IAB CEO: November 2009 Archives

blog-header-rr.gif When Sir Martin Sorrell, Executive Chairman of the WPP Group and for two decades arguably the most powerful individual in advertising, appeared on The Charlie Rose Show last May, the conversation was more remarkable for what he didn’t say than for what he did say.

He spoke of the “significant shift to digital” spending among his clients, noting that 25% of the global marketing services group’s revenues now derive from interactivities. He said “the importance of technology in our business has mushroomed,” and spoke at length about Google, and about his own acquisition of the “remarkably successful” online advertising network 24/7 Real Media, and of TNS Millward Brown, his data, measurement, and analytics unit.

But not once did he mention his ownership of two of the greatest brand names in advertising, companies whose hostile acquisitions 20+ years ago put Sir Martin on the world map: Ogilvy and J. Walter Thompson. Although he nodded in the direction of “the great idea” - ad agencies’ value proposition for the better part of 60 years — he also gave it the back of his hand. “People in the advertising business, in the traditional media advertising business, would say the message determines the medium,” Mr. Sorrell said. “I would say that has totally changed.”

But of course, it has not totally changed. Rather, it’s the ground on which one of the greatest battles in both business history and social history is being fought. The question at the heart of it, although never purely articulated, is likely to determine the fortunes of every company that sells goods or services to consumers or customers.

The issue is this: Is marketing a strategic resource or a procured commodity?

If you listen closely, you’ll discern that this question is tearing apart the entire marketing-media ecosystem, with combatants staking out positions on either side of an increasingly great divide. On one side, people are speaking the language of efficiency: of online networks, demand-side exchanges, real-time bidding, inventory and impressions, buying agencies and procurement offices, of driving the marginal cost of production and distribution of billions of commodity products called banners, spots, and pages as close to zero as they can. On the other side of this gap are people speaking the language of growth: of brand affinity, premium price realization, consumer intimacy, dialogue, social media and the social graph, and of the insights that can generate consumer satisfaction and new revenue streams.

At times, the fissure seems akin to a civil war, with brother fighting brother over unconsidered ideologies. Holding company owners are battling their own agencies. Brand makers’ Chief Marketing Officers are fighting their companies’ Chief Financial Officers. Measurement companies are measuring the wrong things, incurring the ire of marketers and media alike. Advertising pricing systems in place for generations are coming under fire. Publishers’ sales forces are trying to keep up with the mixed messages.

Meanwhile, the people who really matter - the Chief Executive Officers at consumer marketers - are just beginning to wake from their inattention to render a verdict on where their funds will flow. I’m hoping this analysis - admittedly quite long, and reeking of history - will help.

Marketers and Citizens

Strategic resource or procured commodity? The question is of vital importance now because the investments marketers are making, on their own or with the guidance of agency and media partners, is influencing the way they conduct their business. And because their business involves advertising, the fuel that has powered the news and entertainment industries for more than a century, marketers’ decisions dramatically affect how citizens perceive the world around them.

The most prominent example of this disjuncture’s impact, of course, is the distress in the newspaper industry. Having opted at the dawn of the interactive era to distribute their online editions for free in order to build the mass audiences desirable to large brand advertisers, the newspapers (which had been losing readers for decades) found after a burst of new attention that they had forged a marketplace accustomed to accessing news at no charge. When oversupply of ad inventory - an inevitability, because the marginal cost of manufacturing that ad inventory is near-zero — started pressing their online pricing downward, they did not have this vital secondary revenue source, paid subscriptions, to fall back on.

As former Wall Street Journal Chairman and CEO Peter R. Kann wrote in that paper recently, the business model of newspapers’ free online editions “does not begin to cover the cost of significant news reporting.”

“So the online editions with growing audiences - largely cannibalized from print audiences - rely on the poor print editions for almost all the news they give away,” Mr. Kann continued. “Sadly, there is less and less of that, and the ultimate loser, of course, is the public.”

Another, more recent example of the commodity-vs.-resource confusion is the effort by many of the large ad-agency media-buying groups to disenfranchise branded publishers by launching their own “demand-side platforms” - essentially, stock exchanges for the trading of online advertising inventory. In recent months, WPP launched the B3 network, whose goal is to “basically create custom audience networks for advertisers,” WPP Vice President Brian Lesser told Advertising Age. Publicis, the French marketing services conglomerate, is introducing a similar trading platform in its Vivaki Nerve Center unit. Havas, another French holding company, is starting a trading unit called Adnetik. MDC Partners, a Canadian agency holding company, has opened Varick Media Management, which its president has described as a “media hedge fund.”

Ostensibly, the purpose of the trading platforms is to provide data that will help agencies “optimize” advertising for their clients - “optimize” being the catch-all jargon these days that covers everything from providing insights on consumer behavior to finding ad placements that generate more demonstrable returns.

