Frenemies Read online

  ALSO BY KEN AULETTA

  Googled: The End of the World as We Know It

  World War 3.0: Microsoft and Its Enemies

  The Highwaymen: Warriors of the Information Superhighway

  Three Blind Mice: How the TV Networks Lost Their Way

  Greed and Glory on Wall Street: The Fall of the House of Lehman

  Media Man: Ted Turner’s Improbable Empire

  Backstory: Inside the Business of News

  The Art of Corporate Success: The Story of Schlumberger

  The Underclass

  Hard Feelings: Reporting on the Pols, the Press, the People and the City

  The Streets Were Paved with Gold: The Decline of New York, an American Tragedy

  PENGUIN PRESS

  An imprint of Penguin Random House LLC

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  New York, New York 10014

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  Copyright © 2018 by Ken Auletta

  Penguin supports copyright. Copyright fuels creativity, encourages diverse voices, promotes free speech, and creates a vibrant culture. Thank you for buying an authorized edition of this book and for complying with copyright laws by not reproducing, scanning, or distributing any part of it in any form without permission. You are supporting writers and allowing Penguin to continue to publish books for every reader.

  LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

  Names: Auletta, Ken, author.

  Title: Frenemies : the epic disruption of the ad business (and everything else) / Ken Auletta.

  Description: New York : Penguin Press, [2018] | Includes bibliographical references and index.

  Identifiers: LCCN 2018006195 (print) | LCCN 2018007151 (ebook) | ISBN 9780735220874 (ebook) | ISBN 9780735220867 (hardcover)

  Subjects: LCSH: Advertising agencies—History. | Advertising—History. | Marketing—History.

  Classification: LCC HF6178 (ebook) | LCC HF6178 .A895 2018 (print) | DDC 659.10973—dc23

  LC record available at https://lccn.loc.gov/2018006195

  Version_1

  For Matt and Sam

  CONTENTS

  Also by Ken Auletta

  Title Page

  Copyright

  Dedication

  Introduction

  1. The “Perfect Storm”

  2. “Change Sucks”

  3. Good-bye, Don Draper

  4. The Matchmaker

  5. Anxious Clients

  6. “Same Height as Napoleon”

  7. Frenemies

  8. The Rise of Media Agencies

  9. The Privacy Time Bomb

  10. The Consumer as Frenemy

  11. Can Old Media Be New?

  12. More Frenemies

  13. Marketing Yak-Yaks and Mounting Fear

  14. The Client Jury Reaches Its Verdict

  15. Cannes Takes Center Stage

  16. Mad Men to Math Men

  17. Dinosaurs or Cockroaches?

  18. Good-bye Old Advertising Axioms

  19. “No Rearview Mirror”

  Acknowledgments

  Bibliography

  Index

  About the Author

  INTRODUCTION

  In a 1970 TV commercial, a group of child actors portraying Louis Armstrong, Fiorello La Guardia, and Barney Pressman as kids are sitting on a New York City stoop and asking each other what they hope to be one day. Armstrong says he wants to be a musician. La Guardia says he wants to be mayor of New York. The bespectacled Barney Pressman is quiet, so they prod him: “Whaddaya gonna be when you grow up, Barney?” Pausing to adjust his glasses, the future founder of Barneys clothing store says, “I don’t know. But you’ll all need clothing.”

  For more than three decades, in books and in my Annals of Communications pieces and profiles for The New Yorker, I have reported on the digital hurricane that has swept across the media industry. I have tried to “follow the money,” to understand the source of the economic harm that has struck newspapers, magazines, television, and radio, all reeling from shrinking advertising revenue—revenue now fueling Google, Facebook, and a myriad of other new digital enterprises. You can almost hear the young Barney Pressman trilling the world, “You’ll all need advertising and marketing.”

