Why Ad Agencies Could Lose the Interactive Game

Many major advertising agencies have come a long way in delivering interactive solutions to their clients. But moving to the next level will require agencies to re-organize and re-think revenue models to successfully address the major business opportunities the web presents.

The “traditional agency” problem may not as obvious as the issues facing a national retailer whose web channel could potentially cannibalize revenue from “bricks-and-mortar brethren. But it is just as complex.

The majority of any agency’s revenue is generated by media buying, where there are well-established systems in place to maximize in-house cost efficiencies and profits. Regardless of what is said to clients, everyone is motivated to recommend TV, high-visibility print and large media events. Within the media department, there are entire groups — broadcast buying for example — whose very existence rely upon this broadcast-centric focus.

What can replace this revenue model? Where else can that 10 to 15 percent commission on $50 million be transacted in a day? How else can an agency profitably pay for the planning, buying and considerable percentages of the staff servicing not only the account the buy was placed for, but other less profitable accounts as well? What can replace this very effective business practice?

This revenue structure based on traditional media is, in fact, the white under-belly of traditional advertising agencies. Adherence to this model will enable agencies with more flexibility to present a much more appealing proposition to clients, especially as those clients are increasingly demanding a move to more direct “pay for results” models.

More and more, effective media plans will be dominated by some form of interactive media, rather than TV. And as less traditional media can deliver more measurable results, clients will be likely to view this shift — and the agency that delivers it in a big way — with increasing favor.

Pitting traditional media against interactive in a war over clients’ media budgets undermines everyone’s strength in both areas, and will ultimately drive clients away. Success will require a plan for dissolving the polarity.

Let’s Talk Integration

Integration should extend beyond interactive and traditional media. Second — and no less important — is the problem presented by the agencies, and with the traditional separation of media and creative. Media and creative are usually two separate disciplines that interchange ideas and work together, but in fact are separate revenue streams. Translating this model to the interactive world has resulted in the perception of interactive as either a media problem or a creative/production problem. And in the process, it’s turned a complementary relationship between agency departments into a competitive battle.

The media department can easily structure a deal with a web property, that would then compete with the agency’s interactive production capabilities. The result is a perplexed client, and an agency in a lose-lose situation.

Do The Right Thing

If any agencies are doing the right thing, no one is talking about it. Or at least, they aren’t talking it up as loudly as they are their efforts to build separate organizations: the plethora of “(agency name here)+ Digital.” But then, Compaq waited until Dell and Gateway took 20 percent of the market before developing a channel strategy that would “allow” it to participate in e-commerce.

Is this a question of education rather than structure? A year ago, maybe. But now, as the majority of the agencies cling to traditional media, even in the face of successful interactive programs and with clients (like Compaq) whose survival depends on their mastery of the web, the issue must be addressed at a more fundamental level. Soon the majority of major clients will be using the web for commerce, and will thus be able to measure each and every dollar they spend on that medium with those partners, with a very objective ROI.

The fact is that for the agencies, everything was working fine before the web came along. And, from its inception, they have perceived it as a problem to be solved, rather than a catalyst for re-invigoration or re-invention. Maintaining this crouched, reactive posture will prevent them from doing the kind of visionary stretching required, not just for success, but for survival.

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