But the real purpose - and the reason publishers are so concerned - is that the agencies plan to use the publishers’ ad inventory to identify likely target consumers, and with that specific data captured, attempt to find those same consumers on less expensive “long tail” Web sites that are in the agencies’ proprietary networks, a technique known as “retargeting.” As Vivaki President Curt Hecht told Ad Age, “In our first phase, we are moving clients into the audience space at scale and around inventory where they will feel comfortable with their brands. In the second phase, we’ll start to grow our reach.”

Or as Adnetik Managing Director Nathan Woodman more bluntly told an Advertising Week audience at a session on demand-side platforms sponsored by ContextWeb, “You have to value the media and you have to value the audience - and do them independently. We hope to do that in a way that guarantees for our advertisers a buying efficiency: they will never pay more for an ad than it is worth.”

The ordeal of the newspaper industry and the opportunism of the agencies would seem to have little in common. But both derive from the same intrinsic belief: that marketing, necessarily realized through media channels of various sorts, is essentially an undifferentiated good - a basic thing, a mere mote, that can be mined, refined, bought, sold, traded, and exchanged. Whether it’s called “ads” or “impressions” or “inventory,” marketing, in this view, is nothing more than a pure commodity, no different than crude oil, natural gas, or bituminous coal.

It’s this point of view, driven by media agencies, many technology companies, and accepted by many publishers themselves, that underlies much of the tension in the advertising industry today. Agencies profess to have little choice but to consider themselves commodity processors. “When you are on a fixed-commission model, which is typically the way the media business works, you’re ability to test is totally constrained because there’s certain things that might not work initially and you can’t run those because they won’t perform usually,” said Matt Greitzer, a vice president of Razorfish, the digital agency recently acquired by Publicis, at the ContextWeb event.

Adnetik’s Mr. Woodman was even more direct. “A typical agency model is fee-based or hours- based; the incentive is to consolidate — the only way the agency makes money is by putting less people against the task at hand,” he said. “So we are in a situation where the staff is completely over-worked and you cannot do these innovative many things because, in essence, the agency doesn’t have the bandwidth to do so.”

Spots and Dots

For the agency business, this assumption - that an ad agency’s job is to process “spots and dots” the way a pit broker processes stock trades, rather than to drive the client’s growth through innovation — actually represents a return to its roots… and a reversal of agencies’ prevailing wisdom for the last 60 years.

The first advertising agents of note - notably the New Yorker George Rowell — began as media resellers, purchasing newspaper space in bulk and retailing it at a profit to local merchants and patent-medicine barkers. Soon, the brokerage model became dominant, with advertising agents eschewing the own-and-resell strategy in favor of the less risky middleman approach, in which they earned commissions on sales from the papers and magazines for the ad space they sold on the periodicals’ behalf. The first two ad agencies of note, J. Walter Thompson and N. W. Ayer, were built on this foundation - although Ayer’s innovation was to take the fee from the client rather than the media.

Services, notably copywriting, consumer research, and media research, emerged gradually; Rowell published the American Newspaper Directory - the first syndicated research in advertising history - in 1869, and Ayer hired its first full-time writer in 1892. Importantly, though, all revenues came from commissions on media; the additional services, provided gratis, served only to protect the fat margins agencies earned from media buying, which were the source of agency profits. Why? As I’ve written before, under a commission system, each insertion of an advertisement is incrementally more profitable than the last insertion. Treat ads as unvarying commodities, and agency margins can skyrocket.

The conflicts of interest inherent in this procurement-dominated industry were apparent early in advertising’s evolution. In one of the first industry exposes I have found - a 1930 book titled Our Master’s Voice - Advertising, a disgruntled ex-copywriter named James Rorty decried the deceit he saw in this system:

The advertising agency is thus in the somewhat ambiguous position of being responsible to the advertiser whom he is serving but being paid by the advertising, publishing, or other advertising medium, his commission being based on the volume of the advertiser’s expenditure. Objection to this commission system of agency compensation has been chronic for years… But the commission method of compensation has persisted and is a factor in the endless chain of selling that links the whole advertising apparatus.

How lucrative was this “endless chain of selling” for the agency business? Many years ago, I sat down with Harry Paster, the late, great, longtime executive vice president of the American Association of Advertising Agencies, and he gave me the basic tutorial on agency economics: 50% payroll; 6-8% rent; 10-20% overhead; 22-34% profit margins.

“That’s it,” Harry told me. “That’s the whole thing.”

Moreover, he added, “It gets easier as you get bigger.”

