The Executive Chairman of S4 Capital claims that as AI reduces manufacturing costs and changes the economics of advertising, agencies need to go beyond time-and-materials pricing.
The advertising industry’s greatest issue may not be AI. At least not in the way most people perceive it.
While agencies, companies, and artists continue to discuss prompts, synthetic content, and the future of creativity, Sir Martin Sorrell feels the most important concern is economics. The industry’s future, he contends, will be determined not by who embraces new technology first, but by whether agency business models can withstand the changes those technologies bring.
The pressure is already obvious.
The merger of Omnicom and Interpublic has changed the competitive environment, but WPP and Dentsu continue to face concerns about growth and performance. Holding firms throughout the industry are seeing declining revenues, despite the fact that digital advertising continues to grow.
For Sorrell, Executive Chairman of S4 Capital, these trends are indicators of a broader crisis.
In an exclusive interview with Social Samsoa, Sorrell stated that digital advertising currently accounts for around $900 billion of the $1.2 trillion worldwide advertising business. In comparison, traditional advertising costs over $300 billion and is declining.
Many agency organizations, he contends, are still significantly exposed to the diminishing side of the equation.
According to Sorrell, Publicis has been quicker than many of its competitors to react by investing in data and digital skills. Others have struggled to provide a clear route ahead.Many holding businesses do not. Omnicom definitely doesn’t have a strategy. There is no data or digital strategy comparable to that of Publicis.”
“The problems that WPP and Dentsu have, I don’t think are fixable without major structural change.”
He contends that the issue is not merely one of market share or competition, but of a business strategy designed for a previous period.
For decades, agencies have made money by charging customers for people, time, and resources. The charge increases as the team size and number of hours invested grow. Sorrell points out that the typical agency price model is based on time and labour. New technologies present a challenge for both.
And, with AI in the picture, the very technology that agencies are adopting to boost efficiency are diminishing the very inputs they have traditionally sold. Work that formerly took weeks can now be finished in days. Production costs are falling. Turnaround times are reducing.
However, most of the industry’s discussion revolves upon creative production. Discussions generally focus on whether robots can write copy, create images, or replace human creativity.Agencies charge for time and supplies. The challenge with AI from that perspective is that it decreases both time and material.”
That approach is currently under threat from two sources: the shift of advertising expenditure to digital media and technology’s increasing capacity to automate jobs.
Sorrell feels the industry has reached a stage where it must face this truth.
Need for innovative business models
For agencies, they offer a more unpleasant question: how can you charge for something when technology is constantly lowering the labor necessary to generate it?
Sorrell’s evaluation of the agency model is scathing.
“The traditional holding company model is a busted flush. They have to develop new models now.”
This is where the industry’s next struggle will take place. Agencies must reconsider how value is evaluated and monetized, rather than only focused on creativity.You need to change the revenue model.”
He expects agencies to shift toward subscription-based agreements, asset-based pricing, and usage-based remuneration models.
At S4 Capital, the change has already started. The firm is experimenting with charging clients on a subscription basis, based on the number of assets developed and their frequency of usage.
The goal is to guarantee that agency economics evolves alongside technology advancements.
Sorrell continually emphasizes media planning and buying, which remains the financial engine of many holding businesses. Today, advertising organizations contribute over $1.2 trillion to worldwide media spending across markets, platforms, and audiences.
Much of that procedure, he claims, is only partially automated.
As technology advances, media planning and procurement may experience a change comparable to that seen in investment management, where trillions of dollars are currently managed via automated methods.
Increased automation would result in increased openness. It may also put strain on long-established industrial practices and profit pools.
Sorrell believes AI is more than just a creative disruption. It represents an economic reset. The agencies that survive may not be those that generate more work quicker, but rather those who discover how to charge for value when time and effort are no longer relevant metrics. For holding businesses based on labor, scale, and complexity, this may be the most difficult shift yet.
