Frenemies: The Epic Disruption of the Ad Business (and Everything Else) (31 page)

Another 5 percent of its revenues comes from a fourth revenue source, Ventures, which is what R/GA calls its Accelerator program, providing venture capital to start-ups and, as Andreessen Horowitz
does in Silicon Valley, offering mentoring services to these baby companies. Absent the mentoring services, investing in start-ups, including brands, is what Gary Vaynerchuk does. But R/GA's Ventures, started in 2013, is much broader. Out of 1,370 worldwide applicants and counting, R/GA selected 66 companies, a number that was expected to swell to 100 by the end of 2017. In return for their money and services, Greenberg says R/GA receives between 1 to 6 percent ownership, and when these companies go public or are acquired, R/GA will profit. R/GA makes money from this program in another way as well. They invite clients like Snapchat and the Dodgers and Verizon to help select start-ups that might offer “knowledge capital” to these established companies. Between R/GA and the established companies, they offer mentoring to the start-ups. R/GA provides the office space and assigns staff members to work with them, and in return R/GA charges them fees that produce, Greenberg says, “eleven to fifteen percent margins” for R/GA.

One such incubated company is Alvio. It is a mobile game controller that allows children with asthma to breathe into a plastic handheld wireless device that controls games, allowing kids to strengthen their breathing and parents to monitor whether their child's breathing is improving through data sent to the company's cloud. At first, Alvio designed their wireless device for athletes. R/GA's market research, Stephen Plumlee says, convinced them to focus on kids with asthma—the third largest cause of hospitalization for children under fifteen. R/GA also designed the children's games. Additionally, R/GA works with other connected companies, including Snaptivity, which captures and analyzes fan reactions at live events to decide who to photograph, and Owlet, a baby's sock with embedded chips that forwards an infant's vital signs to parents on their smartphone app.

A fifth revenue source is Consulting, generating 10 percent of R/GA's revenues. Greenberg says they consult directly with C-suite
executives, just as the major consulting companies do. Walmart was a consulting client; its CEO hired R/GA to boost innovation and to help design an app and systems to better compete online against Amazon. The Campbell Soup Company was another client. Unlike the consultant companies, who he says leave after their PowerPoint presentations, R/GA stays and tries to offer the kind of creative input they tender Nike.

A final source of revenue—about 5 percent—comes from what R/GA calls Architecture, a group of engineers and designers that devise companies' working environments. The group designs offices that replicate what Greenberg has done, not just in his office but his glassed weekend home perched on 200 acres overlooking the Hudson River in Ghent, New York, modeled on Mies van der Rohe's Farnsworth House. “I have the world's most connected house,” Greenberg says, lifting an iPad and pressing to open the front gate, showing how from this device he can learn the temperature outside, control the lights, shades, heat, solar panels, and the cameras in Ghent or in his 8,000-square-foot Chelsea loft. “When people talk about connected space, I am really doing it.” Greenberg says this growing business generates $25 million, and includes the connected hotel rooms they designed for Loews, and offices for Walmart, Nike, and Du, Dubai's telephone company. The office design, consulting, and ventures are expanding faster than marketing and advertising, Greenberg says. And he asserts that if R/GA pulled out the actual revenues its IP, Ventures and Consulting, and Architecture generated, it would total close to one third of R/GA's revenues.

Greenberg's demeanor is modest, his voice is faint, and he speaks excruciatingly slowly. He does not tout the awards he has personally won. But he is immodest about R/GA's goals. “We could disrupt the holding companies,” he declares. “We could disrupt the consulting business. We can disrupt architectural firms. We can disrupt the
production studios. We can disrupt the venture business. And we're doing all that.” One thing he is not disrupting is advertising's lack of diversity. Although he often invokes the word “diversity” to describe a necessary ingredient of future agencies, only six of the thirty-six top executives pictured on R/GA's Web site are female, and none appear to be black.

Greenberg calls to mind a famous description of Samuel Johnson: “temperamentally . . . always in revolt.” He looks it, driving to work attired completely in black, including a black leather jacket and black scarf in colder months, zooming between lanes on his powerful Ducati 1199 Panigale S motorcycle. His business hero was the late Steve Jobs, whom he describes as a fellow “rebel,” a “person I look to. He had no patience—neither do I—with people who get in the way of progress.” Like Jobs did, Greenberg has a passion for simple, beautiful artistic design; he is said to be the world's largest individual collector of Chinese Buddhist art from the Wi and Wei dynasties.

Greenberg grew up in a working-class Chicago home. He was a terrible student. “I struggled with academics because I was really dyslexic,” he says. He enrolled in Parsons College in Iowa, and later transferred to Arizona State, where he majored in communications and advertising. After graduation, his uncle, who had sold his business to Royal Crown Cola and served as an executive there, offered him a bottom-rung sales job in Chicago. He sold mirrors, and was pretty good at it. By this point, “I was married with a child who turned out not to be mine.” He got divorced, and to escape he moved to Toronto, where his uncle helped him get a job managing a Royal Crown plant.

