The traditional agency model is dying a slow death. The saturation in the market for every conceivable service is immense. You have advertising agencies, creative agencies, marketing agencies, social media agencies — the list goes on. Even at the top levels of talent and output, competition is fierce and differentiation is, realistically, slim. The business model has always been fairly simple — agencies are paid a certain amount of money for a certain amount of services.
That kind of model is very attractive from a few perspectives. You have fairly low overhead (particularly at small sizes), with the majority of your money going towards paying the for the brains that know how to fulfill the services. You don’t need to be spending huge amounts of capital on things like R&D and inventory. It’s very easy to iterate. Services can be worked on whenever, wherever.
On the other hand, there are serious negatives to this model. The complexity and necessary bandwidth increases dramatically as the number of projects increase, causing a need to make more hires or to stop taking on as much new work. Margins fall and scalability can prove to be very tricky. The agency only makes money when someone is working, so there are almost no passive revenues in a usual pay-for-hire situation. And in the end, the agency is only worth as much as its current crop of contracts. Dependence on clients means revenues are seldom guaranteed for long periods of time. Finding investment and selling agencies is tough.
Reaching a boiling point, this begs the question: how can agencies evolve?
The answer is simple, if easier said than done. You make and own your own media, products, and intellectual property. You reduce reliance on clients and contracts by doing so, and allow yourself a much better ability to scale. You end up being end-to-end — the creator and the product. Many companies are taking this approach today.
Internal projects that grow out of their cage
Basecamp, the well-made and well-known project management tool, started when the company (under its original name of 37signals) decided to move from providing web development services to working on internal products — Basecamp being one of them. Needless to say, this has been an extremely good move for them. In fact, Ruby on Rails also began development under 37signals and was first used in Basecamp. As great and evidently talented as they were with web development, it was this product that first launched them into the stratosphere.
Many large media companies have ended up creating agencies in-house, so that they can more fully handle end-to-end creation and distribution. That trend is nothing new. But the opposite has also been happening more and more often.
Laundry Service, a well-known social media agency, created Cycle Media (which has since become the umbrella organization of which Laundry Service is a part) in 2014 as an internal branch of the company. Now, Cycle has seen a tremendous amount of investment and has a large output of high-quality, original content.
Like venture capital, without the capital
Most people have heard of the story of David Choe, who painted Facebook’s HQ at the company’s infancy. He took stock options instead of cash, which ended up being worth over $200,000,000 down the road. The entire venture capital industry exists for a reason — to try to cash in on these high-risk high-reward ventures. Today, some agencies have found a bit of a hybrid model whether they explicitly state it or not.
Red Antler is a well-known agency that focuses on working with and building startups. One of their major successes was Casper, the mattress company. Red Antler is known for taking equity in clients, and they understand that it’s a huge game of chance.
“If you make three bets and none of them work out, it’s probably because you made only three.” — JB Osborne, Red Antler cofounder
However, as evidenced by the massive success of Casper, this strategy has clearly worked for them.
The importance of good branding, design, and marketing in early-stage companies cannot be overstated. Having an excellent basis with your brand makes your company look more legitimate and makes everything else a bit easier. Naturally, an agency providing these services is providing something as valuable as straight cash (sometimes more so). Given that this aesthetic and brand focus is so vital for startups, agencies operating on this equity compensation model can have an impact on a company’s future just a large as that of a typical VC. And just as a typical VC, these agencies can cash out handsomely when one of these equity stakes comes to fruition. Additionally, having these stakes make the agency almost an investment holding of sorts, bolstering its own value at the same time.
Media-first, agency second? Or the reverse?
Vox, the media brand, has an agency by the name of Vox Creative under its umbrella. The agency states that “only we can access Vox Media’s authoritative house of brands” — a very valuable and attractive differentiator. Any advertiser that wants space with a Vox Media property only has one choice. This is a smart move on Vox’s end, since otherwise there’s some agency middleman that is making money off of the media’s reach.
Gary VaynerChuck’s VaynerMedia also purchased PureWow in 2017. However, such acquisitions are less common as media companies tend to be too expensive for many agencies to afford. Gary’s ultra-successful agency clearly had the resources.
The trend is clearly there. Breaking into being a media company has ever-decreasing barriers to entry as content creation becomes dramatically cheaper and more accessible, and many creators are taking that path.
Diversification, one way or the other
All of these approaches essentially steer the business into a direction where they can still produce work creatively, but are not subject as much to the whims of projects and clients. They’re able to scale and build a much more lasting business, particularly one that’s attractive to investors. They’re able to increase their margins and ultimately have a higher chance of survival and success by rising above the ruthless services market.
It remains to be seen what the outcome of the trend will be. At the very least, we’ll have a ton of viral videos as a result.