Evolution of the Advertising Media Holding Company

What is the point of a media agency holding company? Why are these businesses built the way they are?

Historically, the holding companies started with creative and it was a full service creative and media. I’m going back to the 80s. It was a creative business and media (buying) was a side part to activate a wonderful 30-second or 45-second commercial produced by the creative people. The notion of media agency was a French invention by a French company that now belongs to the Japanese. They proposed to clients that media was a very specialized business based on data and scale and that it was good to separate creative from media. They created a trend and we saw or break between creative and media from the 90s to 2010 and media became very sophisticated. Working with huge amounts of data.

We spend millions of dollars or pounds, whatever the currency, every year on data sources. Working on how to optimize prices for our clients. Digitalization changed a little bit of things. Now, it’s fashion also in this industry. Now, we are in the model which is more integration. Trying to connect creative with media. The truth today is, media and creative are pretty much separated. We have contracts for media and creative with the same clients, different contracts. Of course, we are connected with our creative friends and brothers and sisters, but it’s still separated. The reason of having these media agencies was to optimize strategy and pricing for our clients based on benchmark, data, and scale.

For a top 1000 global brand, how have the services they need from media agency holding companies changed?

We need to differentiate here between global brands or international brands, or multimarket brands and local brands. When you have a multinational brand, the need for an agency and a holding company is more important because they try to have consistency across markets. To have a similar product or delivery across markets. We’re talking with global brands, the notion of agency and holding companies are very important. When we go to local, it’s also important because our business is very sophisticated. Today, it's not easy to buy media, even if there is a big concentration. We’ll talk about this later. It’s complex because the difference between planning well and planning badly and buying well and buying badly is millions of pounds for the big clients. How we optimize the right target audience? How we introduce first party data in the question to optimize return? How we avoid bad duplication? How we optimize reach and frequency?

How we can make the different touchpoints live together? There are so many complicated questions that today it is very difficult for clients to work without an agency. There are some clients thinking or contemplating on even in-housing things, but at the end of the day, it’s super complicated. It’s sophisticated. We need experts touching different sectors and categories because they are better off with the client. We need to invest a huge amount of money, millions on data. We need to invest a huge amount of money on technology. It’s complex. Not too many clients manage to have integrated agency or in-housing things. When clients are in-housing social, less though, programmatic, less though because they understand that results are worse and it’s more expensive to do it inhouse than do it outside with an agency. The only thing clients are very keen to inhouse and protect this first party data, because data is a super important asset for a client.

What activities are most likely to successfully be brought in-house in the longer term?

In-housing is a trend, a constant cycle. Sometimes it’s a big fashion to inhouse, and sometimes it’s complicated. Historically some clients (brands) have had integrated agencies. I’m talking about late 90s, early 2000s. They sold them because the problem of in-housing a full agency is that you need [staff] turnover. You need to have people with different experience, different backgrounds. When you are a client, it’s super complicated to have that [kind of turnover]. In an agency, you have 20% turnover.

What is that topic that clients are in-housing more? I can go chronologically. They started by in-housing paid search because paid search is touching the brand. It’s helping to drive traffic to the website and sell more. There was something happening 15 years ago. Today, most of the clients are not in-housing paid search. It’s a commodity. It’s tough. It’s expensive to inhouse. It's more cost efficient for clients to go to an agency, don’t pay them too much, as is the case today, and ask them for a lot. Then they moved to social. Because social is you are manipulating the reputation of the company. Again, it was complicated. It’s tough. It’s very technical. You need technology and data and it’s moving back to the agency.

The one thing that clients are in-housing today is community management. It’s answered on behalf of the client. Then we move to programmatic where some clients or plenty of clients are thinking to try to inhouse. Why? I think the industry didn’t behave well. Some people tried to make too much money with programmatic. Now, the market is compliant. It’s normalized. The supply chain is better now, even if it’s still not perfect. More and more clients are thinking not to inhouse programmatic because it’s complicated. Then lately clients are in-housing DMP. DMP is how to manipulate their data, their first-party data. This is the real trend and clients want to protect their data. Data is very important. Data is one of the assets of the company. You can monetize that data. It’s getting in-housed and what will become in-housed is the data. The DMPs, the manipulation of first-party data because it’s very important for the clients. The rest, I believe that an inhouse model is not the right one. I am working in an agency so perhaps I’m biased. I really believe that it’s better to have a good contract with your agency to put the right pressure to pay based on FTEs and success fees and remove the model of commission-based, basically a percentage on billings. You have the right contract with the right working process and working ethics. I think the best thing to do is to work with an agency because it’s more cost-efficient. It’s cheaper. It’s more flexible for the client. I think it's better for results.

