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Think, forget and wait for inspiration to strike, was Don Draper’s advice to a newbie copywriter. Successors to the Mad Men generation have a more calculated approach. Artificial intelligence promises to be a valuable creativity-enhancing tool in the advertising industry. It can help design, target and place ads too.
The ad industry is braced for far-reaching changes. Mark Read, head of London-listed WPP, reckons the sector will be the most disrupted of any industry. AI is set to be as transformative as the internet was 30 years ago, he told investors at a recent Capital Markets Day.
AI risks are poorly understood. So said the UK government on Tuesday justifying its reluctance to legislate. AI is not necessarily a boon for the agencies. Given it simplifies the task of making and running ads, it makes it easier for clients to take the functions in-house. In particular, it could disrupt the lucrative media planning and buying work. Agencies face the risk of disintermediation.
That could mean a drastic cut in the number of jobs in media planning and buying, as it replaces inefficient, manual functions. In turn, that might shrink the agencies’ revenue base. Fees are generally based on staff costs — typically representing about 60 per cent of revenues — plus overhead and margin, according to Citi’s Thomas Singlehurst.
Yet clients are likely to value agencies’ expertise, if it can minimise the risks of copyright infringement or reputation damage. Efficiency gains should boost margins. Cutting the cost of creating ads might allow agencies to expand their market to serve growing numbers of smaller companies.
AI might also improve advertising’s effectiveness by, say, allowing for the personalisation of ads. For example, WPP used machine learning for a Cadbury campaign in India. It generated videos featuring Bollywood star Shah Rukh Khan seemingly endorsing local shops by name.
WPP, which has been hit by cost cutting by its tech clients, expects AI to support top line growth. It announced a 3 per cent medium-term growth target, alongside plans to invest £250mn a year in new technology. Its enthusiasm is shared by French rival Publicis, which trades on a forward price/earnings ratio of 13, some 5 points higher. Publicis has just announced plans to spend €300mn over three years, on top of spending €9bn on acquisitions of AI, data and technology companies over the past eight years. Nearly 40 per cent of its staff are engineers.
Ad agencies are right to place big bets. Tumultuous change creates risks and opportunities. AI is likely to make advertising more effective and efficient. Incumbents need to prove their relevance if they are to reap the benefits.
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