Big ad agencies are trying to cut out ad-tech middlemen — and justify their own existence

Jeff Bezos

Giant ad-buying agencies are exploring direct programmatic ad deals with top publishers.
Theoretically, such deals would cut out many of the ad-tech intermediaries inherent in digital advertising and the fees they charge.
These arrangements could also bring back more buying power to ad agencies as their futures are increasingly in doubt.
"Both agencies and brands are aggressively leaning in [to this concept], and as a top-10 digital publisher, I can tell you the conversations are very real," said Scott Hendrickson, who heads up sales for News IQ, a programmatic unit at News Corp.
Top programmatic ad-buying firms are essentially trying to follow Amazon's ad playbook.

Giant ad agencies that want to cement their place in the world are drawing inspiration from two unexpected sources: TV and Amazon.

In an era where marketers can buy ads on thousands of websites and apps using powerful software and data, potentially without using an ad agency, these ad-buying firms are looking to reestablish their value by throwing around their weight.

Specifically, the biggest media-buying firms — including GroupM, Omnicom, and Dentsu — are contemplating big changes to the way they buy digital ads. Some are even in talks with top web publishers about gaining preferred, direct access to ad space using programmatic tools.

The hope would be for these agencies to reestablish the kind of buying clout they've long enjoyed in the TV industry, where ad buyers push for preferred pricing and inventory by pooling together the budgets of dozens of clients.

And interestingly, these ad firms might like to exert this clout using the same sort of software- and code-driven connections with top web publishers that have fueled Amazon's rise in advertising.

Ad agencies are looking to plug directly into websites for ad space, just like Amazon

Roughly five years ago, as Amazon started nudging into the advertising business by building its ad tech, the e-commerce giant (along with several others) started offering a header-bidding product to publishers.

That move with header bidding — technology that enables lots of ad buyers to bid on ad space at the same time and has proved popular among web publishers — plugged Amazon's tech directly into publishers' sites, often giving them the first crack at running ads using its pools of consumer shopping data.

Now Amazon is one of the fastest-growing digital ad companies. Ad agencies would like the same kind of preferential treatment.

This type of arrangement, often referred to as server-to-server integration, would appear to have two benefits for agencies:

It would limit the number of ad-tech intermediaries involved in these kinds of ad buys — and the fees they charge advertisers.
It could reestablish agencies' buying heft amid questions about the role of giant ad-holding companies and as marketers contemplate bringing programmatic ad-buying in-house.

"It's early, but what we're seeing is big agencies trying to emulate what Amazon's done over the past few years," a top publishing executive said. "They're trying to integrate directly with publishers to get preferred access to inventory. It's going to be interesting to see how much adoption it gets and how Amazon and other ad-tech companies react."

Plenty of people doubt these tactics, and big publishers aren't necessarily sure they want to play ball with this direct integration. Several ad agencies, like Omnicom, tried to do this a few years ago and never really got anywhere, some publishers say.

And some question whether ad agencies have the technical chops to pull this off without leaning on the very ad-tech providers they'd like to unseat.

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Dentsu has been leading the charge through its programmatic ad-buying unit

The Japanese ad-holding giant Dentsu has been vocal about the need to weed out the seemingly endless array of ad-tech intermediaries that take a small cut of many advertisers' budgets on the web.

Art Muldoon, the co-CEO of Dentsu's programmatic specialty division, Amnet Group, said the company was in discussions with some publishers about connecting directly with their ad-space supply.

"Right now, this is experimental and exploratory," he said.

Amnet is looking at doing this with some existing technology partners and some of its own tech. It's early, but the idea is that it would directly sync with about 100 top publishers.

"Our driving motivation is to create the most efficient supply chain in the industry, and curate quality at scale," said Matt Greitzer, Amnet's other co-CEO. That would mean pulling back on buying via open exchanges.

Greitzer added: "Publishers with whom we have spoken thus far are very enthusiastic."

Brian O'Kelley, the CEO of AppNexus, says that many of Amnet's ideas date back more than a decade, when programmatic advertising was in its infancy. Over time, venture money poured into ad tech, and the ecosystem became beyond cluttered.

"It's a little bit back to the future," O'Kelley said. "The bell has been tolling for a while."

The media-buying firm Magna, a division of Interpublic, is also exploring forming closer programmatic ties with publishers.

"We've been talking about it for years," said Vin Paolozzi, Magna's executive vice president of innovation. "Right now, we are doing everything we can to mitigate risk and alleviate any pressures for publishers."

There's a growing push in advertising to trim the fat out of programmatic

Recent trends in digital advertising are fueling this desire for advertisers to get closer to top publishers — or being used as a great excuse.

Over the past few years, as more ad budgets have poured into programmatic channels, lots of problems have come to light, leading to closer scrutiny of the entire sector.

For example, marketers have been repeatedly burned by ads ending up in the wrong places. And while ad tech has promised efficiency, digital ad space is too often traded back and forth among middlemen.

Advertisers and publishers alike complain that those companies charge fees along the way and make it much less clear where the ads will run and how they'll get there. That's particularly true of ad exchanges open to buyers and sellers across the spectrum, including some less-than-ethical players.

So there's a lot of enthusiasm for streamlining things.

