Structure of the Advertising Industry
Broadly speaking, since the 1980s, most advertising agencies have tended to move towards a common structure. In the past, each individual agency offered a variety of different marketing services under a single roof. However, there has been a dramatic change in the landscape over the past 30 years.
A key factor has been the rapid expansion and fragmentation of the media industry since the mid-1980s, in particular the proliferation of cable and digital channels. At the same time, the complexity of the changing landscape, combined with economic pressures, persuaded clients to move away from the traditional method of remunerating their agencies via payment of a flat 15% agency commission towards negotiated fees. The refusal by clients to pay for inhouse services they didn't use encouraged most large agencies to spin out their more specialised inhouse departments as separate agencies in their own right, with their own fee structures. (See below). Media planning and buying departments were the first to become standalone units in the mid-1980s.
While the number of individual agencies offering different services increased as a result of that post-80s "unbundling", ownership of those same agencies concentrated dramatically. Massive consolidation within the industry led to a huge number of mergers and acquisitions, and the creation at the top end of the market of a small group of major international holding companies, each of whom controls a large number of separate agencies. There are still independent owner-operated agencies out there, but in ever fewer numbers than ever before, and most are small by comparison with the group-owned brands.
Holding companies. Sitting at the very top of the industry pyramid are a small number of holding companies. There are now five major established international groups - WPP, Omnicom, Publicis Groupe, Interpublic and Dentsu - each of whom controls a huge number of different agency brands spread all over the globe. Generally, the holding company doesn't involve itself too much in day-to-day marketing, but works with its subsidiary businesses to encourage intra-group synergy and to develop strategy.
One key development in recent years has been the creation of dedicated "vertical" agencies within the holding companies, set up specifically to manage the marketing requirements of individual multi-national clients, and drawing staff and resources from the group's other multi-client agencies. WPP is generally regarded as the pioneer in this field with the creation of separate networks dedicated to just Ford or Colgate-Palmolive, but all the big groups now offer a similar service. WPP itself now has almost 50 such units. Ironically, this has in effect reversed the post-80s unbundling process, with the re-creation of old-style full-service agencies offering every marketing discipline under one roof, but now just for one client rather than several.
Until recently, there were then at the next level, a small number of mid-size holding company groups, such as Western Europe's Havas and Aegis and Japan's Dentsu and Hakuhodo DY. Although each of these controlled several brands, their range was more traditionally limited, either in terms of geographic reach (in the case of the Japanese companies, who tended to operate mainly in Asia) or the range of services they offer (Aegis for example was a specialist in media, and offered no traditional advertising services). However this middle tier also began to consolidate. Dentsu's acquisition of Aegis, as well as of several Western advertising agencies, gave it a very strong global presence and pushed it up into the top rank alongside US-based Omnicom and Interpublic, WPP of the UK and France's Publicis. Havas is now the last of the fully international mid-size marketing services groups. There are also a few smaller holding companies, most notably MDC Partners, who resemble their larger rivals in terms of the number of different brands they control, but on a very much smaller, sometimes more specialised scale. (See here for major holding companies and independent marketing groups).
Advertising Agencies. The term advertising agency (or sometimes creative agency) is generally applied to a company whose main role is to conceive and implement large-scale marketing concepts for its clients. Traditionally, advertising agencies come up with the core idea for a marketing campaign and then create a series of advertisements which address that idea across different media. They tend to specialise in what is called above-the-line marketing: ads which address a mass market through the four major media of television, print, radio and outdoor (posters). The tool most commonly associated with the traditional advertising agency is the 30-second television commercial. However, the explosion of digital marketing, formerly considered one of the below-the-line disciplines, has changed the nature of the traditional advertising agency. Increasingly these companies are being pushed by their clients to provide excellence in digital marketing as well as the more established mass market media.
There are three sorts of traditional advertising agency. The most important are the 14 or so worldwide networks, such as BBDO, Ogilvy & Mather, McCann Erickson or Saatchi & Saatchi. Each of these operates a global network, comprising local branded offices in 100 or more different countries. The networks grew up primarily to serve multinational client companies such as Ford or Procter & Gamble, who wished to provide a consistent marketing message in all the countries in which they operate. All but one of the global networks are now owned by the "big five" holding companies. (The sole international exception is Havas Worldwide). As a result, they are able to offer clients the widest possible range of marketing services by calling upon the assistance and cooperation of sister companies under the same overall umbrella.
At the next level are "micro-networks", sometimes known as multi-hub creative networks. These are a comparatively recent invention, similar in most ways to the major networks, but operating a far smaller network, with perhaps only four or five (sometimes more) worldwide offices, usually in key regional centres. Often they offer a tailored service for more demanding multinational clients, usually with the hallmark of noteworthy creative work. Examples include Bartle Bogle Hegarty and Wieden & Kennedy. Sometimes they will be employed by a client to come up with the core idea for a global marketing campaign, which will then be executed or adapted for local markets by a more widely distributed worldwide network.
