Greg Hills

I’m attending the Right Media Open in Chicago and, no surprise, change is in the air. Although there is a general consensus on where the industry is headed, I am seeing a healthy debate around the timeline for that change.

While discussing the importance of indirect, bid-based sales to publishers, Dave Zinnman from Yahoo pumped on the brakes, saying that if you believe exchange-based inventory will become dominant in a “career-relevant timeframe”, you need to “step back from the punch bowl.” For me, “career-relevant timeframe” is the most important phrase I’ve heard today.

No matter what your business, its important to have a realistic understanding of how fast your market is changing. Just today, VMM founder Darren Herman retweeted his 2008 post comparing the rate of innovation with the rate of adoption, and reminding entrepreneurs to build for today’s market. That’s the relevant timeframe for a venture backed startup between rounds.

Here in Chicago, the question of the day is: what is the relevant timeframe for advertising-related companies evaluating the momentous shift toward automation?

Up until now, I think media decisionmakers have been very confident in their ability to influence the rate and direction of change. At the 2009 24/7 Real Media Summit, I was struck by GroupM CEO Irwin Gotlieb’s remark that he felt it was, in some part, his responsibility to manage change in this new media landscape on behalf of various stakeholders. Consolidated media buying firms exist for the sake of exerting this type of influence and the comment made me think a lot about how and when the industry would change.

Now that Google has turned its focus to display, they will radically shorten the relevant timeframe for considering change. Google has more clout than any single company and they have built their business on automation and bid-based buying. Whether or not you believe that audience is more important than content in valuing an impression, it is impossible to deny that a lot of client money is lost to the transaction costs of directly buying standardized display inventory. I began my career as a media planner and, like every planner, I spent plenty of time “guesstimating” and doing menial tasks in the current advertising operating system: phone, fax, Excel, email.

Its not necessary for agencies and publishers to surrender to Google — in fact, I think that’s a terrible idea. But it is necessary for agencies and publishers to recognize the economic imperatives that drive Google’s strategy. Without Google, media companies might have been able to defy gravity for a career-relevant timeframe, but that’s no longer the case.

I had a thought-provoking client conversation earlier this week. As the client increased spend for their display campaign with my company, we mentioned that the eCPM for ad exchange inventory would increase slightly. They asked an interesting question: “Shouldn’t it be cheaper if I buy more?”

We’re all used to getting volume discounts. When I supersize my meal at McDonald’s, buy toilet paper at Costco, or buy two bars of soap to get one free at CVS, I’m decreasing my unit cost by buying more. Retailers include volume discounts in their pricing structures when they can increase profits by selling more units, despite the lower unit price.

Volume discounts are prevalent in media buying. Publishers often lower the CPM, or unit price, below the “rate card” for big agencies that spend a lot. Big agencies turbocharge this volume discount. They leverage the collective spend of their entire client base in upfront publisher negotiations, achieving lower rates which are then passed on to the individual clients. Big brands, in turn, leverage their own scale in fee negotiations with agencies. Everywhere you go in the traditional media world, bigger spend equals cheaper rates. So it seems totally backwards to pay higher CPMs when buying more media. What kind of incentive is that after all?

Here’s the important point revealed by my client conversation: A huge, underrecognized shift occurs when advertisers and agencies begin buying media from markets, such as ad exchanges, as opposed to media retailers, i.e. publishers. In a market, prices are determined by the intersection of supply and demand and, all else being equal, price goes up as you buy more. Those familiar volume discounts go away.

These pricing dynamics are familiar to search buyers, since search prices are determined by market mechanisms. Google designs the market for selling their search listings, but they don’t set the CPC price themselves. Nonetheless for anyone used to buying media from publishers instead of markets, paying a higher rate when buying more still feels kind of weird.

I’d like to make two high level observations on how media markets change the agency business:

1) The shift to media markets and away from media retailers is a democratizing force for the buy side. If the big guy doesn’t get a price break, it makes it easier for the little guy to beat the big guy at serving advertisers. When the market paradigm is dominant, like in search, talent and technology will win every time regardless of who is the biggest.

2) The media market paradigm advances the client-agency conversation from a discussion about media to a discussion about the client’s true business goals. When the media agency stops talking about delivering good media prices ( “Through volume discounts, our agency delivered $20mm in cost savings to your business this year.”) they have more time to talk about delivering customers to the client (”Through smart targeting and bidding on the $100mm of media we bought, we delivered new customers representing an estimated $400mm in lifetime value to your business). Once this more strategic conversation becomes the norm, and advertising is discussed as a business driver instead of a cost center, agencies and clients will both be better off.

Note: This post was originally published in the AdAgents column of AdExchanger.com. AdAgents is an opinion column written by agency-side members of the online display advertising community.

Digital media has caused huge shifts in the advertising industry, including the rise of the Digital-Driven Media Agency — media shops that have identified digital media as the key strategic focus for their organization. Management teams at these agencies have set aggressive goals to increase the share of billings coming from digital. Many agencies have collapsed separate print, broadcast, and online divisions, instead forming integrated planning groups led by “digital thinking.”

Agencies have recognized that in a landscape where consumers control their own media consumption, brands need to be authentic, interesting, and useful. In response, they’ve formed branded entertainment and social media teams to help brands thrive in this new landscape.

Now it is time for agencies to go beyond thinking digitally and begin acting digitally. Agencies have embraced digital in terms of high-level corporate strategy but technology isn’t woven into the operational fabric. Planners think digitally, but often only have dated tools like phone and fax available for actual execution. As a result, it is an outside vendor who is actually integrating the data feed for the dynamic ad, determining the optimal frequency and optimizing the targeting parameters. Of course, it’s in neither the agency’s nor the client’s best interests to have the agency do everything. But to act as effective stewards of the client’s interests, and to make a compelling profit while doing so, agencies need to bring more technology within the walls of their own organizations.

Fragmentation, for example, is a defining trait of digital media, and agencies have not adopted significant technology to buy this fragmented channel effectively. Purchasing media over phone, fax, and e-mail introduces a major constraint on how many sites can be included on a media plan. Agencies themselves can’t aggregate a digital audience that is both sufficiently large and sufficiently targeted so they turn to ad networks. Once ad networks are responsible for a portion of spend they are also responsible for the optimization of that spend, which they are well-equipped to do.

Agencies have handed two key business opportunities around digital media: aggregating audiences and optimizing spend based on response to outside partners with the required technology. The most important issue here isn’t even that agencies are passing over two very high-value activities at a time when they are struggling to achieve acceptable profit margins. What is most problematic is that audiences are being aggregated and campaigns are being optimized based on sell-side interests, instead of aligned client and agency interests. Mike Nolet of Appnexus does a fantastic job of explaining the implications of this flawed incentive structure. (See the post.)

To be clear, I am not suggesting that agencies become technology companies or masquerade as such. Instead, I am saying that agencies have not adopted sufficient technology to continue in their historic role of reasonably compensated agents of the client’s interest. It is a positive indicator that forward-thinking agencies are spinning out separate business units focused on data-driven targeting, just as aQuantive did with DrivePM in 2004. But the real victory isn’t creating island of excellence where a select few are able to leverage technology, sometimes proprietary, on behalf of clients. The real victory, and the greater challenge, will be deeply integrating technology into the day to day activities of everyone at the agency who is thinking digitally.