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Media and Communications

The New Economics of Advertising

The New Economics of Advertising


DAVID FABER: All right, well,
let’s get started. I’ll have the panelists
introduce themselves. And then we’ll get started
talking about the future economic model of the
advertising industry and everything in between. Miles, why don’t you begin. MILES NADAL: I’m Miles Nadal. I’m the chairman, and CEO, and
founder of MDC Partners. ALEXIA QUADRANI: Alexia
Quadrani, I’m the advertising analyst at JP Morgan. JORDAN ROHAN: I’m Jordan Rohan,
former Wall Street analyst and now managing partner
and founder of Clear Meadow Partners, an
advisory firm. DAVID FABER: And I’m David
Faber from CNBC, and I’m looking forward to learning a
lot about the advertising industry in the next
40 minutes. So why don’t we start there. Miles, lots of industries like
to describe themselves in the midst of dynamic and important
change, at seminal moment, it seems, with so many different
industries facing the digital future. Is that also the case
for advertising? MILES NADAL: Well, I think
there’s two things about that. One is, there, obviously,
is a transition from persuasion to influence. So, obviously, traditional
media, the movement toward social media and interactive
has been very pervasive. And it is, obviously, caught
the attention of clients. In addition, the economic
slowdown that has happened has had dramatic change on budgets
and changed the expectations and the expectation of
quantification of financial return, on return on marketing
investment expected from agencies. It’s also been an industry that
has been privileged to have had growth for about
20 years, anywhere from 2% to 8% growth. This year, the industry
is experiencing 14% decline in growth. And in a fixed cost driven
business, it has been very hard for most of the
participants to cut their way to success. So as a result, you’ve
had huge declines in profitability. There’s also a very big market
share shift from the big multinational networks to
smaller more entrepreneurial firms, where the most prolific
ideas seem to be resonating from. Especially those in the areas
of influence of interactive and social media innovation. DAVID FABER: Alexia, is the
current economic climate, the decline that Miles just
described, is it forcing the firm’s you covered to think
about changing their model or, actually, begin to change
their model. ALEXIA QUADRANI: I would say
that the advertising holding companies, in general, have been
evolving their business model for quite some time. If you look back at the
agencies, they’ve been investing in newer media, back
in sort of the mid ’90s. Look at Omnicon, for example,
they were the incubator of a lot of digital advertising
firms, way ahead, before they really even talked about
the internet the way they do today. So I think they’ve been evolving
for quite some time. I would say the economic
environment has, maybe, if anything, slowed that a little
bit, because the focus is much more on cost cutting, and
reducing that overhead, and sort of getting through
this headwind. But I do think it will pick
up again in 2010. DAVID FABER: Do you
agree with that? JORDAN ROHAN: Sure. I think there’s an added factor,
though, that makes it of greater urgency to
figure this all out. And that is the impact that
Google and other digital marketing, advertising services
companies, whose business models are based on
results of some sort, whether it’s a lead, an action, a
click, something that’s measurable. When the budget shifts to over
10% of total advertising being digital, and all of that is more
measurable than that a lot of the traditional media,
it puts added scrutiny and heat on those decision makers
who are in charge of the media mix. How do you defend, in a tough
economy, putting more money or more campaigns on TV, when, in
fact, you’re not sure how many more Toyotas or Whoppers
that might have sold? When that happens, then those
people directly involved in the production of those
commercials and all those things, they have to quickly
retool and say, I can do digital too. That takes time. And it’s very hard to
adjust them in a reasonable amount of time. MILES NADAL: The reality is
$0.90 of every dollar today is still spent in traditional
media. The biggest challenge facing
most of the multinational networks is that, in order to
a evolve, and in order to retool, you must reinvest.
Most firms are not in a position to be able to reinvest.
