PHD at Squared 2012: Agencies, technology and revenue streams

We mentioned earlier that some of PHD and Rocket’s young grads were on Google’s Squared 2012 programme.

Holly David, Akhra Amin and Tim Whatley have just finished the three-month-long course. All the students on the course contributed to Squared’s State of the Industry report, which you can read here.

Over here though, what we’re going to do over the course of the next few days is put up what the three of them wrote for their report from the agency, insights that emerged from interviews with people from PHD and Rocket.

The people interviewed were:

Daren Rubins (CEO, PHD)

Anjali Ramachandran (Head of Innovation, PHD)

Hugh Cameron (Chief Strategy Officer, PHD)

Danny Barnes (Head of Broadcast, PHD)

Verica Djurdjevic (Managing Partner, PHD)

Matt Sanders (Managing Partner, PHD)

David Wilding (Head of Planning, PHD)

Kate Herbert (Head of HR, PHD)

Matt Evans (Head of Digital Display, Rocket)

Mark Swansborough (Managing Partner, Rocket)

Nick Ellsom (Director of Platforms, Annalect)

Ian Paterson (Finance Director, PHD)

Mark Girling (Managing Director, Rocket)

Business: How are agencies evolving their revenue streams with the emergence of new technologies?

As markets are becoming more and more competitive, our commission margins are being squeezed as we need to remain competitive in a crowded market. Equally, some clients are starting to buy their own media, subverting the traditional role of media agencies as a buying force – now they are being valued as much for media planning and strategy rather than purely on their ability to drive the best media rates. Furthermore, in the digital environment in particular, media booking value tends to be lower than more traditional offline media, and the number of man hours required to plan, implement and manage a campaign are much higher. With this balance, relying on a percentage of booking as our key source of revenue no longer makes sense.

The industry is already looking at moving away from the traditional commission based revenue structure, towards a more fee based system where we are paid a fee for our time, expertise and services, rather than taking a margin from media bookings. This will not be an overnight change, but is likely to be a gradual shift over time.

Another potential revenue source for media agencies comes with the evolution of strategic business units (SBU’s) in the form of trading desks, data management and in-house creative and production capabilities. By using trading desks we are able to automate a lot of the buying process which cuts out a lot of manpower (i.e. cost) and allows us to avoid buying through an outside company, who obviously add an income stream to their rates to gain their own profit.

Secondly, the use of internal production units (for example Drum, which is a part of the PHD group) offers a similar benefit in terms of avoiding external purchases with profit mark-ups for other companies. The final important SBU for the industry is the creation of data analysis platforms; as data becomes increasingly detailed and coming from a broader range of media channels, the ability to effectively gather and interpret this information will become immensely important to us, both increasing the efficiency of our bookings and creating an extra level of effectiveness for our campaigns, which would enable us to charge appropriate fees to clients for providing such a fantastic service.

However, ultimately any differences in client revenues are very dependent on the industry moving as a whole. If clients pay less through the traditional revenue model it would take a brave agency to make the first move to a fee based model, as they would have an obvious competitive disadvantage.

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