“I gained confidence because of my uncle, who mentored me,” he says, so much confidence that he and his brother Richard, who was doing motion graphics and title designs for movies, decided to team up in 1977 and create a special-effects company in New York, R/Greenberg Associates. They created the first integrated computer-assisted
production process. Dyslexia imposes many burdens, he believes, but brings with it “pattern recognition,” or the ability to glimpse the new world technologies will introduce. With Richard as the designer and Robert as the cameraman and producer, their computer-assisted filmmaking company soon employed two hundred people. They created the opening title sequence for
Superman
in 1978 and the title designs for many movies and trailers, as well as special effects for many others. In 1986, their work won them a technical Academy Award.

Bob saw another pattern: technology was fundamentally changing the advertising business. He had a leg up because he and his brother were immersed early in the digital revolution. “I wanted to reinvent the agency business,” he says. “You couldn't say that because it's very arrogant. Yet the more I got into it the more I saw it was possible.” Bob wanted to create an interactive ad agency; Richard wanted to go to Hollywood to produce and direct movies. Bob's first client was IBM, which retained R/GA to redesign its Web site, and it soon became the digital agency for clients like Nike, Verizon, and Nokia. R/GA received an infusion of capital when it was acquired by True North Communications in 1995, and again when True North was acquired by IPG in 2001.

“What I'm interested in is to have a new model to replace the traditional agency model,” Greenberg says. He rejects AT&T's new model. The work R/GA did for Nike illustrates what he believes will be the hub of a future model that relies more on marketing than advertising: “People want to interact with brands and avoid annoying advertising.” Either on Facebook, its Web site, e-mail, or IM, innovations like Nike's FuelBand and its membership clubs create a one-to-one relationship between customer and brand, giving Nike a loyal customer base to share new products with and a vehicle to provide two-way communication between customer and brand. “When I come to New York, I ask to see him,” says marketing consultant and former Procter & Gamble
CMO Jim Stengel. “I think he has the most forward-looking operation of anyone. I wanted to hire his agency when I was at P&G, but my clients would not agree.”

Like his business heroes, Steve Jobs and Jeff Bezos, Bob Greenberg does not lack for confidence. Unlike Jobs, he does not glare at or scream at underlings. Unlike Bezos, he does not have a high-pitched laugh. Unlike both, he does not treat his work as if it were a national security secret. However, like them, his self-confidence borders on messianic. Near the close of a long conversation in his conference room, Greenberg was asked, “What do you worry about?”

“We don't worry about anyone displacing us.” Turning to Barry Wacksman, he says, “Do we worry about anyone?”

“We don't,” Wacksman says.

“Personally, I'm Jewish. You can't stop worrying,” says Greenberg. But his worry is more personal, centered on nearing seventy. “I'm worried that I'm going to run out of runway, which is
time.”

The thought many marketers try to banish is whether for consumers—spoiled by Netflix and YouTube, by ad-skipping DVRs and ad blockers, by personal devices we hold in our hands—the interruptive ad message may be a relic. Are consumers irrevocably alienated by sales pitches? Has the consumer, on whom marketing relies, become a frenemy?

An eternal verity of the advertising and marketing business is that no one can be certain about what advertising will work. Longtime advertising sage Jeremy Bullmore recalls meeting an old friend for lunch outside London. When they stepped from the restaurant, the friend pointed to his shiny new Aston Martin.

“Well done,” Bullmore said.

“I bought it because of an advertisement,” the friend said.

“Good to know that what we do works,” Bullmore said.

“I saw the advertisement when I was fourteen!” the friend responded.

“How,” Bullmore asks, “do you attribute that seventy-five-thousand-pound purchase to an ad that ran fifty-two years earlier?” Even with
digital ads, whose clicks are more easily measured, if his friend had clicked on the Astin Martin Web site, Bullmore says, “The click would get the credit for the purchase. But nobody would know and could possibly calculate what led to the click in the first place.” He believes the mysteries of what shapes a purchase are largely impenetrable.

The mysteries of marketing were underscored by the election of Donald Trump. A month after the 2016 presidential election, Michael Kassan moderated a panel at the Paley Center for Media in Midtown Manhattan. The panel's topic was the anticipated big advertising trends ahead in 2017 and beyond. Introducing the topic, Kassan recited some stark facts:

An initial advertising prediction was offered by Arpita Chowdhuri, a digital marketing vice president at Hewlett Packard Enterprise, who said: 2017 and beyond “is going to be the year for data. . . . Data is going to be the new oil.”