A third type of agency still exists also: the standalone agency, sometimes independent, sometimes owned by one of the major groups. They tend to operate only in their own country, although they may have links to agencies in other markets. The bigger of these standalone agencies are often able to offer a wide range of other marketing skills beyond creative advertising (including those described below). In that case, they sometimes refer to themselves as full-service agencies. Others, usually smaller more entrepreneurial agencies, specialise in out-of-the-ordinary creative concepts, mainly for television, and are sometimes referred to as creative boutiques. However, these agencies are becoming increasingly rare, especially as independents.
In most cases, if they're successful, privately owned independent creative agencies are snapped up by the larger holding companies within three to five years, and are either merged into an existing advertising network such as DDB, McCann etc to bolster its creative firepower; or left to operate as a standalone brand, but with the financial security provided by a larger and wealthier owner. Just as often however, senior executives break away from the major agencies to set up their own independent agencies, which either prosper and get swallowed up again in their turn by one of the majors, or fade away (See here for major advertising agencies).
Media Agencies. Media services (or media investment services) is the term generally used to describe the process of delivering the message created by an advertising agency via the media. There are, broadly speaking, two aspects to this. Media planning involves deciding where (on which TV or digital channels, in which newspapers etc) the advertisement should be placed in order to achieve the best impact on its intended audience. Media buying is the process of negotiating with individual media owners (such as broadcasters or publishers) over availability and price.
Although some advertising agencies (usually standalone full-service ones) still offer media services inhouse, most have spun out their media departments as an entirely separate business with its own global network operating alongside the main creative agency. In simple terms, this means that clients pay separately for the creation of advertising and for the booking of media space. On the planning side this encourages "media neutrality", so that advertising is placed in the medium best suited to the client's particular marketing message, not just the one that earns most money for the agency (which is television). On the buying side it allows for economy of scale, with the media agency able to negotiate the best possible rates because it is buying ad space in bulk for many clients at the same time, rather than on an individual basis.
As a result of the consolidation process, this part of the market is now dominated by global networks, such as Mindshare, Carat or Starcom MediaVest. Like the advertising agency networks, these are all owned by the major or mid-size holding companies, and each operates through 100 or more local offices around the world. Unlike the advertising agency sector, there is no real media equivalent to the multi-hub network. (Smaller media agency brands, such as Vizeum or PHD, are there primarily to resolve client conflicts rather than to provide a different kind of service). A very small number of standalone media agencies remain, mainly independently owned, but they now represent an increasingly tiny part of the overall market. (See here for major media agencies).
Despite their size and scale, the major media networks are under increasing pressure from their clients on one side and the media outlets in which they buy space on the other. This has led to an implacable squeeze on margins. Theoretically media networks are still paid in commission on the advertising space they purchase. According to tradition, agencies took a cut of 15% of the media space they purchase as their fee. However competition and negotiation have greatly reduced this percentage, particularly in the case of large clients. In many cases, media agencies might agree to take a cut of as little as 1% of billings from an especially large or prestigious client, although they don't allow this to be publicly known. As a result, all of the major international groups have a centralised "negotiation" arm (for example, WPP's GroupM or Interpublic's Mediabrands) whose job is, where necessary, to bulk-buy the media space required by their individual media agency networks, cutting rates to their lowest possible level. In many cases, "chinese walls" are imposed within the negotiating company to avoid conflicts between competing clients.
To boost their income, the larger media agencies have also broadened their range of services, adding fee-based disciplines such as sponsorship, product placement, search and social media. One key area of growth has been "branded entertainment", or brand-funded entertainment content. This form of marketing represents a move back towards the old style of advertising prevalent between the 1930s and 1950s in which a sponsor paid for all the cost of a particular radio show or TV broadcast (such as The Maxwell House Show Boat or The Palmolive Hour). Some media agencies have also shown signs of moving into areas such as general business strategy and management consultancy.
Marketing Services. This is the term generally understood to denote anything other than advertising in the major media, and is often described as below-the-line marketing. It comes in many different forms, each of which demands a more specialised, often more technically complex, set of skills. These include direct marketing, sales promotion, interactive marketing, public relations, healthcare marketing, and so on.
In simple terms, direct marketing involves any form of advertising which communicates with its target audience one-to-one, for example through individually targeted direct mail. It often asks for a response from the target, for example, in the form of a coupon or a phone call (in which case it is sometimes called "direct response"). Increasingly, direct marketing and digital marketing via the internet have become aligned since both involve a one-to-one relationship with an end user.