They’re trying to maximize quarterly earnings
and cash flow. So they’re not prepared to make
the changes necessary to get rid of that 10% or 20% of
unused real estate, to get rid of the older personnel who are
not digitally savvy, who don’t really understand how consumers
consume influence in a digital economy. If you started from scratch
today, you would not have 72 offices in 54 countries. The internet has leveled
the playing field. That you can be a firm with
global clients and two offices or three offices. So the infrastructure, that is
a legacy infrastructure, it’s very hard to, dramatically,
change that. You can only modify it. And with $0.90 of every dollar
is still going to traditional media, I don’t believe that
we’ve adopted a dramatic transformational mentality,
as an industry. ALEXIA QUADRANI: But Miles,
wouldn’t you say that one of the reasons $0.90 of every
dollar goes to traditional media is because the advertisers
haven’t really pushed so hard to make
that change? Or do you really think it’s the
holding companies being a bit antiquated and, therefore,
not having the capabilities to make the change. MILES NADAL: It’s a very
good question. I think it’s both. First of all, if you want to
have behavior in life, you should create economic rewards
that reward that behavior. We, as an industry, don’t
want that change. It was easy, when you’ve got
paid 50% commissions, and all you do had to do was do TV
spots, that’s very lucrative. To do viral marketing, to do
interactive, to do social media, we haven’t figured out
the methodology for billing to get paid, on the same basis, so
the profitability of those businesses is not the same. In addition to that, I think, at
the feedback we’ve had from clients, is that, historically,
agencies led clients as to what to do. Clients, now, are very
frustrated and saying, we need innovation, and we’re
not getting that innovation from agencies. And that’s why there’s more
shift from big multinational firms to smaller, more
entrepreneurial firms, where that kind of big idea in
thinking is coming from. It’s going to evolve. And it’s happening. I mean, Jordan, you were the
first guy to recommend Google, four or five years ago. DAVID FABER: Jordan, in terms of
the idea that more people, I would think, people spend more
than 10% their time on the internet, at this point– JORDAN ROHAN: Oh, for sure. DAVID FABER: –various things. And yet, as Miles has pointed
out, only 10% of the dollars are flowing to that. Is that surprising to you? Or are we going to reach some
inflection point where suddenly it flips
very quickly? Or is it going to continue to
lag significantly time spent? JORDAN ROHAN: I think if you
ask the owners of local stations groups, and billboards,
and other categories like that, they’ll
tell you, it’s happened pretty quickly. We’re in the midst
of it, right now. If you look, from any one year
to the next year, you may not see the trajectory that
you’re really on. But if you look over the
last five years, it’s been quite dramatic. DAVID FABER: Even getting
just to 10% has been dramatic, really? JORDAN ROHAN: It’s been a faster
adoption, historically speaking, then radio, TV,
or anything else that has come before it. And I’m talking about the
category of digital and, specifically, response based
digital advertising. Which I think is unique, in that
it’s hard to debate the merits of doing it. It’s just a question of what
resources you’re willing to– DAVID FABER: Alexia’s
shaking her head. ALEXIA QUADRANI: I think there
has been a pretty quick move. But I think, in some ways,
it might be stalled. And before you disagree with
me, let me explain what I mean by that. I mean, the advertisers,
I think, want to more money on digital. The consumers are, obviously,
spending much more time digital. But I think the advertisers– and you guys correct me if I’m
wrong– the advertisers are struggling on how to
do it effectively. I mean, they know display
doesn’t work. Search works, definitely, but
for a certain function. And I think they’re all
struggling, saying, I need put more money into digital, but
I don’t really know how. And I think they’re looking
to other agencies. And some other agencies are,
clearly, coming up with some good ideas. But I’m not so sure we’re going
from 10% to 20%, because I don’t really know how
they quite do that. MILES NADAL: There’s another
point that we’re really completely missing. You’re only talking about
measured media. But social media is not
considered measured media. So there’s all these dollars
that are not being quantified in YouTube, MySpace, Facebook,
Twitter, et cetera. DAVID FABER: YouTube is
considered social media? YouTube would be
part of Google. That wouldn’t be counted,
would it? MILES NADAL: No, it is
part of social media. But let’s take the most successful marketing campaigns. So I talked about persuasion
and influence. So the election of Barack Obama
was the most successful marketing campaign that I can
remember, from my perspective. They recruited 14 million brand
evangelists, on the internet, to raise $400 million
in nine months, deploy $300 million on television,
measured it every day, massaged the message, and,
ultimately, got him elected. So what do you attribute
the success to? Was it the 14 million people you
recruited on the internet, the $400 million that you raised
over the internet, or the $300 million worth of
television advertising that was being used to actually get
the message across and to get him elected? It was the combination
of those factors. So, going forward, I think, it’s
going to be the ability to use both traditional media
and social media and interactive. Where you have the interactivity
