Manslaughter (LID Publishing, September 2015), Chapter 7: “Media Expansion, Media Fragmentation and the Balkanization of the Industry.”

The advertising landscape was once a homogeneous one, dominated by the traditional advertising agencies and the traditional advertising media in which they worked: print, radio and television.

The traditional Mad Men and their creatives were the aristocrats of the industry, operating with big media commissions to carry out visible and important work. Toiling at a lower level in the industry were the seemingly unwashed—“below-the-line” practitioners of direct marketing and sales promotion, working in low-prestige, below-the-line agencies, pencils behind their ears, estimating and bidding on local direct mail or promotional point-of-display projects that always went to the lowest bidder. Apart from competing with one another for client dollars, the two worlds coexisted and largely ignored one another.

But the below-the-line agencies had a number of things going for them. First, they were able to measure the results from their work. Second, they were paid on a per-project basis, so they had to develop sound estimating, bidding and project-management skills. They were paid for all the work they did.

Because margins were paper-thin in this highly competitive business, volume was key, and sales practices were sharp and aggressive. This set of skills never developed at the above-the- line agencies, even after commissions gave way to fees. And third, the below-the-line agencies were wedded to consumer and customer data, and technological and social developments were going to assure that data became more plentiful and powerful. History would prove to be on their side.

Below-the-line agencies began to grow faster during the 1990s as advertisers lined up to experiment with improved CRM and loyalty programs. This phenomenon might have been overlooked by the traditional advertising agencies, but it did not go unnoticed by Sir Martin Sorrell and WPP, who aggressively acquired specialized below-the-line agencies.

WPP identified a central feature of these specialized companies—they loved working independently in their specialized fields, even though their clients had broader needs. WPP—like the other holding companies and the rest of the industry—had a strong interest in maintaining the fragmented structure of the industry, if only for management convenience.

The resulting ‘Balkanization’ has been a feature of the ad agency industry ever since, but it is not a universal phenomenon across all service industries. Management consulting firms, for example, somehow expanded their technical capabilities and specialties under one brand name. Indeed, partnership in a consulting firm is predicated on an individual’s intellectual capacity to learn and master a number of disciplines.

Revenge of the geeks

The cultural divides within the advertising industry became wider when web pages became part of the marketing mix, beginning in around 1995. Early web pages were like printed catalogs, and traditional advertising agencies knew how to design catalogs. The rub was that web pages seemed to clients and agencies more like the domain of computer programmers than that of traditional copywriters and art directors.

Web production costs were exceptionally high, too—the hours spent by web designers and programmers far outstripped the creative hours spent on catalogs. Wasn’t the business of web design—and later, web advertising—a separate business?

Traditional (TV, radio, print) advertising agencies were quick to judge that the digital revolution was another specialty that would be handled by specialist agencies, just as direct marketing had been in the past. There was no comfortable place for programmers in the production department of an ad agency. Traditional advertising creatives could do the concept work for the look and feel of web pages, but the downstream execution, which was a digital production job, belonged elsewhere.

Technological innovation at the programming end, though, began to become the cart that drove the horse, and the question “what can we do with technology?” became as important a creative variable as images and sound. Digital technology did not really lend itself to a simple division of labor between creative (generating the ideas) and production (executing the ideas). In an increasing number of cases, creativity was all in the execution, especially on YouTube, Facebook and Twitter.

Balkanization in the advertising industry has limited the technical development of individual agencies and hobbled the intellectual growth of senior client service people. The downside of this is that each specialty has become less important for clients within their growing need for a mix of specialties, and that senior agency people have not grown intellectually to keep up with the changing needs of their clients.

Clients respond to the challenge of managing integrated needs

In a word, advertisers today, requiring traditional advertising, direct marketing, PR, customer relationship management (CRM), events/sponsorship, social, digital, etc., have had to engage a broader number of advertising agencies. Each specialized agency in a manner of speaking has “lost share” within each client relationship, and each senior agency client head has lost influence with his/her client, as well.

In many cases, clients have become their own integrators. While this is probably the right course for clients, the practice is bad for the agencies—they are on the receiving end of directives, rather than taking control and offering initiatives. Self-integration makes clients stronger and more self-sufficient, while it makes agencies weaker and more dependent.

In a few cases—P&G comes to mind—clients have turned to lead agencies and asked them to be the “brand navigators,” managing the loose network of diversified agencies on behalf of the client.

In a number of well-known cases—Ford, J&J, Bank of America—clients have entered into holding company relationships, but this means that all the agencies come from a single holding company.

Finally, in very few cases—Toyota, Lexus—clients have required their agencies to expand their capabilities to cover a broad range of services, from traditional to digital advertising.

In 2004, Toyota turned to its traditional (and virtually captive) agency, Saatchi & Saatchi Los Angeles, and encouraged the agency to hire digital specialists and to increase the proportion of digital executions within the marketing mix. The Saatchi & Saatchi Los Angeles example proves that Balkanization need not be the only outcome – agencies can become integrated across disciplines. However, integration is certainly the exception rather than the rule.

Balkanization of the industry has been the default outcome, driven by the agency belief that each discipline belongs in a separate house. Strategically, we can see that this belief has contributed to a loss of influence by individual agencies and an overall strengthening of clients in the relationship—not to mention the decline in agency remuneration.

About the Author: Michael Farmer is chairman and CEO of Farmer & Co., a firm that works with global agencies and their clients to improve management disciplines and brand performance. His book, “Madison Avenue Manslaughter” (LID) was launched at Cannes and will be published in September, 2015.

 

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