How the digital age has reshaped the ad game

Laura Petrecca and Roger Yu | USA TODAY

Madison Avenue is quickly morphing into Digital Drive.

Technological advances have changed everything from where consumers watch TV to how they buy holiday gifts. In turn, ad agencies have revamped their hiring practices, commercial buying models and even their mind-sets on whether other firms in their field should be considered friends, rivals or a mixture of the two.

Sunday's news of a merger between Omnicom Group and Publicis Groupe was a prime example of how traditional ad firms are evolving to better compete in this increasingly digital landscape. The two holding companies announced a merger to form the world's largest ad company, called Publicis Omnicom Group.

That combination will "benefit our clients by bringing together the most comprehensive offering of analog and digital services," Publicis CEO Maurice Levy said in a statement. He and Omnicom CEO John Wren will be co-CEOs of the merged company.

That's a grand example of how the ad industry is changing. But there are countless others. For instance:

• Consumers are willingly leaving digital trails of their consumption habits and agencies will risk losing clients if they're unable to tailor campaigns that reflect targeted demographics.

• "Creative types" typically need to back up their super buzzy Super Bowl commercial ideas with a digital or social-media plan that will have measurable results.

• Those who buy ads on digital platforms no longer need to be adept at verbal wheeling and dealing — instead, they need to know how to use automated trading systems that simply take the highest bid.

"The digitization of the world has had a tremendous impact on advertising strategy, the advertising business and relationships in advertising," says Steve Farella, a 30-year ad industry veteran who is now CEO of media company holding group Maxxcom Global Media.

In the 1950s and 1960s, "you needed to be a creative person" to make it in this business, he says. And while creativity is still incredibly important, he adds that "today, you need to be a technology person."

Rarely do marketers run a campaign that only uses TV, radio or print. They now want integrated multimedia efforts that can include buying strategic search terms or creating a wider Internet-based marketing effort.

As clients demand more measurable and sophisticated campaigns, ad agencies are doing all they can to oblige.

That means hiring engineers who can create a logical yet eye-appealing "user experience" for a client's Web page.

It also means ramping up on digital investments — cited by Publicis Omnicom as a primary motive for their marriage.

"Instead of spending twice as much money (on future digital investments), we can maybe spend 100% or 125% of what we'd be spending and get the greatest and best thing on the planet," says Wren, referring to digital ads.

As an example, Wren pointed to Omnicom's trading desks — where digital ads are bought and sold quickly on exchanges — as examples of its digital expansion and vowed to push their investment in technology.

"We can offer it to as many markets as appropriate," says Wren, who will be co-CEO of the merged firm.

The combined companies will now have more data analysts working together to process information and pull out learning points, says Wren. "The real value is how many analysts we have that can process and turn data and into meaningful analysis," he says.

Driven by shared services and products and cost-cutting, the combined company will likely save about $500 million, estimates Patrick Kirby, an analyst at Deutsche Bank.

The digital revolution for the ad industry also means making friends with a company that could also be considered a competitor.

WPP Group CEO Martin Sorrell once labeled Google as a "frenemy," and the U.K.-based firm's spending on Google rose 20% last year to hit $2 billion.

Mirroring the tactics and strategies of Google, Facebook and other tech companies, ad agencies want to work hand-in-hand with their clients to deliver similar types of services that come from mining their own data and delivering ads in the media outlets that can deliver the best bang for their buck.

GROWING DIGITAL ADS

The ad industry changes come as these firms try to grab their share of burgeoning expenditures in the digital media space.

Internet advertising is expected to increase by an average of 15% a year between 2012 and 2015, according to the latest advertising expenditure forecast from ZenithOptimedia.

Mobile is the fastest-growing segment of Internet advertising, with a 67% growth anticipated this year. Facebook last week impressed Wall Street with its strong performance attracting mobile ads.

In comparison, the global advertising market as a whole is estimated to grow 3.5% to $505 billion this year.

While there are business advantages to the digital explosion, it also makes for "a confusing landscape," says Clark Fredricksen, a vice president at research company eMarketer.

"Marketers face a very complex array of ad technologies, middlemen, acronyms that all represent roadblocks for them in talking to consumers. You're going to buy a mix of media — TV, mobile or what have you," he says. "In order to do that well in targeted fashion, it's very difficult. It just requires a lot of work."

The Omnicom-Publicis deal only underscores the industry players' attempt to get a handle on and beat competitors in tackling the complexities.

"The new group will, with WPP (previously the largest ad holding company in the world), dominate the industry and will have the means to set the norms — something the market badly needs," wrote Charles Bedouelle, an analyst at Exane BNP Paribas, in a report.

But at least one competitor says joining forces won't make the firms more digitally powerful or technologically savvy.

"The industry's obsession with mergers and acquisitions still amazes me, particularly in a world where digital and technology have made scale irrelevant," says David Jones, global chief executive officer at ad firm Havas, noting that Instagram has just 32 employees yet has 140 million users.

He also points out that it's the technology that matters, not a vast amount of people or resources behind that technology.

"Clients today want us to be faster, more agile, more nimble and more entrepreneurial not bigger and more bureaucratic and more complex," he said in that e-mailed statement. "I doubt you'll find a single client who said, 'We wish you were bigger and we were less important to you.' "

Larger ad agencies' efforts to compete with the likes of Google, Facebook and Salesforce in emerging advertising technologies and data mining could be an exercise in futility, says Bob Vallee, CEO of Project: WorldWide, a network of ad agencies.

"That the combination (of Omnicom and Publicis) is going to place them in the center of the revolution is a little far-fetched," he says. "Advances in ad technologies by companies like Google and Salesforce will accelerate much faster than (Omnicom-Publicis).

Ad agencies' competitive strength will continue to be creative ideas and content message, he says.

"The content that's placed has to be extremely creative," Vallee says. "It doesn't matter how good their digital chops are. We're going to get beat by Google and Salesforce (in technology). Where and how it's placed is important, but tech companies will control more of that. Let's work with tech companies and decide how to get it to the people. We should focus on ideas, the intent."

Contributing: Rebecca Castagna