Frenemies: The Epic Disruption of the Ad Business (and Everything Else) (23 page)

Corden introduced Moonves, who took shots at various competitors before stepping aside to allow the introduction of CBS's fall prime-time schedule, including the twenty new shows, all of them wholly or partially owned by the network. With Jo Ann Ross as orchestra leader—or “Momma,” as she joyishly called herself—an array of well-known actors, newscasters, and executives trotted onto the Carnegie Hall stage.

When Upfront sales ended later that summer, Moonves blared that 2016 was “the strongest Upfront we have seen in many years.” He said CBS enjoyed “double-digit price increases.” Irwin Gotlieb concurred: “CBS did extremely well. Jo Ann Ross is as good as there is in the business. She knows how to read the marketplace.”

What didn't change is that since network TV was the only way to reach a mass audience, the networks continued to get higher prices for shrinking live audiences and thus less viewing of ads. How long will this CBS advantage last? Will the advantage erode as technology enables
buyers to cobble together a digitally targeted mass audience? Those two questions will hover over Les Moonves's head in coming years.

Michael Kassan, among others, believes Les Moonves will not like the answers to those questions. True, Kassan reflected, 2016 was “one of the best Upfronts. There was a flocking back to television as a safe place.” Why? Because buyers in 2015 decided to spend less on the Upfront, wagering that the scatter market would be less expensive—and they guessed wrong. This year, he believes buyers said, “I don't want to get burned again.” Nevertheless, he echoed a view shared by Gotlieb: for Moonves and the networks, “it was a short-term win, I
think.”

“We recast our business as communications marketing. The reason we did that was we wanted access to the marketing budgets, and we wanted to signal: you don't have to go to an ad agency to get marketing results.”

—Richard Edelman

The advertising business is being invaded from all directions. A plethora of Michael Kassan's media clients—the
New York Times
,
the
Wall Street Journal
,
NBC, Condé Nast, Hearst, Vox, Refinery29, among others—are stealthily building out their own in-house advertising agencies. In 2015, Kassan believed that the primary disruption threat to agencies was to the media agencies that massaged the data, devised strategies, and purchased advertising time. He shared the view that Google and Facebook would one day go directly to agency clients and say, “Why do you need an agency in the middle?” By early 2016, Kassan's view had shifted: “I think the most likely to be disrupted now are the traditional creative agencies, and I'll tell you why. Every publisher from Condé Naste to Hearst to NBC to Disney now has creative agency units being built inside. So
Condé Nast has 23 Stories. Hearst is making all these investments in digital content creation. NBC has a content studio. Their mission is to sit down with Procter & Gamble and say, ‘We can bring you ideas. We actually know how to create it.' They're not saying this, but the implication is: ‘Why do you need a traditional advertising agency?'”

Today up to three quarters of the up to $2 trillion or so that is spent worldwide on advertising and marketing is not funneled through the creative ad agencies featured in
Mad Men.
The rise of below-the-line marketing expenditures, including public relations, polling, design, branding, lobbying, and in-store sales promotions, was why Martin Sorrell and rival holding companies vied to stave off disruption by acquiring marketing firms. Platoons of disrupters keep coming over the ridge. Among them, none is more surprising than publishers posing as ad agencies.

This ambition was on display on a visit to the
New York Times
in January 2016. The
Times
employed an advertising sales team of 325 people, and if you spied them at their desks you saw that nearly half were coders and designers and copywriters creating ads for clients rather than just selling ad space. Under chief revenue officer Meredith Levien, they worked for the T Brand Studio, whose purpose she described this way: “We are now in the business of making advertising. Our ad sales person goes out with a content creator to meet clients.” The ads they create are interchangeably described as native ads or branded content, and they involve crafting stories featuring a brand. These look little different from a news story in the digital edition, except they carry a modest-sized advertorial label at the top of the page: “Paid for and Posted by . . .” With mobile becoming the dominant digital platform, native ads were necessary, she says, because the small phone screen “left no adjacent space on the page” for ads. Thus new ad forms were needed.

