Reinvent or die is the stark message to advertising agencies. As pressure on margins continues, and clients' needs change, serious questions hang over the traditional agency business model. Is it time for agencies to take some ownership of the ideas they create?
The common misconception is that agencies don't own the intellectual property rights of what they create. They do. It's just that, generally, and often willingly, they sign them away in return for fees and creative work, which may or may not be linked to a performance-related bonus.
Take the Jolly Green Giant, created in 1928 by the then 37-year-old Leo Burnett when he worked at the Chicago agency Erwin, Wasey & Co. That agency earned a modest fee for the reworking of the brand and its iconic spokesman; the brand's owners have earned billions in the 79 years since.
It's hard to gauge what an iconic ad might be worth to both a brand and the agency that created it, but a 2003 court case offers some idea. Joseph Shields and Thomas Rinks, who claimed to have dreamed up the Taco Bell talking chihuahua, won $30 million in damages after a court ruled in their favour. A crucial element to the decision was that there was no contract, so the court had to assess what the idea was worth without taking a traditional agency/client relationship into account.
It can seem both outdated and outlandish that some of the greatest iconic ad ideas - the Honey Monster for Sugar Puffs, the Smash Martians, the Direct Line red telephone - continue to be used by clients "for free" when they move away from the agency that dreamt them up. Especially when such icons can become media properties, as well as finding their way on to merchandise and into toy shops. Would Bartle Bogle Hegarty have signed over the rights to Flat Eric or Fallon to the wind-up Orange men had they known how desirable they would become?
Alas, it has always been accepted that advertisers need the security of owning brand essentials. Like it or not, agencies are almost always cost plus or charge-by-the-timesheet institutions.
There are exceptions, and they're growing more numerous. Some communications agencies have managed to dig in their heels and persuade clients that a degree of rights sharing might boost agency commitment. Then there are the adland entrepreneurs who are setting up new-business models, with a view to hanging on to rights. In other places, where agencies and clients are dipping their toes in content creation, the rules on ownership are more fluid.
Most contracts between client and agency license the use of intellectual property during the term of the contract and then assign it at the end of the relationship on condition that the client has fulfilled its obligations under the contract. The IPA is holding out hope that more contracts might see a licence only, which could be renewed with varying terms, depending on the success of the idea.
The trade body has been leading a charm offensive on client chief executives and financial directors. Much of its focus is on brand values, which are now taken seriously in the boardroom and on the balance sheet, representing up to 70 per cent of a company's market capitalisation. The 2006 annual BusinessWeek/Interbrand survey of Best Global Brands reveals that 66 per cent of the market capitalisation of the Coca-Cola Company is the brand, which Interbrand values at $67 billion. The value of the McDonald's brand, undoubtedly given some help by Ronald, represents 67 per cent of the company's total market value.
One or two agencies have clients who agree to share or license ideas. Beattie McGuinness Bungay works for one major client on a UK-only basis, with the potential to gain extra licensing revenue if the idea travels abroad. "We've deliberately tried to have several different ways of charging clients, in order to have checks and balances," Andrew McGuinness, the founding partner, explains. "We get paid fees, commission and intellectual property."
In the US, Crispin, Porter & Bogusky last year struck a deal with the clothing company Haggar, where the agency took an equity stake as part of its compensation. And the chairman and chief creative officer of Siltanen & Partners, Rob Siltanen, owns the rights to the talking Baby Bob. When Baby Bob's original client, Freeinternet.com, went bust, he took the rights in exchange for money owed. Since then, the brand icon has been a good earner for Siltanen.
If a new remuneration model is to work, there has to be a trade-off for agencies; they have to take risks, which means investing in the brand. But agencies are not capital-intense businesses, it's not realistic for them to invest huge sums in getting an idea off the ground, especially when there's a chance an idea could be a damp squib.
The director of brand and communications at Abbey, Jeremy Davies, says: "I wouldn't see any reason to share IP if you were paying for the development. The only reason you would share IP is if it is a pre-existing property. If you're paying for an established equity, you'd have to pay a fee."
So, could performance-related contracts turn out to be the answer?
David Muir, the chief executive of WPP's media and research arm, The Channel, is working on building brand valuation principles into client contracts at creative agencies. "As the techniques to do valuations become more transparent, inventive agencies will put those measures in so that they capture some of the value," he says. "It shows the commitment to adding value."
As well as reviewing the client contract, WPP, like its rivals, has decided to invest in companies that are based on entirely different business models when it comes to IP. It has a minority shareholding in the European audiovisual company Mediapro, a venture with Universal Music and, through its media investment arm Group M, is aggressively developing IP.
Kelly Clark, the chief executive of Group M for Europe, the Middle East and Africa, explains: "The other area where we are moving quickly to create and own IP is in audio-visual programming, for TV as well as other distribution platforms such as broadband and mobile." Last year, it announced October Road, a new primetime series it is jointly funding and producing with Touchstone Television and ABC. It also launched Group M Entertainment in Europe last year, which is developing similar partnerships.