With the surprising election of Donald Trump in mind, Kassan wondered whether there were some lessons to be learned from the contest, especially about data. “People are going to question data more,” he said, “because the projections said there was a ninety-one percent chance on the morning of the election that Hillary Clinton would be president.” Data from the polls and the predictions of prognosticators were dead wrong.

Donald Trump's success in winning the Republican nomination, and his election as president, challenged not just conventional political
wisdom but some cherished precepts of advertising and marketing, starting with the assumption that there is a meaningful relationship between vast expenditures on advertising and the electoral outcome. Jeb Bush spent $80.2 million on ads—nearly five times Trump's expenditures. Trump and his independent and Republican Party PAC raised over $500 million less than Clinton and Clinton reportedly spent more than two times what Trump spent on advertising. In an era when advertising is increasingly perceived as an interruption, more ad dollars appeared to equal fewer votes. Trump's campaign shrewdly spent more money on targeted digital messages to pull his supporters to the polls.

A second axiom—that public relations usually belongs in the back of the advertising caravan because it can't be counted on—did not fare well. Traditionally, marketers want to spend more for “paid” media, worrying that the “free” media generated by news stories can't be relied upon the way a thirty-second ad can. Historically, unpredictable “free media” does not deliver for most candidates; it did for Trump. His campaign relied on media coverage, and the
what's-he-going-to-say-next
fascination with Trump boosted TV ratings and newspaper circulation.

When Donald Trump was attracting television audiences in 2016, Les Moonves told a reporter after Trump won the New Hampshire primary that the campaign was “a circus.” But he was pleased nevertheless. “Man, who would have expected the ride we're all having right now? The money's rolling in and this is fun. . . . This is going to be very good for us. Sorry, it's a terrible thing to say. But bring it on, Donald. Keep going.” Critics howled at Moonves for cheering on the “circus” because it was good for CBS.

Months later, I asked Moonves, who was a Hillary Clinton supporter, to explain his crude words. “It was a joke,” he answered. “It was said in front of three hundred bankers. I got them to laugh.” It
may have been a wisecrack, but for CBS and much of the press that slavishly devoted airtime and front-page treatment to Trump in 2015 and 2016, it was true. Trump was good for ratings and circulation; his coverage harmed journalistic credibility because it revealed journalists were not always chasing what was news or important but rather what was good for business.

MediaQuant, a firm that computes the financial value of media coverage pegged to advertising rates, concluded that by the spring of 2016 Trump earned close to $2 billion in free press attention, far eclipsing his Republican or Democratic adversaries. Studies of the general election revealed he received more press attention than Clinton, and even though much of it was negative it did not deter his hard-core supporters who blamed the “fake news” press.

A third marketing axiom—that celebrity endorsements are valuable—backfired on Hillary Clinton. Clinton's rallies in the final days were headlined by Jay-Z and Beyoncé, by Bruce Springsteen and Katy Perry. Without dissent from his panel, Kassan asserted, “Celebrity endorsements turned out to be a negative.” They served to reinforce the impression that Clinton was an “elitist” and Trump was the outsider.

The Trump campaign did buttress an emerging marketing axiom: targeting works. It is one adopted by Nike and by every modern president who used technology to communicate directly with citizens. While polling data failed Clinton, targeting data assisted Trump. Relying on the sophisticated targeting work of Cambridge Analytica, a privately held data-mining firm that assembled what it said were three thousand to five thousand pieces of data on each potential Trump supporter, the campaign pumped money into Facebook and social network messages. In an interview with
60 Minutes
days after the election, Trump bragged of his success at circumventing the press on Facebook and Twitter: “I think that social media has more power
than the money they spent, and I think maybe to a certain extent I proved that.” Martin Sorrell believes the digital targeting and messaging undertaken by the Trump campaign was “vindication, in a way, of all the stuff we're doing with programmatic advertising and the use of technology.” The reliance on data, he continued, is “highly supportive of the way we see the business going. It's not good news for Don Draper.”

Bank of America's Anne Finucane, a dejected Clinton supporter, was impressed with how Trump communicated directly with his customers. This is what brands like Nike do with Nike+ and its FuelBand and the creation of a Nike membership community. It's what Unilever is doing with the members of its Dollar Shave Club. And it's what Finucane aims to do with her bank and Merrill Lynch's fifty million customers. Trump's success in building a community, she said, “makes me think of going directly to our customers more often.”

There was at least one other parallel between the Trump effort and many advertising campaigns: Trump's well-documented use of hyperbole and untrue claims—what Stephen Colbert has labeled “truthiness”—replicates the exaggerated, emotionally manipulative claims of too much advertising. In this sense, Trump was at least partially copying, not innovating (though a president's falsehoods are far more consequential).

