Does the Rise of Digital Products Spell the Death of the Agency Industry Model?

The multi-billion dollar agency industry is undergoing an existential crisis. Big names like Coca-Cola, Johnson & Johnson, P&G and more are pulling their budgets and reviewing their accounts with major players.

Seth Waite is the CMO of RevUnit, the leading B2B digital product studio.

As a result, huge corporations like WPP and Publicis could lose billions in what Fortune describes as “an uncertain future”.

As global brand demands evolve from basic advertising brand strategy to the creation of customized digital tools such as apps, chatbots and flashy VR experiences at a low-cost, this means a shake-up for the industry. The reigning agency giants are not equipped to deal with this new digital world. They have been forced to evolve, making big changes to their operations and restructuring in order to keep up with independent specialists.

So, what do brands really want today and how is the agency industry adapting to this shift, amid the rise of digital products?

The antiquated agency model

Marvel’s report ‘State of the Digital nation 2016’ paints a picture of marketing efforts historically managed by one of two parties; advertising holding firms – big names like WPP, Publicis and Omnicom – and management consultancy firms – the likes of Accenture, Deloitte, McKinsey and such – conducting mass advertising campaigns on TV, print and later online.

These large multinational corporations have their roots in advertising and business consultancy, not product design and development. Building an app, for example, is a complex and specialized process. From concept to market, it involves specialist designers, developers, product managers and even data scientists. These highly skilled individuals are not core ingredients of the traditional agency framework. Instead, agencies are focused on linear internal relationships and longer term strategy and retainers.

As a result, big brands like pet food purveyor Freshpet, PepsiCo’s SoBe and Pret A Manger are all rejecting traditional agencies, turning either in-house or to smaller outlets to create customized products and campaigns.  

“The agency model is not going to bend – it’s going to break”, said PepsiCo Inc’s Brad Jakeman, claiming the industry has failed to keep up with the evolving digital landscape.

This shift to differentiated products is costing agencies. So, how are these media conglomerates responding to the demand for new digital expertise?

The agency world reacts

Outsourcing work to specialist groups is just one way that agencies can continue to provide competitive services. For example, Omnicom’s global marketing communications network, DDB Worldwide, is trying to reinvent itself. The agency is utilizing a new “flex” approach, restructuring departments and compensation models to work better with external partners.

This approach puts pressure on teams to manage multiple, complex projects with various parties. An alternative to this is to bring talent in-house – through hiring or acquiring smaller enterprises.

In late 2015, Publicis made radical changes to its business model with the creation of new division Publicis Media to focus on “cutting edge technology solutions”. This announcement followed the creation of Sapient Inside, a new program to integrate experts from recently purchased network Sapient into agency teams.

That same year, advisory firm Ciesco reported a spree of acquisitions, with 1,105 deals in

“marketing technology, mobile, digital media, advertising, data and analytics.” The world’s largest ad holding company WPP, topped the charts with the largest number of acquisitions, picking up 40 companies, including digital media buyer Essence.

In recent years, Deloitte acquired mobile agency Übermind and digital shop Banyan Branch, and rivals PWC, Accenture, McKinsey all followed suit, buying a whole range of creative digital entities.

We’re seeing a huge amount of consolidation in digital media through a frenzy of acquisitions. In 2015, AOL purchased independent mobile advertising network Millennial Media. This acquisition gave AOL a foot in the door of the mobile advertising industry, the fastest growing sector of digital advertising. AOL itself was acquired by Verizon earlier that year, which then went on to purchase Yahoo, just months ago.

Through buying smaller companies, agencies have quick access to emerging technologies, but it doesn’t always work and in many instances brands today opt to cut out the middle-man going directly to the studios themselves.

The rise of the digital studio partnership

The Guardian recently reported a movement, with brands rejecting agencies in favor of “low-cost, quick turnaround digital campaigns and technology”. The article, in light of a recent seminar hosted by the UK-based publication with software company Deltek, cited the changing role of marketing as a large influential force, and a need for data in conjunction with “engaging, creative ideas”.

Small independent studios, which rely on product owners working directly with clients, are one answer to this. Instead of working with large agencies we are seeing top brands opting for strategic partnerships and accessing these studios on a project-by-project basis.

Global brand Coca-Cola uses a small in-house digital team Coca-Cola Studios that works with specialist partners to create video content. The enterprise recently launched a partnership with StudioNow Studios providing access to a global network of creators, enabling Coca-Cola fast solutions to drive improved client engagement.

Kimberly-Clark CMO Clive Sirkin suggests an Uber-like approach, described by AdAge as “managing the traffic without owning the ride”. This emerging model of this decentralized model of creative execution takes the risk away from large agencies, who can better satisfy client needs by selecting appropriate partners.

Who will survive the imminent agency apocalypse? In the new digital landscape, it will be the agencies that are able to evolve, adopting a more agile structure and a client-centric focus. The large corporates are already transforming, armed with big buying power and a new crop of product and design departments. But amid this transition the small teams; independent digital studios with specific products, will also come out on top.

A shake-up to this industry means new innovation comes from the startups that provide specialist skills tailored to customer needs, executing these at a low-cost – be this in content or digital product creation, customer acquisition or the next digital product to dazzle online audiences and brands alike.