Doug Poretz

Standard and Poor's Whacks Advertising Companies

The real problem with the advertising stocks isn't the economy -- the economy will be the straw that breaks the agencies' back -- but the core problem is that they have the wrong business model it is outdated and has at least two basic flaws. I have been in the communications business for 40 years and have written about this extensively at my blog (linked above).

First of all, agencies bill on the basis of time. They remunerate on the basis of time. They measure success, make promotions, award bonuses and are totally driven by the time sheets that dominate their businesses. Crazy. Clients don't care how busy their agency may or may not be. They only care about whether the value they expected to receive is being delivered at a minimum. Time has very little to do with that. Skill, commitment, capabilities have a lot more to do with that. In fact, an agency's interests are just not aligned with their client's interests when the agency is obsessed with time. That is a core fundamental of the agency business, and it will kill them eventually.

Secondly, agencies are structured and organized on the basis of silos defined by distribution channels. That is, there are ad agencies (or "practice groups" within larger firms) that are separately identifiable because they buy time or space on a distribution channel owned by another enterprise. PR is identifiable because that effort seeks to "earn" coverage on someone else's distribution channel. Digital, interactive, events marketing -- go through the list of those specialities of the communications business and they all refer to the distribution channel. But this is 2009 and the way to get a message to an audience is by using whatever distributuion channels work. That goal is undermined when agencies are organized by silos where each practice group seeks to win more of the client's budget for their silo rather than seeking to be part of an integrated team that has the single shared goal of hitting a homerun for the client. This, too, will eventually kill the existing business model.

Washington Post Pulitzer Prize winning business reporter Steve Pearlstein wrote about this outdated model about three years ago and his points are still valid. You can read where he said here: tinyurl.com/ylobdq

If You Believe Bernstein's Estimates, It's Time to Buy Ad Related Stocks

I am the co-founder of a 100-person communciations firm based in DC and I have 40 years of experience in PR, advertising, and (more recently, of course) interactive. I will focus these comments on your comments about WPPGY, OMC, and IPG. I believe they all have inherent and very major flaws in their business models. Rather than reiterate those views here, if you are interested, I laid-out my thoughts here: tinyurl.com/dk8ked

Beyond the analysis at that link, I can tell what is happening simply because I am on the receiving end of emails and phone calls from people who are leaving the big agnecies. Many have been laid-off; many more are afraid (with good reason) for being laid-off in the near future; and many (especially the most talented) just want to get out of a big ship that will take a very long time to turn around. If this was a topical isolated and temporary phneomenon, it might be an opportunity for the big agencies to pare expenses and eliminate some deadwood, etc. The problem is that in this business when people go and client teams experience rapid turnover, clients become impatient, especially when their own budgets are under pressure and their bosses are yelling for new ideas and approaches.

In short: from someone inside the business ... I see absolutely no reason to think that the big agencies have a bright future in the short-term.