Volume 48: Election reprieve special.

1. 80% of my advertising is wasted and I know exactly which advertising holding company is wasting it.

tl;dr: There’s a reckoning coming for WPP, Omnicom, and the rest.

To understand agency holding companies and just how much trouble they might be in, we must first walk back through history. You see, nowhere in the formation of these vast agency networks was there ever an intention to create value for clients or consumers. No, these were always financial entities built to exploit valuation arbitrage.

What is valuation arbitrage? Well, boiling it down, the important bit is that the stock market was willing to value a dollar of agency revenue owned by a publicly traded holding company more highly than that same dollar of revenue if the agency were privately held. A bit of jazz hands magic that led to a kind of financial alchemy: By doing little more than buying agencies, the holding companies could grow their stock price and drive up their market valuation because each additional dollar of revenue purchased was worth more than they’d paid for it.

Now, if you’re reading this and thinking it sounds a bit like a Ponzi Scheme you’d be correct. As a strategy, valuation arbitrage bears more than a passing resemblance to exactly that. A fact that has become increasingly apparent in recent years.

You see, adding revenue via acquisition is one thing, but it must still sit atop the revenues of the businesses you’ve already bought. And, unfortunately for the holding companies, the guiding thought behind their acquisitions was rarely to purchase great future-facing companies and build a complementary operating portfolio, but instead to buy under-valued revenues that could be booked as profits immediately, which is all fine and good unless the world changes.

And, yeah, that’s right. A digital revolution in marketing meant the world did change and the holding companies weren’t ready. As their operating performance began taking a hit, the stock market started questioning what a dollar of holding company revenue was really worth, advertising tech stocks sucked away investor attention with promises of vastly improved returns, and the detritus of 20+ years of non-integrated “buy low” acquisition behavior started to show through.

Now, we shouldn’t be surprised. Because buying agencies was their primary means of value creation, it became the only area of excellence they ever really had to foster.

That’s why at an operating level the holding companies have always been filled with odious, aging old ad guys (and yes, they’re almost always guys) who hold court in packed Midtown restaurants screaming non sequiturs like “That’s capitalism, baby!” over the din of lawyers at the other tables. (I have had this experience, and it was exactly as horrible as it sounds).

But enough of the history lesson already. Let’s bring this up to where we are today. The holding companies were never really built to be operating entities, they’re led by people whose primary competence is in buying agencies rather than running them, and their historical arbitrage advantage has now dried up as their own valuation multiples have dropped. Which means competition from consulting companies is squeezing them out from the best acquisition opportunities, which they can no longer afford to participate in. (Hello, Droga5)

This means what you’re left with are businesses under tremendous pressure to squeeze every last drop of revenue and profit, by any means necessary, from a grab-bag, rag-tag portfolio of acquisitions they’ve made over the past twenty years, many of which aren’t particularly relevant to what clients are looking for. (Which, as an aside, makes being the CEO of any holding company agency a truly awful job).

So, what could possibly go wrong from here? In a single word, media. Media will be for the holding companies what sub-prime mortgages were to the banks.

Media planning and buying is one of the last big profit pools for the agency holding companies, all of them depend on it, and media has two big problems converging simultaneously. The first is a shift toward privacy, which has begun to upend the advertising surveillance business model of recent times (you know, the ad world is worried when they respond to lawsuits). The second is that advertisers are becoming increasingly wise to, and unaccepting of, the sheer scale of how badly the surveillance advertising ecosystem has been ripping them off.

Dr. Augustine Fou, the canary in the coalmine on this subject, recently wrote some great articles here, here and here. In these, he describes how nefarious media buying practices have become, how the holding companies double-dip, double deal, and operate via a network of shady and non-transparent entities. And how an increasing number of brands are now refusing to do media deals with them. Sure, the going has been good. But history suggests that if you’re getting there by destroying rather than creating value for your clients, things won’t be good forever.

The moment there’s a groundswell of major brands taking a long, hard look at their media buying and ad-tech relationships, which is exactly what changes in privacy and do-not-track mechanisms are likely to cause, then the agency holding companies, which are already weakened by their failure to effectively keep up with change, stand to be the biggest losers. And guess what? Unlike the banks, none is “too big to fail.”

2. From search-based to browsable commerce.

tl;dr: Shopify enabling new models of online shopping.

