What's going on?
WPP, the world’s largest advertising group, saw its shares fall almost 10% on Thursday in the latest sign the advertising world is being rocked by new technology (tweet this).
What does this mean?
WPP, which owns a bunch of different advertising agencies, such as Ogilvy & Mather, partly blamed its declining sales on cost cutting among its biggest clients, including consumer goods giants Unilever and Procter & Gamble. Perhaps the bigger issue, however, is that technology has changed both the nature of advertising (e.g. the rise of digital ads) and how companies purchase those ads. Companies can now access Facebook’s and Google’s platforms directly, along with a bunch of fancy analytics tools, without having to use an advertising agency to liaise with publishers.
Why should I care?
For markets: Stock prices of WPP’s major competitors also suffered.
Publicis and Omnicon, two of WPP’s biggest competitors, saw their stocks fall 2-3% as investors tarred all advertising agencies with the same brush. WPP’s stock price is now back to 2014 levels, representing a significant underperformance versus the overall market. And there’s no clear way out. The ad men are rapidly trying to combine their disparate agencies, but that’s easier said than done – and doesn’t really solve the industry’s underlying issues, which relate largely to its deficient technology.
The bigger picture: Technology disrupts the middlemen.
Advertising agencies have traditionally helped connect brands with eyeballs. The model is similar to retailers that sell various brands (e.g. department stores) – both act as middlemen. The problem is that technology has made their jobs less valuable: in both cases, brands can use platforms, like the internet (more specifically, Amazon or Google), to more directly access their customers. In short, people are still going to buy Nike running shoes – but Nike can now advertise and sell them directly to its customers without having to serve a helper a piece of the profit pie.