Such ventures could be where the smart money will lie. BBH has been quick to launch a music-publishing arm, Leap, and a brand-creation business, Zag. According to the chief executive of Zag, Neil Munn: "It's about recognising that an agency's strongest asset is its ideas-generating power."
But getting new brands off the ground takes patience and deep pockets. Zag has been working on projects for a year or so and, despite having irons in the fire, has yet to launch anything, and doesn't expect to turn a profit for two years.
Carl Johnson, the former TBWA\Worldwide chief operating officer, set up Anomaly in New York with the specific aim of changing the business model. "We have no interest in being an ad agency," Johnson says. Rather than charge per hour, a practice that he believes commoditises the ad industry, Anomaly makes money from charging a flat fee or taking a cut of sales.
Last year, it won business from Virgin America for its new domestic airline. In return for design help for plane interiors, in-flight entertainment and new Virgin-branded products, Anomaly gets fees plus a cut of in-flight product sales. It is also some way down the line on the launch of the first shopping platform, which will enable consumers to buy products via text. "I want to earn money on the back of ideas we have when we're asleep," Johnson says.
Given the increasing need for clients to originate content, surely this is the moment to join advertising into the IP-owning world? BBH has been here for a while, with Mark Boyd as the director of content at the agency. He warns against seeing IP ownership as providing significant agency revenue. Even if an agency is able to share the IP, often there are other creative parties involved in the split; then there's a waiting game to see if the investment comes good. "There are potentially new revenue opportunities around IP, but I think people can get distracted and over-excited," he says.
TBWA is another that has its own brand entertainment division, Stream. It is the fastest-growing company in the TBWA\UK Group. In one current deal, Stream has negotiated for a cut of the future sale of a range of clothing, which will be launched as a movie spin-off. Paul Bainsfair, the TBWA\Europe president, says: "These sort of arrangements will be common where ad campaigns bump up against the entertainment industry."
This IP-ownership-by-the-backdoor seems a more likely evolution than ad agencies turning the tide of the client-owns-all culture that exists in adland. The competitive state of the agency marketplace only makes it harder for traditional agencies to push for IP.
Johnny Hornby, the managing partner of Clemmow Hornby Inge, which created the highly successful Mowbli for Carphone Warehouse, echoes the widely held sentiment that the client pays for development and agency work, so it's fair to assign rights. But he does predict a new order.
"In the new world, where creativity is content, there's a greater case for agencies to get smarter about IP for what they create," he says. "All of us in advertising need to recognise we're not in a client service business, we've got fantastic creative people. That's what agencies should be thinking. Then they should be saying that they'll do business for a revenue share."
JOLLY GREEN GIANT - Pillsbury, Leo Burnett
Advertising's most famous giant started life in 1928, selling peas. Leo Burnett upped his presence in the 30s, and by 1952, the Green Giant company was taking sales of $46.8 million. While early TV performances had children scurrying behind the sofa in fear, he remains a jewel in the General Mills crown.
SMASH MARTIANS - HL Foods, Premier Foods, Boase Massimi Pollitt
The Smash Martians arrived in 1974, created by Boase Massimi Pollitt. John Webster's cult aliens have been dusted off for a number of relaunches through different agencies, helping Smash maintain a dominant share in the instant mashed potato market. Premier Foods has also sold various licences, spawning Martian T-shirts, mugs, cards, stationery and canned pasta.
FLAT ERIC - Levi's Sta-Prest, Bartle Bogle Hegarty
Launched in 1999, Levi's headbanging, yellow puppet had an instant impact. Levi's rushed out a replica toy and a single of the Flat Beat techno track, which sold 2.5 million copies Europe-wide. Flat Eric, Levi's, BBH and director Quentin Dupieux were part of a jeans revival - between 2000 and 2002, Levi's UK sales rose from £134 million to £167 million.
MONKEY - ITV Digital, PG Tips, Mother
As PG Tips replaces its real chimps with Monkey, his value has come back into play. After ITV Digital died in 2002, and Monkey and sidekick Al (Johnny Vegas) were laid off, receivers agreed to donate him to Comic Relief. But Mother has stayed close to "its" cult icon. This time, profits from merchandise go to the charity.
MOWBLI - Carphone Warehouse, Clemmow Hornby Inge
Retaining rights was not in the minds of the founders of Clemmow Hornby Inge when Charles Inge came up with a cute mobile phone mascot for its first client, Carphone Warehouse, in 2001. A year later, Carphone Warehouse was selling more than 1,000 Mowbli toys each week, while growing into Europe's largest independent mobile communications retailer.
ORANGE MEN - Orange, Fallon
Fallon came up with the wind-up toys to showcase its "togetherness" theme created for new client Orange last year. The big idea has quickly been received as being bang-on the brief and eminently campaignable. The toys, developed by Aardman Animations, have already become collectors' items, with limited edition charms creating excitement on eBay.