In a perfect world, competition pushes an industry to constantly innovate, while getting consumers the best possible price. But we don’t live in a perfect world, so what happens when offering a bargain-bin bill is the only outcome of competition?
There’s certainly an argument to be made that perhaps there are too many companies battling away in Australia’s advertising industry. We’re a country with a relatively small population compared to our geographic size, so we’re just going to see economic Darwinism come out on top.
Basically, the strong will survive, and balance will return to the market.
But the problem with this suggestion is that one of the best ways to get ahead of your competitors is not to offer a superior product, but simply to undercut them on price.
And while we’ve seen some wonderful indie agencies emerge over the past decade or so, agencies that have really pushed the envelope and dragged our industry into the 21st Century, an indie agency likely doesn’t have the financial clout to win the race to the bottom.
Of course, a handful of the best operators will keep the lights on by offering a premium product, but the middle agencies that would otherwise keep the rest of the industry honest are in real danger of simply being muscled out by the big multinational businesses that can afford to spend a few years making losses in the name of seeing competitors go the way of the dodo.
It’s somewhat reminiscent of what has been happening with the visual effects (VFX) industry in Hollywood.
While pretty much all the top-grossing films each year since the mid-90s have been big-budget flicks with a substantial VFX spend, the companies and artists who actually create the effects have largely failed to create a sustainable business model.
“A good year for a visual effects company, a great year … is 5% profit margin,” Lee Berger, the former president of Rhythm and Hues, told The Fresno Bee.
“For some visual effects companies in my past, when we broke even, that was a good year. When we lived to fight another day, we felt like we had succeeded.”
For the uninitiated, Rhythm and Hues was the Oscar-award winning VFX company behind Babe, The Golden Compass and Life of Pi, yet three Academy Awards couldn’t stop the company from filing for bankruptcy in 2013.
While there are a number of issues that plague the VFX industry – not least different states and countries’ tax credit schemes – one of the major issues is one agencies will surely be familiar with: covering a loss by making up for it elsewhere. That all-to-familiar race to the bottom.
“A lot of the business ends up being that thing that you get into where we all agree to, ‘Okay, you guys are going to lose on this shot. Make it up on the other one. You might lose on this show. Make it up on the other show,’” DreamWorks executive Chris DeFaria told Freakonomics Radio.
“It becomes a, you know, kind of a barter system or a horse-trading game, which is a tough way to do business.”
However, in advertising, it’s more than just a tough way to do business, it’s increasingly the way of doing business.
Companies that offer the lowest bid to win business generally find that their quote means they’ll end up making a loss – unless they find another way of making up the shortfall. That can mean the service promised isn’t forthcoming – a dedicated team may actually end up working on other clients’ business as well – or another client pays ‘overs’ to cover the difference.
Or there’s the possibility that no one gets screwed, but funds that could have been set aside to push innovation and ingenuity ends up simply becoming money needed to stay afloat.
And so the industry as a whole stagnates, because the finances just aren’t there to chase a better way of doing things.
In an interview earlier this year, R/GA global CCO and vice chairman Nick Law said agencies are struggling in the innovation stakes.
“The last time teams [in creative agencies] were innovated was when art directors and copy directors came together,” Law said.
“I hate the laziness of an industry that is telling stories the same way it was 50 years ago. Netflix and HBO have reinvented TV in the last five years, every teenage kid around the world is reinventing storytelling in their own voice and yet advertising is incapable of being influenced by these far more progressive advancements of the grandeur of narrative...”
Now, I’d hate to put words in Law’s mouth, but it seems to me that originality – in both what we produce and how we produce it – is hardly going to be pushed forward by companies that think the best offering they can make is to undercut competitors.
Rather, we as an industry need to start putting a premium on the power of our ideas. And the best way to achieve that isn’t to pull the rug out from underneath one another, but to build the taller tower and give competitors something to live up to.