The best evidence of that was the growth of the Ted Bates Worldwide agency, as engineered by the Madison Avenue legend Rosser Reeves. To clients, and in his 1961 best-seller Reality in Advertising, Reeves, a copywriter by background, argued that for an advertising campaign to be successful, it was best for it to say one thing, in exactly the same way, ideally forever. He called this unvarying underpinning a “unique selling proposition,” or U.S.P. He defined the U.S.P. as “getting a message into the heads of most people at the lowest possible cost.”

Reeves’s argument was simple: Unless a product becomes outmoded, a great campaign will not wear itself out. He counseled his clients to seek vast reach for their ads, saying, “If 90 percent do not remember it, the story is certainly not worn out.” Thus early television was blanketed by such Bates campaigns as “Wonder Bread helps build strong bodies 12 ways” and “M&M’s melts in your mouth, not in your hands.” Notably, the U.S.P. was meant to apply not only to an ad campaign’s mission, but to the specific advertisements themselves. As he related proudly to the author Martin Mayer, he was once entertaining a client on his yacht, when the marketer idly inquired what the hundred people who worked on his account did. Reeves answered: “They keep you from changing your advertising.” The tactic was certainly successful: Reeves publicly boasted how one client spent $86,400,000 over the course of 10 years “on one piece of my copy.”

That unchanging copy - commodity advertising in its purest form - made Reeves (pictured left) and his acolytes fabulously wealthy. When Reeves’s successor as chairman and CEO of Bates, Robert Jacoby, sold the agency to Saatchi & Saatchi in 1986, he personally pocketed $110 million - more than 20% of the total sale price.

But there had always been an undercurrent of discontent in the agency business - a minority understanding that there was a better way to serve clients and consumers together. James Rorty gave voice to this in 1930. Having gone independent with the slogan “The Less Advertising the Better,” he pursued clients with an argument that sounds, 80 years later, astonishingly like those offered by many in our ecosystem today. Here is his pitch, aimed at a fictional industrialist he named a Mr. Hoffschnagel:

Mr. Hoffschnagel, you and I are practical men. I don’t need to tell you that advertising is not an end in itself. Neither is selling. The end, Mr. Hoffschnagel, the true objective of the manufacturer and dispenser of products and services, should be the efficient and economical delivery to the consumer of precisely what the consumer wants and needs: what the consumer needs to buy, I repeat, not what the manufacturer needs to sell him. In any functional relationship between producer and consumer, advertising and sales expenditures are just so much frictional loss; in the ideal setup, which of course we can’t even approximate under present conditions, released buying energy would be substituted entirely for the selling energy which you now spend breaking down ‘sales resistance.’ My task, therefore, is to redefine and reinterpret your relationship with your customers; not to pile up sales and advertising expenses… but to cut them. What do your customers want from you? Service! What do you want to give them? Service! Not advertising - the less advertising the better - that’s just so much friction and loss. But service! The end, Mr. Hoffschnagel, is service!

It is a wildly contemporary argument: Advertising is a service that in turn enables marketers to provide services to their customers - in contemporary parlance, a solution. Advertising agents, agencies, and by extension media, Rorty was the first to argue, should become solutions providers.

Cost-Saving Creativity

The next to take up the call, to claim that the Emperors of Commoditization like Rosser Reeves had no clothes, were advertising’s creative revolutionaries of the 1950’s and 1960’s.

Fed by stories of bell-bottomed copywriters, pot-smoking account executives, and art directors threatening to jump out windows if their campaigns weren’t approved, advertising’s “Creative Revolution” has come down to us as the unbridling of a Dionysian impulse in the agency business. But it was actually an evocation of the discontent true business strategists and service providers felt toward forebears whom they believed had sold clients a bill of goods. Their only weapon at the time was creativity, but creativity had a pure logic underlying it: the logic of efficiency, born of effectiveness.

“Properly practiced, creativity must result in greater sales more economically achieved,” the Marat of the Creative Revolution, Bill Bernbach, said. “Properly practiced, creativity can lift your claims out of the swamp of sameness and make them accepted, believed, persuasive, urgent.”

His fellow revolutionary leader, David Ogilvy, also saw that creativity was a strategic resource that agencies had a duty to apply to campaigns. Taking a swipe at Rosser Reeves, his one-time brother-in-law, Ogilvy (who took inspiration from direct marketing, and saw no contradiction whatsoever between “brand image advertising” and “advertising that sells”) proclaimed it was “brand personality,” and not “any trivial product difference,” that drew consumers to products. He and his fellow revolutionaries were steadfast in affirming that creativity was a service that rendered advertising more effective, thus saving their clients money.

