The relationship between the advertising holding companies and the big digital platforms is a bizarre set of apparent inter-dependencies.
The world’s biggest buyers and sellers of advertising inventory obviously have a mutual interest in each other as trading partners, but it is much more complicated than a traditional trading relationship.
Whereas the dice used to be loaded in favour of the buyers, the real power now belongs to the platforms who now account for 70% of worldwide ad sales.
This is not a level playing field. Meta is worth $1.75 trillion, WPP comes in at $8 billion.
Meta has the audience, too, with over 3 billion ‘daily active people’ across its platforms, dominating the Social Media market.
Google owns Search and also online video, via YouTube. TikTok has captured the video market for young audiences and Amazon is pre-eminent in e-commerce
These are quasi-oligopolies which dwarf the six holding companies, who are now the junior players in the partnership.
The platforms also have weapons grade engineering skills in unlimited supply. The holding companies don’t.
The advertising tools that the big platforms provide are vital to the media agencies’ operations, with daily analytics from Google, Amazon, TikTok and Meta pored over within custom apps that activate.
The self-serve tools that the platforms provide make creation and activation easy, quick and cheap.
The big platforms are also the largest advertisers in the world, with client/agency relationships across the holding companies that may influence how they are treated.
In short, the platforms hold all the cards, and they have attained their position of power by attracting millions of advertisers, including the big brands via the media agencies.
The platforms have used trading incentives to attract big brands, thus sealing their position throughout the advertiser world, but the platforms are impervious to advertiser pressure given their strengths in the ‘long tail’
By accepting such incentives, the media agencies have effectively strengthened their competition.
This ‘frenemy’ relationship has reached a new level as the platforms and holding companies all launch AI-led activation platforms for creative and media. WPP is partnering with Google on its Open platform, and a sign of the times is that this isn’t seen as an obvious conflict of interest between buyer and seller.
The recent statements from Mark Zuckerberg on how Meta could replace the agencies by automating the creative and media functions on Meta’s properties are a natural extension of the power imbalance.
What looks like mutual dependency is heavily loaded in favour of the platforms, and the network media agencies have effectively been drawn into their orbit as the junior party.
Stock price movements since the Zuckerberg announcement are instructive, with Meta up and the holding companies down. WPP has declined 38% since December and Mark Read, its [now outgoing – Ed] CEO, has no doubt been the victim.
An instructive parallel about the future direction of the industry power balance comes courtesy of Apple in China: the Capture of the World’s Greatest Company by Patrick McGee.
This book tells the story of how Apple effectively funded and trained Chinese businesses to compete with Apple itself, pouring billions of dollars into the design and manufacturing process.
Unlike other companies who outsource manufacturing offshore, Apple employed Chinese companies to manufacture its devices, and this expertise has led to competing products in electronics, and also in other sectors that use similar techniques.
The symbiotic trade-off is that Apple got flexible, low-cost labour that enabled it to charge Western prices at Asian costs, leading to massive margins, but it has led to a dependency on China that was not foreseen when China was a more liberalised economy.
Apple has paid over $50 billion a year to teach its Chinese partners to compete, with its intellectual property open to replication.
This is the proverbial ‘cuckoo in the nest’ story, where a US corporation has helped a major global competitor compete.
What lessons can we draw from this for the advertising industry?
The first is that the holding companies do not have the power that Apple has in its relationship with China. This is not a symbiotic trade-off where both sides benefit.
The power of the Apple brand, built over decades, and the quality of its products are critical to that inter-dependency and can counter the competitive effects of their rivals.
The holding companies don’t enjoy the same robustness of demand and pricing and are subject to competition from the platforms themselves, as well as an increasingly powerful independent agency sector.
The holding companies are pursuing an AI-led platform positioning that will automate creative and media functions. Initially their advantage will be the ability to operate across multiple channels and platforms, functionality that the big digital players don’t yet have.
However, the platforms can and will develop further advertising options outside of their owned and operated properties, as Google has done and Amazon already does, via its increasingly potent demand side platform.
These options will be used by big brands and the ‘long tail’, thus strengthening the platforms across the whole advertising spectrum. This could break up the market and weaken the agency sector.
Whereas Apple has played to its strengths in its mutual dependency with China, the holding companies are increasingly vulnerable to the platforms’ ability to replace them.
While it is understandable that the holding companies want to move to a platform positioning that reduces cost by automation and headcount reduction, the risk is that they resemble the platforms, except without their superior economic and technical firepower.
It’s a tricky balance, but the holding companies can rebalance the playing field by playing to their strengths, too.
This means a greater emphasis on higher level strategic thinking, competing against the consultancies but with more specialist expertise.
It means amping up creative thinking and using AI to both make messaging more impactful and easier to produce.
It means placing more emphasis on the full range of communications options in both creative and channel planning.
And it definitely means a greater emphasis on effectiveness in its true sense, not just the nebulous ‘outcomes’ offered by the platforms, and the holding companies should ensure they are (and deserve to be) rewarded commensurately.
Most importantly, the holding companies should show that they are capable of growing brands and business through the combination of their thinking and technology in multiple platforms, including but not exclusively Meta, Google, Amazon and TikTok, and not just in advertising.
The holding companies can resist the spiral towards the domination of the platforms by demonstrating the business value they can bring on multiple dimensions. This goes way beyond automation and is in the agencies’ DNA.
As things stand it is relatively easy for the platforms to replicate what agencies do, if the agencies let that happen. Their dependency on the platforms shouldn’t prevent them from differentiating themselves through superior capabilities.
In the AI-led arms race the natural winners are the platforms but, as Apple has shown, quality, brand and pricing power are crucial.
Agencies can compete by being more Apple, and this may be the only way to remain relevant.
Main image by The New York Public Library on Unsplash