of the brand hanging out with the consumer
and vice versa. That you’re going to, actually,
be able to deliver actionable strategies
that are measurable. I mean, ultimately, we’re the
return on investment business. And we, as an industry, have
never had to be accountable. You’re on Squawk Box, in the
morning, you think about, everybody on your show marks
the market daily. Think about, sort of, what would
happen if you had 4, 6, 8, 12 quarters worth of negative
performance of any manager who shows
up on your show. They wouldn’t have a lot
of clients, right? So the measurability of
impact is coming. It has come. And it’s now being demanded. And I think the compensation
model will change accordingly, where it’ll be much more like
the hedge fund model. You’ll get paid for the costs. DAVID FABER: We only hope it was
like the hedge fund model. MILES NADAL: No, that’s
not true. DAVID FABER: I don’t think 2
and 20 is [UNINTELLIGIBLE] industry model. I really want to run
a hedge fund. MILES NADAL: I love it. I know I love it, because,
actually, it’s Darwinian. The people that will actually
produce the results will get paid handsomely, and
those that won’t will falter and die. So it’ll, ultimately, show
the wheat from the chaff. DAVID FABER: I like
the big answer. In the hedge fund industry, even
those who die, die with $60 million or $80 million. MILES NADAL: But the concept of
pay for performance is very different today. It’s not the concept of pay for
performance that we as an industry requested, which
was to get incremental compensation for the
value we created. This is being requested by
clients who sort of say, I don’t want to pay for
the time you put in. I want to pay for the
value you create. So I’ll cover your costs,
but I’ll give you upside potential, based upon quantifiable performance metrics. DAVID FABER: And I want
to get to that, but I want to let Jordan. JORDAN ROHAN: There are a
couple of key points. I happen to agree with much of
what of what has been said, possibly, not the hedge
fund comment. But a few things. First of all, attribution is
an industry wide debate, in every segment of media and
advertising that I address in my business today. And the reason is, because
it’s not– you’d like to say,
it’s science. And, certainly, there are
algorithms in place to try to estimate it. But it’s very difficult to
discuss whether a billboard, or a radio ad, or a television
commercial, or print magazine ad, or a search keyword, how
much of that conversion, that new customer, was
really driven by each of those things. And so as much as we’d like to
be completely results based, the only guys who are, possibly,
making too much money on each click
are Google. Because they’re all the
way down the funnel. Everybody else is trying to
convince the advertising community that they should
look at other metrics. It’s hard. It’s very difficult to argue
with that last click attribution model. Second, when you take the world,
and you start to focus on social media, it’s hard to
express a budget, for any big advertiser there. There aren’t a lot of places
to spend money today. I recently gave the analogy
that social media is a lot like Central Park. DAVID FABER: But they’re going
to figure it out, aren’t they? At some point. Certainly, there are a lot of
people who’ve invested in Facebook, who believe
they will figure out a way to monetize. JORDAN ROHAN: Well, I won’t
speak for those that have invested in Facebook. But I will tell you, that
the social media– DAVID FABER: [UNINTELLIGIBLE] value that could be as much as
$10 billion for this company that has very little in terms
of [UNINTELLIGIBLE] cash-flow or revenues. JORDAN ROHAN: Right. Now Facebook’s user activity
levels are extraordinarily high. There was recently a study that
said 65 million people out there check Facebook via
their mobile device every day. And 275 million people in the
world are looking at Facebook on a regular basis. More engaged with that then
any internet business that we’ve seen. DAVID FABER: It’s
a pretty robust platform, one would think. JORDAN ROHAN: That’s right. So the ability to either
persuade or influence people using social platform is
extraordinary, and something that we can’t quite put
a price tag on. Microsoft put a price tag. And some other investors
put a price tag on it. But it’s hard to value that
amount of influence and persuasion. MILES NADAL: I do agree with
what you said, David. Ultimately, somebody will crack
the code to figure out how to monetize that. Whoever does will become
very wealthy. DAVID FABER: Any ideas here? JORDAN ROHAN: I have
a feeling. My guess is the Facebook
founders, right? That’s really what we’re
talking about here. There’s only one Central
Park in New York City. It’s a tremendous place to
hang out with friends. You can throw a Frisbee. You’re not going to spend
a lot of money there. That’s the toughest part. When you look at the internet,
right now, and you look at say the ad network business, it is
awash with Facebook inventory. Everywhere you look. They’ve billions of patrons
that nobody knows what to do with. Reasonably, the only patrons
that matter, for social media, are the first three, before you
really got into something social and interactive, and
the last three, before you exit the platform. Because that’s when your
more receptive to a marketing message. DAVID FABER: So you’re not
convinced that they’ll ever figure it out. JORDAN ROHAN: They will. It’ll be slow. It’ll be incremental. They’ll do over $500 million
in revenues this year. They are figuring it out. But don’t expect the
intermediaries and the agencies to be able to make
a ton of money on it. There’s no guarantee of that. MILES NADAL: When you talk
