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  • Survival Tips for Advertising Agencies in the Online World

    By: Karen Webster on August 29th, 2007

    For centuries, advertisers have operated on a wing and a prayer. They ran ads and hoped for the best. Other than looking at monthly sales figures which told them nothing about the role of advertising in motivating a consumer’s decision to buy, advertisers never understood whether ad spending really drove sales.

    Google has changed that game forever. With more than a 60% share of the search-based advertising business, it is also one of the largest players in inserting ads in the space made available on websites across the internet. Today, Google allows advertisers to pay when someone clicks on their ad and tomorrow may charge only when someone buys.
    The technologies that enable online advertising provide a vastly more efficient means than other available options for doing what advertisers ultimately want—selling their products and services to consumers.

    The sea change that Google – and the other catalysts like Yahoo, Microsoft MSN and that are nipping at their heels in the online advertising world – will bring to the marketing and advertising business is profound. What’s certain is that they will change the advertising game forever. Here are a few thoughts for advertising agencies, and in-house advertising departments, on ways to stay ahead of the inevitable tidal wave created by Google’s imprint on the online world.

    Milk the Model. Convergence is finally here to stay in part because the cost of connectivity and computing power has never been lower. In a few short years, much of the content that people look at will come in digital form on devices that are connected to the Internet—and therefore will become prime candidates for whiz bang advertising technologies that turn today’s two dimensional media fully interactive experiences. There is only one problem. Advertising revenue online is but a fraction of what it is off line – by a factor of 15. That means that commissions on those advertising placements, assuming that agencies are not replaced by exchanges that disintermediate them, will also plummet. When coupled by the flight of advertising from traditional print outlets to that which lives in cyberspace, the long term survival of agency commissions seems grim. So what’s an agency to do? Find other sources of revenue and milk the model for all its worth in the meantime.

    Embrace the pointy heads. Enter one alternate revenue stream: data. Information technology and data are the names of the game in the online world. Computer software is the lingua franca of online advertising. The billions and billions of bytes of data captured by the massive search engine databases are what enable clever software algorithms to target the right ads to the right consumer at the right time. It’s what fuels Google’s empire—with a market value of $145 billion— and has persuaded them from doing things like starting Google Checkout to capture transaction data and courting DoubleClick to get data that company has collected from cookies on millions of computers.

    Not surprisingly, companies like Google have been hiring Ph.D.s in economics, statistics, mathematics, and computer science in droves. But companies and their advertising agencies are going to want to hire more quantitative types too. “Data analytics” may be the new buzz phrase in marketing but the spoils will go to those who understand how to mine the vast troves of data coming off the Internet into meaningful and useful insights – and what will make micro-segmentation both a reality and a profit maker.

    Change the model. Many of the skills that have been at the core of the advertising and communications business are going to be far less needed tomorrow. Take sales reps, for instance. The future of buying and selling of advertising space will be done online via electronic exchanges. That’s already the MO behind the keyword bidding systems operated by Google and its competitors. More online display ads—currently sold partly by direct sales forces—will move that direction as well as onto advertising networks that consolidate space. Advertisers, agencies, and publishers aren’t going to need nearly as many sales people making one-off sales since there won’t be as many advertisers interested in those one-off buys. Of course, advertising will still need great ideas and the demand for creative types isn’t going to go away. But the best advertising agencies will turn their focus toward the hiring of creative strategists that can devise campaigns suitable to a digital landscape and data-driven behavioral experts who can turn mounds of information into actionable ideas. And, it may be that ad agencies turn their business model upside down where revenue comes solely on the basis of their creative contributions rather than on commissions from placing advertising sales.

    Think small. Marketers understand well that broadcast messaging is like shooting a howitzer in the dark. The treasure troves of data that your pointy heads will mine will allow you and your clients to achieve the nirvana of targeted messages and campaigns. It will be possible for literally markets of one to be served. These data will enable advertisers to develop more targeted campaigns, assess the effectiveness of their campaigns, adjust strategies in real time, and most importantly gain a much deeper understanding of their potential customers than is possible today. That reality will force marketers (probably via their CEOs) to make some hard choices about advertising to build brand and advertising to build sales. The new technologies and data enable advertisers to target their messages to communities of probable buyers so that they can achieve their singular goal—make sales. Of course, this also means that marketers and their advertising agencies should be able to prove their worth—and CEOs will be looking at hard evidence that their advertising dollars have solid ROIs.

    Don’t expect a free lunch. Because of scale economies and positive feedback effects, it is likely that huge players will emerge in online advertising that will control directly or indirectly access to ad space. Google is already a long way there. Once the industry gets consolidated advertisers may be giving back in higher prices some of the gains they have realized along the way to the companies that have the eyeballs locked up. Google is giving lots away for free these days and offering handsome deals to publishers. Don’t count on that lasting necessarily.

    More can be annoying. There is going to be a vast expansion in where advertising messages are presented. The online advertising industry is already looking to everything from the software you use, to your mobile phones, to geo-positioning services to place advertisements. Everything that’s digital may have ads and almost everything we look at will be digital. But is more really better? Given this potential explosion of advertising messages, it is likely to become harder and harder for companies to break through – and more difficult for consumers to want to pay attention to your message. The great equalizer will be the business model – who pays for what and how much will quickly quell the temptation to put an advertisement on everything.

    The advertising business is a classic example of a catalyst - businesses that derive great value and profits by bringing different customers together at the same time onto the same platform and helping them interact. Catalysts make those interactions more efficient, less costly and of greater value to all parties. The catalyst business model is the same one that is driving Web 2.0 and a good portion of the economy today.

    Catalysts have transformed a variety of industries for thousands of years. Microsoft did it with a software platform and transformed the way end users interacted with their computers. Visa did it with a payment card platform and changed the way merchants and shoppers did business. Lloyds of London did it with a insurance market in London in the late 17th century and helped spur commerce by insuring merchandise as it crossed the high seas in wooden boats. And, Simon Properties did it with the shopping mall platform and brought retailers and customers together for a more engaging shopping experience. Hearst Publishing did it with a publishing platform and made it possible for advertisers and readers to form a bond.

    As catalysts, marketers and advertisers, in many respects, have been a part of that change too – pushing, embracing and often challenging new ways of doing business. The advertising industry in 20 years will be vastly different in almost all respects than it is today – with new and powerful catalysts like Google at the heart of that transformation. Some members of this vast catalyst ecosystem today will look back and smile at their success at navigating the turbulent waters to the new industry. Others will be doing other things. Which will you be is the question.

    Webster is the President of (Market Platform Dynamics). She headed the research effort for Catalyst Code: The Strategies of the World’s Most Dynamic Companies, authored by MPD Founder David S. Evans and Chairman Richard Schmalnesee. She consults extensively for platform-based businesses and is an adviser to iCache which was recently named one of the top three disruptive businesses by Business 2.0.

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