Frenemies Page 20
This schmoozefest was gently interrupted by two panel discussions, the first moderated by Kassan, at which Jim Bankoff, CEO of Vox, without ever mentioning CBS or the networks, sought to distinguish “premium” digital video ads, primarily native ads, offered on Vox from the “interruptive” ads on television. Bankoff defined a “premium” ad as having three qualities: It’s “creative,” it “loads quickly,” and “it engages me rather than interrupts me.”
Bankoff and Kargman nodded their agreement on the second panel when Kassan concluded by declaring an end to the networks’ Upfront monopoly: “I am a strong believer in this becoming a Video Front. It’s all one. And at the end of the day, we subscribe to all the platforms and love all of the children equally. . . . If you adopt that view, it’s all the same. The siloes are broken down.”
The New Front brought bombast as well as competition. At YouTube’s well-attended New Front presentation at the Javits Center, CEO Susan Wojcicki declared fallaciously that YouTube “reached” more 18- to 49-year-old mobile viewers “during prime time than the top ten shows combined.” But as noted earlier, “reach” does not equal viewing. Nielsen reports that the average audience per minute on television accounts for 95 percent of video watching, with smartphone video accounting for only 1 percent (and PCs 4 percent). Dave Morgan, the CEO of Simulmedia, a marketing technology company that designs targeted TV ad campaigns, says TV’s ability to attract eyeballs far exceeds that of Internet darlings like YouTube. “Judge Judy today in thirty minutes,” he says, “will deliver more seconds of advertising consumed by more people than all of YouTube will in all of America all day. One show!” Actually, more than YouTube delivers in an entire month, an RBC Capital Markets 2014 analysis reported. With 260 episodes per year, each containing 8 minutes of advertising for Judge Judy’s 9 million daily viewers, an estimated 1.6 billion minutes of ads were offered viewers, or twice as many as the 830 million minutes of ads per month on YouTube.
Some disruptions occur more slowly. At least in the short run, even with traditional TV’s vulnerabilities, CBS and the networks have strengths other legacy and digital media can only envy. Networks may one day lose some leverage if programmatic advertising becomes dominant, but in 2015 Martin Sorrell said WPP sold only about 3 percent of its ads programmatically. Networks like CBS still command the attention of a vast audience. Ten of the top-ten-rated shows on network TV in February 2016 were on CBS, the first time ever that a single network captured all ten. By 2016, CBS owned just over 80 percent of the programs it aired in prime time, allowing the network to sell those shows to TV outlets in the United States and abroad. And by 2016, Les Moonves’s CBS was making more money than when he joined CBS twenty years before. “When I first came here,” Moonves says, “the CBS television network was losing money.” Other parts of CBS, like the local stations it owns, were making money. Today, the network is the primary profit engine, one of several reasons CBS outperformed all media stocks over the previous five years.
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Entering the 2016 Upfront marketplace, all the networks knew that the 2015 Upfront fell below expectations, with lower volume of sales and CPMs, or cost per thousand viewer. In the months leading up to the 2016 Upfront and the ensuing negotiations between buyers (the agencies) and sellers (the networks), Moonves says, “It’s always a cat-and-mouse game. Someone always has the upper hand.” Because a disappointing 2015 Upfront was followed by ad prices jumping 15 to 20 percent over the rest of the year in what’s called the scatter market, and because he believed “the bright, shiny object,” as he referred to digital video, had lost its luster, in late April he predicted that “this Upfront will be a little bit of a renaissance for networks.” His head of sales, Jo Ann Ross, would set a higher CPM price.
Several days earlier, Irwin Gotlieb of GroupM, the largest buyer, relaxing in his office wearing an open-necked pink dress shirt and tailored jeans, sat on a low couch and likened the Upfront to a futures market. “There was a futures market for Bordeaux in 2000 and 2003. But there wasn’t in 2001, 2002, or 2004. You know why that was? The better vintages had scarcity. Good wine and reduced supply equals a strong futures market. Television continues to be a limited supply market. It will be a little more limited this year because I think people are looking very seriously at reducing commercial loads.” Thus he predicted, as did Moonves, a buoyant Upfront for the networks. Which led Gotlieb to conclude that the buyer who jumps in early and makes a large dollar commitment to a strong network like CBS is likely to get a price break. To illustrate, he had his assistant place 10 bottles of water on the coffee table. “Let’s say the total supply is 10 bottles and the cost per bottle is $100.” Thus the total market demand is $1,000. “If I buy eight bottles at a two percent advantage because I bought early,” the cost is reduced to $784. Similarly, if he chooses to buy late for a weaker network, the bet he is making is that the faltering network will offer a steeper discount in order to finally sell its ad inventory. For the buyer the question is always: “How do we read the futures market?”
