The advance of the internet is creating the biggest challenge agencies have faced since the 50s, when television appeared on the media scene. As the pace of change persists, how can advertising and media agencies - companies founded on the creation and trading of traditional advertising and media models and currencies - adapt to such a fundamental shift?
Over the past couple of months, Campaign's "Uncovered" series has outlined the growing importance of the internet and other technologies. Search is a must for brands. There are now more mobile phones than people in the UK. The in-game advertising market is expected to be worth £1 billion in ten years' time.
And the delivery of all media content via broadband spells perhaps the greatest danger for agencies that fail to adapt because it throws traditional media schedules out of the window and traditional marketing techniques up in the air.
Despite some radical change to the way media are being consumed, online has so far been perceived as a threat rather than an opportunity by many major advertising networks.
But consumers are now "enlightened despots", according to Maurice Levy, the chairman and chief executive of Publicis. The web is proving something of a democratising force, signalling an end to the kind of interruptive marketing from which advertising has made its living so far.
"Anyone who sits in an ad agency and says brands are created by agencies is talking absolute rubbish - it is consumers who create brands now," Martin Brooks, the chief executive of the Omnicom-owned Zulu and Agency Republic, says.
Nigel Morris, the global chief executive of Isobar, Aegis' global digital network, agrees that the terms on which brands can talk to consumers have changed. "Our view is that you cannot buy enough time to reach consumers because it is so fragmented and the cost of mass delivery has gone up so much. But if you create something that they really like, you can have them for five hours."
Sir Martin Sorrell, the chief executive of WPP, predicts that the agency of the future will be almost unrecognisable to anyone working in the industry today, and getting it right is harder than it has ever been.
"It's very difficult because you can't take away the digital part from an established business because that's where the growth is. On the other hand, if you're an established business you tend to be more naturally focused on established areas," he says.
The future for ad agencies
Networks seem to have two choices. Dave Allen, the chief executive of Team Vodafone at WPP, says: "In order to build (digital) skills, the debate will be about whether you keep digital as a specialist unit in the long term or whether it becomes integrated into the business and the business just wraps around it."
To date, the ad networks have all adopted different strategies to deal with digital. WPP has WPP.com, a vertical "catalyst" structure within the network, while the separate network brands have their own individual capabilities in-house. Omnicom's agencies, on the other hand, all have a digital element - Tribal to DDB, Agency.com to TBWA and so forth. Omnicom is now setting up Zulu, an umbrella brand for various specialist agencies headed by Brooks.
Publicis has digital divisions for all of its agency brands, as well as the recently launched Denuo - a new-media consulting unit. Havas and Aegis both house digital specialists within their agency brands and IPG is in the process of merging Draft with FCB. Howard Draft, the head of the new group, says: "I come from the world of specialisation, so for me to say 'Now is the time to change' is pretty radical. It's time for the model to change."
Some of the recent moves in the market suggest where things are headed: the merger of Draft with FCB, for example. The appointment of the former Interbrand group chairman Chuck Brymer as the group chief executive of DDB Worldwide shows the network wants to move on from just advertising. Guy Lambert's recent promotion from the joint managing director of OgilvyOne to the head of Ogilvy & Mather also indicates the increasing demand for digital and direct experience in leadership.
"Agencies have to really understand the digital agenda and they need to reorganise agencies around putting digital at the heart of the agency," Lambert says.
But opinion is divided on how that reorganisation should manifest itself. Some think integration is the only way forward. "Structurally, agencies need to stop talking about embracing digital and get on with doing it. Culturally, agency people at all levels must welcome the challenge of becoming experts in such an exciting new area instead of fearing it. The same goes for clients," Kevin Murphy, the planning director at Zed, says.
To integrate, or not to integrate?
The theory of integration means digital creative skills sit in the creative department along with everything else. Grant Duncan, the chief executive of Publicis, says: "I foresee a situation where what remains consistent is the creative community in an industry - but it will be a single community like a New York neighbourhood, with all living together. A creative department will have people like scriptwriters, digital creative people and copywriters."
But will educating everyone in all things digital not risk making everyone a jack of all trades and master of none? Absolutely, Brooks says.
"I think there is a severe danger in the vision of the integrated agency. We absolutely have to integrate, but we have to integrate specialist capabilities. The danger is that if you try to provide everything within one great big bucket, you provide something very average. The market is so complex the only organisations that can profess to do everything are inherently average," he says.
"What you've got to have, and I think this is a huge challenge for our industry, is the depth of specialist capability and then structures to create bridges so that those specialisms don't become silos. That requires a different way of working within the agency network and quite often from clients."
There will be lots more informal, collaborative relationships between agencies of different specialisms and more virtual networks of people pulling together, Brooks adds.