The T Brand Studio “is separate from the newsroom,” says
Times
CEO Mark Thompson, insisting that the church/state barrier has not been breached. Much of the sales force is composed of former journalists, which he sees as a calling card. “Clients come to us wanting to work with people comfortable with the idiom of storytelling. They don't have that with the agencies. And the agencies are locked into formats. We have a group of people who are used to inventing new formats. We offer a more open-ended approach.” The
Times
aspired to serve as a near full-service agency. They bought a digital company, HelloSociety, that offers audience analytics and strategic alliances with influencers from its arsenal of 1,500 social media stars. They train ex-journalists and hire videographers to craft native video ads for mobile phones. They sell consulting services. They recruit employees skilled in distributing content on social networks. They are, Thompson says, “helping clients figure out how to use social media platforms. We're beginning to offer a broader portfolio of useful marketing services.”

The
Times
is not yet a meaningful disrupter; its T Brand Studio produced revenues of just $35 million in 2015. But this represented a jump of 150 percent over the prior year. The incursions add up when you throw in the native ad revenues in 2016 of almost $600 million for Vice, $250 million for BuzzFeed, and about $60 million for the
Wall Street Journal
. Vice Media went a step further and formed a global ad agency, Virtue Worldwide, helping clients like Lululemon, and Unilever brands like Dove's personal-care products and Breyers ice cream shape marketing and ad campaigns to reach younger consumers. Refinery29 provides about two thousand stories per month targeted mostly at women and aiming to “help people discover and refine their personal style.” Philippe von Borries, a cofounder, says, “We think of ourselves as a creative tool set for brands,” helping them reach the 140 million women who visited his site each month by the winter of 2016. Of his 350 employees, 110 of them were tasked with
creating native ads. “Brands need us because we have an audience and we have data.” He would not disclose his ad revenues, but said they rose 70 percent in 2015.

In England, David Pemsel, the former marketing director of the
Guardian
newspaper and now CEO of the umbrella Guardian Media Group, doesn't sound as if he embraces that newspaper's leftist attitude toward capitalism when he describes the teams of storytellers and graphic artists that he has forged into Guardian Labs, with a staff of two hundred working directly with brands. “Guardian Labs is evolving into how do we help brands sell their stories. That could be by creating films. It could be producing print products or blogs. There are a whole bunch of assets I think we can create on behalf of our clients that will not deceive our audience.” In appearance, Pemsel could pass for a smooth ad executive, with his fashionable stubble, square red-framed glasses, and a black V-neck tossed over a white shirt. In reality, he makes clear that he is taking aim at Martin Sorrell and cumbersome agencies, who he believes will be threatened by “media owners like the Guardian and Vice beginning to create advertising on behalf of our clients to get to the audience.” The Guardian and Vice and the
Times
are hardly alone in creating internal agencies. Most traditional media companies—from Condé Nast to Hearst to NBC to Time Inc.—have molded what they refer to as content studios to work directly with brands.

The more immediate disruption
threat to agencies comes from many former clients like consulting companies that are also invading the advertising and marketing business. “Several years ago, we thought Google was going to eat our lunch,” Sorrell says. “Lately, it's become more of a Facebook threat.” But the bigger menace, he says, may come from companies who have relationships with corporate CEOs or who have special
skills to go along with their deep pockets. “People always said McKinsey would move into the marketing space, which they are increasingly doing. And Bain and the Boston Consulting Group. And then you're getting accounting firms that split their auditing and consulting functions. Accenture was our auditors. IBM buys three advertising firms in one week. Then there are the software companies—Salesforce.com, Oracle. So you've got layers.” One reason Sorrell's WPP formed the marketing consulting firm Vermeer in 2014, as Publicis in early 2015 acquired the much larger global consulting firm of Sapient, was to better compete with consultants who had the ear of C-suite executives and were aggressively offering marketing services. The competitive threat from consulting companies was given a boost by Jon Mandel's vilification of the holding companies.

Unlike in Silicon Valley, marketing disrupters don't hide in a garage nurturing a new idea with the zeal of a founder. The threat usually comes from established corporations with a pool of capital and eagerness to seize a fresh business opportunity. “The largest digital ad agency in the country today is IBM,” Michael Kassan says. “Accenture now has a digital agency. Deloitte has a digital agency. Ernst and Young has a digital agency. Maurice Levy spent $3.7 billion to buy, essentially, a consulting firm”—Sapient. He believes Levy was correct to do so because he wanted to confront the danger from companies like IBM. Levy had reason to quake, for at the end of 2015 the three largest global digital agencies by revenue, according to
Advertising Age
, were companies new to the marketing business: IBM, Accenture, and Deloitte. And the market cap or stock value of IBM (about $165 billion) was double the combined value of the six largest advertising and marketing holding companies—WPP, Publicis, Omnicom, IPG, Havas, and Dentsu.