about accountability and measurability, you’re talking
about it on a per click or per item basis, on every single
thing you do. But the reality is, what
marketers really want to know is over a period of time,
how has the impact been? Am I selling more burgers? Am I putting more
people through? Is my average sale greater? Am I gaining market share? Not everything you do has to be
quantifiable, but, over the course of that year, the metrics
don’t lie, in terms of financial performance. DAVID FABER: The model you’re
describing, where the ad agency is paid, essentially, an
incentive fee, would demand those kind of metrics, right? MILES NADAL: Well yeah. I mean it goes back to, that
you’ll get paid a lot less than you did on a base
basis, but you, based upon the success. Like I wish that CPB was paid
on Coke Zero, for the performance. I would have taken, and I
would have underwritten, personally, the base
compensation if we could have just been paid for the 40%
growth in share that happened over the last few years. Look, Chuck [UNINTELLIGIBLE]
told me a story once. He said look, when
we took the BMW– DAVID FABER: He’s here. He could just tell
us, himself. MILES NADAL: It wouldn’t
be as good, actually. I tell it with more
embellishment than he would. They had the BMW
Mini business. They put Minis on the cabs of
Ford Expeditions, and they drove them around cities. And the Germans came up, and
they said, we want to measure the impact. We want to see, is this a good
investment of time, effort, and energy. And, at the end of the several
days, they basically said, we don’t know if can measure the
impact, but every single stop light we get to, everybody’s
pointing and looking at it. And it seems to get a
lot of recognition. Ultimately, over the course of
the period, they sold out all the inventory, throughout the
year, for several years. Same thing was true, by the way,
of Coke Zero when they did the online campaign
with the lawyers. It didn’t test very well. They actually ran
the campaign. It was exceedingly successful. So some of these,
you got to do. You just got to throw. I mean, Nike’s one of the great
organizations that just throws brilliant, creative
ideas at brands and tries things. And it, obviously,
seems to work. ALEXIA QUADRANI: So you,
basically, you support the model going [UNINTELLIGIBLE] incentive count, as long as
there’s some coverage of your fixed cost? Because what about
the client– Nina gave two great examples. We’ve have been very
successful. But what about the client,
where there’s some extraordinary factor having
nothing to do with your creative work that hurts the
sales of the product. Does that mean your guys
don’t get paid? MILES NADAL: First of all, I
know where the world’s going. Whether I like it or
I don’t like it. It’d be nice to be paid for
whatever you did, no matter what happened. That would be nice. But that’s not the reality
of the world. Corporate profitability
is under siege. Costs are under siege, because
revenue is not growing for most firms. So, I say, we
have a choice in life. We can either embrace change and
be, as Bear Bryant said, mobile, agile, hostile. Or we can sit there and pray. I never saw prayer
as a strategy. I say, we need to get
ahead of this. So my notion is, I think that
more of our own internal costs have to be more variable. I think we have to be in a
position where we need to demonstrate quantifiable
success. And we need to be in a position,
if we’re going to take that risk, to be able to
go to clients and say, then give us the upside potential. But the reality is, we
don’t have a choice. The clients are demanding it. And the movement is going to
go that way, whether we embrace it or not. So I say, let’s embrace it. And, ultimately, economics
are very efficient. If you can deliver value,
clients will find you. The best opportunity that
exists, right now, is the market share shift. There’s still $600 billion
being spent. I mean, the firms that are
growing, right now, are growing because they’re
taking share. DAVID FABER: Jordan, on the
digital emergence at ad firms. You’ve written that the
complexity has increased. That is, the complexity of
offering a product for advertisers, I guess. But the fees advertisers are
willing to pay have decreased. That doesn’t sound like
the kind of business you want to be in. JORDAN ROHAN: Right. And let me expand upon that
a little bit, if I could. DAVID FABER: Please. JORDAN ROHAN: To everybody,
the idea that complexity increases makes a
ton of sense. But let’s just examine what
it was 20 years ago. Essentially, you had between 4
and 20, depending if you had cable in your neighborhood,
number of channels to reach people on. You had geographic targeting,
for local media, newspapers, print, other forms of print,
media, billboard, and such. And today, you go everywhere
with your mobile device. You can be anywhere logging
into the internet, on any website, which may or may
not have accurate cookie information tracking you
all over the place. They’re measuring you
behaviorally. They’re measuring you from a
contextual point of view. They’re measuring you based on
past transaction behavior, even if they wipe
out your name. They are looking at when and
how long you’re spending on certain sites, and what sites
you’re coming from. If you’re going to and from
Facebook, they know it. Because they’re putting
pixelated indicators on your web browser. And this is also supposed to
be done by the same set of agencies and brand stewards that
we’re doing it before. And it’s just very, very
difficult and complex. Now, are they going to
pay more for that? I doubt it. Because, at this point in the
economy, the threat to a big agency holding company of losing
