Tuesday, March 4, 2008

Follow the money: inside the Publicis/Google deal

By David Pasternack

A mind-meld between Google's geeky Ph.Ds and Madison Avenue's pony-tailed creative types could kick-start the next generation of advertising. Here's a look at what the deal might yield.

The ad biz rags have been abuzz with news that Google and French ad holding company giant Publicis have, for the past year, been conducting informal talks about how Google can help Publicis figure out how to create next-generation advertising.

Details of the alliance, "based on a shared vision of how new technologies can be used to improve advertising," were vague enough to stimulate a raft of speculation among the chattering classes. Was Google (which has repeatedly denied that it wants to disintermediate agencies) finally getting into the business via a Trojan Horse arrangement? Would Publicis use this leverage to cut out competing giants such as WPP, whose CEO Martin Sorrell has branded Google as a "frienemy?" What wild new ad units would result from the new synergies made possible from a mind-meld between Google's geeky PhDs and Madison Avenue's pony-tailed creative types?

Let's put this idle speculation aside and focus on the real meat of the deal, which (as is characteristic of everything that happens in the online ad business) is about money. Once you follow the money, everything about this deal makes sense. Here's why:

Time is money, and buying Google's media is too annoying
Despite the mythology that big ad agencies are populated exclusively with people who can't even figure out how to open their email messages, the truth is more complicated. The main reason that more ad dollars aren't flowing into digital is that digital is too hard to buy. If you wanted to reach a million people 10 years ago, you could execute this buy in less than 10 minutes with one phone call. To reach the same million people today, you'd have to have a team in place, which would have to spend a week planning, constructing and executing such a digital campaign.

The irony that digital marketing is labor-intensive hasn't been lost on ad agencies, and Google knows this. Unless it can make it much easier for agencies to buy big chunks of its media, agencies won't bother. Time is money, and ad agencies don’t want to spend time and money on projects whose internal management costs are higher than the cost of the media that's purchased.

Agencies won't buy Google's media without an agency discount
But there's a deeper problem with the way Google sells media than the fact that buying media from it is annoying: It's not profitable.

Every form of "traditional" media, including print, radio, TV and outdoor, has an agency discount associated with it. Agencies make a significant share of their earnings from the spread between wholesale and retail media prices -- except with Google and the other search engines. When buying this kind of media, agencies pay retail, even if they're buying millions of clicks a month. So at the end of the month they're faced with a truly rotten choice: either present their clients with a very high bill (retail price plus media management fee) or a bill without a markup (which means they're going out of pocket running the search campaign).

Given their druthers, agencies wouldn't touch search for this reason alone; those that do will do so as an accommodation, which they do grudgingly in order to keep other profitable parts of the client's business. If Google seriously wants agencies to pony up serious cash, it will have to cut them a break on price.

What will this deal yield?
Google will do two substantive things for Publicis: first, provide it an agency discount (which it will eventually have to open up to other competing ad agencies), and second, figure out some way to vastly simplify all the complicated decisions required to run digital campaigns. Both of these steps are easy to take and will likely be accomplished within a year.

Coming up with a "universal digital marketing dashboard" is a dream that tech-challenged marketers have had for years; the problem with such dashboards is that they're inherently unreliable, and inherently wasteful. They conceal the minutia, and the secret of running effective digital campaigns is to optimize all of the complicated moving parts, which means "working under the hood."

Beyond this, Google clearly has an agenda that it will be busy selling to Publicis, namely how to extract value from numerous expensive properties it has acquired over the years which, from a revenue perspective, have been either disappointing or abject failures. By this I mean YouTube, dMarc, and its various offline media initiatives. None of these have served Google's advertising system; perhaps one of Publicis' old media, pony-tailed creative types can tell Google how to fix them.

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