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Friday, December 20, 2013

The Abdication of Advertising Agencies?

Like many of you, I spend a fair amount of time reading marketing case studies and company success stories. Recently, I began to notice one trend in the summaries. It is quite simply the relatively narrow role that advertising is playing in most of the marketing triumphs. How can this be? Here is my theory:

When I started in the business back in the early 1970’s, advertising and marketing were often used interchangeably. That was wrong, of course, but advertising was such a dominant part of the entire marketing mix that it is understandable how it happened. Many of the senior people in advertising in that era were the best of the best. A surprising number were from Ivy League or NESCAC schools and they were bright, well read and well connected.

As the 80’s came along and Wall Street surged, the bright young men and women from the best schools stopped going in to advertising. A number went into finance and made staggering amounts of money very quickly. I dare you to look at recent graduates of the top schools in America. Find out how many have gone into advertising. The number approaches zero these days. Along with this brain drain came the end of the 15% commission in advertising. It seems with every passing year that clients increasingly turn the screws on their agency. With the agency’s dominant asset being talent, how do you recruit young talent when Wall Street beckons with huge salaries? The crowd that provided strategic talent for a few generations on Madison Avenue are now on Wall Street or tucked away in Silicon Valley.

So, a great deal of the marketing know-how, if you will, is now client side and not at agencies. An old friend who is currently on the corporate side told me an illustrative story recently. His boss, an erudite marketing pro from far overseas, was visiting my friend in the states. When his agency found out about the global chieftain’s visit, they begged for a meeting under the pretext of a “really big idea.” The big idea turned out to be a storyboard for a TV spot. The international marketer was polite and attentive when they showed the proposed commercial but started to lose it when they called the session without a clue about a business strategy that backed up the spot. My friend kept his job but will keep this agency and perhaps his future agency far away from the global marketing director.

Another wrote to me saying that his company has moved to more promotion in their mix and are finding it extremely profitable and, to their great joy, far more predictable than advertising. He was so thrilled with the performance that he wanted to throw a dinner for the graphic artists who put together the promotional packages and coupons plus the two young agency analysts who tracked redemption and helped pick support markets. To his shock, their agency chief said, “Why do you want to spend time with those guys? They are not talented.” He did it anyway and said sales continue to go up and his TV advertising continues to decline as a percentage of his total spending.

Agencies always tell clients that they want to be “a partner and not a vendor.” Well, vendors present spots and ads and partners lay out a strategy. Yet the Catch-22 is how do you provide strategic leadership when you cannot afford to hire authentic counselors?

There is no likely solution in the immediate future. Big players will likely work with a team of marketing communications companies covering internet, mobile and conventional advertising and have some staffers on board who can orchestrate harmony among the parties. Yet the important functions of keeping tabs on trends and staying close to popular culture will likely come from the research team on the client side. These days clients tend to think of the marketing arena as their platform for creating connections. Agencies, especially those that are mid-sized, still want to sell ad campaigns.

So, many say that advertising agencies have abdicated their role. I disagree. To me, the game has changed and advertising is playing less and less of a role in integrated marketing communications. Many agencies have chosen not to or cannot afford to keep up with the changing times.

Over the last few months Media Realism is now delivering 55% of its audience from outside the United States. I wish all of you across the world a very Merry Christmas and a great 2014.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Friday, December 13, 2013

Admitting Your Mistakes Publicly

A few days ago, I was not feeling at all well and needed to take my mind off my discomfort. I picked up a compendium of Warren Buffett’s annual letters to Berkshire Hathaway shareholders and found some of his comments so riveting that I soon forgot about my pain.

The one issue that hit me hard was not his folksy wisdom and common sense. It is his total willingness to explain, IN GREAT DETAIL, the major mistakes that he has made managing his shareholders money. As clearly one of the greatest investors in history, it is amazing to see the stunning humility that Buffett continues to show year after year.