a major client is too great to absorb. They would rather absorb a
reduced margin or reduced payout, in the short term. And not have that big corporate
disruption of losing their brand name client. So they’ll take the
punishment today. If there were no fear of loss,
and there were new budgets everywhere, and growth in the
economy, the agency world would be able to fight back
a little bit more. Because they could fire
their clients and find some new ones. That’s not how things
are going today. So some of this is just the
margin impact on a really tough economy, on these agency
holding companies. They’re in a tough spot. They have a lot of fixed
costs, as Miles said. ALEXIA QUADRANI: I agree with
most of what you say. I think the difference is, is
that when the dollars move from traditional media to some
sort of digital platform, I think the agencies assume
a lot more of that revenue stream. They’re not paying for expensive
media on primetime. They’re not paying for talent
and fancy directors. They’re doing a lot of
the work in-house. And, I think, you’re right. I think, the more fragmented
the business gets, the more work there is to be done. But, I think, if they’re
actually assuming a lot more of that share of those billings
, ultimately, they can makes some good profit
dollars off it. So I don’t think it’s necessarily a lose-lose situation. I think there’s an awkward
transition period. But I also think, who else
is going to do for the advertiser? MILES NADAL: Well, the other
thing is, we’ve talked about media and measurement. We have talked nothing
about creativity. This business has, is, and
always will be about storytelling, about brilliant
ideas that have an emotional connection between the consumer
and the brand. And those people that could tell
a very compelling story will, ultimately, have the
ability to deliver results. DAVID FABER: Regardless of
how it’s distributed. MILES NADAL: Absolutely. DAVID FABER: Even if it’s
on my BlackBerry? MILES NADAL: Well, there’ll
be many different means of distribution. And one won’t replace
the other. It’s all additive. DAVID FABER: Can you find
people, qualified people, though, who know what they’re
talking about in the digital arena? MILES NADAL: Absolutely. DAVID FABER: And who want to
work for an advertising firm? MILES NADAL: Well, Jeff Benjamin
told me that six years ago end he was one of four
people, and now there’s 250 people that are just
in digital at one firm. I mean, if we could find
500 more, we would. I said, the other week, if we
could find 500 social media experts, I would go hire
all of them at once. DAVID FABER: You would? MILES NADAL: Absolutely. DAVID FABER: That doesn’t sound
like a good investment. MILES NADAL: Why not? DAVID FABER: Sounds like an
awful lot of people who’d all be thinking the same way. MILES NADAL: In 2001, there was
a little firm, and it had, I don’t know, about
100 people. Now it has 1,100 people. And we always hired ahead
of the curve. And I believe in the field
of dreams. If you build it, they will come. To me– DAVID FABER: Your other pals
are laughing at you. MILES NADAL: I like that. DAVID FABER: But they’re
not talking. JORDAN ROHAN: I’m
just smiling. I’m not laughing. ALEXIA QUADRANI:
[UNINTELLIGIBLE]. MILES NADAL: It’s true– DAVID FABER: What was it
that made you smile? MILES NADAL: –the most talented
people produce the best ideas. And the clients follow
the talent. They have and they
always will. And, right now, what’s
happening is there’s a huge shift. It was interesting. DAVID FABER: But there’s
a huge shift. What’s the shift? MILES NADAL: The shift is away
from big firms to smaller entrepreneurial firms. Lori
said that [UNINTELLIGIBLE] just joined us as a named
partner at Kirshenbaum, Bond, Senecal and Partners. She said to me, $3 million
is the new huge. She came from McCann,
so everything– DAVID FABER: Alexia,
is that true? ALEXIA QUADRANI: I mean, I
would say that, I think, you’re right. I think, there’s definitely a
resurgence in some of the independent, smaller shops. Because I think, some of the
great, creative ideas are lost in the big shops that keep doing
the same thing, in and out, and they’re more frightened
about losing that client relationship than
being innovative. So I definitely think, you’re
generally correct. I think, it’s also
very difficult. I mean, I have covered this
space for about a dozen years. And my biggest surprise,
covering this space, is how slow things change, how
slow advertisers are to make a change. How, if they’re unhappy with
creative, you know that try it again, they try it again,
they try it again. So I do think, there’s
definitely the opportunity, where there’s a few clients
that do quickly move. They’re not happy. But a lot of clients
are sticky. And they stay with things for
a long period of time. So, I guess, I agree with you,
on the premise, but I don’t think it’s that drastica of
a shift, at least not yet. MILES NADAL: Until it happens. The big financial institutions
used to be in the money management business. The biggest money managers in
the world we’re Citigroup, Bank of America, JP Morgan,
Merrill Lynch, et cetera. They have 0, 0 share
of that market now. They’re not in the money
management business anymore. So for 25 years they were
in that business. They don’t exist it in it. They’ve outsourced all
of that activity. They’ve sold off their
operations. They’re now in the distribution
business. I would say, I think,
it’s happening on a more prolific basis. Here’s my prediction. DAVID FABER: JP Morgan
is still in the asset management business. JORDAN ROHAN: Sure. MILES NADAL: Small. But if you take a look. My interesting thing will be,
watch what happens to the car companies, and all the agency