Trump's victory injected more uncertainty into the marketing and media industry, especially since he is not anchored to a predictable ideology or core Republican/conservative convictions. With media consolidation accelerating, right after the election media and tech executives were asking: Would the Trump administration approve the announced acquisition of Time Warner by AT&T? Outraged by what he gratuitously labels as its “fake news,” would he hold AT&T hostage and demand it shed, or punish, CNN? Would the new administration and the Congress alter the tax code to end “the immediate
write-off of all advertising expenses,” as the Republican chairman of the House Ways and Means Committee advocates? (Days after the election, the ANA wrote its members and cautioned that if Trump and the Congress did this it would cost advertisers and agencies up to $200 billion.) Might Trump punish media and advertisers by having the FTC crack down on native advertising? Would Trump and the Congress rescind the privacy protections imposed by Obama's FCC? Might the Trump administration restrict immigration, including of the qualified engineers digital efforts require? Might his Justice Department assert that digital giants—Google, Amazon, Facebook, Apple—had monopoly power? What would Trump do with the net neutrality rules promulgated by the Obama administration, which are opposed by telephone and cable broadband providers and embraced by media and tech companies who stream their content via the Internet?

The net neutrality rules were seen as especially significant by outgoing FCC chairman Tom Wheeler, who somberly said in a conversation we had weeks before he departed that equal broadband access was vital to advertisers. “Martin Sorrell ought to care about the ability of folks advertising on IP-based services being able to freely reach consumers in a fast, fair, and open net.” Consumers, he continued, want access to advertiser-supported content “without somebody setting the terms of how you can get there or, worst of all,” do what DirecTV once did, which was to learn of an attractive business and jump into that business themselves and give it away for free. This monopolist behavior is why federal courts ruled against Microsoft when it crippled the Netscape browser by giving away its own Internet Explorer browser for free. Within weeks of taking office, the new Trump administration and the Republican Congress did roll back the privacy strictures of the Obama administration. And, in November 2017, FCC chair Ajit Pai proposed to scrap the Obama administration's net neutrality rules.
He did this on the same day Trump's Justice Department announced it would block the merger of AT&T and Time Warner as a violation of antitrust laws.

The changing rules
of the game in Washington only heightened the advertising and marketing world's sense of turmoil. Yes, agencies were increasingly troubled that clients were treating them as extraneous middlemen by performing more agency functions in-house. Yes, they were not happy that their customers, media platforms, now vied to become ad agencies. Yes, they worried about competition from consulting companies. And yes, they obsessed about the growing power of procurement officers and the escalating mistrust between agency and client fanned by Jon Mandel's accusations and the resulting ANA report.

But these could all be categorized as competitive challenges, not existential threats. The digital giants, however, particularly Facebook and Google, might pose an existential threat. By their nature, these companies are disrupters. They want to eradicate extraneous middlemen. They may begin in one industry, but when they spot new opportunities, they seize them: Google's tentacles spread from search to television to mobile phones to driverless cars to the Internet of things to cloud computing. Facebook went from social networking to IM to Instagram to the work of Carolyn Everson's growing armies of marketing teams. Imagine the advantages Facebook will reap if, as Carolyn Everson predicts, it adds a Buy button to facilitate e-commerce for its advertisers. Digital frenemies follow the immortal words of George Washington Plunkitt, “I seen my opportunities and I took 'em.”

Asked what Facebook and Google's real designs on advertising were, a central player in the digital world with deep ties to both companies says he would honestly answer if he could speak anonymously.
The answer, he says, begins with the fact that executives below the top in the ad world who perform much of the copywriting and art and account work are poorly paid and no match for the talent at companies like Facebook and Google. “I think what Facebook and Google see is, ‘Oh my God, this is The Gang That Couldn't Shoot Straight and they've been given the keys to the U.S. Treasury! If we could just get our shit together marginally better than these jokers, we'd be rolling in dough.' There's an arrogance there. But a valid arrogance.” He was dubious that digital companies would try to compete by creating ads, because “that business doesn't scale” since it's not reliant on machines and algorithms. But he had no doubt they would come after media agencies like Irwin Gotlieb's GroupM: “No question they're competitors. Frenemies was Martin's word. I think he was just trying to be polite. The digital companies try to be equally polite because they still have to go through the gatekeeping of a GroupM or a WPP. But in the end, it's a battle of two cultures: Math Men versus Mad Men.”

Martin Sorrell was not polite when he said worries about a third digital giant, Amazon, sometimes kept him awake nights. With almost half of all online retail sales and a wealth of the most valuable consumer data, “Amazon knows what sells and what doesn't. They provide 25 percent of all cloud computing,” Sorrell says. They don't share their data. Increasingly, they enter WPP's client businesses—making products that compete with what Unilever and P&G sell, taking on Walmart, buying TV shows, selling food and produce. “If I ask my clients what they worry about most,” Sorrell says, “they say Amazon.” With the data they have, he frets that Amazon will slide into the advertising business, offering to help target and place the ads of his clients, supplanting GroupM.