Inscribed across the lift doors at Mindshare's office on the Strand are four adjectives: "passionate", "tenacious", "connected" and "fresh". Written in pastel colours, the mantra is a vision of how the modern media agency would like to be perceived.
But right now those four qualities are being tested more than ever before - and media agencies are being forced to re-evaluate how they make their money to survive. Thanks to the perfect storm of economic downturn, digital advancements and better transparency in the payment system, media agencies must move away from billings-based income streams and raise their game in terms of analysis, creativity and measurement.
Colin Gottlieb, chief executive EMEA of Omnicom Media Group, says: "The days of the commission system developed 150 years ago in the tea rooms of Fleet Street are numbered. This will force media agencies' remuneration models to evolve rapidly."
Nick Manning, chief operating officer of Ebiquity, which oversees the Billetts media auditing division, believes that as digital media comes increasingly into the mix, media agencies' roles will become more data-driven. Manning advises agencies to learn from the salutary tale of the music industry, which did too little, too late.
He says: "The parallel to media agencies is the record industry in the late 1990s. For many years, it survived on selling CDs and cassettes at record shops, which was hugely lucrative. They didn't want to let the business model go, even though they could see this great big thing called internet downloads coming along. They tried to hang on for far too long and didn't deal with the threat until it hit them big time."
The recession has obviously dealt media agencies a body blow, with 2008 billings down for major players such as OMD and Starcom UK (see table, page 24). As one media accountant puts it: "I expect media agency profits will be eroded. We will see margins decline over 2009 and the market will become increasingly fragmented."
But the issues run deeper than that. Long before the financial storm erupted last autumn, the traditional media agency business model was coming under fire from clients and media owners, unwilling to accept a system where accounts were not always transparent.
Pincer movement
Historically, the major agency network groups could get away with reducing their fees in exchange for rebate income from media owners, sometimes known in the trade as "kickbacks" (see box on opposite page). But now clients are asking for the rebates to be paid back, and struggling press and broadcast businesses are unwilling to give away more rebate money.
One agency source, who asked not to be named, says: "A pincer movement is strangling income streams. Fees and commissions are down, interest has plummeted due to historically low interest rates, ad-serving income has fallen and profiting from unbilled media is a thing of the past, now media owners and clients are more streetwise."
He adds: "The traditional media agency model works on the basis of loads of money going through the system. As it does so, some of it sticks to the sides and that's how agencies have made their money for decades. But clients are becoming irritated. They don't like the fact there is all this hidden money knocking around."
The short-term consequence is a race to the bottom, where major pitches are awarded to the agency that offers the client the lowest price. As a result, the agencies' margins are squeezed to single digits, with one well-known media agency reportedly adopting a three-year "churn and burn" policy when taking on new clients - seeing the account as a short-term profit machine rather than a long-term creative partnership.
The agency source agrees that now the days of "high-twenties margins" are a distant memory, service levels are in decline. "The balloon is deflating fast," he says. "The traditional media agency business model works very well when the money is going up, but it is terrible when the money is coming down, because you can't reduce your overheads by anywhere near the same levels as your income is declining."
Add to that the different ways of doing business necessitated by consumers' mass adoption of new technology, and media agencies have a fight on their hands. However, Jed Glanvill, UK chief executive of Mindshare, insists today's market provides an opportunity for his agency to pull ahead of its competitors by diversifying into strategic advice and creativity. He says: "Recessions accelerate change. We started on this journey some time ago, but other agencies that don't have a plan will flounder."
Glanvill predicts that agencies' revenues from traditional billings will eventually make up just half their sources of remuneration. He says: "Total billings are down, but we are not totally reliant on billings revenues. Already, 40% of Mindshare's business comes from fee or income-based activities not tied to traditional media billings."
On his competitors fighting for survival on price alone, he says: "If billings and market share are the objectives, agencies might take on business at a loss or a low commission. They hope to negotiate improved terms later on, but that's wishful thinking." Glanvill believes this approach harms an industry attempting to rebrand itself. He says: "A focus on our basic function of negotiating better pricing makes it harder to move the debate into added value, whether that's through better strategy or more creative ideas."
The new spaces media agencies are moving into include advertiser-funded programming, of which one of the highest-profile examples is the Krypton Factor on ITV. The show was funded by business software provider Sage and its media agency Drum PHD worked with ITV to recommission the show.
On the internet, Sofia's Diary, an online soap shown on Bebo that featured a heavy use of revenue-generating product placement, was able to avoid the strict rules governing traditional broadcast.
The game is also changing because of consumers' increasing adoption of personal video recorders, which allow them to fast-forward and screen out advertising. Derek Luddem, digital strategy director at PHD, comments: "We are going back to the time before the commercial break. This is where soap operas came from: companies such as Procter & Gamble funded programmes long before the arrival of the ad break."