  Worldwide, advertising and marketing is variously said to be a $1 trillion to $2 trillion industry. Of that astronomical sum, roughly three quarters is categorized as marketing dollars. Often, rather than joining together the words advertising and marketing, we employ the shorthand, advertising. We do so because advertising is a more familiar term, and to utter both terms together is a mouthful. In fact, advertising and marketing are interchangeable. They take different forms, but each involves a sales pitch. A thirty-second TV ad or a full-page ad in a newspaper seeks to sell something, which is also a marketing pitch. A direct mail or newly designed brand name or email solicitation or giveaway coupon is listed as a marketing expenditure, but it’s also an advertising sales pitch. So the two categories are really one.

  Yet advertising and marketing, like the media industry it has long subsidized, is convulsed by change, struggling itself to figure out how to sell products on mobile devices without harassing consumers, how to reach a younger generation accustomed to dodging ads, how to capture consumer attention in an age where choices proliferate and a mass audience is rare.

  In the course of my work as a journalist, I have tended to shift back and forth between the disrupters and the disrupted. My first book, The Streets Were Paved with Gold, published in 1978, chronicled how New York City had been hit by a Category 5 economic and social storm that shattered its manufacturing base and spurred the flight of its middle class. My focus on the people on the wrong end of change continued in 1981, in a three-part series in The New Yorker that grew into a book, The Underclass. A reporting sojourn to Wall Street in the mid-1980s resulted in Greed and Glory on Wall Street, a battlefield account of the corrosive greed that brought low Lehman Brothers, the oldest partnership on Wall Street, and signaled the Wall Street gluttony that produced insider trading scandals and would bear such disastrous fruit in 2008.

  It’s fair to say that at this point I was a naïf about the advertising industry’s true economic power. That began to change in 1985, when I embarked on a nearly six-year odyssey through the world of network television while reporting my book Three Blind Mice, a report on how the three dominant television networks—CBS, NBC, and ABC—were being disrupted by a new technology, cable. Advertising was central to that story, for unlike cable, the networks were 100 percent reliant on advertising. And so when the estimable Tina Brown, the new editor of The New Yorker, offered a regular platform in the magazine, which she called the Annals of Entertainment, I demurred. I told her that in reporting Three Blind Mice I glimpsed how the world of media was being transformed, and so we needed a broader rubric—the Annals of Communications—because studios and publishers and television and digital companies were increasingly invading each other’s turf.

  Over the next quarter century, unsettling change was the subject of much of my work for the magazine and for my books, and the advertising industry was often a backdrop for the stories, and usually an underexplored one. I witnessed the flight of advertisers from old to new media with my reporting for The New Yorker about Google, which led to the book Googled: The End of the World as We Know It. The flight of advertisers from old to new media started in the late 1990s and accelerated in the new century, and its impact was hard to miss. Less obvious was the impact on the ad industry itself. In the public imagination, we were still in the age of Don Draper, but I began to see more and more clearly how
this industry that had been intrinsic to the disruption of old media was itself facing fundamental challenges to its existence.

  Trying to understand the media without understanding advertising and marketing, its fuel supply, is like trying to understand the auto industry without regard to fuel costs. A war correspondent would be derelict not to try to calculate whether General Patton had enough gas in his Third Army tanks to race across France in 1944 (he did not). But it’s not merely that a reporter covering the communications business would be remiss not to follow the up to $2 trillion advertising and marketing sector; anyone who takes a moment to ponder this pool of money can’t avoid the inescapable truth that capitalism could not exist without marketing. True, the force of marketing is often malign, seeking to manipulate the emotions of consumers. Readers of this book will, hopefully, share my rage at the many tricks marketers practice. But marketing has a purpose in a free society, and intellectual honesty compels us to recognize that those who sell products need a way to share information about them with consumers. In a non-state-dominated economy, advertising is the bridge between seller and buyer. It would seem an obvious statement, but I’ve found it bears repeating. And that bridge is teetering, jolted by consumers annoyed by intrusive ads yet dependent on them for “free” or subsidized media. In this sense, consumers are frenemies.

