Last night, I had a great dinner with one of the people I really respect in the advertising ecosystem. Because he is a leader in the innovation space, we had our usual great conversation about how we collectively plan to change the world. As part of our conversation, I hearkened back to my days growing up in Rochester, NY where my father was a research chemist at Kodak. Kodak was once one of those great american industrial powerhouses that had armies of scientists and engineers developing cutting edge technologies that would change the world. Kodak scientists, like their compatriots at institutions like AT&T's Bell Labs, were so far ahead of the world in their innovation, that their management teams completely failed to monetize their innovations. Kodak scientists perfected technologies like the CCD chip - the basis for all digital photography - color copiers, instant film, specialty plastics, and many more innovations that others built multi-billion dollar businesses on.
So why did none of this amazing innovation prowess translate to future success? The problem was too much profit. In the late 1970's, the price of silver, the most expensive component of film, spiked 900%. Kodak management got very good at holding down cost and passing some on to the consumer. As the 1980's went on, the silver bubble popped and prices once again dropped to their pre-bubble levels (from $50 to $5). For Kodak, the efficiency and price increases they were forced to make translated into huge operating margins once the price dropped. By the late 1980's, Kodak's margin on film was over 90%!
As management teams looked at their business, they were so enamored by their own operating prowess, that they lost sight of the fact that their own innovation teams had created the very products that will eventually destroy their legacy business. Instead of using their massive operation to cannibalize their own business by building new ones, they sat on their hands. Worse still, they juiced their balance sheets by selling off these innovations and cutting back on their research teams. This was a long and slow form of corporate suicide.
So what does all of this have to do with agencies? Think of all the major advertising technology related businesses that agencies knew were needed and could not build over the last decade. I am convinced that a vast majority of agencies and media buyers know that all media buying will be automated in the next decade, but are working to hinder its adoption when they should embrace it. There used to be a time when the oft heard retort by people in ad-land "this is a relationship business" rang through the halls of all the major Wall st. trading firms. Today 90% of the volume of trades on the NYSE happens electronically, the only reason the famous trading floor at 20 Broad St. in Manhattan still exists is as a backup, in case of an emergency system failure in the exchange's computer infrastructure.
Agencies need to stop thinking about trading desks as their 'film business' - a high margin arbitrage opportunity - and start thinking about it as a true value-added service for building an expert trading team, that can stay at the cutting edge of the business. A highly skilled and technical team is the only way to keep a competitive advantage in business today. Building a business that profits from the ignorance of your clients may work in the short term, but like Kodak's film business, it distracts agencies from where the long-term businesses should be built and could eventually bring about the demise of their media buying.
Agency-land management teams need to put plans in place to put their legacy media buying businesses out of business. Otherwise, technologists and the major advertisers will do their darnedest to make media buying within the agency a thing of the past. From my perspective, I have seen major Wall st. firms evolve to find new businesses where the work of people can not yet be done by machines. A stock broker now gets paid for creating value by giving you investing advice rather than executing trades. Where agencies have a competitive edge, is in this same 'space': media planning.