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The new advertising industrial complex is here — for now

Could the cataclysmic decline of the retail industry in 2017 have been avoided? Contributor David Rodnitzky thinks so and explains why an aggressive marketing strategy makes the difference.

David Rodnitzky on February 6, 2018 at 1:02 pm

Despite the amazing growth of the stock market in 2017, several sectors of the American economy had a cataclysmically bad year.

The poster child for this decline is traditional retail: things like clothing stores, department stores, malls and toy stores. Bloomberg reported more than 7,000 physical stores closed in 2017, and analysts expect 2018 will be even worse.

As Bloomberg notes: “… and this comes when there’s sky-high consumer confidence, unemployment is historically low, and the US economy keeps growing. Those are normally all ingredients for a retail boom, yet more chains are filing for bankruptcy and rated distressed than during the financial crisis.”

Traditional media companies also failed to benefit from the booming market. Check out the stock performance of the leading traditional media companies: Disney peaked in 2015, CBS peaked in March 2017, Viacom is down more than 50 percent from its 2014 high, and Fox has steadily dropped since a late 2014 spike.

One of the main reasons these stocks aren’t performing is their flat or declining revenue and profit. For example, take a look at this Google Finance report from Viacom, which owns MTV, Nickelodeon, BET, Comedy Central and VH1:

Lastly, let’s not ignore traditional agencies (holding companies). Advertising behemoth WPP Plc‘s highest valuation occurred in 2015, which is also what happened to Dentsu and Publicis.

Omnicom waited until the end of 2016 to spike, and IPG had its high in mid-2017 before suffering a 20 percent drop.

When to lower review guidance

In October 2017, WPP Plc reported that they had to lower revenue guidance numerous times in 2017. Their explanation for the disappointing earnings is essentially threefold:

Digital disruption from companies like Google, Facebook and Amazon.
The intrusion of management consultancies into their agency business.
WPP clients cutting ad spend.

The advertising industry is complex, and the trinity of traditional media, traditional advertisers and traditional agencies is under threat:

Digital disruption

WPP blamed online publishers Google and Facebook for a portion of their disappointing numbers.

Let’s juxtapose Facebook’s financial performance against Viacom’s. Tell me if you notice a difference. Here is the Viacom performance graph again, as reported by Google Finance:

And here is Facebook’s performance graph:

WPP also blames Amazon in conjunction with WPP clients cutting spend. Here’s the financial performance of Procter & Gamble (P&G), which happens to be WPP’s largest client:

And here’s Amazon’s:

Intrusion of management consultancies

Lastly, WPP blames encroachment from consultancies. While I agree that consulting firms do represent a threat to holding companies, I don’t think this tells the entire story.

In WPP’s annual report to shareholders, they identify a much more dangerous risk:

Competition is fierce and as image in trade magazines, in particular, is crucial to many, account wins at any cost are paramount. There have been several examples recently of major groups being prepared to offer clients up-front discounts as an inducement to renew contracts, heavily reduced creative and media fees, extended payment terms, unlimited indirect liability for intellectual property liability and cash or pricing guarantees for media purchasing commitments, although the latter are difficult for procurement departments to measure and monitor. As some say, you are only as strong as your weakest competitor.

Here is how I interpret this paragraph: Desperate competitors are slashing prices to win deals to make themselves look healthier than they actually are, and WPP is being “brought down” to their level. In reality, agencies that only win business as a result of “image in trade magazines” are not prepared to compete in the world of new media and new advertisers, like Google and Amazon.

When “image” is the only currency a company has, commoditization and a race to the bottom are the inevitable outcomes. This is a classic innovator’s dilemma.

WPP acted the way a smart company would, by doubling down on products and services clients were asking for. Since branding has always worked, who could blame clients for wanting this?

Meanwhile, disruptive brands were gaining market share by embracing new marketing techniques on new channels. Initially, these new channels and strategies drove minuscule revenue for agencies and didn’t show explosive growth for brands, so big holding companies and brands were content to pay lip service to new media. Their loss.

Who could have predicted internet advertising would grow 12x from 2002 to 2016 as Statista reports? Clearly not the incumbents.

The result has been the transformation of the advertising industrial complex: from traditional advertisers to new advertisers, traditional media to new media and traditional agencies to new agencies. The current triad now looks like this:

To be clear, the game is not over. It is never over! The players and the strategies will continue to evolve, and any company, be it Google or Amazon or the digital agency du jour, may suffer the same fate as traditional companies they are replacing if they don’t continue to innovate and change.

History often repeats itself, so it is likely the leaders of the new advertising industrial complex will someday be replaced by a new triad of companies.

Opinions expressed in this article are those of the guest author and not necessarily MarTech Today. Staff authors are listed here.

About The Author

David Rodnitzky

David Rodnitzky is CEO and co-founder of 3Q Digital, a marketing firm with offices in the San Francisco Bay Area and downtown Chicago. David is the founder of the LinkedIn Online Lead Generation Group, an advisor for Marin Software, and a regular contributor to the 3Q Digital blog. He can be found at numerous speaking engagements across the SEM community.