activity over there. ALEXIA QUADRANI: But who
runs the car companies? I mean, is that a big coup to
win all the car business? MILES NADAL: I don’t know. It was one of the largest
advertisers in the whole world. And it was always dominated
by multinational networks. Let’s see what happens
to those four. ALEXIA QUADRANI: I shouldn’t
speak [UNINTELLIGIBLE]. It’s obviously a very
big category. But it’s under tremendous,
tremendous challenge. The revenues declining. The margins are being
squeezed. And from what I hear, the
managements are being increasingly difficult. I’m not saying it isn’t a coup
to win a big car account, but I think it’s not what it
was five years ago. MILES NADAL: No, but
no business is. There’s not any business where
you aren’t under siege to deliver performance. If you show me one of those
industries, I’ll pay you for the referral, because I’d
love to find those– DAVID FABER: Yeah, but there
are better clients. ALEXIA QUADRANI: There are
better clients than cars. DAVID FABER: If the audience
has some questions, think about them. I will turn to you
in just a second. I did want to follow up on
this idea of incentives. And I know Coke has begun to
really move down that road. Do you think it’s a viable? ALEXIA QUADRANI: I sat through
the entire Coke presentation, last spring at the A and A
conference and listened, really tried to understand their
business model and their proposition about moving
to this more incentive, comp model. And Miles, you work with
Coke, directly. So you correct me
if I’m wrong. But it didn’t even sound like
they wanted to cover the fixed cost. They wanted to, basically,
give you a little bit of money and, really, make
it very incentive component. I mean, most compensation,
all incentive. And I just think it’s very
nice in theory and very difficult in practice. If what you’re saying is, maybe
that’s true, Alexia, but that’s where the World’s going,
and you need to embrace it, rather than fight it. I mean, I think, maybe you’ll
see a few more clients jump on the bandwagon. But again, I don’t think it’s
going to wake up one day, and everybody’s paying
all incentive. MILES NADAL: I agree. It’s not feast or famine. And I’m not saying the exact
model that they propose is where they’re going to land. I think it’s a philosophy. I think marketers are angry. Because they feel that they
haven’t been given the value they paid for. So you have this
pendulum shift. There will be an equilibrium,
where it will be more moderate. And people will have to earn
their compensation. And they’ll get paid for
the value they create. So I’m not condoning that model,
exactly, or the exact parameters– ALEXIA QUADRANI: You see some
compromise come out of it. DAVID FABER: I just say,
there’s a direction. The direction is a lot
more accountability. ALEXIA QUADRANI: But you
probably remember, 10 years ago, P&G talked a lot
about this, too. And I don’t really think
that much came of it. MILES NADAL: But you had
a growing economy. You had positive GDP. You didn’t have 14% decline. You didn’t have the risk
of a depression. You didn’t have credit
markets freezing. You didn’t have negative
growth in sales in every industry. DAVID FABER: All right,
[UNINTELLIGIBLE]. JORDAN ROHAN: We all know
how bad [UNINTELLIGIBLE] DAVID FABER: Say again? JORDAN ROHAN: We all know
how bad the economy was. [UNINTELLIGIBLE] DAVID FABER: Yeah, it’s
been a good two years. Yes. How about right there. AUDIENCE: So I’ve heard from a
bunch of people on this panel and the other panels that
there’s a pendulum swinging, and it’s getting harder
for every one. And that the margins
are all squeezed. I’ve also heard from almost
every panel, and from here, that it’s pendulum, and that,
one day, it’ll swing back and things will be better. It seems to me that it probably won’t ever get better. The incentive compensation was
just about making sure those margins are smaller forever. And that the ad industry
businesses is just under unbelievable pressure. And it will never be
the same again. Love to hear what you each
think, whether it’ll ever get better, or it’s just going to
continue to swing, to a point, and then stay there
and continue to be very, very difficult. MILES NADAL: I apologize. I hope I didn’t convey that. I click my heels when I come
to work every day, now. I’ve waited four and a
half years for this. I think there’s better
opportunity, now, than ever before. I think that’s not true. I think there are firms within
our stable that are making more money than they’ve
ever made. We will have a record
year this year. I think it’s about capturing
share and delivering. I think it’s a better
opportunity than ever to attract talent. And I think, if you’re really
able, in terms of talent, and you can deliver, I think
there’s better economic opportunity for talent. So I just say, you can’t rely
on the old model and expect the old results. It’s about a new model and
a new approach to deliver performance. But I think you can
get paid for it. DAVID FABER: Alexia, your job
is to determine who the winners and losers,
ultimately, are. And so many industries that I
follow are facing these same challenges that the digital
world brings on them. But are you starting
to get that sense? When do you think you finally
do get that sense, as to whether the pendulum is swinging
one way or the other for so many firms? JORDAN ROHAN: I think, when
you’re sitting in a dark hole, it’s sometimes hard to
see the other side. And I do think things
get better. I think the advertising
market does, at some point, grow again. I don’t know if it ever has the
kind of exuberant growth that we saw in the late ’90s. I don’t know if it’ll ever grow
