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Follow the money: inside the Publicis/Google deal

Follow the money: inside the Publicis/Google deal David Pasternack

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.


David Pasternack is president of Didit, a New York-based search marketing firm. .

David Pasternack co-founded Didit with Kevin Lee in 1996. Prior to this, he launched the United States Information Corporation, which became one of the largest electronic publishers of Federal Government bidding and contract information in the...

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Comments

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Commenter: David Singh

2008, March 26

"Agencies won't buy Google's media without an agency discount."

In regards to this section that agencies are paying retail, I respectively disagree - "retail" is a relative concept. A well run, tactically sound campaign will cost below what other advertisers are paying for the same term - the discount is in the quality of ads, keywords and landing page and varies from advertiser to advertiser. Therefore costs are dynamic so there is no static or "rate card" (or benchmark) CPC that is made public to get a discount from.

The genius of Google's model (for them to max profit) is hiding that true price - even if it was made public it would be useless since many advertisers are paying below that anyway and unless Google changes their business model, we will never know true price.

I do believe however that bigger advertisers tend to pay less than the average advertiser because they can afford to buy consistent presence on the engine and the quality score views big brands with higher authority thus lowering their overall costs.

In the offline world the cost is much more static for the flight dates of the campaign so the discount rate is clear and thus can be negotiated and demanded for the amount of media bought.

In the end I think comparing discounts from the offline world to search is apples and oranges - two completely different models

Commenter: Mini Guruswamy

2008, March 05

Despite digital marketing being "labor intensive", agencies must invest in it. Because if agencies don't have a digital marketing department they face obsolescence. You only have to look at the increased percentage spent in media dollars on digital marketing by large companies over the last three years to see the new trend.

Commenter: J. Michael Roach

2008, March 04

I inherently disagree with the simplification model. I don't see how agencies would want digital to be easier to buy. The easier it is to buy, the easier it is for clients to buy and bypass the agency.

It's the not 15% model that's outdated, in my opinion, but the traditional agency model. Or more accurately stated, agencies will begin to move full-circle into the role of buyers of ever-complicated digital campaigns. Access to the minutia, and the resulting tweakability, is the very reason digital advertising offers so much promise. Eliminate the tweakability, and you might as well buy something else.

It's not up Google to simplify for the agencies, it's up to the agencies to simplify for the client. And therein lies the value for the next generation of agencies.

Commenter: Jerry Stevens

2008, March 04

David Pasternack wrote: "Agencies won't buy Google's media without an agency discount. If Google seriously wants agencies to pony up serious cash, it will have to cut them a break on price."

Boy, I dunno. Maybe they will offer a break on price, but the 15% model is already outdated isn't it? It's not as though the client is unaware of the discount so it's already factored into the contract between agency and client. It's an antiquated model that from which traditional media would no doubt like to extricate themselves. I can't see Google adopting a business model that appears to me to be a decades old relic.