The creative revolutionaries knew exactly what they were doing, and felt morally and professionally committed to it, even if it entailed some sacrifice. “Bufferin and Anacin, the Ajax tornado, were repeated and repeated and repeated; the Volkswagen campaign was not,” Bob Levenson, Doyle Dane’s longtime creative chief, the leader of its flagship Volkswagen account, and today an advisor to the television show Mad Men, told me in 1992. “I mean, we did a lot of print advertising, far more than television, and very rarely did an ad run twice. It was a different game. We did 12 ads a year, one a month. That was how the work requisitions came in. And occasionally you’d repeat an ad, but it was the great exception. It was not like pound-it-in. It was much easier to do it Rosser Reeve’s way, and it was much more profitable.”

The premise - that creativity is a customer service that builds value for a marketer - was explained to me years ago by Jeremy Bullmore (pictured right), once the head of J. Walter Thompson’s U.K. operations, today a non-executive director of the WPP Group. When I asked him why the Creative Revolution swept the ad industry and trounced the prevailing commodity strategy, he pulled from his bookshelf The Act of Creation by the essayist and critic Arthur Koestler. In it, Koestler argued that “emphasis and implication,” while complementary literary techniques, affect readers differently - an argument that applies equally in marketing, Mr. Bullmore said. Emphasis - Reeves’ U.S.P. - “bullies the audience into acceptance,” he said, quoting Koestler, while implication, Doyle Dane Bernbach’s favored approach, “entices it into mental collaboration.”

It’s hard to overstate how controversial the Creative Revolution was in marketing. No less an eminence than the pollster George Gallup attacked it, calling brand image advertising a “passing fad.” But by the late 60’s, the strategic resource called creativity was well on its way toward winning the battle of Madison Avenue, confirmation coming in 1966, when Doyle Dane won the $8.5 million Mobil Oil account from the Ted Bates agency. By the 1980’s, when I began covering the advertising industry for The New York Times, it was taken for granted that creativity was the natural ground on which the battle for advertising supremacy should be fought.

“If you look at advertising history, most of the shops that are the big guys today started up as small shops in the 40’s and 50’s, where the owners of the agency were also the business strategists and the copywriters,” David E. R. Dangoor, then the head of marketing at Philip Morris U.S.A., told me in 1991. “That gave birth to new ideas and a lot of gutsy marketing moves.”

In other words, by the 1980’s, Advertising’s Long War seemed to be over. After a half-century during which the procured-commodity suppliers were dominant, the strategic resource providers, following a two-decade battle, had won the day.

Or so we thought.

Looking Like Hucksters

In reality, the war was continuing inside client companies themselves, and for good reason: one of the largest line items on many consumer-facing companies’ P&L accounts is advertising, and for the most part that has meant media - the channel through which marketing strategy was realized.

Clients paid little notice to advertising costs as long as the economy was growing, which it did for several decades in the United States after the close of World War II. But the oil shocks and stagflation of the 1970’s gave rise to a new discipline in business, and as the 80’s rolled in, so did management consultants, procurement specialists, stringent cost controls, and continual re-engineering.

It was only a matter of time before these new facts of industrial life caught up with marketing departments — and in 1986, they did. Bates Chairman Bob Jacoby’s $110 million windfall from the sale of his agency to the Saatchis changed client-agency relationships forever, by forcing marketers to confront the staggering profit margins their agencies were earning from their advertising spend. “We may stand today looking more like hucksters than when Frederic Wakeman wrote the book more than 25 years ago,” American Association of Advertising Agencies President Len Matthews lamented at the time.

He was right. Client companies immediately began pushing down agency compensation. They started hiring professional search consultants, whose tasks included not only help with agency selection, but compensation negotiations. Agencies recoiled - Matthews publicly called one prominent search consultant, an ex-agency executive named Alvin A. Achenbaum, a “quisling,” after Norway’s traitorous World War II leader - but to no avail. Agency margins began collapsing, from 20%+ on average to 10% and less.

The agencies had no choice but to unbundle - to separate the media-planning and -buying functions from the strategic and creative functions. Unbundling served two purposes: It enabled the holding companies, which increasingly dominated the industry, to consolidate their media functions, and gain both scale efficiencies and purchasing clout with media companies, which themselves were aggregating into global giants like Time Warner, News Corp., and Viacom. Unbundling also allowed the agency holding companies to start charging, on a menu-like basis, for the many offerings the so-called “full service agencies” had long given away for free, such as creative, research, public relations, and product development.

Unbundling, however, didn’t necessarily help the agency business. Holding company operating margins, even factoring out the effects of the recession, still hover in the 10-13% range, far below the historic norms that prompted advertising’s “megamerger” boom of the 1980’s. With the recession, the picture is far more grim. The WPP Group reported operating margins of 7.5% for the first half of 2009, down from 13% during the same period the previous year. Interpublic’s operating margins were 1.7% for first nine months of 2009, down from 5.1% in 2008.

Marketing Drives Growth

But a funny thing happened on the way to this resurgent procurement -driven view of marketing: interactivity.

