The future is digital, but less profitably?
Hidden amongst the small print of financial announcements from various agencies in the last couple of weeks were a number of hints that, while the advent of digital is transforming the shape of the marketing industry, it is not necessarily helping to maintain its profitability.
In other words, the industry has little future without digital, but the future with digital is unlikely to be as profitable as it was before it.
Part of the problem has been the impression formed among clients from the early days of digital that it is a cheaper way to communicate. That’s the trouble when effective results appear to be produced from nothing more than a box of chips instead of the massive creative department of a traditional agency where production costs were a chunky component of marketing budgets.
It is easy to overlook that even digital communications often have to make use of external production resources and a range of other bought in skills. And it is tempting to imagine that the expertise involved in executing digital work is provided by the software alone, without the crucial time-consuming planning, creative and technical skills of its producer.
Against such a backcloth it‘s hardly surprising that LBi International regarded the achievement of an improved operating profit margin of 12.2% (before all sorts of exceptional costs and up from 9.6% in the corresponding period last year) as worthy of celebration. Of course that’s good news, but the performance is still behind what traditional marketing agencies used to aim at.
Evidence is growing that wise operators are getting more cautious about regarding digital as the next gravy train. Recently we learned that Dentsu had run away from paying the sort of money that AKQA (or at least its private equity owner General Atlantic Partners) thought it was worth. AIM listed Digital Marketing Group put out a cautious message about its revenue prospects last week, while Asia Digital has had to sell some of its business just to keep afloat.
The Aegis bid for the digital-rich Mitchell Communication Group in Australia is unlikely to have been influenced by any hope of better margins but rather by the need to expand its presence in that region and to rebalance its income streams as traditional media revenue declines.
None of this indicates that digital is anything but an essential component of marketing activity in the future. But “stand alone” digital agencies are going to have to demonstrate some uniquely valuable skills to attract clients and earn the profit margins they probably deserve, not to mention command the high valuations that were enjoyed in early years.
Recognising that marketing agencies need digital expertise and that digital expertise on its own may not be the best way to make good profits, we are seeing an increasing number of digital agencies getting into bed with traditional marketing businesses. Sometimes it is a marriage of supreme strategic merit. Sometimes it is a marriage of convenience or financial necessity. Last week’s example was the absorption of Media Square’s Twenty-Six brand into its Lloyd Northover design consultancy.
Bob Willott is editor of “Marketing Services Financial Intelligence”, providing continuing news and analysis of financial developments in the marketing communications industry