Why the ad agency model is on its last legs
And what will replace this great institution of modern business
In March I’d written about the way the internet is killing the ad agency model.
This is what I was essentially saying: In a world where companies relied on mass market advertising to reach consumers, the old agency model made sense.
This was because of the simplicity of the post-war economy: companies produced stuff, the consumer came to the store to buy said stuff, and advertisements to help sell this stuff were broadcast on TV/radio, and printed in newspapers.
And for the kind of products that need that kind of marketing (think FMCG), the agency model still makes sense.
But, and here’s the problem for all-purpose ad agencies: The internet has democratised both production and distribution. There are more markets for different kinds of things. And they are advertised and sold differently: On Instagram, on Twitter, on dedicated websites, on streaming platforms, on podcasts, and so on.
In his last weekly essay, Stratechery’s Ben Thompson put it even better.
Paraphrasing:
Market-making in media isn’t a new concept; perhaps the best example is the traditional advertising agency.
Few advertisers actually buy ads, at least not directly. Way back in 1841, Volney B. Palmer, the first ad agency, was opened in Philadelphia. Instead of having to buy ads individually in multiple newspapers, an advertiser could deal directly with the ad agency, vastly simplifying the process. The ad agency, meanwhile, could leverage its relationships with all these newspapers by serving multiple clients.
It’s a classic example of how being in the middle can be a really great business opportunity. The utility of ad agencies only increased as more advertising formats like radio and TV became available. Particularly in the case of TV, advertisers not only needed to place ads, but also needed a lot more help in making ads; ad agencies invested in ad-making expertise because they could scale said expertise across multiple clients.
In this case the ad agencies gave a single point of contact for advertisers on one side, and ad inventory sellers on the other, creating a market.
That was then, though; aggregation has been terrible for ad agencies for the same reason it has been bad for publishers: the more that advertising becomes centralised on Facebook and Google, whether on their sites or on programmatic exchanges, the fewer advertising dollars are available for the inventory that ad agencies used to abstract away for clients.
That’s a problem for the ad agencies: when there are only two places an advertiser might want to buy ads (Facebook and Google), fees to abstract complexity becomes a lot harder to justify.
I’ll repeat what Thompson said there: Since advertising dollars are going only to Facebook and Google, paying agencies is hard to justify.
I’ll repeat what I said before: Since there are more places where ad dollars need to go, like Instagram and Twitter and podcasts, paying ad agencies is hard to justify.
Where both these views converge, is that this means opportunity.
There are markets (and money) to be made here.
This is what I’d written in March:
There will be more specialisation - Instagram or TikTok agencies, design houses that will work exclusively on D2C products, even Twitter specific copywriting talent. This could also mean smaller agencies, or highly specialised freelancers.
More talent will also move in-house, a result of companies realising that marketing is now an infinite scroll of continuous activity, and that they need full-time creatives to keep it going.
These changes are already here.
Look at the ads for CRED. Conceptualised by Tanmay Bhat and some of the old AIB writers in collaboration with in-house talent, these ads are made for social media as much as TV. This can only happen with an innate understanding of the medium, helping exploit its reach, which creators like Tanmay Bhat already have.
Think Zomato’s in-house copywriting team, all of them internet celebrities. This is exactly the kind of thing that companies would outsource to agencies. But Zomato bucked the trend, knowing that what they needed was better done in-house. And it became one of their brand signatures.
So if you are really good at one of these skills, and can place yourself in the middle, congratulations. The markets just opened up.