I first saw the marked change in the tone and content of marketers’ interests in 2004-2005, when I was part of the team at the consulting firm Booz & Co. that helped the Association of National Advertisers grapple with the evolution of marketing capabilities and marketing organizations. The ANA’s members - Chief Marketing Officers and other senior marketing executives - felt they were drifting away from the center of influence in their companies, a feeling underscored by the shrinking tenure of CMOs. Was that true, the association wanted to know, and if so, what did marketers need to do to regain their centrality?

The first thing we discovered was that the perception was false. Overwhelmingly, across all industry segments, marketers and non-marketers alike agreed that marketing had grown strikingly in importance during the early 2000’s. The prevailing trends affecting all parts of business - growing capital and labor mobility, frictionless global communications, the increased speed of technology transfer - were hastening the perception and the reality of commoditization across all product and service categories. Chief executives needed marketing to help them overcome the commodity challenge, and add value to their companies’ goods. And some marketers were fulfilling the promise. These “super-CMO’s,” as we dubbed them, were serving as the lead growth drivers in their firms.

Unfortunately, they were still a minority. Most CMO’s served as what we called “Chief Advertising Officers.” Their expertise was in shepherding third-party agencies toward the creation of discrete sets of pre-formatted advertising products - print ads, TV commercials, press releases, and the like. It was the gap between the CEO’s desire and this reality that accounted for CMOs’ short tenure: They wanted someone who could own the company’s growth agenda, but too often they ended up with an advanced advertising manager. In other words, too many CMOs were managing commodity processing, in an environment where commodity processing could no longer assure their firms’ need to generate growth and deliver shareholder value.

As we probed further, we discovered that advanced marketers were seeing a way out of the commodity trap: The same communications technologies that were creating it.

“What’s changed is that the engagement level we can have with our consumers is just so much higher,” Jim Stengel, then the Global Marketing Officer of Procter & Gamble, told our Booz-ANA team in 2006. “We can have a two-way dialogue, a relationship. That means we will need more brand-enhancing, consumer-enhancing dialogue in more of our businesses. It’s a different skill set—with different capabilities—than we required in the past.”

John D. Hayes, the Chief Marketing Officer of the American Express Co., affirmed the shift, in words that should have put the nail in the coffin of the “procured commodity” school of advertising management. “The world is in the middle of an ongoing conversation,” Mr. Hayes said, in interviews for the book we published, CMO Thought Leaders: The Rise of the Strategic Marketer. “A marketer’s challenge and job is to enter that conversation. And when you do join in, you had better be prepared to add value. If your attitude is, ‘We’re going to pound away with this many GRPs talking about our new product,’ all you’re doing is interrupting the conversation. People don’t like that.”

This, of course, is the language of strategic resource - language that has grown louder and more insistent in the years since that first study. In 2007, the ANA and Booz joined with the IAB and the American Association of Advertising Agencies for a new study, Marketing-Media Ecosystem 2010. In it, we asked marketers what their greatest need was. Eighty-two percent gave the same answer: consumer insights, by which they meant actionable marketplace understanding with which they could grow their businesses and build new businesses. How would they gain these insights? Page after page of our study saw the same answer - in Booz’s words, they required “marketing as conversation.”

“The marketing function, equipped to broadcast brand messages to consumers, has now become a center for dialogue, geared to gleaning what consumers want, and when and where they want it,” the Booz partner who led our research, Christopher Vollmer (pictured right), wrote in the journal strategy+business. “Advertising has evolved from an interruption—grabbing attention for a product or brand—into an experience, an application, a service that the consumer actually wants. This new marketing model doesn’t shout; it listens and learns. And relevance, interactivity, and accountability are its essential ingredients.”

This, indeed, has made for a profound gulf between marketing laggards and marketing leaders, as determined by their investments and their returns. Eight-eight percent of leaders in our study had “open channels for communicating with consumers,” while only 63% of laggards did. Another 88% of the leaders were participating in or leveraging online communities, vs. 59% of the laggards. Of the leaders, 72% had formal processes for integrating consumer intelligence into products; fewer than half the laggards did.

Marketer-Publisher Teaming

We also found a greater willingness by clients to work directly with leading publishers to realize their need for more intimate consumer relationships.

“If I were an agency, I would be really worried about being disintermediated,” Becky Saeger, CMO of Charles Schwab, said at the ANA’s 2008 “Masters of Marketing” conference, reinforcing the study’s findings. “More and more the agencies are almost in the way sometimes.” Schwab, she said, had begun doing “strategic briefings for media companies so we know that they understand what we’re trying to do with our brand so we get higher quality input and not have to rely on our media agency to be in the middle all the time.”

