Agencies vs. VCs

William Charnock is the co-head of strategic planning at JWT, and recently presented his ideas on advertising’s new business model in this Adweek article.

Charnock says that a year ago, while attending TED people would ask him “Which clients do you work for?” He answer was “We don’t really start with clients anymore.”

Charnock writes, More and more these days, we look for ideas we think people will be interested in and help to get these up and running…Some of these we create from scratch and some of them we find in places like [TED].

He continues: Now, I know agency-generated and intellectual property is nothing new, and JWT is only one of many agencies exploring this business model as an alternative to working for clients and handing the intellectual property over to them. My recent experience with JWT’s innovation and incubation venture, called Sector 64. Had proven to me that we can successfully create intellectual properties which we license to clients, retaining or sharing the intellectual ownership of the idea.

And according to Charnock, the advertising industry is better equipped to handle this business than the traditional VCs.

We have access to funds through our clients and our media partners. But more than this we have interest in the strategic value and integrity of their entrepreneurial centure. One of the biggest complains about VC funding is that they are only interested in the financial multiples they make on a relatively short-term investment. VCs are also often criticized for their lack of “big thinking,” preferring to fund ideas that are similar in nature to toehr successful centures. Anything totally new, that has never been done before, forget it. The majority of VC’s are not that visionary.

This is where I think we have the competitive advantace. Advertising agencies that are exploring IP business models tend to be looking for genuinely new ideas that can help to differentiate clients who choose to license or sponsor them. These agencies have a vested interest in the strategic value, rather than just the financial value, of the idea. And unlike the VCs, it is important for us to create ideas with longevity and the potential for mass social and cultural impact. These are, after all, the kinds of initiatives that hold the greatest value, over time, to our biggest and most valuable clients

I like the idea of agencies vs. VCs. It’s a pretty bold step that makes a lot of sense. But it takes some restructuring on the agency side. In the mid-1990s, no one would have said Cliff Freeman & Partners and Draper Fisher Jurvetson should be coloring at the same table.

I can’t find much about JWT’s Section 64 online. But the mention of it confirms my belief that there are two chief forces working to evolve the industry:

1. Big, firmly established corporations that have the funds to dabble in innovation. (e.g., JWT’s Section 64, Crispin Porter + Bogusky’s purchase of Radar Communications, and Wieden + Kennedy’s new Platform)
2. Small companies that have no regard for what an advertising agency is supposed do and be. (e.g., Poke)

An agency crawls onto VC turf.

Platform: When successful agencies start to offer more, successfully

I remember about a decade ago reading an interview with Rich Silverstein. He said he hoped Goodby would become more of an idea shop that could turn out screenplays and pilots as easily as print and broadcast advertising. This was pre-Subservient Chicken, pre-Web 2.0, pre-Titanium Lion. In a print/radio/TV world it sounded like they were a bunch of dissatisfied creatives who wanted to write novels and make feature-length movies.

But in the decade since, we’ve seen Transformer movies because Hasbro turned to the Creative Artists Agency, Crispin begin a bike-sharing program, and a presidential campaign win a Grand Prix at Cannes.

Now Creativity reports that this September, Widen + Kennedy will launch Platform, “a think tank and workshop to handle beyond-communications projects for clients.”

Sam Brookes who is leading Platform says evolving beyond advertising “could be anything from problem solving and social responsibility programs to applications for Nokia, or the evolution of Nike Plus. It’s going to be pushing ourselves beyond what we do in the communications sphere further into their business.”

And to get started, Platform is making a point hire non-advertising people like programmers, fashion designers, engineers, anthropologists and artists. Which is really what W+K did when it was just a small start-up.

Obviously, ad agencies need to pay attention to these kinds of developments. But I’m not sure that means agencies need to develop these kinds of appendages. Fallon began a great symbiotic relationship with Duffy Design, but that didn’t mean that the ad agencies of the future needed to be attached to a design firm. Similarly, Crispin’s acquisition of Radar Communications bolstered its design resources a couple years ago, and just planted its flag in Europe with the acquisition of Daddy, but that doesn’t mean that’s what agencies need to be doing.

It seems that when larger, successful agencies end up buying out or marrying smaller specialty shops, they do so to expand their offerings without completely changing the agency’s direction. Fallon and Crispin are still known for (arguably) killer print, radio, and broadcast. They’ve just become successful enough to become umbrella corporations.

