Same Plate, Less Cost. Will Agencies Ever Lose Leverage?

One of the truisms of agency life over the past decade has been the constant push for reduction in media costs within campaigns, while maintaining campaign outcomes - same plate, less cost. The technology hardware version of this is Moore's Law. In advertising, it is the client's expectation of a 3% reduction in media cost every year, without a reduction in campaign outcomes. This makes for an interesting data point when considering digital advertising spend has grown about 15% a year for the last decade and spending in all media has grown  over 5% yoy, while publishers have seen a precipitous decline in CPMs over the same period. These are only a few of the many data points that have made digital advertising  a gordian knot of an industry to understand. The problem is that many of these facts, when considered side-by-side seem to defy some of our basic understanding of economics. How can agency clients continue to demand price reductions in a market where the aggregate amount of spend keeps going up? Further, if there is "infinite" display and mobile inventory and publishers can create more at no cost, why have the prices of display and mobile ads not completely collapsed to an effective price of zero? In contrast, the RTB part of the ecosystem will be over $3 billion in 2013. That doesn't sound like a collapsed market, 8 years since RMX first launched. In fact, it is just getting started...

So how is this possible? Well, look at the ad tech industry maps and tell me how many of those companies existed before 2005? and lastly, where does the revenue for all those companies come from?

So, what has happened in the last decade in ad tech, has been the systematic 'technologification' of media asset transactions. Clearly, a majority of anything you see on a Lumascape provides some sort of value, the business model for that value may not be right, but some customers are buying. What this means is that in this last decade, a very significant amount of the growth of spend on digital media has been captured by these companies. Services and business models are getting rationalized by the market  and like all maturing technologies, prices are racing down. In this environment, the big players that can operate the business at the lowest margins and create the classic tech oligopoly: 3 meaningful players, controlling about 75, 20, and 5 percent of the market, respectively. It is in this time, that publishers will start to see meaningful reductions in the cost of their media trading stack. And today, we have hit the part of the cycle where the market rationalizes at full speed. This process will probably take about two years to settle, but in the end, vertically integrated stacks at flat licensing fees will meaningfully change the 'game'.

While it may seem like a roundabout way to justify the answer to ' will advertisers maintain their pricing leverage in the future?' the answer is there. Technologies continue to unlock value in the market, more technologies will come, and more value will be uncovered in the market. But, if you look at the historical growth of digital advertising spend vs. GDP, you find that it leads GDP in a meaningful way. The implications are profound: advertising's 'piece' of the economy is growing. In other words, the economy is finding value better in advertising than elsewhere. That's good right? Yes, the data shows us that on aggregate, content creators hold the leverage. How is that you ask? Well the advertising opportunities created by content creators are extracting a greater piece of the economic pie, when combined with the entire cost of the supply chain.

So, the real answer is that agencies never had the leverage in the first place, it was just a mirage... The market is telling us that demand is greater than supply, but the investment in the technology required to get here was expensive and long-fought.