In the modern age of media buying, there is no added value in processing a transaction anymore. Technologies have brought those costs down so much that little expertise is required for simple transactional execution. The role of the agency is to get more bang-for-the-buck than the client can do on their own. We recently sat in a board room listening to the lamentations of a management team talk about the complete collapse of margins in media buying, over the last three years. I liken this to the rise of discount brokers on Wall St. In the 1980s, your stock broker would charge you 3%-4% of the transaction to place a trade on your behalf. As we moved into the 90s and beyond, technology providers effectively disintermediated these high broker fees through technology. Sound familiar? In reality, the high fees charged by brokers also came with advice.
The first generation of financial trading technology, effectively unbundled the trading service from the advisory service, and packaged the trading service in an electronic form. Over time, the brokers realized that in order to make up for the lost trading business, their advice business would need to scale as well. The problem with scaling an advisory business is that it very rarely requires technological innovation to drive the scale. More specifically, these types of businesses need to solve a distribution problem: how to differentiate the quality of the service, inform potential clients of the offering, and make it very easy to purchase.
The innovation for achieving this scale was already in the market, it was the fund structure. Instead of investing all your money with a firm to manage it, the firm created little units that an investor could buy. The firm managed all these units together as a single portfolio. In essence, the financial engineering innovation that brought us the fund (the mutual fund to be exact) enabled firms to create units of service that can be bought and sold easily. Furthermore, it meant that the unit (minimum investment with the fund) could be much smaller than the minimum account size required to have all your money managed by the firm. Said otherwise, you are buying a unit that authorizes the fund company to invest it in the way they believe best achieves the fund goals. We think agencies need to learn how to do the same.
The lesson to be learned by media agencies is that the current market transformation will require a new way to distribute their media buying service. Too complex you say? Too individualized? Well, lets count how many different ways asset managers have created to package up specialized investment management? As of 2013, the answer is 75,000. Yes, there are more than 75,000 different types of funds in financial markets today. Each fund represents a specific strategy. Agencies can use this same approach. For example, creating units of a media buy where the strategy is a CPG food product targeted at 18-34.
By creating units of their service, agencies can present these offers at all times and to all market participants, via an exchange. Many more buyers can afford to purchase these services as their minimum transaction sizes are much smaller, and agencies can leverage trading technologies and automation to scale services (media strategy, planning, and buying) using a well understood model proven to enable scale and efficiency for advisory services, related to the investment of capital. The innovation in this case is that the advisory services focus on buying media instead of stocks or bonds.
We believe that such a change in the market dynamic will be good for the good guys and bad for the bad guys. If you really are good at what you do, it will shine. If you're not, it will be very hard to hide it.