at a higher rate than GDP growth, going forward. But I do think we’ll see growth
again, hopefully, not too far off. With regards to the challenges
going into the industry, and how the agencies or other
media sort of fair through that. I think there’ll be winners
and losers. I think, Miles made a
great point, later. If you have a great, creative
idea and a great talent, you’re going to make a lot of
money in this industry, in the agency world. I think the change is, you
don’t just make money by showing up to work anymore. I think the advertisers are
going to be more demanding. But in a better economic
environment, I also think, people kind of forget
about all this. And you go back to the old ways,
more than you kind of think you do. You take like a couple steps
forward, maybe, one step back. And so I don’t think
it’s going to be drastically different. But I do think we are migrating to a different model. And with regards to other media,
we say, at JP Morgan, there are clearly people on
the winning side of what’s going on, out of home,
cable nets, digital. People on the losing side,
print, radio, local TV, to a certain extent. And I think that will
continue to be the case, coming out this. MILES NADAL: Just to add
to what Alexia said. Even when we get 1% to 2% growth
back, in the industry, which advertising spend usually
mirrors GDP growth. I don’t think the accountability
and the psychology that marketers have
about demanding accountability and looking for more for less
is going to change. AUDIENCE: I have follow up
question to that, which is, you didn’t address the absolute,
total value of the advertising dollars. So we’ve heard about
shifting analog dollars to digital dimes. Is there anything to say that
when the dollars shift, whether the impressions are that
they’ll be at the same dollar level? Because you just talked
about growth. You talked about who wins
and who loses and what the margin is. But is there anything to say
that the levels are the same? DAVID FABER: Yeah, I think that
that question, basically, is Jeff Zucker, my boss,
has talked about. And this is a challenge
for all media companies, dollars to dimes. Which I would assume impacts
the amount of money that they’re willing to spend, that
the advertisers are willing to spend on agencies and
everything else. Does it ever get to parity? JORDAN ROHAN: I know it has
to get better than this. So I agree with the assertion
that you may never recover all that you’ve lost. What you’ve
lost, more than anything, is the attentiveness of the
consumer during periods when that consumer is in front of
a TV or something else. That attentiveness is not
likely to return. There’s an entire generation
of people that don’t go anywhere without staring
down at their BlackBerry or their iPhone. You can see them walking all
around Manhattan, causing many traffic accidents. I know, he’s one. He’s addicted to
his BlackBerry. MILES NADAL: I don’t
drive anymore. JORDAN ROHAN: But that very
much applies to what the behavior of those people. Even when they’re watching TV,
it’s often not based on an appointment viewing. They might have recorded
that show. They may be paying less
attention to ads. And there are fewer ads,
sometimes, in what they’re kind of also looking at. And I think that is the key
variable that doesn’t return. Sometimes an audience becomes
more elusive. I would suggest that some of the
problems that Viacom’s MTV Networks unit is going through,
right now, is that they’re audience is becoming
more elusive. They’re elsewhere. It’s harder to reach them
with cable programming. For Viacom, it’s not clear to
me how quickly they can recover that. Clearly they can have some hit
shows, where they haven’t had hits in the past and
get a little bit. But, overall, that trend is
very, very compelling and irreversible. DAVID FABER: But the number
of dollars is not coming? MILES NADAL: No, and
it’s not going to. Dollars spent on marketing will
be a reflection of sales of companies. Harvard’s done a study for years
and years that said, companies that maintain or
increase marketing spending, in difficult economic
times, maintain or increase market share. Ultimately, if you have 1% to 2%
GDP growth, you’ll have 1% to 2% dollar growth. The difference is, they’ll be
looking for much more bang for their buck. So they’ll be getting, if it’s
a $600 billion dollar industry, and it grows 1%, then
instead of being $606 billion, it’ll be, effectively,
that they’re getting $630 billion worth
purchasing power. But if you said to me, do I
think we’re in a declining advertising world for
the next 10 years? Not a chance. As you get growth in sales and
corporate revenue streams continue to grow, people will
still spend a portion of their revenue on marketing. It just will change in
terms of the mix. And they’ll get more
dollars of impact. DAVID FABER: Sir. AUDIENCE: Could you dig in,
a little bit, on this rosy future for social media. There’s a couple things
I’m not so sure about. I’m a little anti-social. So there was a correlation about
time spent with media and time spent with an
advertiser, following that time spent. But that correlation
isn’t really there. 29% of consumers time
is with radio. Only 10% in the ad spends,
sometimes less. 6% of people spend their
time with magazines. Magazines get 16%
of the dollars. So that’s out of correlation. Twitter has a 20% retention
rate, after the first 30 days, for their average user. So they’re losing 80%
of the trial. And then lastly, I’m just not
sure what happened to GeoCities, the fourth most
visited site of the web. I just wondered if
you dig in there. JORDAN ROHAN: I can handle
the web questions. DAVID FABER: Go ahead. JORDAN ROHAN: Listen, I’m not