Here are a few examples:

In his 2007 letter to the Berkshire faithful, he conjured up a story that many of us in communications can relate to easily. He discussed at length how 35 years earlier he passed on buying the NBC TV affiliate in Dallas-Ft. Worth (his board member, Tom Murphy of Capital Cities Communications had to divest the station to meet FCC regulations). Buffett talked about how, at the time, TV stations used to “shower cash on their owners.” He went on to say that since he did not pursue the deal the station has spun off approximately $1 billion dollars in profits and was likely worth $800 million. He also said that he could have grabbed it for $35 million back in 1972. Buffett closed by saying, “The only explanation is that my brain had gone on vacation and forgotten to notify me.”
Looking at the 2009 letter we find-- “During 2008, I did some dumb things in investments.......Without urging from Charlie (Charles Munger, his long time business partner and Berkshire Vice Chairman), I bought a large amount of Conoco Phillips stock when oil and gas prices were near their peak....the terrible timing of my purchase has cost Berkshire several billion dollars”.

You simply do not see that kind of candor anywhere else on the business scene. In other letters he went after himself for his USAir involvement and his purchase of Dexter Shoe among others. Today, companies and financial analysts constantly talk and write about transparency. Buffett lets his shareholders know what he has done wrong and also that he has learned from his mistakes. Both the quantity and quality of his admissions are both amazing and refreshing. And, he is truly transparent. If you wish to plow through some dense numbers, he lays out the figures for every Berkshire Hathaway operating company.

As I look back on my career, few people ever admitted mistakes. When an ad campaign did not work, it would be blamed on a bad economy (sometimes true), poor media (true when we did not have sufficient funds), poor distribution, or competitive tactics. How about ineffective creative? No one ever admitted to that!

Over the years, I was often called in to rationalize what went wrong to clients and senior people said that I had become an excellent spin doctor. Hindsight has shown me that these were not my proudest moments but I suppose we all rationalize things to protect our corporate franchise.

One of the problems now is that marketing directors have a rather short tenure; some studies say that it tends to average around two years. So, if you are candid and say, “Sorry, we blew it this time”, you will likely get fired as the marketing director knows that his or her job is tenuous as well.

A few people have told me that Buffett can afford to be honest as his success overshadows the occasional stumble that proves he is human. There is some truth in that but in both my heart and my head, I know that his course is best. I salute him!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Friday, December 6, 2013

The Top 1%

These days many of you hear and read a lot about the top 1% in income in the United States. Some research coming very recently from the University of California at Berkeley hit us with some eye-popping statistics including:

--Last year the top 1% or earners in the U.S. collected 19.3% of the nation’s total household income which is an all time high

--Incomes of the top 1% have grown by 31.4% over the last four years while the remaining 99% have experienced a gain of 0.4% (not a typo, my friends--less than one half of 1%).

--The top 10% of earners took home just over 50% of the nation’s total income last year.

--The top 1% earn just over $500,000 per year and if you go to the elite .1% if soars in to multi-millions topped off by a few hedge fund managers who make over a billion dollars per year. The top .1% have nearly 11% of total earnings.

--Separately, the New York Times has reported that the top 10% have 90% of the stock market wealth (not a big surprise!).

Long run, if you are fair minded, it is hard to determine what kind of divisions this is causing or will cause in society but it is safe to say that it will eventually put a strain on social safety nets both on a state basis as well as nationally.

Are you bothered by the 1%? Most of us do not give them more than a passing thought. When I talk with people they either say that they are not as smart as the 1% and others tell me that they are not willing to work as hard as the elite do. Interestingly, I have not heard the term “the idle rich” in a few decades. And, it makes sense. Nearly 100 years ago, in 1916, the top 1% received only 20% of their income from paid work. They “clipped coupons” and lived off the interest on their bond portfolios. Today, it is closer to 70% of the wealthy living on their earnings, not passive bond and dividend income. Most of the elite in the U.S. have not inherited their money--they earn it every day and put it long, even savage hours in many cases.