Luddem argues that strategies such as connecting with bloggers or placing a link online achieve more per pound than a traditional media buy.
However, creative agencies see things differently. Rory Sutherland, vice-chairman of Ogilvy Group UK, claims media agencies are stigmatised by clients. He says: "The fact is that many clients want to commoditise for ease of comparison. It's like going into Oddbins and choosing a bottle because of the alcohol volume - the people who do that are called alcoholics."
Sutherland warns that although digital technology offers advantages, it also presents threats. He says: "At some point, media costs will fall because it's harder and harder to maintain the pretence of scarcity. More and more things are becoming media today, particularly in digital. Things have value in digital, but not scarcity."
However, Omnicom's Gottlieb is putting his faith in a digital future. He says: "Digital media is driving a world that forces justification of ideas and the measurement of outputs. Everything becomes measurable, so we will have to justify our ideas against well-defined, client performance indicators."
Ebiquity's Manning agrees that digital is one of the biggest drivers of change. "Media agencies have not yet evolved their business models to reflect the new digital world, where measurement is key," he says. "They need to invest in people, data and technology to provide the kind of analytics that are needed and there is a danger that profit pressure caused by the recession will stop them making those kinds of investments."
He adds: "The development of digital analytics will be the next arms race in the media agency world and some agency groups are starting a long way behind."
One agency group that has made analytics a priority is Vivaki, in recognition of the fact that agencies have access to more data than ever before and that this can be "confusing and paralysing" for marketers. Speaking at Media Week's Media 360 conference last month, Jack Klues, managing partner at Vivaki, said the role of a media agency is to "organise" and "simplify" data and put it to use to make smarter connections with people.
Vivaki's aim is to "search for new ideas, content, technology, tools and people that can take its brands and their clients into the future". To this end, it has developed four new platforms to help clients engage with the digital environment. The Pool is researching online video advertising options, the Audience on Demand media network will enable clients to buy specific audiences online, the REAL Social service will help clients navigate social media and the Listening Studio will capture "brand-related buzz".
The role of a media agency is still to find the best connection between brands and audiences and to deliver effective communications at the most economic rate. But while the demand for media agencies' services is arguably greater than ever, their business models will have to change to reflect the new world order - and quickly.
Money money money How media agencies traditionally generate cash
Commission, fees and bonuses from clients
Agencies receive commission, fees or bonuses from clients in return for media buying and planning services. Commission is still a large part of clients' commercial arrangements with agencies. In the "good old full-service days", commission rates on media buying were 15%.
These gradually eroded and when media independents were set up average commission on planning and buying was about 3.5%, although agencies are now doing it for as little as 0 to 1.25%.
Online media buying is still in the region of 5 to 8%. Agencies now like to charge fees for planning, topped up by buying commission. Clients pay a monthly retainer, with a contract outlining what they get, justified by timesheets against a scope of work. Bonuses are based on performance against a service level agreement and media prices as measured by an auditor, and are increasingly linked to the client's business performance.
Interest on money received from clients to pay media owners for space booked
Media agencies traditionally paid media owners 10 to 15 days after they received the money from clients. Nowadays they often arrange special deals and pay media owners even later.
In the meantime, the agency keeps the money in the bank and pockets the interest. Media is a high-turnover/low-income business. If an agency bills over £1bn per year, this can be very lucrative. However, low interest rates - the Bank of England rate is currently 0.5% - have significantly inhibited this stream of income.
Unbilled media
Media owner billing systems are not 100% efficient and don't always "speak" to media agency systems as they should do, especially in radio, local press and digital media. A remarkably high number of transactions go through the systems, and then there are group deals, discounts, refunds and CRR to factor in.
Sometimes media owners make mistakes and agencies simply aren't billed for certain media, or they aren't billed as much as they should be. It has even been suggested media owners sometimes "forget" to bill an agency for a piece of media. Some clients are aware of this and specify that they want some or all money from unbilled media returned to them and that agencies should not alert media owners to errors.
Group volume deals
Agencies negotiate prices versus rate cards, average prices and pools, and pass the discounts achieved on to clients, but they also negotiate "kickbacks" from media owners. These are paid by media owners to agencies and are generally negotiated upfront in central group deals: the bigger the volume, the better the rebate or "kickback".
Once a group has reached its negotiated volume target it gets a rebate on every extra pound spent. Clients are not made aware of these rebates and hence rarely ask for them to be credited to them.
Some say this system, which is more prevalent as big buying groups have grown stronger, kills planning: money has to go where group deals need topping up to earn rebates for the agency, not the best place for the client. Proponents of this view say fees are the only way to get true media-neutral planning.
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