Let’s get into a bit more detail on that then and talk about the transformations that agencies have undergone.

It’s important to understand how a holding company is built. A holding company is built based on the previous model. The previous model is what? It’s a model at the beginning, full offline with decent or very good margins. It was a notion of agency commission, which is 15%. Media used to have 15% remuneration. I’m talking about 20 years ago. Offline, 15%. It was a very healthy business. The agencies pile on plenty of people. Plenty of talent. Plenty of manpower. The problem is that first procurement arrived at the question, client procurements. The 15% becomes 2/3/4/5% max.

And digitalization arrives. Digitalization means what? It’s fragmentation. It’s more activities. Before, when you buy TV, you buy a couple of channels, 30-second format. Easy. When you go to paid search, programmatic, social, digital. You are doing millions of buys. Sometimes automated, some not. It means that it’s more complicated. You need more people. More invoicing people. More complexity. More tools. Basically, today we are in a model where we have too many people. Too many people of mid-management.

This is making things very complicated. When you go to the consulting company or the law firm, it’s a very pyramidal. You have three or four partners or whatever. You have a huge amount of junior people. They are invoicing time. Our model is very few on the top, plenty on the middle. Plenty down. Plenty junior. Plenty mid and not too many up. Still, the current model today is commission-based. This is a killer. This is a real problem. Today, one of the problems we have today in our industry is that we have too many people. Our industry is not automated enough. It’s quite interesting because we manipulate a lot of technology. We build technology, but our own business is not automated enough. Every market has a different planning system or media because the invoicing system is not connected with the planning system because the different media are not connected. Today, we cannot connect television with digital because within digital, you have the GAF [Google, Amazon, Facebook] which they don’t want to agree to terms. Google have the Google way. Facebook has the Facebook way. Amazon has the Amazon way. For all of these reasons, it’s very complicated. Today, we are in a business which is not automated enough. We have too many people. Too many mid management people, which is quite expensive. Today, this model is dying.

It’s tough. It’s very tough for us to survive because we have this endemic issue and we have plenty of risk outside. The risks outside are, it’s the GAF [Google, Amazon, Facebook]. Today, Google, Facebook, Amazon, they don’t want to work with middle people, with agencies. You have consulting companies. There are at the center of this world, they are entering the digital and they have a very good contacts at the top C-level, the top management level. They have a model with no legacy. We have also the pure players, the specialized agency who are very good at one specific thing. You have the clients themselves, which are pitching all of the time, which is driven by procurement. To give you an idea, there is between 30 and 40 percent of the total business at least in the mature markets on review every year. That means every time we go in a review, we lose. Even if you win and you retain the business, you lose because in order to retain the business, you need to lower your remuneration, lower your prices and promise more value. It’s a lose/lose situation. Today, we are in a very tough situation as an industry. The media agencies, the holding companies. I would say the broad media agencies. This Covid situation is just an acceleration to this problem.

Today, adding to all of these problems I just mentioned, you have a new challenge on top, which is lack of billings. Basically, our business is sustained by billings, by scale. [Our industry] can afford to have thousands of people because we have billions of billings. When the billings are down 10/15%, which is going to be the case this year [...] and it’s going to be tough for Q3. The whole situation changed because to give you an idea, a healthy holding company, they have a compensation rate between gross income and compensation of around 45%, between 40% and 45%. Meaning that 45% of the revenue we obtain from clients is dedicated to people. If the business goes down, revenue goes down and this 45 becomes 50+. At 50+, we cannot survive. Today, we are in trouble. Our industry is in trouble. You read the press outside and every single holding company is restructuring, they’re cutting things. They’re closing agencies. They are reducing the office space. We are facing a very complicated situation because of the Covid and mainly because we were already in a tricky situation.

Jorge, really, to look at this question of where the model needs to get to and what sort of transformations need to happen in that model, what is most crucial to understand there?

This is a list of things we need to do to not only survive, but to continue growing. First thing is, we need to reduce compensation. We need to have less [headcount], better talent. We need to upgrade our talent and we need to be able to deal with less. In order to deal with less, we need automation. We need to invest heavily in automation.

We also need to be much higher in the chain of value. Today, we are perceived by our clients as people implementing, executing and we need to be perceived as people helping to solve problems. Helping to sell more. Helping to optimize things. We need to scale the ladder of value. We are very low down. We need to be able to optimize the equation of content data and activation. This is for me the most important challenge we have, which are not easy. Also, the last one is we need to change the way we sign our contract with our clients. We need to change our model. We need to be a model based on success, based on revenue serving, based on business results and based on media execution on percentage of billings. We have plenty of challenges to manipulate.

When you talk about investing heavily in automation, could we explore that a bit further?