  To dig deeper into this world is to realize that more is being disrupted here than the flow of marketing dollars. The agency edifice itself is being assaulted, as new rivals surface—tech and consulting and public relations and media platform companies—many of whom have long been allied with the agencies and claim still to be. A once comfortable agency business is now assailed by frenemies, companies that both compete and cooperate with them.

  For many years, I examined advertising as an aspect of some other story I was telling. It crept up on me that there was much to be learned by turning that around and looking deeply into the advertising industry itself, and through it out onto the wider world—a world of artificial intelligence (AI) and algorithms and big data that raises fundamental issues, including issues of privacy, issues of whether the science of advertising can replace the art, whether relationships still matter, and where—and whether—citizens get their news.

  This book is populated by characters who represent the points of tension within this world. You will meet artists like Bob Greenberg, founder of the R/GA agency, who rail at consummate executives like Martin Sorrell, CEO of WPP, the world’s largest advertising and marketing holding company; the scientists, including the engineers at Facebook and IBM, who fervently believe in their machines; the clients, like Unilever’s Keith Weed and GE’s Beth Comstock and Linda Boff, who must wrestle with trust issues between clients and their agencies; and you will meet Michael Kassan, a charming man who relies on relationships to link the artists and managers and clients and scientists.

  This book attempts to peer deeply into this world. I sought to step into the shoes of many important actors and frenemies in the marketing world, old and new, disrupters and disrupted alike. It is a world stocked with passionate and creative people, but it is also a world roiled by anxiety. Ultimately, this is a story of a world whose fate is imperiled, and why that fate matters to us all.

  1.

  THE “PERFECT STORM”

  Characterizing the rebates as “criminal extortion,” he said of the giant advertising holding companies, “At least four of them, maybe five, are doing this.”

  —Jon Mandel, March 2015 speech to the Association of National Advertisers

  Former advertising colleagues were shocked when Jon Mandel morphed into a whistle-blower. Mandel had been a member in good standing of the advertising establishment for nearly four decades, a former chief executive officer of media agency powerhouse MediaCom, a reasonably popular joke-cracking executive with a chubby, beardless face and a full head of dark hair. But he seemed a different person on March 4, 2015, when he stepped onstage before his former clients, the Association of National Advertisers, or ANA, at their annual Media Leadership Conference in Florida. He looked different to old colleagues. He was rail thin and almost completely bald, with a trim grey beard that gave him a severe, almost Mephistophelian look. Before the very advertisers that fund his former agency, Mandel trembled, knowing that former coworkers would “try to kill me professionally” when he accused them of corruption. Agencies, he declared, engaged in a “pervasive” practice of demanding “kickbacks” from media companies and platforms like magazines, newspapers, TV, radio, and Web sites in exchange for their ad dollars. “There are cases where there are rebates that should be going to clients that are instead going to agencies.”

  The assertion was atomic to this audience: the ANA represents about seven hundred companies, including Coca-Cola and Procter & Gamble, which spend more than $250 billion annually in the United States to advertise over ten thousand brands. Moreover, Mandel was placing a cloud over the many billions spent worldwide on marketing as well as advertising. Coupled with the ongoing disruption of the industry by Facebook and Google and the Internet, the controversy threatened to upend the flow of monies that finance the public’s news and entertainment.

  * * *

  ■ ■ ■

  Wearing a dark suit and open-necked grey shirt, with tiny eyeglasses perched on his bald dome, Mandel spoke out against what he depicted as the rot in the agency world, the world in which he’d spent his entire career. Now, he and his marketing consulting firm, Dogsled Enterprises, were paid by the ANA to prosecute the case against agencies. Most of Mandel’s career had been spent at Grey Advertising, and when WPP, the giant marketing holding company, acquired Grey in 2004 they retained MediaCom and he had served as CEO of this media-buying unit, reporting to GroupM global CEO Irwin Gotlieb.