IBM is worth a detour, for it has entered the marketing business at warp speed. In May 2015,
Advertising Age
named IBM's Interactive
Experience (iX) division the largest global digital agency. Later in 2015, IBM ingested live streaming and marketing software companies. Over two weeks in February 2016, it purchased two digital advertising agencies in Germany and one in the United States, and announced that it planned to open design studios in Prague, Warsaw, and Dubai. Worldwide, IBM had marketing offices in thirty locations and a staff of more than ten thousand performing creative and marketing design work for companies. Paul Papas, the global leader of its Interactive Experience division, announced, “We're raising the bar for experience-led digital marketing and commerce.” Coupled with its October 2015 acquisition of the online assets of the Weather Company, weather.com, IBM made it clear that it was in the data business.

Joanna Peña-Bickley works for Papas and is the global chief creative officer for IBM iX. Her career started at ABC News, which she left to invent a video player to deliver streaming news videos and to design company Web sites. After the dot.com crash, she spent the next decade working for advertising agencies owned by WPP and Omnicom. Thinking that agencies were too focused on mass—like TV and full-page newspaper ads—and not focused enough on “solving the business problems of companies,” she started a marketing company that grew to 150 employees.

IBM iX acquired her company and together she said they set out “to rethink the agency world.” The “hole in the market” they saw was that data was not being used to zero in on what individuals wanted or needed and to solve large corporate problems. “Agencies are in a race to the bottom. They are losing talent, and the reason is that they have commoditized their creativity.” Their corporate bosses at the holding companies, she believes, dwell too much on finances, including selling more thirty- and sixty-second ads. “The people that will win the race in the end will be the people who can fundamentally refine and make new products out of data.” This data, for instance, tells IBM that large
numbers of millennials don't want to own cars, they want to share them. So in representing an auto company, IBM iX brings a team to the auto company “to tackle this big business problem,” and employing the data its engineers, writers, and designers assemble, they craft individualized messages to reach these millennials.

Although her creative department hired 1500 designers and writers in 2015, and would hire another 1500 in 2016, she said IBM would not supplant creative ad agencies. “Your ad agencies will still absolutely play a role in the innovation that we create. There's really room at the table for everyone. Our focus isn't ever going to be in the ad creation or campaign creation. It will always focus on innovation.” She is sugarcoating, because her use of data and strategizing might not leave much “room at the table” for Irwin Gotlieb's GroupM.

In the world of data gatherers, IBM sees weather as a beachhead. Weather reports trigger emotional and very human responses that yield important marketing clues. Weather offers IBM an opportunity to marry data and marketing. For example, people tend to get depressed when it rains, which boosts both soup sales and movie watching. High pollen counts cue Walgreens ads. Inclement weather might trigger a company to advertise its all-weather tires. Steamy weather invites Gatorade ads. “We process billions of data points a day about the weather,” says Jay Henderson, director of IBM's Marketing Cloud. “The weather,” IBM CEO Ginni Rometty declared in a keynote speech at the Consumer Electronics Show in January 2016, “is the most pervasive impact source of data there is. It is why IBM acquired weather.com.”

Another reason IBM acquired weather.com and its digital agencies was to mate them with Watson, a supercomputer that uses artificial intelligence and software to answer verbal questions, as Apple's Siri, Amazon's Alexa, or Google's Home strives to. But Watson's ambition is to be much more than a personal digital assistant. Its goal is to be
capable of cognitive reasoning, like a human. Unlike a human, it would be capable of processing enormous amounts of data to unearth a single correct answer or to search for patterns to predict behavior. Watson searched weather.com and instantly awarded an IBM client, the Campbell Soup Company, with locations to invest their marketing dollars. Watson sweeps the Internet for what millions of people write on social networks and blogs. Instead of using standard measurement tools—clicks, CPMs, demographics, geography—it identifies personality types and interests that advertisers can precisely target. Instantly, Watson can scoop up sports fans, personalizing marketing messages to individuals. IBM is betting that ads directed at individuals will result in highly relevant marketing that may please rather than annoy.

It worked for Unilever when it partnered with IBM's Weather Company and created a new platform, Watson Ads, allowing consumers to tap into their mobile phone or computer and ask for a mayonnaise recipe using favored personal ingredients. “The big thing more than anything else,” Jeremy Steinberg, the Weather Company's global sales chief, announced, “is that Watson is going to help humanize the advertising experience. It allows consumers to have a one-on-one relationship with brands like never before.”