Sitting on the same panel, Gary Elliott, vice president for corporate marketing at Hewlett-Packard, echoed her sentiments. “We’re going to pilot a number of different relationships where we go direct with media companies,” he said.

It’s unsurprising that clients would start rebelling against their agencies’ procured-commodity approach to marketing: Many marketers, particularly packaged-goods companies, have confronted similar commoditizing pressures from their retail customers, and realized that their only way out was to become more expert at providing services to these customers.

The two-decade-long “private label revolution” has pressured brand marketers’ prices down. In the early going, they responded by offering slotting allowances - essentially, fees for shelf space - to the retailers. CPG makers then went on cost-cutting binges, in order to be able to permanently bring their pricing in line with private-label merchandise, a strategy known as “everyday low pricing,” or EDLP. But as the retail trade has grown even more concentrated and powerful, competing solely on price is a strategy that, literally, offers diminishing returns to packaged goods companies. CPG manufacturers have had to compete in other ways. They have had to learn to be more sophisticated about their trade promotions strategies, offering retailers only deals that can provide both parties an acceptable return. They have created special box sizes, customized store displays, advanced consumer research and analysis, even brands unique to individual retailers - assistance unthinkable in the era of one-size-fits-all mass manufacturing. They have, in short, added to their commodity production processes an overlay of solutions - services that help their customers create value for their customers.

No wonder these marketers expect the same solutions-focus from their agencies and media. The circle is either vicious - endless rounds of cost-cutting until everyone gets zero value and zero return - or virtuous: Continual innovation by which agencies and media help marketers shape practical or emotional utility for consumers.

Hence, the paradox we face in today’s marketing and media industries. There is not a creative agency or an interactive publisher I know that doesn’t say that among its greatest challenges is the demand from clients for marketing programs that are innovative, customized, or unique. Marketers are looking to get closer to a specific publisher’s specific audience. They want entertainment and engagement, special to them, that only this media company’s assets can provide. They desire insights about product features and benefits that only this section of that social network can offer.

So why, then, do we spend so much effort developing new platforms for blasting impressions by the billions across the entire face of a shapeless Internet? Why, 150 years after George Rowell launched the first one, do we consume ourselves with introducing new media brokerage services capable of shaving arbitraged micro-pennies from the trading of direct-response data? Why are so much energy and investment focused on the development of “digital media trading solutions,” “algorithmic audience targeting platforms,” “networks of networks,” and other mechanisms designed to improve cost efficiencies on the distribution side of spots and dots?

Even the smartest people in our industry mistake the challenge, and the opportunity. Consider this recent essay by Eric Picard, a noted advertising technology advisor to the advertising platform engineering team at Microsoft. “I envision a world where media planners will spend the bulk of their time defining the goals of the advertiser, and translating those goals into complex instructions that can be interpreted by software,” Mr. Picard writes. “The ad platforms of the future will match these instructions against available ad inventory that is enriched with targeting attributes based on user behavior and content associations — and then optimized in an automated fashion by very smart systems.”

But guess what? That is not the world CMO’s are envisioning. Listen to what Lucas Watson, Global Team Leader for Digital Business Strategy at Procter & Gamble, told attendees at the IAB MIXX Conference this past September about “what we have been learning in the interactive space.”

“As we spent all this time worrying about ad frequency and ad formats and where we’re placing, contextual targeting and behavioral targeting - it’s all important — but we’re finding that it’s creative quality that is driving 70% of the business impact we’re seeing in our return on advertising,” Mr. Watson said. “Good ideas are driving more business than bad ideas. It’s not rocket science. But I think there was some doubt about whether this counted in the interactive space. We think it does.”

Or consider what Hewlett-Packard’s Michael Mendenhall said to his fellow CMO’s at the ANA’s annual conference in October 2008. “Web 2.0, which enables multiparty, multimedia, simultaneous, digital conversations, has completely upended the traditional relationship between companies and consumers,” Mr. Mendenhall affirmed. “The power of a single individual to shape perceptions on a massive scale is a dramatic and fundamental shift. It is no longer just about where businesses put their ad spend. A comprehensive digital media strategy across all operations of a company is required. As marketers, we need to ask ourselves, ‘How can we drive efficiency and stakeholder engagement in this interactive environment…while still managing the reputational risk to our brands?’”

Don’t get me wrong. Not for a minute am I arguing that improving commodity processing isn’t vitally important to marketers, media, and agencies. Quite the opposite: If you’re going to live in WalMart’s World - and pretty soon, every industry confronts its own version of WalMart’s World - you have to become superior at efficiency. Network-like aggregating mechanisms, trading platforms, and process automation devices are both important and necessary. To support my bona fides, I point that back in April, 2000, I was the first person to raise in the pages of Advertising Age the viability of online exchanges for the trading of media space and time.

