Joe Cappo on the Future of Advertising

Editor’s Note: Joe Cappo’s book, The Future of Advertising: New Media, New Clients, New Consumers in the Post-Television Age traces ad agency consolidation, the impeding demise of television as an ad force, and more -- then lays out a startling yet ultimately logical roadmap for the future of bran marketing and advertising. Cappo recently retired from Crain Communications, Inc., where he was senior vice president. He also was publisher of Advertising Age, and is a world-class speaker.

Few people know the industry as well as Cappo does or have as intriguing a perspective on what’s to come. Here’s the first part of Cappo’s  fascinating and challenging conversation with Doug Weaver, president of Upstream Group, at the February's iMedia Brand Summit. 

DW: Joe, in the book you offer a really vivid picture of the ad business and the market and the social forces that really took it to the place that it is today. So how about starting us off with some context. How did a business that was seemingly so rich and profitable and exciting back in the late 1970s end up where it is today? What happened?

JC: Well, its food source was cut off, and as soon as you cut off a food source, any industry or any individual is going to be in trouble. I started actively covering the advertising business in 1968, and at that time, it was a personality business. It was a business of creativity. It was a business of entrepreneurs. There was only one publicly held ad agency in 1968, which was Foote, Cone & Belding. And even then, Foote, Cone & Belding had a very small core of owners, most of whom were employees of the agency.

At the time, advertising agencies had a sweet deal. They charged 15 percent commission on any media that they bought for their clients. So if they bought a hundred million dollars worth of television time, which you could do with one telephone call, they would get $15 million in income. With that money -- in fact, I interviewed the former president of J. Walter Thompson, who said, “You know, in 1965, in our Chicago office alone, which was the second largest office at the time with about 600 employees, they had a research department, they had a PR department, they had a merchandising department, they had a sales promotion department.” They were an all-inclusive, full-service ad agency, and they didn’t charge clients for any of those services because they made so much money from the commissions on buying media, especially television, that they were able to give all these services away as sort of a value-added kind of a proposition for their clients.

Well, what happened to J. Walter, as well as all the other agencies, is that as we went through time, as we went through the ‘80s and then toward the end of the ‘80s, this phenomenon called the “media buying specialist” started in Europe. And that is that clients would say, “Okay, I want you to create my advertising, but I’m going to go over here and have these media specialists buy the time because they’re only going to charge me 4 percent or 3 percent or 2 percent commission in order to buy my time on the television or radio or my space in publications.”

And so what allowed the agencies years ago to be a marketing partner with their clients all of a sudden just evaporated. The agencies were being paid then a creative fee for doing something or an hourly type of a fee or something, but nothing ever to match the 15 percent commission that they were getting for their services previously.

DW: At the same time that this economic core of the business gets yanked away, you also have the emergence of the big four holding companies coming, and we start to see arbitrage and a financial angle to the business. Will you talk a little bit about the holding companies and what difference they’ve made in the business.

JC: Well, in fact, it was the growth of the media buying specialists that prompted the agencies to say, “We’ve got to get a bigger margin. We’ve got to create a bigger entity in order to replicate the money that we were getting before. So the acquisitions began, really, in the early ‘90s.

In the list of ad agencies top 20 agencies in 1980, of those top 20 agencies, 17 are now part of the four major holding companies. Of the other three, one is still independent and the other two have disappeared. And the only independent agency left in the top 20 in the country is Gray Advertising, and they are not part of WPP, Omnicom, Interpublic, or (unintelligible), which owns the rest of the business. These four companies represent 82 percent of the advertising in the United States and 50 percent of the advertising in the world. So, that’s how powerful they are.

DW: So they found their financial efficiency, but one of the things that you say in your book is that the most damning thing is that the big holding companies have not stepped up and really become the general contractor for client strategy. They have not stepped up and really added a strategic value component to the mix. Instead, they are really becoming purveyors of low-cost advertising services.

JC: Well, they’re doing all of those things. Omnicom acquired 108 subsidiary companies in 2002, and those companies are sales promotion firms, web designers -- all kinds of different little companies, many of whom have since gone out of business because of the problems that came about in the Internet business.

But what they have failed to do largely is to integrate these various things. I did dozens of interviews for this book. I talked to sales promotion people owned by a holding company who have virtually no contact with advertising agencies owned by the same holding company. They might handle the same account, but they really have no involvement with the advertising agency.

What agencies are trying to develop now is a strategic marketing function, but they’re not doing it very well. I’ll be very honest with you.

DW: So there’s a bit of a strategic vacuum out there. How are clients going to fill that vacuum? If they’re not getting strategy and they’re not getting market direction from their agencies or the holding companies, where do they go for that?