But as Murphy rightly points out, that model has its weaknesses: "If I were a client again I'd be frustrated at having to chase different answers from different specialists at different companies and having to build an overall picture by myself. I thought that was what I was paying agencies for."
Agencies coming closer together could also create managerial issues, Bill Brock, the chief executive at Tribal DDB, says: "There's going to be a significant amount of confusion over the next two years. Who owns the client relationship? Who is the client listening to? How do the disciplines retract their claws and start accepting the fact that the big idea might not be executed in their channel?"
Indeed, in some channels, there might not even be the need for much creative execution. A page on MySpace, for example, does not require much in the way of creative skills, while creating advertising in video games is best left to the games manufacturers. But there will always be a need for the big idea. And over the next few years, creative, media and specialist agencies will all be jostling to make sure they are the ones delivering that idea.
Michael Roth, the chief executive of IPG, says: "Based on my meetings with our clients, what they are looking for is the big idea fully integrated through all the different fragmented media and, if we can deliver that, then we will have happy clients. The issue is how you deliver it."
The future for media agencies
Network heads agree that as agencies change over the next few years, so will the contribution that non-traditional advertising makes to profits. Sorrell has said he expects non-traditional media to account for two thirds of WPP's business in the next few years. At the moment, the share is split 50:50 between the two.
At IPG, traditional advertising currently makes up around 60 per cent of its business. "Our goal is to get that to more 50:50 within a reasonable period of time, sooner rather than later," Roth says.
One view is that media and creative will become much closer again, just like in the old days. In the same way that creative skills will be forced to mutate to maximise the opportunities on screens other than TV, so media's role is shifting fundamentally.
Crucially, the importance of media scheduling is in decline, what with personal video recorders and the forecast growth of internet protocol TV. Media placement, planning and buying skills will become less structured and as a result media agencies will have to develop new skills and play a bigger role in developing new vehicles such as ad-funded programming.
Some of the ad networks have already moved on this. WPP has a share in the Spanish production company MediaPro, for example. "If you create content, you should have a share in it," says Sorrell.
Historically, the problem agencies had with making money out of digital was that the money wasn't there to spend. But the agency heads are also predicting a shift in the way that they are remunerated.
"There will be no media costs associated with a third of all brand communication within the next two years, because of MySpace, YouTube and so on," Morris says. Agencies - especially media agencies - will have to find other ways of making money.
Nick Brien, the worldwide president and chief executive of Universal McCann, says: "In the absence of a commission system, we need to look for a tripartite sort of scheme where we're paid for what we produce, but we link our accountability to business success and enjoy the long-term success of the brand."
Kate Robertson, the UK group chairman at Euro RSCG, suggests that agencies take a look at ways of charging clients for hour-long segments of time, as lawyers and other professionals do.
At WPP.com, the group is starting to charge for labour hours rather than using set prices, and the results are crucial to how much the company earns for its services.
The future for independents
Where do the independents fit into all of this? There are already only a few significant players left in the online ad space but tiny pioneering companies are sprouting up to innovate in areas such as mobile advertising and search marketing. Will they survive?
"The independents are crucial to getting this going," Allen says. He predicts that ultimately many of them will be bought by the networks, as has already happened with most online advertising companies, bar exceptions such as i-level.
Those that choose to remain independent will face just as many - albeit different - challenges as the traditional agencies. They may have the technical skills but, in many cases they do not yet have the ear of the client. Then there are practical challenges: the various media are growing so fast that staff and infrastructure issues are only going to become even more of a problem for them over time.
And if the mainstream agencies prove themselves capable of developing skills in-house to rival the services provided by specialist agencies, the future of the independents will look even more bleak.
Murphy puts it like this: "As clients become more integrated it will make sense collectively to have an agency that can run all media or creative under one roof. This could cause problems for specialists that don't get bought out by the mainstream agencies. Of course, the mainstream agencies themselves have to develop a credible all-media speciality proposition to offer a compelling alternative to the independents. The speed of digital channels and technological change gives them the opportunity to stay ahead of the game."
WHAT THE CHANGING MARKET MEANS FOR ...
- Approach briefs in terms of big ideas, not 30-second ad spots, online banners or poster campaigns
- Embrace change - it will be less painful. If you don't, you might find media agencies and specialists are muscling in on your territory
- Think about how you charge - should clients start paying you for your ideas?
- Start innovating with new models such as ad-funded programming and product placement - TV will endure, but its distribution model is changing
- Appreciate being able to be more experimental (there are fewer legal restrictions online)
- Look at the way you charge your clients - many of the new opportunities come without a media cost
- Keep an eye on the pace of change in the network agencies
- Trigger change within your business too. Independents have the upper hand at the moment in terms of technological savvy, but do not have the infrastructure to cope with massive growth
- Start developing strong relationships with senior clients. You will need them.