So if I’m reading this right, this is what hypersuccessful ad agencies do:

1. Begin by doing one thing, and doing it well (e.g., great creative in most cases).
2. Grow in size and billings.
3. See deficiencies in their offerings (e.g., digital, design, brand consultancy).
4. Buy (sometimes organize) a smaller entity to make up for those deficiencies.
5. Keep the new entity separate from the old/traditional one.

But the mistake most agencies make is to merge #4 and #5 into a different step that is “Decide we’re just going to start offering new services to our clients within our current framework.” That’s how decent traditional shops become mediocre traditional shops with mediocre digital/design/brand consultancy capabilities.

Should Agencies Be Entering Award Shows?

The expensive-to-enter, and even-more-expensive-to-attend Cannes Lions festival is currently underway in the south of France. Meanwhile, the economy forces agencies to continue handing out pink slips. So it’s not surprising that there’s been a lot of press decrying the importance of award shows.

Bob Garfield recently stated that Cannes doesn’t matter any more. And Jeff Goodby wrote an article for Ad Age called “We Are Becoming Irrelevant Award-Chasers.”

Goodby argues that the famousness of a campaign should be the focus of agencies, and not how many gold baubles it’s received. He writes, “It’s fast becoming clear that the majority of things we’re rewarding, as an industry, are either small or marginal efforts for legitimate clients, things we made for real clients that the clients seem not to have ever heard of, or out-and-out fakes.” He thinks we should demand that awards judges take into account the sheer “famousness” of a piece of work, not just whether or not it worked.

In April, a one-post blog called A Year Without Award Shows appeared, hoping to rally agencies to the cause of boycotting the expensive shows in light of the struggling economy.

And in Jim Aitchison’s book Cutting Edge Advertising, Indra Sinha says, “If you had a moratorium on awards for ten years, if you said there will be no awards for the next ten years, and said that after those ten years there will be awards for the most new and original things that had emerged, then you might find that within those years all the new ways of expressing ourselves will just come out, because there would no longer be any compulsion to impress juries who are steeped in the old, conventional ways.”

Will agencies of the future stop submitting work to awards shows? I doubt it. They’re too much fun to win, and sometimes fairly fun to attend. But if I were an agency head, I’d have to think very hard about spending $350 per print campaign, unless it had already been written up in industry pubs and celebrated throughout the industry on “free” sites like Creativity or Ads of the World.

Years ago, Fallon decided not to enter the local Minneapolis award show, claiming they wanted to focus on national and international shows. The other shops in Minneapolis were pretty bummed. It was like the Lakers deciding not to participate in the NBA Playoffs. The championship trophy comes with a big, fat asterisk.

The only way award shows could be made irrelevant would be for the Goodbys, Fallons, Crispins and Widens of the industry to issue a joint statement of intent to abstain from further shows.

If I were an agency principal, I'd love to say, "We're not going to enter award shows any more. We're going to spend that money on raises and talent. At the very least, we'll have a better summer party." But then I limit the talent who wants to work for us. And I probably limit the press that's written about us. All of which will have some effect on the business we're able to attract.

Agencies That Make Things Other Than Ads

What happens when ad agencies start to make more than ads? Like pizza and lip balm? The July/August issue of Fast Company features excepts from a panel organized by consulting group PSFK and moderated by Fast Company writer Danielle Sacks. Panel participants included representatives from BBH Labs, Fuseproject, Anomaly, and Trumpet, all of which have created consumer products ranging from healthy pizza to ready-to-eat vegetarian meals to lip balm.

So why would agencies want to develop consumer products? Ben Malbon from BBH Labs says “By creating our own brands, we wanted to make ourselves recession-proof – or at least more recession-proof than other agencies.”

Robbie Vitrano of Trumpet says, “It was sort of inevitable. What an agency does-which is essentially to determine a unique positioning and dvine a go-to-market strategy – is pretty valuable to investors and also to a startup company.”

“I think it makes you better,” says Anamoly’s Carl Johnson. And Malbon adds, “You get exposure to the full gory detail of how clients make and lose money.” BBH likes to have employees spend time at Zag (BBH’s offshoot for commercial products) so they can return to the agency and “be able to have a much smarter conversation with a client’s marketing director, or CFO.”

