Digital disruption

Ad industry's brave new digital world

September 6, 2013: 2:03 PM ET

Disruptive technology is forcing ad agencies to shift what they do and may put them out of business.

By Ethan Rouen

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FORTUNE -- Much like what it peddles, descriptions of the advertising business are full of clichés. Fortunately for writers -- and unfortunately for the current generation of ad people -- those clichés are going the way of the, ahem, three martini lunch.

Increased computing power and the influx in the amount of personal data available to businesses have thrown a wrench into the advertising business. From the way ad space is bought and sold to the definition of a successful campaign, advertising today looks quite different from a decade ago.

Of course, this change makes sense when looking at the broad shifts in the economy. Some of the biggest companies in the world, like Google (GOOG) and Facebook (FB), have grown by delivering more effective ads to users. The businesses that support these tech companies do not resemble those that were selling TV dinners to the nuclear family.

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This change may be positive in the near term for those who dream of careers on Madison Avenue (or Silicon Valley), but in the not-too-distant future, ad people may find themselves on the couch staring at late-night infomercials offering the unemployed a chance to change their lives.

"Today, the sheer number of companies in the space is staggering," says Clark Fredricksen, vice-president at eMarketer, a research firm. "The reason that this landscape has grown from nothing is that we are finally figuring out what to do with the data that we have about consumer behavior and how to use that data to create better, more targeted, bette accepted ads."

The current process of pitching a product to consumers is complicated and filled with many steps, Fredricksen says. In the past, an ad agency looking to place a spot on television would work with a media buyer or directly with a network.

Now, that process can involve as many as 10 layers, ranging from the creative team, to the ad buying team, to the data management team. With all the data available before, during, and after an advertisement lands in front of a consumer's eyes, the ability to tweak ads and deliver them at just the right moment makes this process necessary.

The new aspects of advertising have created lots of opportunities for entrepreneurs, computer geeks, and advertising agencies eager to evolve. "There are more middle men between an advertiser and a consumer than ever before," Fredricksen says.

On the other hand, recent consolidation in the industry, including the mega-merger of Publicis Group and Omnicom (OMC), signals that this bright era in advertising will not last forever.

Consolidation has significant perks for advertising companies. Placing ads is so complicated right now that having all the layers of service under one roof can smooth the process and deliver significant cost reductions. Still, those reductions will inevitably translate to layoffs.

The pitch ad agencies make to potential clients is one of the few aspects of the business that hasn't changed over the years: They are experts so their clients don't have to be.

What they are experts in is no longer the creativity that will make everyone want to know where the beef is. Instead, it is in how to get an advertiser's product in front of a consumer at the exact moment when that consumer is thinking about making a purchase.

This skill is one the agencies share with the likes of ad platforms Google and Facebook. This is the most significant risk the industry faces. The few publishers that control a significant majority of the advertising inventory around the world have an incentive to make ad buying easier for companies. The easier the process, the more likely they will buy ads. The better the results, the more they will be willing to pay.

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As strategic ad buying becomes easier, companies will no longer need experts to tell them how to place their ads, removing much of what the agencies are doing.

Still, while the number of jobs in advertising may decrease, the business won't be completely wiped out. Most ad publishers don't offer what Google and Facebook can offer, such as unlimited analytics and simple bidding processes for ad placement, providing plenty of opportunities for the ad people to continue selling their expertise.

The concern is that, from a bird's-eye view, as technological disruptions like the one in the advertising world become more frequent, there will be fewer employed people out there who can afford what is being sold to them.

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