Advertising agencies squeezed by tech giantsThe industry has benefited from the growth in online publicity but it is starting to feel the impact of disruption
At this year’s annual advertising festival in Cannes, even the children’s merry-go-round is feeling the competition from the leading tech companies.
The waterfront along the Plage de la Croisette, the stretch of golden beach made famous by decades of cinematic glamour, used to be dominated by the once all-powerful media agencies, such as WPP and Publicis.
Yet in a sign of the industry’s shifting sands, a host of Silicon Valley names have been ruling the roost during the Cannes Lions festival. Facebook, YouTube, Twitter and Pinterest set up hipster beach clubs where executives, journalists and marketers could talk business or just sip lattes while watching beach volleyball.
The prize for the most audacious statement went to messaging platform Snapchat — fresh from its $20bn IPO in March — which erected a giant yellow Ferris wheel next to the Palais des Festivals, offering holidaymakers and delegates a free ride.
“It’s been a catastrophe,” says Corrinne D’Harcour, who has been running Le Grand Carrousel de Cannes — the children’s attraction next door — for the past 13 years. “They are also handing out lollipops,” she says with a thumbs-down gesture as she pointed at two children armed with the Snapchat-branded sweets.
The symbolism of the Cannes festival underlines an inexorable trend that is reshaping the advertising industry. Although the sector as a whole has benefited from growing digital ads, the media agencies are starting to feel the pinch as the leading technology companies become ever more powerful players in the industry.
“In 2010 you wouldn’t have seen Google and Facebook along the beachfront here,” says Duncan Painter, chief executive of Ascential, which runs the festival. “That used to all be the big agencies.” Or as one UK TV executive complains: “Cannes is now just a technology show. The vibe is now, ‘come have a smoothie while we ruin your business’.”
Yet even if this feels like a shift in the industry’s balance of power, the tech companies also face threats to their own advertising models. Big customers have become openly critical of the way they calculate the effectiveness of advertising on their platforms. And they have come under attack for the spread of fake news and hate speech. If the move to digital advertising is to continue, the Silicon Valley groups will need to come up with answers.
Digital impact
For the time being, though, it is the traditional media groups that are starting to feel the biggest impact from digital disruption. For the first time since the financial crash drove the advertising industry into recession in 2009, advertising’s big four — WPP, Publicis, Omnicom and Interpublic Group — are stalling.
Publicis, where Maurice Lévy has just been replaced by Arthur Sadoun after 30 years as chief executive, suffered the steepest fall, posting a 1.2 per cent decline in organic revenues around the world in the first three months of 2017. The situation in North America was more acute, with Publicis suffering a 5 per cent drop while WPP experienced a 0.2 per cent fall over the same period.
According to Brian Wieser, a media analyst with Pivotal Research in New York, organic growth for the big four plus Havas, which looks set to be merged with Vincent Bolloré’s Vivendi in a £2bn deal, fell 0.3 per cent in North America — the first time this has happened outside a recession.
“This follows a marked deceleration in the US and globally for agencies which began after the first half of last year,” adds Mr Wieser. “The narrative won’t go away anytime soon.”
Earlier this month the research firm Magna predicted a 3.7 per cent rise in global net ad sales, a sharp slowdown from the near-6 per cent increase the industry enjoyed in 2016.
“It’s a tough environment,” says Sir Martin Sorrell, chief executive of WPP, the world’s biggest advertising group. In addition to “technological disruption”, advertising firms are having to deal with fierce cost-cutting by clients and growing pressure from activist investors for short-term returns. “It’s a perfect storm,” he says.
Enders, the media research consultancy, said in a recent report: “The advertising industry is undergoing profound change. Overall advertising spend continues to grow at a faster rate than consumer spending. But . . . vital signs in the market are alarming.”
According to Enders, the increasing focus on short-term slots — driven by the speed and efficiency of programmatic online advertising — poses a serious threat to the traditional role agencies have played in developing memorable campaigns for big brands such as Coke, Apple and McDonald’s.
Enders found that the balance between long-term brand building and short-term activation was broadly equal at 50 per cent, but would soon tip to 60/40 in favour of the short term, handing even more power over advertising to the tech platforms. Research shows that chief marketing officers hold their posts for shorter periods than other senior executives, adding to the short-termism.
