After encountering numerous difficulties, advertising holding companies such as WPP, IPG, Omnicom, and Publicis have transformed to offer data and e-commerce services.
Ad agencies have been able to assert their importance to marketers once again, according to industry analysts, thanks to the continued fragmentation of the mass media, new e-commerce demand, and the emergence of new platforms like TikTok.
Even as inflation and economic disruption rocked other industries in 2022, major advertising companies continued to report strong quarterly earnings and raise their year-end forecasts.
When compared to the situation facing advertising agencies five years ago, Facebook and Google have performed remarkably well: before agencies could even offer their services, Facebook and Google had developed direct relationships with marketers and were winning increasing shares of their advertising budgets.
Traditional television viewing was declining as more people "cut the cord," which put pressure on the agencies' revenue from creating and airing TV commercials. In addition, new rivalry emerged as consulting firms turned their attention to the advertising sector and advertising-technology and marketing-technology firms offered new data services for marketers.
Some large advertising agency owners observed a slowing or flattening of their growth in 2017 and 2018.
However, the emergence of fresh difficulties for marketers has since strengthened them rather than cast them to the background. According to analysts and executives, this includes the mass media's ongoing fragmentation, the Covid-19 pandemic's spike in e-commerce demand, and actions taken by Apple that have reduced the efficacy of ad targeting on Facebook and other platforms.
“The complexity and the fragmentation that has only increased in the ad market over the last many years has actually just fed into the capabilities and the expertise of the ad holding companies,” said Tim Nollen, a senior media tech analyst at Macquarie.
Agency holding companies including WPP PLC, Interpublic Group of Cos., Publicis Groupe SA, and Omnicom Group Inc. have overhauled their businesses to help clients with services such as managing first-party data—the information that marketers directly collect on consumers as opposed to the third-party data now under pressure from Google, which plans to eliminate third-party tracking in its web browser, and Apple.
Agencies are also helping with e-commerce as brands increasingly seek to sell directly to consumers.
"Clients will come to us and say today, "How do I succeed on Amazon?"," said Mark Read, chief executive of WPP, which owns media-buying company GroupM and advertising agencies Ogilvy, Wunderman Thompson, and VMLY&R. "'How can I create a social media brand? How can I safeguard my online reputation? How can I increase the level of employee engagement? How is the experience on my phone? How do I create [offers] that are direct to consumers? All of those are questions that, ten years ago, neither they nor we were asking.
Some agency holding companies made significant acquisitions to help meet these demands. For example, IPG agreed to purchase data management company Acxiom Marketing Solutions for $2.3 billion in 2018, and Publicis Groupe purchased marketing services company Epsilon for $4.4 billion in 2019.
Businesses improved their precision marketing skills to assist companies in directly reaching consumers through digital platforms, and they expanded their data and technology offerings.
The strategies that marketers use and the ways in which they collaborate with outside parties vary widely, and some major brands opt to handle some marketing tasks largely in-house. If the economy worsens in 2023, some clients may reduce their marketing budgets, which would be another challenge for agencies.
However, according to executives, every new marketing conundrum presents a chance for agencies.
Complexity's advantages
As advertisers spend on alternatives like Amazon.com Inc. and ByteDance Inc.'s TikTok, Facebook parent Meta Platforms Inc. and Alphabet Inc.'s Google are holding a smaller share of ad budgets.
According to research firm Insider Intelligence, Google received 34.7% of digital ad spending in the United States in 2017 while Facebook Inc.—now known as Meta—received 20%. According to Insider Intelligence, Google will rake in 26.5% of digital advertising dollars in the US by 2023, while Meta will take in 18.4%.
In response, agency businesses have developed procedures to support marketers on TikTok and Amazon-like platforms.
According to MoffettNathanson analysts, the time of the Facebook-Google advertising duopoly appears to be over. And the agencies benefit from that, too.
In order to reach the right consumers, many marketers today must distribute their budgets across a variety of platforms and wade through complex data sets, according to MoffettNathanson. The analysts wrote that every agency now has a successful "digital transformation" business that assists legacy companies in gathering, organizing, and analyzing that data.
Marketers must contend with a proliferation of advertising platforms from retailers and other companies that engage directly with consumers and frequently use their own customer data. For instance, Walmart permits advertisers to use its data to target ads at customers online. Additionally, data-driven ad networks are operated by DoorDash, Kroger, Marriott, and CVS Health.
According to Insider Intelligence, the net ad revenues from such retail media advertising in the U.S. will increase from $37 billion this year to more than $55 billion in 2024, excluding some costs related to traffic acquisition.
According to Andrew Lipsman, a principal analyst at Insider Intelligence, the more platforms that marketers want to use, the more likely it is that they will look for assistance from partners like ad agencies, who can help spread their dollars.
Since they don't involve media budgets and are less susceptible to macroeconomic trends, some newer agency specialties, like IT implementation and business transformation, may withstand a downturn better than the core competencies of the past, according to Mr. Nollen, the Macquarie analyst.
According to Macquarie, the organic revenue growth of ad holding companies will decline by 1% on average in 2023 as opposed to the 5% to 10% decline they experienced in the prior recessionary periods of 2001–2002 and 2008–2009.
Marketers negotiate with external partners
Major marketers still want to closely monitor some of their data-related initiatives.
"While I am aware that agencies are doing more work akin to consulting...
Brad Feinberg, vice president of media and consumer engagement for Molson Coors Beverage Co. in North America, stated, "I don't want to be necessarily beholden to any agency.
According to Mr. Feinberg, even huge corporations like Molson Coors have partners like S4 Capital's Media.Monks to assist with data capabilities and get ready for market changes relating to privacy.
According to Jill Weiss, associate vice president of digital and traditional media at Royal Caribbean Group, the company has expanded its use of disciplines like programmatic trading, social media, advanced analytics, and modeling since partnering with IPG's Mediahub in 2015.
According to Ms. Weiss, "I have seen them develop and significantly broaden some disciplines."