going to try to pick on each of these points. We can talk about it afterwards
if you want. But the specific theme that
you’re addressing, which is that web properties come and
go, particularly those with low retention rates overall. That, in aggregate, when you
look at the utility that the web provides, it’s going up. And that’s how you may go from
GeoCities to Myspace, to Facebook, possibly,
to Twitter. But the percentage of people who
are doing something social on the web is going up. My mom just got on Facebook
three months ago. Because she was sick of my
in-laws seeing pictures of my son without her seeing
pictures of my son. And I don’t know it that’s
necessarily the driving factor for everybody else. But when my mom does something,
that means that 2/3 of the rest of the population’s
already there. That’s just kind how it is. So you may be anti-social,
today. But, over time, you’re going to
find yourself becoming less anti-social, I believe. And when you do, there will
be something popular that’s made for you. It may not be the expose
everything world of Facebook, which I agree, sends shivers
down many people’s spines. But it may be something only
slightly social, which can fit your personality type,
if you will. And, over time, that utility of
the web, as a whole, it’ll adapt to you. The web is very low cost
of barriers to entry. That means people can try out
things and see if they work very inexpensively. And eventually, somebody’s going
to find something that works for you. MILES NADAL: Also, you want to
make it very scientific, in the short term. Our job, as a creative
organization, is to make brands relevant in pop culture
terms. So if Twitter is a relevant distribution vehicle,
we need to induce trial. We need to see what happens. And we need to try
these things. And we’re pleasantly
surprised. AUDIENCE: So how do you resolve
the correlation issue with the rest of the
media world? Time spent and investment from
advertisers are not directly correlated. ALEXIA QUADRANI: They haven’t
figured out, really, how to use social networking, how
to advertise on social networking. Like we talked about before, I
think they’re beginning to. We’re seeing real revenues
on Facebook. But one day, someone
may figure it out. And you’ll see a flood
of dollars go there. And I think, you may not see a
one for one, because I agree with you, you don’t see one for
one in most other media. But you’ll see something
a bit more normalized. MILES NADAL: There’s not a
marketer, in the world today, who doesn’t say, I’m not
comfortable that we are covering all of our basis
on social media. I don’t know what
we’re not doing. But I know we’re not
doing enough. ALEXIA QUADRANI: They
want to be there. They just don’t know how. JORDAN ROHAN: And I’m not going
to pretend to be the expert on correlations between
time spent and dollars spent. But time spent may not be the
ultimate indicator of what’s important here. MILES NADAL: Good point. DAVID FABER: We have time
for one more question. How about this area right
here in the front? AUDIENCE: Hi there. Shari Novick, Planet Sur. Miles, I’m not sure if everyone
here knows about your very interesting and quite
different portfolio strategy that’s different to the
larger networks. But you own gems like
[? Crispin ?]. In advertising, you’re talking
about the importance. I’m sure you’ll be buying
more digital, strictly social media. But tell us about your
investments, going back some years, in innovation and design
firms, as well as, about a year ago, speaking
with people in your organization it was, we see
plenty of growth in the US. We’re not that interested in
China, in Asia, other regions. There’s plenty of upside
in the US. That’s changed a lot since last
year, from an economic standpoint. But tell us more about your
portfolio strategy, and where you’re seeing growth in some
of these other sectors and disciplines that are not getting
as much mention as social media. MILES NADAL: We love design,
because we see there’s a convergence between marketing,
advertising, design, and the product. I mean Alex Bogusky and John
Winsor just wrote a book called, Baked In, and it’s all
about how the product is the best brand evangelist. And the
brand equity, in a product, is very powerful and unexploited. So we’re very privileged to have
firms like Redscout, and Skinny, and Bruce Mau,
et cetera, who really are secret weapons. Maybe not so secret anymore. We’ve chosen to be in America,
because 50% of all dollars are still spent here. And we don’t have
global scale. So, at one point in time, I
questioned and sort of said, gee whiz, when Asia and all
these emerging markets were growing 13% a year, maybe
that wasn’t so smart. I kind of love America, land
of the free, home of the brave. It’s been very
good for us. And everybody else going
everywhere else, so I’ll stay right here. That doesn’t mean we won’t
support Crispin Porter Bogusky, or Kirshenbaum Bond
Senecal Partners, or anybody of our other firms who have
broader geographic ambitions, but it’ll be in relation to the
demand from their clients. But right here, in this
marketplace, we think there’s an incredible opportunity
to capture share. Right now, we have 1% share of
the domestic marketplace. I don’t know, if we get to 2%,
that’s not so terrible. All we need to do is double
over the next three to five years. We’ll do just fine. And so we’ve got a
niche strategy. We’re going in a different
direction. That doesn’t mean what
everybody else does isn’t a good idea. It’s just not for us. DAVID FABER: We have
to end it there. Miles gets the last word. Miles, thank you. Alexia, thank you. Jordan, thank you. And thank you all
for being here.

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