What I’m arguing is that these mechanisms address only half the challenge. As HP’s Mr. Mendenhall says, marketing’s future is about efficiency and stakeholder engagement. That means agencies and media alike must focus on the development of strategic resources that can drive growth - their customers’, and their own.

Building Brands Online

The need to bridge this terrible gap - to get Silicon Valley talking to New York and Chicago, encourage CPG companies’ Global Media Officers to speak with their Chief Marketing Officers, and perhaps spur media agencies to rebundle with creative agencies - was perhaps the most important finding in the newly-released IAB-Bain & Co. study Building Brands Online: An Interactive Advertising Action Plan.

This groundbreaking research, which involved a survey of 700 marketing executives, found clearly that brand marketers have three powerful needs; that to fulfill these needs, media companies require three sets of capabilities; and that to organize profitably to apply these capabilities, media companies must have three distinct service models.

The three marketer needs have conventional names - brand awareness, brand engagement, and transactions. But as the Bain/IAB team reviewed the survey results and the qualitative responses from marketers, these vague terms took on new meaning.

“Engagement,” we came to understand, really means the application of a distinct set of assets and capabilities to enhance the affinity consumers feel for a company, brand, product, or service, sufficient to maintain that marketer’s premium price realization versus like competitors through time. The concept of “transactions” also took on new depth. Typically defined by direct marketers as the successful consummation of a sale at today’s offer through the current control device, transactions in the interactive space can cover anything from total number of clicks, to the data derived from clicks, to the downloading of collateral material, to the delivery of a consumer by a brand marketer to a retail partner.

With these learnings, we saw that, by applying old processes, metrics, and compensation models in this newly complex yet opportunity-rich space, media, agencies, and marketing departments had underserved the needs of the enterprise.

For example, publishers had over time increasingly conflated brand awareness advertising with transaction-focused advertising, in large part because both are reach-based functions. But by allowing marketers and agencies to pay for awareness campaigns on the basis of clickthroughs or other transaction metrics, publishers perversely found themselves giving away brand lift as a free added value on top of low-priced direct-response campaigns. Moreover, because brand awareness builds through time, by demanding clickthroughs as a metric for such campaigns, agencies were developing media plans aimed at the wrong audiences, in the wrong media contexts.

Similarly, while transactions can be employed to understand engagement, they are not synonymous with it. To take one simple example, reading about multiple friends’ brand preferences on a social network can create powerful affinities between a consumer and those brands - but they cannot be measured by transactions (because there aren’t any) and they cannot be charted on a conventional media plan.

The mismatch between metrics and brand marketers’ objectives was among the strongest conclusions of the study. Clients, Bain found, wanted classic measurements designed to show growth in consumers’ knowledge of and feelings for the brand, including awareness, purchase intent, and likelihood to recommend. But media and agencies, misunderstanding what marketers meant by “accountability,” kept trying to push digital metrics, especially those drawn from the arsenal of direct response, such as clickthroughs, unique visitors, viewthroughs, and time spent on page.

“The clear message coming out of interviews [with marketers] was ‘we don’t have any of the right metrics,’” John Frelinghuysen, Media Practice Leader at Bain and the lead partner on our study, told Advertising Age. “And the sellers are saying ‘we have loads of metrics.’ The people who are making these decisions of how much to allocate to online and how to think about that in relation to TV buys are people who’ve grown up with TV. … They think online has digital-specialty metrics and they want metrics that speak a common language with the offline world.”

Bain recommends that publishers develop “triple play” service offerings to fulfill marketers’ three needs, and gain expertise in both lower-cost, more automated delivery of reach advertising, and in the high-value services (customized creative, category-specific marketing strategy, consumer analysis, cross-platform marketing, and customized targeting among them) that will enhance engagement - and command high prices from clients.

“Agencies also have to think about how to take advantage of the medium,” my colleague Sherrill Mane, IAB’s Senior Vice President for Industry Services, told Ad Age. “If an agency isn’t able to produce the creative that captivates and does more for brands, then media partners will.”

Cross-Platform Expertise

And they are. The IAB-Bain study highlighted the cross-platform expertise developed by ESPN; the marketing services capabilities brought to the market through six agency acquisitions by Meredith; the customized creativity offered by The New York Times, MTV Networks, Yahoo, and the Wall Street Journal; the unique creative partnerships forged by Sprint and Microsoft; the tiered price segments offered by Martha Stewart Living Omnimedia, Forbes, and Time Inc.; and the database marketing and lead generation services built by IDG - among the many “triple play” offerings developed by publishers to realize their obligation to marketers. These and other case studies and best practices form the heart of the IAB’s soon-to-launch “Shifting Share Campaign” to drive more brand marketer attention and spend to the growth opportunities offered by digital media. (If you’re a brand marketer and want to learn more, please email me!)