Over the past five years, the big advertising conglomerates have benefited from the rapid growth driven by the technology companies.
But following an investigation last year by the Association of National Advertisers and a probe by the US Department of Justice, big brands have asked searching questions about the way agencies spend their money online.
The agencies have been accused of spending clients’ funds but then taking undisclosed rebates from media companies that are not passed back to them.
Added to that, the lack of transparency around programmatic buying — the high-speed auctions for online ad slots — has forced many companies to cut out the agencies and deal directly with tech platforms.
The result has been a surge in advertising spending, with just two of those technology companies — Google and Facebook — already accounting for one-fifth of all global advertising spending, according to Credit Suisse.
At the same time there is evidence starting to emerge that TV advertising — for so long the main driver of marketing spend — is facing a sharp fall this year. In the UK, ITV and Sky have reported declining ad revenues in the first part of 2017. In the US, digital ad spending overtook TV for the first time last year, with $70bn spent online versus $67bn on television, according to Magna. Globally, TV is marginally ahead.
Some of the slowdown in 2017 can be explained by a bumper year for advertising in 2016, boosted by spending for the Rio Olympic Games and Donald Trump’s presidential election campaign.
But many in the industry fear that last year’s performance masks a longer- term shift as brands and companies review the way they sell and market their products to consumers.
In light of wider global economic uncertainty and concerns over transparency, the two biggest advertising spenders — the consumer goods conglomerates Unilever and P&G — are reviewing their spending and relationships with agencies.
Unilever, which owns brands such as Ben & Jerry’s ice cream and Dove soap, recently announced it is cutting half of the 3,000 ad agencies it uses around the world and will make a third fewer ads.
At the same time P&G, owner of brands such as Gillette and Pampers, says it wants to cut its marketing bill by $2bn over the next five years, on top of $600m of savings in previous years.
Cost-cutting
With the big agencies losing ground to the tech giants, Marc Pritchard, P&G’s chief brand officer who is responsible for allocating an annual ad budget of more than $8bn, says the agencies need to do more to help their clients. “We spend $600bn a year on advertising but we are still squeaking out a fairly anaemic growth rate, so what the ad industry needs to do is figure out how we drive growth.”
But Mr Pritchard has also been at the forefront of another important trend: the growing pressure on the tech platforms over how they measure advertising views on their platforms and the content they sometimes allow.
In a landmark speech to advertising executives in Florida in January, he described the media supply chain as “murky at best and fraudulent at worst”.
Six months on, Mr Pritchard says he had been encouraged by the way technology groups and agencies had responded but added more needed to be done. “I think it has shifted — a lot of the attention has been on digital media and about technology which is extremely exciting. But we have peeled back the cover and said we are not sure it’s all it’s cracked up to be.”
Since his speech, the tech companies have found themselves under pressure following a series of public controversies that have knocked trust and confidence among advertisers.
In March, a number of high-profile brands and advertisers including Honda, Lloyds Bank and Tesco pulled their advertising from YouTube following an investigation by the Times newspaper that revealed how brands were appearing on extremist websites and other inappropriate online content.
The social media platforms have also been under scrutiny over the way they monitor fake news and hate speech — especially in the wake of recent terror attacks in major European cities.
Despite YouTube owner Google taking steps to deal with the backlash, including making it harder for terrorist and hate speech sites to monetise content from ads, many advertisers have stayed away.
Matt Brittin, Google’s European chief, admitted there had been setbacks. “There are some who are still re-evaluating the platform,” he says. “The majority of our advertisers have stayed with us, some chose to pause and re-evaluate.
“They expect high standards and in a number of instances we fell short of those high standards, which is why we have been working to improve.”
Facebook, meanwhile, has admitted to a series of blunders in its measurements of the effectiveness of ads after it overstated the number of times videos were viewed on its site.
Against that backdrop traditional media companies are arguing fiercely for advertisers to switch back to them and away from the murky world of programmatic ad buying on social media.
“The whole advertising ecosystem is in a pretty precarious place right now,” says David Dinsmore, former editor of the Sun and now chief operating officer for News UK. “In the last five years no chief marketing officer has been fired for putting more money into Google and Facebook. How that plays out over the next two to three years will be very interesting.”