Surprisingly, the group that seems most resentful of the super elite (.1%) tend to be the folks at the lower end of the 1%! They may be lawyers, accountants, doctors who see the vast wealth of members of the super elite as they are service providers to the posh and the riches of the few seems to annoy many of them. While compared to most of us these professionals appear to be living the American dream, they are jealous of the super elite. I have personally heard snarky comments from those who are lower echelon members of the 1% say, “He has just been lucky” or “I am far more intelligent than he is--why does he have so much money.” So envy surfaces at all strata of society although one might think that anyone in the top 1% would be happy or at least thankful for what they have in today’s uneasy economy.

A few years ago, I talked about the issue of income inequality in “The Gini Coefficent and the Future.” (see Media Realism, January 21, 2010). What surprises me is that the gulf between the wealthy and the rest of us has grown far wider in just a few years. Part of it has to be due to a buoyant stock market in the US. Also, when real estate bottomed out a few years ago in many areas of the country, the top 1% had ready cash and could scoop up some great bargains when foreclosures were soaring. Yet, even a cursory look at the income and wealth spread shows that American is now resembling a developing country rather than a vibrant democracy. Historically, in an economic recovery, the income growth was spread across the entire population. Not so any longer! Allegedly, we are in the fifth year of an economic turnaround, and the asset growth continues to go almost exclusively to the flush and especially the super-flush.

To be clear, in a relatively free market such as ours, there will always be income inequality. Always. The talented, the hard working and yes, the lucky, will rise and do better than most of us. What is alarming is that the middle class is getting hollowed out and the majority of Americans are, at best, simply running in place or losing ground.

What to do? Soak the rich? There are not really all that many of them. Tax reform might be a start. During the 2012 presidential campaign, I along with many who are data junkies, were more than bit annoyed when we saw that Mitt Romney was paying out only 13% of his income in Federal Income taxes while many of us with far more modest incomes were writing checks to the US Treasury as a percentage of our incomes that were two or even three times as much as he did. Now, do not get the wrong impression. Former Governor Romney did not break any laws. He was wealthy enough to structure his affairs in such a way as to minimize his tax bite.

This leads to some saying that the concept of fairness has to be set aside because the super wealthy or even the affluent are “job creators.” I have a problem with that logic, even though people tell me that a private investor such as I is often a “job creator”. If someone takes a flyer on an IPO (Initial Public Offering), he or she is definitely a job creator. Such individuals take a risk and the capital that they provide helps new companies expand and help grow the economy.  Most investors do not buy IPO’s. The overwhelming majority of their investments are stocks bought in the secondary market. Consider this example--let us say that tomorrow one of you buys 1,000 shares of a famous global blue chip company. You hold it for five years and watch with delight as they raise the dividend each year 8-10% giving you a growing stream of income. After five years, the price of the blue chip has doubled and you sell for a nifty profit. How many jobs have you created? The company treats you as a bookkeeping entry with your thousand shares now being owned by someone else. Yet, our tax system gives you preferred capital gains tax treatment. You have created zero jobs.

Here is a modest proposal that makes sense to me. Jobs do not come from “job creators” such as I but rather from businesses. So, slash or eliminate the corporate income tax and tax all capital gains (except IPO’s) and dividends as regular income. Eliminate the “carry trade” which treats some short term trades as capital gains (sorry, Mitt). Perhaps this can right the ship a bit with some job creation and bring some fairness back to the tax code. And, finally, reform the Social Security and Medicare systems with a means test. The top 1% and especially the super elite top .1% may have to fend for themselves. I am confident that they can do it.  :):):)

Why are most people complacent about our growing inequality? I am not sure and often find it hard to get people to speak about it. One thing is certain--this trend cannot continue much longer or we will face significant social unrest at some point down the road.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com