  The practice Mandel accused agencies of is common, and legal, in countries like Brazil and China. It once was common in France and Western Europe, before being declared illegal. Speaking in a high-pitched nasal voice, Mandel claimed that the practice had spread to the United States. The “kickbacks” or rebates, he said, come in several forms: in cash; in a gift of additional ad space that giant advertising holding companies hold on to and resell to other clients; in the form of promises of a larger future media buy in exchange for an ownership stake in the vendor by the agency; or “in the worst case,” the agency resells the purchased ad time to the client and makes money on it. “Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?” Mandel asked the audience. He estimated that media and digital companies kick back 18 to 20 percent of the media buy to the agencies, and that the agencies hide kickbacks that total “well into nine figures across agencies.”

  Mandel’s blast helped stoke “a perfect storm,” in the words of Andrew Robertson, the CEO of the BBDO agency. Advertising clients were already uneasy with their advertising agencies. They had long complained about steep agency costs and a lack of transparency about how agencies made money. Clients were pleased that the agencies that dominated media buying had leverage over media platforms and could demand better terms, but they worried that agencies kept secrets from them. The trust issue was even more acute because advertising clients were under greater pressure to curb costs and were insecure about the digital disruption that shook the very foundations of their business—from smartphones that turned their banner and pop-up ads into annoyances; to ad-blocking software consumers were embracing to repel ads; to a younger generation grown accustomed to ad-free YouTube and Netflix, and to ad-skipping digital video recorders (DVRs). Mandel’s allegations reinforced these anxieties.

  His assertions were damning, but Mandel did not cite a single agency by name. In a presentation sweeping in its condemnation of agencies for their lack of transparency, he was hardly transparent himself. Not about the 18 to 20 percent kickbacks. Not about the figure of at least $100 million in kickbacks he said were collected by agencies. His clear implication wa
s that most agencies, particularly the six advertising giants that dominate global advertising expenditures, were guilty.

  When Mandel concluded his remarks, ANA CEO Bob Liodice came onstage and energetically shook his hand. “That was fascinating and frightening,” he said, and was “very courageous.” So, Liodice asked, “What should clients do to gain greater transparency?”

  “You’ve got to go in somewhat doubtful.”

  “You’re saying a prenup is not enough!” Liodice said.

  “Yes, and beware: you’ve got to audit not just the agency but the holding company,” Mandel declared.

  The stakes are huge, for advertising and marketing dollars subsidize most media and Internet companies. Today, the amount of money spent on advertising and marketing is up to $2 trillion worldwide, says Pivotal Research Group senior analyst Brian Wieser, perhaps the industry’s most widely respected marketing analyst. Based on a Publicis Groupe study, this estimate was backed by Maurice Levy, the CEO of Publicis, and separately by Adam Smith, GroupM’s futures director, who says the estimate “is in the ballpark.” WPP CEO Martin Sorrell insists the true number is close to $1 trillion. Irwin Gotlieb cautions that the figure could be higher, or lower, because these were “soft numbers,” guestimates. For example, Sorrell’s guess does not include marketing awards programs, free coupons, or marketing messages in McDonald’s food tray liners; Wieser’s guess does.

  Over lunch some months later, Mandel sipped from a glass of Pellegrino and calmly described the changes in the business that had led to what he considers kickbacks. Agencies, he said, were once “a trusted adviser, just like your lawyer,” and were paid a handsome 15 percent commission. But agencies became part of today’s dominant advertising holding companies—UK-based WPP, U.S.-based Omnicom Group and the Interpublic Group (IPG), France-based Publicis and Havas, and Japan-based Dentsu. Two thirds of global ad expenditures flow through these six companies and through privately held Horizon Media. “What has happened is there is a certain need to grow to show increased profit year to year. At some point the agency business model changed because of the financial pressures. It wasn’t just no more commissions. It was, ‘I don’t care how you make your money. You just better show me ten percent year to year.’ They were incented financially to worry more about themselves.” Over time, clients began to ask, “Is what you’re recommending to me good because it will be great for my business? Or is it because you will be making more money?”