JC: You know, I asked that question dozens of times, from clients, agencies, et cetera. The agency’s people said, “We should be doing it,” but they’re generally not doing it. They might be doing it here and there, but this is not -- you go to an ad agency, you’re going to get advertising. You’re not going to get direct marketing, you’re not going to get sales promotion, you’re not going to get research or public relations or anything. You’re going to get advertising.

So there are three different ways that the strategy is going to be developed for a client. One is that ad agencies will step up to the role and start delivering this for their clients. Two, and what’s probably most prominent right now, is the clients are doing this themselves with a caveat that I will mention in a minute. Clients are trying to do it themselves. The third way is outside management consultants are now coming into the business. Accenture, for example, which is the largest management consulting firm, will go into a company and create a marketing strategy for that company and then have somebody else actually do the advertising, do the sales promotion, do the online and the direct contact and things of that sort.

The problem with the clients doing it is that the clients are as siloed as the agencies are, and that is the ad department is always fighting with the sales promotion department to determine who’s going to get the bigger budget from the marketing department. And you have direct is different from media advertising. You have these guys that are, “We’re in the brand advertising department” -- “Well, we’re in the direct sales part.” And they’re all fighting with each other. Even within the client companies, there’s a problem of strategy and who is going to direct. It’s an orchestra of a lot of instruments all playing their own tune without having a conductor who knows what each instrument can add to a symphony and then develop a strategic plan to create a very successful outcome.

DW: That conductor we’re talking about, that person who’s going to step in and really drive strategy for clients and help them see the whole marketing picture and really make the best use of all the tools. You mentioned Accenture. You mentioned the big consulting firms and them potentially stepping into that role. My first question is are they ready? Do they have what it takes to step in and make that happen for clients? Also, where else? I noticed a few years it was Coca-Cola that stepped in and brought in CAA to help them with some of the big strategic vision.

JC: Right, but that was a very backward move on the part of Coca-Cola, which has obviously made a lot of problems for themselves over the years. But they hired CAA because they thought the essence of marketing was television commercials, and that’s not what it is. Actually, to go into another realm, the essence of success in a consumer product is distribution. If Toys R Us doesn’t sell your toys, you ain’t gonna sell toys. If Wal*Mart doesn’t sell your shampoo, you’re not gonna sell a lot of shampoo because the retail market has become so strong, is exerting an incredible amount of pressure on the advertising people, and money that used to go into advertising is now going into slotting allowances. It’s going into trade promotions, into other things, to force the product into the marketplace.

There’s an easy reason for this. Why? Because, one, new products are coming off the roll as fast as they ever were. Two, there’s virtually no increase in shelf space. For every super Wal*Mart that opens, 25 other retailers go out of business.

So we get back to who else is going to… there is no one else to do it unless somebody develops a strategy, an idea. We now have these brand development companies. My friend, Don Shultz, who is a professor at Northwestern University and the fellow who invented IMC, Integrated Marketing Communications, just came out with a book called Brand Babble because everybody’s, like, “brand, brand, brand, brand, brand,” and most people don’t understand what a brand is or what a brand does or who owns the brand. So we see all of these formations in the consulting world and then in the corporate world about brand, chief brand officer, and things of that sort.

I think this is done without a thorough examination of what is going on in this business, and I think that there is no one there right now, but I would say the best chance is for these management consultants to come out to assume this role.

Now, a typical example is in the agency selection business. When I started covering the industry in the late 1960s, if Kraft wanted to hire an agency, they would get the ad director. The ad director would get four or five agencies. They would call them and say come on in and do a presentation, et cetera. Great.

Now if Kraft wants to hire an ad agency, they call an agency selection consultant who will send all kinds of questionnaires out to a hundred different agencies. They’ll talk to 40 or 50 of the agencies. They’ll whittle them down to four or five good prospects for this particular account, and then the client will come in and talk to these three or four agencies. This has created another barrier between the agency and the client, and this is sort of what’s happened.

An example I give in The Future of Advertising is that years ago, Fairfax Cone, the chairman of Foote, Cone & Belding, was a buddy, a close friend, of Joyce Hall, who was the chairman of Hallmark. For all of those years, they went fishing together and hunting together, et cetera. Foote, Cone & Belding was not only the agency, they were the marketing partner for Hallmark cards. Foote, Cone & Belding was the producer of the Hallmark Hall of Fame, and everything they did, they did everything for their client within that. They designed the racks and everything else like that. That kind of  -- of course, Foote, Cone went public, Hallmark went public, they became part of bigger organizations, there’s no more contact, and the client is now at Leo Burnett and with nowhere  -- believe me, the chairman of Leo Burnett has no contact with the head of Hallmark. You have an account supervisor at Leo Burnett who is dealing with an ad director or a marketing director at Hallmark. It’s on a lower level.

DW: They have tactical contact but no real strategic contact.

JC: Exactly.

Monday: Cappo discusses why TV can’t compete, who’s really driving the business, and the big market you’re missing.