What the seller always tries to do is steer the buyer away from a pure economic analysis by stroking their emotions in an Upfront presentation with the kind of showmanship the New Front cannot match. CBS invited thousands of buyers and the press to Carnegie Hall on May 18, where they were welcomed from the stage by Jo Ann Ross, who came out in a floor-length white fur coat, white top hat, and bedazzled cane. A video greeting from Hamilton creator Lin-Manuel Miranda was followed by late-night comic host James Corden performing as Hamilton in an eighteenth-century costume, surrounded by an ensemble, and rapping, “We just want your Hamiltons!” Lisa de Moraes of the Washington Post tweeted, “Another Hamilton segment at an Upfront! This makes three, or is it four?” But when Corden finished she tweeted, “James Corden’s Hamilton performance puts other networks’ Upfront Hamilton references to shame, including ESPN’s Hamilton, ABC’s Hamilton, and, sorry, Jimmy Fallon’s Hamilton.”
Corden introduced Moonves, who took shots at various competitors before stepping aside to allow the introduction of CBS’s fall prime-time schedule, including the twenty new shows, all of them wholly or partially owned by the network. With Jo Ann Ross as orchestra leader—or “Momma,” as she joyishly called herself—an array of well-known actors, newscasters, and executives trotted onto the Carnegie Hall stage.
When Upfront sales ended later that summer, Moonves blared that 2016 was “the strongest Upfront we have seen in many years.” He said CBS enjoyed “double-digit price increases.” Irwin Gotlieb concurred: “CBS did extremely well. Jo Ann Ross is as good as there is in the business. She knows how to read the marketplace.”
What didn’t change is that since network TV was the only way to reach a mass audience, the networks continued to get higher prices for shrinking live audiences and thus less viewing of ads. How long will this CBS advantage last? Will the advantage erode as technology enables buyers to cobble together a digitally targeted mass audience? Those two questions will hover over Les Moonves’s head in coming years.
Michael Kassan, among others, believes Les Moonves will not like the answers to those questions. True, Kassan reflected, 2016 was “one of the best Upfronts. There was a flocking back to television as a safe place.” Why? Because buyers in 2015 decided to spend less on the Upfront, wagering that the scatter market would be less expensive—and they guessed wrong. This year, he believes buyers said, “I don’t want to get burned again.” Nevertheless, he echoed a view shared by Gotlieb: for Moonves and the networks, “it was a short-term win, I think.”
12.
MORE FRENEMIES
“We recast our business as communications marketing. The reason we did that was we wanted access to the marketing budgets, and we wanted to signal: you don’t have to go to an ad agency to get marketing results.”
—Richard Edelman
The advertising business is being invaded from all directions. A plethor
a of Michael Kassan’s media clients—the New York Times, the Wall Street Journal, NBC, Condé Nast, Hearst, Vox, Refinery29, among others—are stealthily building out their own in-house advertising agencies. In 2015, Kassan believed that the primary disruption threat to agencies was to the media agencies that massaged the data, devised strategies, and purchased advertising time. He shared the view that Google and Facebook would one day go directly to agency clients and say, “Why do you need an agency in the middle?” By early 2016, Kassan’s view had shifted: “I think the most likely to be disrupted now are the traditional creative agencies, and I’ll tell you why. Every publisher from Condé Naste to Hearst to NBC to Disney now has creative agency units being built inside. So Condé Nast has 23 Stories. Hearst is making all these investments in digital content creation. NBC has a content studio. Their mission is to sit down with Procter & Gamble and say, ‘We can bring you ideas. We actually know how to create it.’ They’re not saying this, but the implication is: ‘Why do you need a traditional advertising agency?’”
Today up to three quarters of the up to $2 trillion or so that is spent worldwide on advertising and marketing is not funneled through the creative ad agencies featured in Mad Men. The rise of below-the-line marketing expenditures, including public relations, polling, design, branding, lobbying, and in-store sales promotions, was why Martin Sorrell and rival holding companies vied to stave off disruption by acquiring marketing firms. Platoons of disrupters keep coming over the ridge. Among them, none is more surprising than publishers posing as ad agencies.
This ambition was on display on a visit to the New York Times in January 2016. The Times employed an advertising sales team of 325 people, and if you spied them at their desks you saw that nearly half were coders and designers and copywriters creating ads for clients rather than just selling ad space. Under chief revenue officer Meredith Levien, they worked for the T Brand Studio, whose purpose she described this way: “We are now in the business of making advertising. Our ad sales person goes out with a content creator to meet clients.” The ads they create are interchangeably described as native ads or branded content, and they involve crafting stories featuring a brand. These look little different from a news story in the digital edition, except they carry a modest-sized advertorial label at the top of the page: “Paid for and Posted by . . .” With mobile becoming the dominant digital platform, native ads were necessary, she says, because the small phone screen “left no adjacent space on the page” for ads. Thus new ad forms were needed.
The T Brand Studio “is separate from the newsroom,” says Times CEO Mark Thompson, insisting that the church/state barrier has not been breached. Much of the sales force is composed of former journalists, which he sees as a calling card. “Clients come to us wanting to work with people comfortable with the idiom of storytelling. They don’t have that with the agencies. And the agencies are locked into formats. We have a group of people who are used to inventing new formats. We offer a more open-ended approach.” The Times aspired to serve as a near full-service agency. They bought a digital company, HelloSociety, that offers audience analytics and strategic alliances with influencers from its arsenal of 1,500 social media stars. They train ex-journalists and hire videographers to craft native video ads for mobile phones. They sell consulting services. They recruit employees skilled in distributing content on social networks. They are, Thompson says, “helping clients figure out how to use social media platforms. We’re beginning to offer a broader portfolio of useful marketing services.”
