Advertising firms must embrace digital transformation to keep up

Middle market companies in the advertising sector need to invest in technology, including artificial intelligence (AI), to position themselves for success as ad spend continues to shift, primarily in the streaming space.

According to eMarketer, connected TV (CTV) is projected to become the fastest-growing digital channel, with an anticipated increase in advertising spend of 21% in 2023. This is after CTV advertising spend accounted for 18% of video advertising expenditure in 2022, a percentage that has more than doubled since 2020. 

The reasons for the shift include the following:

• Subscriber growth is no longer the primary key performance indicator for streaming companies, which have shifted to the average revenue per user model, opening the door for advertising agencies to optimize revenue opportunities for these companies.
• The major players in the streaming space have rolled out ad-supported tiers, attracting budget-conscious consumers who subscribe to multiple platforms.
• Media companies are shifting marquee content from traditional television, including live-sports rights, to streaming platforms. 

The increased shift to streaming platforms is advantageous to advertising firms. Because of the reasons listed above, more advertising dollars will be spent on CTV.

Growing competition among connected TV and other digital channels will lead to an increasingly fragmented audience, spurring greater demand for advertising agencies for their ability to precisely target markets and supply greater insight into the impact of ad campaigns. The most successful agencies will leverage technology to purchase advertising space on an increasing number and variety of platforms to ensure their message reaches the widest possible audience.

One way to do this is through programmatic ad buying, which uses automated technology for media buying. This technology gives advertisers access to a wide range of ad space inventory while providing a significant cost benefit compared to traditional ad buying. Advertising agencies with the capital and willingness to incorporate technology into their processes will benefit, as digital transformation will allow them to focus on other value-added activities.

As access to technology such as AI broadens, ad agencies will need to differentiate themselves in the marketplace. AI will enable agencies to track the performance of advertising campaigns in a more precise and automated way, allowing them to implement best practices, identify past performance and generate various types of content. This will also decrease their reliance on labor and boost profits even as wage costs continue to climb. In this way, labor costs and productivity, which have historically correlated, may not be so closely aligned in the future.

The increase in technology-led advertising campaigns also comes with challenges. Not only will agencies compete with industry peers, but large technology companies may step in to overtake revenue from middle market firms.

According to IBISWorld, large technology firms are making it easier for companies to purchase ad space. While advertising agencies generate revenue through creative services, most also earn a commission from media companies for their clients’ advertisements. As a result, companies are developing in-house advertising capabilities and purchasing ad space directly from these tech giants.

Companies with the capital and bandwidth to handle the media-buying process themselves have purchased these tools in an effort to bypass advertising agencies entirely. That is why it is imperative for agencies to adopt new technologies to keep pace.

Customers will demand advertising agencies become one-stop shops that collaborate with clients, create campaign strategies and concepts, deliver finished products that convey their message to the intended audience, and provide media planning, buying, and placement services. All of this can be done more efficiently and effectively through technology. For agencies that invest in digital transformation, the opportunities will be vast. But those who fail to capitalize will lag behind.