The Unfinished Marketing Revolution
Why are the Mad Men so mad?
The marketing world is changing as never before. The backslapping, clubby culture of Madison Ave. is being transformed in a world of bytes, databases and algorithms that is increasingly ruled by geeks rather than suits.
The old order is gone but the new order has yet to arrive. The fate of marketing services companies is still an open question.
To get an idea of where we’re going, it makes some sense to look back and see how we got here. The best place to start is the financial revolution that preceded the present marketing upheaval.
The Financial Revolution
In the midst of a global financial crisis, it’s easy to lose sight of the enormous progress that was made in the financial industry in the 70’s and 80’s. A genteel, stodgy industry was transformed into a hi-tech marketplace.
The banking industry was characterized as an industry of 3-5-3. Fine old men would borrow at 3%, lend at 5% and be on the golf course by 3:00 in the afternoon. Stockbrokers solicited clients more through personal relationships than by touting performance.
The revolution was largely an American one and it was created by a confluence of seemingly unrelated events in the US during the early 1970’s.
A New Market: In April, 1973, the Chicago Board of Trade opened a floor for trading stock options. Investors could purchase the right to buy or sell the underlying asset without actually having to buy the stock.
In effect, it was like buying a form of insurance. If you owned a stock you could lock in the price by paying a “premium.” If the stock went down you wouldn’t lose, but if it went up you could still gain. Of course, you could also not buy the stock at all and just bet on the price.
A Pricing Model: Coincidently, one month after the exchange opened the Black-Scholes pricing model was published which used a differential equation to determine the value of financial options.
Previously, there was no known method of determining a fair price.
The achievement deemed so important that the authors of the model won the Nobel Prize for Economics in 1997
Computing Power: It was also at around the same time when programmable pocket computers came on the market. The Black- Scholes pricing model was too complex for traders to calculate prices in their head, the new devices were small enough to use on the trading floor.
It didn’t take long for Wall Street to become Silicon Valley’s biggest customer.
The Moon Landing: The 1969 moon landing effectively ended the Apollo program at NASA and created a glut of quantitatively talented people. Seeing the advantage of powerful mathematics on the trading floor, the financial industry was eager to transform the rocket scientists into financial engineers that they called quants.
It wasn’t long before every investment bank had its own team of quants busy creating complex models and new financial instruments. The world of finance was transformed.
The Marketing Revolution
The marketing world has been transformed by technology as well. What used to be a business of ideas is increasingly one ruled by numbers.
In the 70’s and 80’s the cable industry broke up the large network TV audiences into smaller, more targeted niches. The emergence of the web in 90’s brought even greater fragmentation. Increasingly, advertising has become less about what you say and more about finding the right people to say it to.
The new marketing world has also been changed by computer technology. When I started out in the media business, expensive mainframe computers were still used to crunch audience numbers. Today, even large expenditure databases can be run on a cheap laptop.
TV buyers soon saw the emergence of their own version of Black Scholes. Computer programs called “optimizers” helped them massage coverage curves into just the right shape to deliver campaign goals efficiently, much like the Wall Street quants shaped financial products.
Today, no new business pitch is complete without a section about the agency’s proprietary tools that take in mountains of data and spit out slick graphs that will tell the client exactly where the money should go.
The Missing Piece
The marketing revolution is similar to the financial revolution that preceded it in that they both are dependent on powerful computer technology and sophisticated mathematical models. However, for the marketing industry, this similarity begs an important question:
Where are the quants?
They exist, for sure. Big holding companies like Interpublic, Omnicom and Publicis have econometric divisions that can build expensive bespoke models for clients. However, these divisions are considered special and are therefore integrated into core operations.
As I’ve pointed out before on this site, mathematical skills among marketing professionals remain atrocious and don’t show much sign of improving.
How Much Will Google Own?
When profits disappear, industries consolidate and that’s precisely what has happened with marketing services.
Although companies who look seek service from marketing professionals have a wide array of brands to choose from, in actuality those brands are largely owned by four large holding companies.
A quick look at a chart prepared by advertising age graphically shows the stunning array of services and enormous market share that these firms possess.
With a little more checking, it’s not too hard to estimate the total market value for all four of these behemoths combined is less than $30 billion compared to $180 billion for Google. It is quite possible, if not probable, that Google is worth more than all marketing services companies in the world combined!
And it’s not just Google. Look at some media company valuations:
Disney: $55 Billion
Time Warner – $36 Billion
Viacom- $20 Billion
Yahoo: $20 Billion
Total: $131 Billion
These companies don’t have any where near the market footprint of the marketing behemoths, but are worth far more. What kind of clout does the marketing services industry have today? Will it be less or more in a decade?
The Future of Marketing Services
Now we can see why the “Mad Men” are so mad. While their industry is being transformed and everybody else is getting rich, they live in a world of diminished expectations and shrinking fees.
The problem is serious but the solution is simple:
Get some quants.