June 23, 2013

The ad industry’s high water mark is usually seen as the “Mad Men” era, when the startups of the day were service-based agencies. It’s estimated that in the early 1970s over 200 ad agencies were founded annually. The best were eventually consolidated into a handful of marketing services holding companies that we all know and love today.

The more recent epoch in advertising has been marked by the rise of advertising tech. The game plan for making money in ad tech has been to build some proprietary technology, hire an incentive-driven sales team, cajole enough media agencies and publishers into using your product, and then get acquired.

But that playbook is starting to show its age. This is the year when the market collectively said “enough already” to many ad-tech peddlers. Recent IPOs have not done well, while other companies have been unable to find a buyer. Like the airline industry, which has never made money, some people now wonder if ad tech can be a viable industry on its own.

As a result of these events, some venture capitalists are now closing their wallets to new investments. Without funding, the number of new ad-tech firms would decrease as the industry consolidates. Google, Yahoo, Microsoft and AOL have already acquired many promising ad-tech firms.

If ad tech is really over, then what comes next? The answer may be the return of services. One of the great things about cloud technology and agile development is that companies can respond incredibly fast to customer needs. New features can be pushed live basically whenever, blurring the lines between services and technology.

What would a next-generation advertising services and technology company look like? Perhaps a lot like Undertone. The ad firm has deftly built a layer of technology around a highly effective sales and customer service team. It is a high growth, profitable business with hundreds of employees.

VaynerMedia, Gary Vaynerchuk’s social media agency, is another recent industry success story. The company has outgrown its offices multiple times over the past year. There’s really nothing stopping a firm like this from offering some proprietary tech to its clients.
Other successful companies like Buddy Media were services businesses long before they became a platform. Pointroll gained early traction because it offered outsourced creative services to agencies. And it’s worth remembering that the ad server Atlas was spun out of a digital ad agency.

Companies that start with services first can listen to what the market wants and then build something more certain to be useful. In effect, these companies are doing what Paul Graham describes as unscalable -- but highly necessary -- things. “The most common unscalable thing founders have to do at the start is to recruit users manually. Nearly all startups have to. You can’t wait for users to come to you. You have to go out and get them,” writes Graham.

By launching with services, ad companies have an immediate pool of users on which to test and then roll out new technology. These kinds of companies also start with a heightened focus on customer service and revenue, which are never bad things.

While we’ll never go back to the “Mad Men” era, perhaps the future of advertising will look a bit more like its past.

By Matt Straz
Matt Straz was a senior partner at MEC from 2002-2008. He is currently the CEO of Namely.
Courtesy of MediaPost.

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