Because most agencies have such a strong understanding of branding and product design, it makes sense that any products they develop could be branded from the ground up. In fact Johnson points out Anomaly hasn’t bought a single ad in sport of any of their products. “Why would we?” he asks. “You can do so much if you know what you’re doing with product placement, sponsorship, digital PR…It makes you much better at grinding out media without paying.”

Building brands, creating new products and making extra money all seem like worthy pursuits for an ad agency. But what about the fox and the hedgehog theory of business? Are these agencies diluting their core creative product by diverting resources into product development? BBH is at least insulating their agency side, having created Zag.

Seems to me it’s not necessarily the future of ad agencies. But definitely a viable option for entrepreneurial agency heads. It’s definitely something agency principals would have to invest in. Product development isn’t really a skill set most writers, art directors or planners come to the job with.

BAD's 20:20:20

Most agencies make money either by fees or commissions. With a fee, the client company and the agency decide on an hourly fee before beginning a project. With a commissioned project, the client and agency decide on a percentage that will be a proportion of the media cost (typically 15%), so at the end of the project the client receives a bill for media with the agency’s fee bundled in.

Big Agency Defectors (BAD) is a new agency in Santa Monica with a new way of billing that is neither fee nor commission. It’s called 20:20:20. Their website states:

Our process and fee structure is very straightforward and allows first-time clients to dip their toes into the water without making a major financial commitment. There are three phases of creative development, each with a bite-sized fee attached. We call it 20:20:20.

Phase 1 – we develop three creative routes for a fee of $20k.

Phase 2 – we blow out any one of these creative routes as TV scripts, print ads, outdoor, digital - or whatever else makes sense for the goals and the agreed budget - for a fee of $20k per route.

Phase 3 – for any ads produced we charge a 20% markup of production.

If you don’t want to move forward from one phase to the next, that’s no problem. At the very least you’ll have some fresh thinking about your brand. But we think you’ll like what you see and want to go further. Our fee structure rewards us for getting the ideas into production. This means doing great work right from the start.

I think about all the time I’ve put toward pitching a piece of business that resulted in nothing but burnt feelings and a drawer full of concepts I might hope to one day repurpose. If the agency had made $20k for a two-week pitch, it at least would have gone to a nicer summer party. 20:20:20 seems a great way for an agency to stop giving away so much for free.

BakerTweet from Poke

Poke is a London-based creative company that "focuses on inventing and making interactive things."

They're not an ad agency in the way Crispin or Wieden or Goodby are ad agencies. But they do enough interactive work that you could argue they're in the leagues of the Barbarian Group or R/GA. Still, on their FAQs, they answer the question, "Are you an online advertising agency?" like this:

In a word: "Yno."

Poke is currently getting a lot of press from their BakerTweet invention - an industrial looking box that sends Tweets announcing croissants and buns are fresh out of the oven.

So Poke is a web agency. But also a design agency. And also an agency that can't really be categorized at all.

Is this what ad agencies need to become? Or does Poke live in its world and let the Goodbys and Fallons of the world live in theirs?

In a word: Yno.

I think when an agency positions itself as an "ad agency" it becomes much more difficult to sell anything but advertising to the client. Even media-savvy clients are likely to say, "Yes, you handle our advertising, but we've got other suppliers to handle special promotions, online work and other marketing."

If you want to sell more than advertising to your clients - even ambient media installations and PR events - you've got to begin by positioning yourself as more than an ad agency. And that's got to be a top-down decision. It probably won't happen just because a writer and an art director had a pretty cool idea that went beyond the print brief.

The Irv Blitz model of business

Irv Blitz is director in LA. I’ve worked with him on a couple projects. Really nice guy. Very hard worker.

From what I understand, Irv owns all his own equipment – the lights, the cameras, everything. So while most directors have to rent their equipment from the studios, Irv rents everything from himself. He gets paid as the director, and he gets paid through his rental company when he uses his equipment. I’m not sure, but I imagine the margins on that help him outbid competitors when he needs to.

Shouldn’t agencies be doing this? Why couldn’t an agency have an in-house production company. For every project, the agency would see two streams of income: the clients pay them for a concept, and for production. It could work in broadcast as well as print.

One reason might be the hedgehog and the fox theory of business. It would be tough to be a Wieden-caliber agency and have a Smuggler-caliber production wing. Still, that’s not a reason to try it.

Last thought: An agency/production house hybrid – I think that’s exactly what digital agencies are.