"In concept, it makes a ton of sense," said Joe Zawadzki, the CEO of MediaMath. "Instead of buying in the ocean, the idea's of a curation role in programmatic ... with a bunch of always-on deals, preferred deals."

Many advertisers have lost trust in their agencies and want a closer look at the books

Besides the messy nature of programmatic advertising, there's also the issue of declining trust between agencies and their marketing clients.

In 2016, a bombshell report from the Association of National Advertisers decried the lack of transparency in the industry — particularly in programmatic advertising — and alleged rampant kickbacks.

That led many marketers to question whether their ad agencies were ripping them off by arbitraging media using programmatic channels. Now, agencies are using this moment of doubt to tell their clients that things will be different this time around — just trust us.

"Really what you are starting to see is the more complicated, messy, and technical this all gets, clients are saying: 'Enough! Get me in your ad server,'" said Sarah Warner, a managing partner and digital investment lead at GroupM. "They are very focused on compressing the supply chain."

Warner added: "This is really about holding the entire system accountable."

An ad-tech shakeout may be coming — and the winners are likely to be big players like Google and AppNexus

Compressing the supply chain is probably not good news for the hundreds of small and midsize ad-tech companies that don't have standout tech or unique access to big ad budgets.

This now well-known slide from the investment bank Luma Partners illustrates ad tech's complexity:

lumascape

To mitigate such complexity, Magna recently asked dozens of ad exchanges and supply-side platforms to lay out their features and demonstrate their value in a detailed questionnaire.

It's likely to significantly shrink the number of intermediaries Magna works with — and, ideally, allow the agency to forge more direct programmatic deals.

"This will lead to continued massive amounts of consolidation in the coming years," Paolozzi said.

"You're going to probably end up with big, most efficient, scaled partners," said Jeremy Hlavacek, the head of global automated monetization for Watson Advertising, a division of IBM. "They'll muscle everybody else out."

Digital ad buyers are jealous of the negotiating clout TV buyers have

Typically, talk in the ad industry of late has focused on how TV advertising needs to emulate digital media, meaning more tech and more data.

But there's one aspect of the TV business that digital ad agencies would like to steal back: buying power.

One of the reasons that giant media-buying companies exist is to negotiate mega TV ad deals, the promise being better pricing and preferred inventory — that is, ads on the best shows.

That dynamic has been lost in programmatic, where buying is automated and highly democratic.

"One of the side effects of programmatic is that there is no benefit from the fact agencies are spending billions," a former ad agency CEO said. "If you're spending $1 or $1 million, you all get the same shot at buying an ad in a given moment."

That's the trade-off between automation and human negotiation. But with direct publisher partnerships, ad agencies think they can recapture some of that lost power.

Some publishers are bullish on direct integrations, while others want guaranteed money

Like most ad-buying trends, some publishers like the direct concept, and others don't. But given the competitive landscape, it will be hard for many to continue to say no.

"Both agencies and brands are aggressively leaning in [to this concept], and as a top-10 digital publisher, I can tell you the conversations are very real," said Scott Hendrickson, who heads up sales for News IQ, a programmatic unit at News Corp. "In broad terms, they are trying to solve for trust and efficiency."

Hendrickson said that for a while, advertisers and publishers worked together to create "private marketplaces," where a single advertiser could get preferred access to a publisher and maybe bring its data along for targeting purposes.

That has proved largely inefficient, he said.

slow down caution warning sign

Still, even if publishers like the concept, they'll have to be very picky about how many third parties get to plug into their sites.

Besides that of the likes of Google and Amazon, will most publishers want to integrate tech from four or five giant ad agencies? Especially if they're trying to ensure their site loads fast and operates smoothly in a mobile world, a mission that every extra bit of tech on it threatens to thwart?

"It's still early days," said Sara Badler, the head of programmatic revenue and strategy at the IAC-owned web publisher Dotdash. "We want to be as efficient as possible, and we want to manage our revenue. But every publisher is looking at their tech stack.

"This is a place of exploration," Badler said. "We're not there yet."

Another top publishing executive put it plainly.

"No chance — not unless you give me a huge spending guarantee," he said. "Otherwise, why am I doing that?"

Fueling this debate is the reality that agencies are fighting for their purpose

There have been dozens of stories over the past few years about how programmatic, data-driven advertising is leading more marketing giants to explore whether they can hire a few experts, tap into the right software, and bring ad buying in-house.

Having a bunch of direct deals with big publishers for preferred access and prices helps agencies counter that argument.

"This is the kind of thing where leveraging scale, custom tech and tech partners can add value for clients," said Muldoon. "Brands probably couldn't do this on their own."

Steve Katelman, the executive vice president of global digital partnerships at Annalect, a division of Omnicom, said ad-buying agencies had not sold their programmatic expertise enough, and that these kinds of deals can help make their case.

"As agencies, we need to make it clear: This is what we're good at, this is why we're valuable," Katelman said. "We're going hard at this idea."

Some major media companies contend that agencies have little choice, as their very existence is at stake.

"There really is an existential crisis at these agency programmatic trading desks," said a top web publishing executive. "They don't want to become order-takers — they want to offer strategy and planning."

In their favor is that agencies control a lot of advertisers' budgets, this executive said. On the flip side, "if you're an agency, your biggest threat is Google selling direct to Coke."

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