Creating these high-value customer services represents a departure for publishers. For generations, great media companies have certainly focused on service. They filled informational needs (“all the news that’s fit to print”), practical needs (“access to tools”), emotional needs (“fun, fearless, female”), or social needs (“must-see TV!”). But whatever its mission, the service was specifically consumer-directed.

On the advertising side of their businesses, though, media companies historically offered up variations of processed commodities. They sold time or space, in mass bundles. They differentiated those bundles by the most elemental of demographics: A male or female skew, 18-49 age group, A and B counties. They’d compete on their audiences’ propensity to buy certain categories of goods. But the mechanics of selling and the product they sold otherwise differed little from place to place - hence the commodity characterization of advertising sales as offering “spots and dots.”

In other words, for the most part media companies considered their customer value proposition to be synonymous with their consumer value proposition: They created fabulous, alluring, differentiated content that successfully and repeatedly assembled an audience - and then they allowed third parties called agencies to place ads (with few variations in length or dimension) in front of them. They took no responsibility for those ads’ strategic underpinning, creation or performance.

Those days are over. IDG CEO Bob Carrigan, a one-time magazine-centered publisher whose company today has a menu of some 20 services, including but certainly not limited to advertising, that it provides to clients, even put a headline over the strategic shift taking place at media companies. It was the title of his keynote presentation at the IAB Annual Leadership Meeting last year in Orlando, Florida: “If You Just Publish, You’ll Perish.”

Agencies Must Reinvent

Agencies, too, must reinvent their business. The unbundling of the procurement function from the strategic function clearly ill-served their clients - as the clients themselves are saying ever more loudly. Straight rebundling may not be the answer - but neither is a tighter and narrower focus on the cost-squeezing side of their own business. After all, the same technologies that enable agencies to develop their own networks and trading platforms can be even more readily insourced by large consumer-product makers and service providers, which have a 30-year head-start integrating sophisticated IT solutions into their catalog of capabilities.

The great creative agencies that surfaced during the 1980’s and 1990’s seem to understand the power of service best. I’ve been struck by the degree to which agencies like Goodby Silverstein, Hill Holliday, the Martin Agency, McKinney, Crispin Porter Bogusky, along with agencies cut from the same creative cloth, such as R/GA, Droga5, Barbarian Group, and Campfire, seem to be dominating both awards shows and client interest. Having shaken off their shellshock from the first wave of digital disruption, they are strutting their abilities in best-of-breed creative, and in some cases developing their own version of “triple play” services, gaining expertise especially in transaction facilitation. This isn’t really surprising: These agencies’ greatest proficiency is in ideas - and for marketers, that remains the most important service of all.

And to be fair, there are those on the agency side that are talking the language of service outside of the creative arena. WPP’s consolidation of more than 20 individual companies into the Kantar Group, which the holding company describes as “one of the world’s largest insight, information and consultancy networks,” is certainly an example.

Even a few that are launching new commodity-procurement operations are careful to note that they are not meant to subsume their devotion to service. For example, Quentin George, Chief Digital Officer of Mediabrands, the media-buying unit of the Interpublic Group of Companies, and the acting CEO of its recently launched online ad network Cadreon, is adamant that arbitrage is not part of its model - that indeed, risk arbitrage is antithetical to the agency’s mandate, which is to render service to clients.

“We think there’s a lot of good margin to make on the services side,” Mr. George (pictured left) said recently. “Certain clients have become a lot more willing to talk about things like licensing fees and data fees. And we would much rather make money on those elements, than pure arbitrage where we put [agency] capital at risk - buying inventory and then selling it off over time.”

Calling up the decades-old argument that agencies sitting on both the buy and sell sides of media risk irreconcilable tensions with their clients, Mr. George added, “There is the potential for conflict if you put agency capital at risk to acquire inventory, and then sit on that, and then dish it out to clients over time.”

“The number one job we have,” he said, “is to really apply our client’s money where it creates the biggest benefit. And in return, you can extract money for services.”

Real Business Opportunity

Mr. George has that part exactly right - as did ex-copywriter James Rorty 80 years ago, and as do the publishers that are adding value-additive services to their mix of offerings. While commodity procurement will forever remain a vital part of the marketing industry, the real business opportunities reside in strategic resourcing.

Because if business history is any guide, the procured-commodity experts will get it right. The “digital media trading solutions, “algorithmic audience targeting platforms,” “networks of networks,” and “demand-side exchanges” will make a difference.

But when technology succeeds in driving the cost of reaching the perfect audience down to zero, what are you left with?

Everyone with the same low costs, the same perfect efficiency, for doing the same exact thing … and nothing unique to say or do or offer to consumers.

And that’s when the real competition begins.

Reposted from www.randallrothenberg.com