Depending on the type of interaction, this is also sometimes described as "customer relationship management" (or CRM), for example in the case of customer loyalty schemes, or financial services membership. In many cases, old-style direct mail agencies and new-style interactive agencies have merged to offer a combined service. Social media (Facebook, Twitter, search marketing etc) transcends its roots in CRM and so it is also widely offered by PR agencies who for the most part don't otherwise provide traditional direct & digital marketing services.
Sales promotion covers a variety of different areas, such as in-store promotions, exhibitions or one-off sponsored events. In very broad terms it relates to the interaction between the client brand and its customer in a specific place (for example, in a store) or at a specific event (for example, a sports match or a concert). However different agencies use different terms to describe the process. Those involved in the retail environment often use the term "brand activation"; while agencies which specialise in live events sometimes call it "experiential marketing".
Traditionally, all of these marketing services disciplines have been largely execution-based - in other words, a large client would employ an advertising agency to come up with its main advertising concept, and would then hire the appropriate marketing services agency to adapt that concept in other forms. However the lines between these different disciplines have become blurred, especially with the emergence of the internet as a major advertising medium.
As a result, a breed of larger marketing services agency has emerged. This resembles the traditional advertising agency in many ways, such as global scale and creativity, but tends to specialise in a more direct form of marketing which engages the target audience not as part of a mass market (as with television advertising) but on a more individual level, often through direct contact, now primarily via digital channels, but also by mail, in a store at point of purchase, or at a sponsored event. Examples include Wunderman, Rapp and others. Sometimes, these agencies also offer all the above-the-line skills of the traditional advertising agency as well, in which case, they are often known as integrated agencies, or sometimes through-the-line agencies. (See here for major marketing services agencies).
However, just as common is a less creatively oriented form of agency whose main speciality is more workmanlike customer relationship management (or CRM) in areas such as list and lead management, telesales, data analysis and number crunching. These agencies, such as Epsilon, Acxiom or Experian, have begun to establish a considerable hold on the industry as a result of the sheer quantity of customer information they control.
Increasingly also, management consultancies are carving out a large share of marketing budgets, especially in digital marketing. Accenture, PwC, Deloitte and others are all now major players in the modern marketing environment, advising clients on the processes necessary for adapting to a digital-led world and then executing them. They don't usually initiate creative concepts, but they have a major presence in the construction of relationship management and back office systems.
How do agencies get paid? The original model used across the entire industry was commission-based, whereby agencies would mark up the cost of media or third-party services purchased on behalf of the client, traditionally by 15%. That commission would cover all the agency's inhouse costs from research to creative concepts to media. Often, the arrangement would also be sweetened with a retainer fee. From the 1960s onwards, that percentage gradually began to become negotiable as agencies vied to poach business from one another at lower rates.
The unbundling process that took place during the 1980s effectively put an end to commission-based remuneration for anyone other than media agencies. Many of these still charge a percentage-based mark-up on media purchased, but now usually on a sliding scale, with higher spends rewarded with commission rates that are substantially lower than that century-old 15% benchmark. With global media budgets in excess of $1bn, even 1% is a sizeable payout, especially if accompanied by a retainer fee.
However virtually all other agencies, and an increasing number of media agencies as well, are now remunerated in the form of negotiated fees. The most common type is the labour-based arrangement, in which agency and client agree a business plan or "scope of work" (SOW) upfront. The agency calculates how many staff will be needed to execute that plan, often expressed as the number of full-time equivalent employees, or "FTE"s, who will work on the account. A fee is agreed on that basis, ideally with an additional allowance on top for profit.
Yet here too, the urge on the part of clients to shave costs has introduced alternative fee structures. In some cases, agency's actual base costs will be covered but any profit must be earned separately, usually through some sort of agreed performance incentive, such as product sales achieved or market share. In other cases, particularly for project work, the client will simply state what it wants to achieve and what it is prepared to spend to that end, and the agency must make its own decision whether to take it or leave it. These are sometimes described as "output-based" fees (for example to deliver x number of 60-second commercials) or "value-based" fees (for example, to launch a new product for a cost determined by the client).
Payment models are monitored by the annual Trends in Agency Compensation report compiled by the Association of National Advertisers. According to the 2017 edition, a little more than one in ten agencies use the commission model as their preferred form of remuneration (though that is an increase on the number cited in 2010, when only around 3% of agencies used it). Of the rest, around 60% have some form of negotiated fee-based arrangement, based on pre-agreed staffing or scope of work. Around another 25% operate a fixed fee remuneration scale. Many larger agencies prefer to negotiate a combination of negotiated fees with an additional bonus payable according to business results, for example increases in sales or market share. In practice, however, only comparatively few advertisers are prepared to accept such an arrangement.
Last full revision 15th June 2016
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