Advertising at crossroads?

BS SPECIAL

Benefits of increased media spends did not accrue to the agencies in 2006.

The Rs 1,500 crore advertising agency business is in a state of turmoil. At 25 to 30 per cent a year, the attrition rate is at its peak and commissions are at an all-time low.

Advertising industry's top executives admit that commissions on creatives are as low 5 per cent and on media they are often a measly 1.5 per cent.

On an average, the business has not grown more than 8 per cent , even though advertising revenues, according to TAM Adex data, grew by 23.4 per cent in 2006 over 2005. Clearly, the benefit of increased media spends did not accrue to the agencies.

"Advertising is a sunset industry," says Ishan Raina, former head of Euro RSCG who recently tied up with China's largest Out Of Home (OOH) media company Focus Media for an India launch.

Adds Grey Worldwide chairman Nirvik Singh: "The industry as we knew it is facing a threat""a threat of not keeping pace with changing times."

However, he feels that the communications business may survive, but the rules of the game are being redefined. For starters, agency commissions have shrivelled from 15 per cent to about 6 to 7 per cent as the industry severely undercuts to win new business.

Says media audit company Spatial Access Solutions Managing Director Meenakshi Madhwani: "There is no pattern to the fees being charged. It's like a fish market where haggling is the norm."

Raina, however, feels that income squeeze is the effect, the cause lies elsewhere. "If you are relevant nobody can squeeze your revenues. Every agency is supplying the same service and product, so what premium can you charge?" he asks.

Agencies need to match up to the technological advances that are creating new media opportunities (mobile, Internet and other digital media) for consumer connections.

So while communications may be growing, it may not be in the traditional way. And the industry is not entirely prepared for the change, says Singh.

"We are on a new curve of learning and product offering the old ways we mastered are not valid for today's need and addressing new forms of communications has not been really mastered by yet."

Besides, retaining talent is a major issue with the agencies today.

"Victims of their own short-sightedness, agencies have failed to stop the flight of talent to media owners, marketing companies and overseas assignments. As a result of pathetic talent practice, they are no longer the destination for smart and ambitious young people," says Ravi Kiran, CEO (South Asia), Starcom Media Vest.

Agencies are losing people to hot new business categories such as telecom, airlines, media and the financial sector. But experts say that money is not the primary driver for this switch.

"Advertising is failing to sustain them intellectually or in terms of career opportunities. There's over crowding at the top," says Madhwani.

Meanwhile, ad agencies' business, and, therefore its revenues, has got fragmented, too. Functions like below-the-line advertising, media, events and PR have disappeared from its portfolio to resurface in specialised agencies.

"Now even the creative function has attracted competition," feels Abhishek Chaswal, Euro RSCG's creative director in Delhi.

"For instance, a theatre personality could be doing a creative. Clients are increasingly approaching the vendors directly to get their creatives or commercial films made, eliminating the agency completely. ", he adds.

But the state of agencies' affairs does not faze Madison Communications Chairman cum Managing Director Sam Balsara. "While margins may be low and attrition rate high, we must not forget that business volumes have grown. Agencies have learned to put out the best possible product within the resources."

To shore up revenues, media agencies have opened specialist divisions for in-film branding, sports marketing, luxury and lifestyle marketing, among others.

Commenting on specialist services, former Mediacom head Jasmin Sorabji says that specialised units are critical for survival. "But it's not just about specialist services, it is about expanding their over all thinking and communications skills to beyond the traditional boundaries," she says.

Adds Grey's Singh, "We need to treat this as an investment phase in our business. We need to invest in talent and technology, to make clients re-value our offering and take those debated margins up."

To be sure, agencies are responding to their problems individually. Balsara says that Madison refuses business if it is offered on terms that are not sustainable.

To curb the attrition rate, some agencies have increased the entry level packages and are now hiring interns from B grade Business Schools who have a lower propensity to move in the initial years.