The Times is not yet a meaningful disrupter; its T Brand Studio produced revenues of just $35 million in 2015. But this represented a jump of 150 percent over the prior year. The incursions add up when you throw in the native ad revenues in 2016 of almost $600 million for Vice, $250 million for BuzzFeed, and about $60 million for the Wall Street Journal. Vice Media went a step further and formed a global ad agency, Virtue Worldwide, helping clients like Lululemon, and Unilever brands like Dove’s personal-care products and Breyers ice cream shape marketing and ad campaigns to reach younger consumers. Refinery29 provides about two thousand stories per month targeted mostly at women and aiming to “help people discover and refine their personal style.” Philippe von Borries, a cofounder, says, “We think of ourselves as a creative tool set for brands,” helping them reach the 140 million women who visited his site each month by the winter of 2016. Of his 350 employees, 110 of them were tasked with creating native ads. “Brands need us because we have an audience and we have data.” He would not disclose his ad revenues, but said they rose 70 percent in 2015.
In England, David Pemsel, the former marketing director of the Guardian newspaper and now CEO of the umbrella Guardian Media Group, doesn’t sound as if he embraces that newspaper’s leftist attitude toward capitalism when he describes the teams of storytellers and graphic artists that he has forged into Guardian Labs, with a staff of two hundred working directly with brands. “Guardian Labs is evolving into how do we help brands sell their stories. That could be by creating films. It could be producing print products or blogs. There are a whole bunch of assets I think we can create on behalf of our clients that will not deceive our audience.” In appearance, Pemsel could pass for a smooth ad executive, with his fashionable stubble, square red-framed glasses, and a black V-neck tossed over a white shirt. In reality, he makes clear that he is taking aim at Martin Sorrell and cumbersome agencies, who he believes will be threatened by “media owners like the Guardian and Vice beginning to create advertising on behalf of our clients to get to the audience.” The Guardian and Vice and the Times are hardly alone in creating internal agencies. Most traditional media companies—from Condé Nast to Hearst to NBC to Time Inc.—have molded what they refer to as content studios to work directly with brands.
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The more immediate disruption threat to agencies comes from many former clients like consulting companies that are also invading the advertising and marketing business. “Several years ago, we thought Google was going to eat our lunch,” Sorrell says. “Lately, it’s become more of a Facebook threat.” But the bigger menace, he says, may come from companies who have relationships with corporate CEOs or who have special skills to go along with their deep pockets. “People always said McKinsey would move into the marketing space, which they are increasingly doing. And Bain and the Boston Consulting Group. And then you’re getting accounting firms that split their auditing and consulting functions. Accenture was our auditors. IBM buys three advertising firms in one week. Then there are the software companies—Salesforce.com, Oracle. So you’ve got layers.” One reason Sorrell’s WPP formed the marketing consulting firm Vermeer in 2014, as Publicis in early 2015 acquired the much larger global consulting firm of Sapient, was to better compete with consultants who had the ear of C-suite executives and were aggressively offering marketing services. The competitive threat from consulting companies was given a boost by Jon Mandel’s vilification of the holding companies.
Unlike in Silicon Valley, marketing disrupters don’t hide in a garage nurturing a new idea with the zeal of a founder. The threat usually comes from established corporations with a pool of capital and eagerness to seize a fresh business opportunity. “The largest digital ad agency in the country today is IBM,” Michael Kassan says. “Accenture now has a digital agency. Deloitte has a digital agency. Ernst and Young has a digital agency. Maurice Levy spent $3.7 billion to buy, essentially, a consulting firm”—Sapient. He believes Levy was correct to do so because he wanted to confront the danger from companies like IBM. Levy had reason to quake, for at the end of 2015 the three largest global digital agencies by revenue, according to Advertising Age, were companies new to the marketing business: IBM, Accenture, and Deloitte. And the market cap or stock value of IBM (about $165 billion) was double the combined value of the six largest advertising and marketing holding companies—WPP, Publicis, Omnicom, IPG, Havas, and Dentsu.
IBM is wor
th a detour, for it has entered the marketing business at warp speed. In May 2015, Advertising Age named IBM’s Interactive Experience (iX) division the largest global digital agency. Later in 2015, IBM ingested live streaming and marketing software companies. Over two weeks in February 2016, it purchased two digital advertising agencies in Germany and one in the United States, and announced that it planned to open design studios in Prague, Warsaw, and Dubai. Worldwide, IBM had marketing offices in thirty locations and a staff of more than ten thousand performing creative and marketing design work for companies. Paul Papas, the global leader of its Interactive Experience division, announced, “We’re raising the bar for experience-led digital marketing and commerce.” Coupled with its October 2015 acquisition of the online assets of the Weather Company, weather.com, IBM made it clear that it was in the data business.