Online shopping has grown immeasurably over recent years. For evidence, look no further than your own doorstep and Amazon’s jaw-dropping $96bn quarter. But, if we dig into the underpinnings of online retail, we see that it remains a search-led construct. Look at any online retailer from Amazon on down and you’ll see a shopping experience predicated upon searching for what you want and then buying it. Yes, there are some recommendations of other products and some sponsored listings, but there’s traditionally been very little that equates to what we might consider the browsing experience we get when visiting physical stores or the mall. Which is important, because so much of our total discretionary shopping behavior isn’t driven by a desire to find something specific at all, but instead to have that delightful find that gives us a dopamine hit as a part of what might better be labeled a browsing experience.

But this is changing fast. Following leadership from Chinese Internet companies that have been way more innovative at a business model level than their American counterparts, we’re beginning to see a platform-level shift away from search toward browsable discovery and purchase.

Instagram, initially bought to stop it becoming a materially important competitor to Faceboo is rapidly becoming the jewel in their crown. By embedding transactional behavior into the ads themselves, they’re shifting from a world of search-driven commerce to a much more impulsive world of browsable commerce, in which they’re both advertising medium and shopfront.

And they aren’t alone. Not to be outdone, TikTok recently announced that it’s investing in a video product that enables purchase directly from 30-second clips. Pinterest is getting into the action, too.

But, what’s most impressive isn’t that visually oriented social media platforms are driving a new gold rush by re-tooling the way we shop online, it’s the company behind the scenes selling them the shovels.

Shopify is by far the most innovative of the large Western Internet companies, and at this point seems to have a finger in almost all of the pies that threaten Amazon’s retail dominance. Providing self-service tools for small retailers? Check. Acting as a fulfillment provider. Check. Backend commerce provider plugging straight into Instragram ads? Check. Partnering with TikTok to push video commerce? Check. Partnering with Walmart to put small retailers onto their online platform? Check and check again.

There’s a huge battle for our online shopping dollars ahead, and for the first time in years, there look to be real innovations happening at a philosophical level of how we buy. Some might even upend who we imagine as the winners. And underpinning it all right now seems to be Shopify. Color me impressed.

3. The cognitive load is real.

tl;dr: Usability, familiarity and the desperate need for unique.

I saw this graphic on LinkedIn last week, originally posted by Tobias van Schneider and used here entirely without his permission:

And it got me thinking. You see, although many of these icons are in fact Google products (which is a problem in its own right), most of them are not. This is in fact a pretty good representation of what we all face on our phones every day, which increasingly act as 6” branding battlegrounds. And let’s be frank here, this is an absolute travesty of a disastrous mess for anyone even minimally versed in the practice of branding.

So why does it all look the same you might ask? Well, I could be pejorative and say that everyone is being lazy, and either A. They all discovered the gradient feature in Photoshop at the same time. Or that, B. The engineers telling the designers what to do wanted it all to look like Google because that’s the company engineers look up to the most. But I think it’s actually deeper than this.

In most large companies, especially technology companies, the most senior designers come from a background in digital product design. This means they think through a lens of UX and UI and are steeped in the practices and philosophy of usability. Now, there’s absolutely nothing at all wrong with usability design when it comes to digital products. Certainly, as more companies have followed its principles, our experience of using their products has improved immeasurably.

The problem does arise, however, with the fact that it can be hard to separate usability from familiarity. What do I mean by this? Well, if I’m familiar with how an interaction works I’m intuitively going to find it more usable than if I am not. It’s this familiarity that makes iPhone users find swipe gestures entirely acceptable, whereas Android people get frustrated almost immediately.

So, when we look at the world through a lens solely of what people will find usable, rather than what they find unique and different, we’re entirely likely to find everything blending together into just a few approaches that are very, very similar to each other. Which sounds eerily familiar.

So, let’s bring this back to the design of these brand icons for a second. You see, product designers who’ve become so very senior are increasingly being given responsibility for branding design as well as product. So, while brand design used to be the purview of a CMO that was well versed in differentiation but who lacked a deep understanding of usability, today that relationship has flipped to one where brand design is increasingly owned by people with very little understanding of differentiation and an almost righteous pursuit of usability.

So what happens next? Well, when I look at the above, about 10% of my reaction is a hearty sigh and the other 90% is focused on the sheer opportunity on offer. You see, what lies ahead is exactly the kind of re-balancing really good brand designers should be able to bring to the table to demonstrate to their clients (or bosses) what is necessary to cut through. Not to compete with usability but to complement it. Walking us back from a place of such obvious commodification by demonstrating the value of difference and of standing out in those places where it absolutely needs to happen. Like the icons on that 6” branding battleground called your phone.