Advertising Agencies

SIC 7311

Companies in this industry

Industry report:

This industry includes establishments primarily engaged in preparing advertising (writing copy, artwork, graphics, and other creative work) and placing such advertising in periodicals, newspapers, radio, and television, or other advertising media for clients on a contract or fee basis. Establishments that either place advertising with media but offer no creative services or provide creative services but do not place the advertising with media are excluded from this industry.

Industry Snapshot

Advertising agencies are primarily responsible for two functions. The first is the production of advertising materials in the form of written copy, art, graphics, audio, and video. The second is the strategic placement of the finished creative product in various media outlets, such as periodicals, newspapers, radio, and television. Agencies generally receive compensation for production costs from the client, plus a standard 15 percent commission from the media source for the ad placement.

Advertising agencies can be found throughout the United States, with the greatest percentage located in large cities. Many have headquarters in New York and field offices in Chicago, Los Angeles, San Francisco, Atlanta, Detroit, and other major areas of commerce in order to be close to clients.

Although the larger agencies are more frequently mentioned in the media and in trade publications, the industry is actually predominately comprised of smaller agencies, many with only one or two principals. Industry observers credit lower overhead, diversified services, willingness to accommodate change, and an entrepreneurial attitude for the success of smaller, boutique agencies.

Advertising agencies faced difficult times in the late 2000s and early 2010s, as many struggled to survive the economic recession. A drop in corporate spending on advertising was only part of the problem; companies were also pouring more ad money into direct promotions through the Internet, cell phones, and the like rather than into traditional media such as radio, television, and print. The massive change that was occurring in how Americans consumed media was cited by research firm IBISWorld as one of the main reasons for many ad agencies' decline.

As clients focused on a variety of forms of marketing communications, advertising agencies had to look beyond conventional media-based advertising. Advertising budgets reflected this shift, with additional dollars earmarked for point-of-sale promotions, public relations, and a major entry into the media mix that was the Internet. Changing demographics and a savvy American consumer were additional driving forces behind these alternative forms of marketing communications.

Some advertising agencies augmented their primary line of work and changed their longstanding compensation system based on commissions. Realizing the need for "integrated marketing services," many agencies responded by offering public relations, direct mail, promotional, and Internet services.

Organization and Structure

The activities within an advertising agency are typically divided into four broad groups: account management, the creative department, media buying, and research. These divisions are usually physically separated, although all four areas work closely together to produce an advertising campaign in its entirety. Account managers usually have daily interaction with a counterpart at the client's office and coordinate the activities of the other departments according to the client's wishes. The creative department designs original themes or concepts for ads, while the media department places finished ads within the media in which they will receive the most exposure to a target audience. The research department provides data about consumers to help the agency and the client make informed advertising decisions.

Added to advertising agencies' roster of services are public relations, direct marketing, and promotional services. Other activities that used to be completed by outside vendors, such as photography and high-tech print work, have been brought in-house in many agencies.

Background and Development

Advertising agencies began in the mid-1800s, when independent agents sold newspaper space. Later these agents took on the added responsibilities of writing and designing the actual advertisements. Such advertising agents could be found in major industrial areas such as Philadelphia, New York, and Boston. Volney Palmer opened offices in 1841 in Philadelphia. Representing a selected list of newspapers, Palmer sold space to advertisers and received a 25 percent commission from the newspapers. After his death, Joy, Coe & Co. took over the business and renamed the firm Coe, Wetherill & Company. This agency later was absorbed by N.W. Ayer & Son, the oldest advertising agency in the United States, which was bought out by the Publicis Groupe of France and closed down in 2002.

By 1860, roughly 30 agencies in the United States sold newspaper space by offering exclusive representation in selected periodicals. As new agents entered the scene, the principle of exclusive representation ended because publishers accepted anyone who brought in advertising. Most agents soon became independent brokers or middlemen, selling space to advertisers and then buying from publishers to fill their orders.

Increased commercial and industrial activity following the Civil War facilitated the growing acceptance of advertising as a sales tool. A new type of advertising agent also appeared on the scene at this time. Space wholesalers, including industry leader George Rowell, purchased space in bulk from publishers at a discounted rate and then sold the space to advertisers. Some agents went as far as purchasing all the advertising space in the publications they represented, thereby essentially controlling selected periodicals.

Advertising legend J. Walter Thompson had his start in the industry at this time. Thompson persuaded several literary magazines to carry advertising, something not previously done. Thompson thought magazines should accept advertising because their widespread circulation could be a powerful selling medium. By 1900 his "List of Thirty" represented most of the popular women's and general monthly periodicals. This transformation of magazines into an advertising medium had an enormous impact on the entire advertising industry, because magazines were the first publications with nationwide distribution.

George Rowell took an early step toward changing the advertising business into a modern-day agency. In 1875, Rowell announced that he would act on behalf of his clients, rather than the newspapers and periodicals in which their ads appeared. He was the first to offer a full line of services to advertising clients: to "act as their agent, working only in their interest, dealing to their best advantage . . . making up schedules, checking insertions, and paying bills," according to Advertising: Today, Yesterday, Tomorrow.

Shortly after Rowell's announcement, Ayer began what was considered to be a revolutionary plan--the open contract, plus commission. This arrangement created a long-term relationship between the advertiser and the agent. At first, commissions fluctuated from 12.5 percent to 8 percent to 15 percent. Although not immediately embraced by the rest of the industry, Ayer's rate of 15 percent soon became the norm. The commission system has remained the traditional method of payment to an agency.

By the 1890s, the advertising industry gained momentum due to the increased use of brand names and trademarks, the growing distribution of newspapers, the talent of experienced copywriters, and the success of earlier advertisers. For instance, only 121 trademarks were registered with the United States Patent Office in 1871. By 1875, that number had grown to more than 1,000 and by 1906 to more than 10,500. In addition, free newspaper delivery to rural areas exposed the entire country to national advertising campaigns.

The result was the creation of a relatively homogenous marketplace, perfect for selling mass-merchandise items. By 1897, more than 2,500 companies had large-scale advertising campaigns, including many brands still known today. Kodak, Coca-Cola, Ingersoll, Prudential, Waterman, Quaker Oats, Hire's, Cream of Wheat, and numerous other goods became commonly known by their brand names.

By the 1920s, advertising agencies had become professional entities in their own right. Agencies were organized into departments or operating units that served numerous clients. They offered specialized services in both campaign research and development and media placement. Copywriting staffs were augmented with art departments, and research departments were established.

Perhaps the most significant indicator of the increasing prevalence of the advertising industry was soaring ad budgets. For instance, Coca-Cola spent $11,000 on advertising in 1893; by 1928, its ad budget had grown to $5 million. Campbell's Soup spent $4,000 on advertising in 1899 and $2.5 million in 1928. Wrigley started advertising its chewing gum with only $32; 10 years later its ad budget had reached $3 million.

Radio became a significant advertising medium during the 1920s, with the formation of NBC in 1926 and CBS in 1927. Early radio stations only sold empty time, not time slots related to programming, as became common with television advertising. However, most of the big, nighttime radio programs were actually created by advertising agencies and were used as a way to communicate their client's message. Advertising agencies also created daytime radio dramas. The Blackett-Sample-Hummert agency produced such programs for its client, the consumer products giant Procter & Gamble, and aptly named the programs "soap operas."

The second revolution in advertising occurred in 1948, with the advent of television. This new form of entertainment came with large billings and even larger agency commissions. Combined with the healthy post-war economy, the advertising industry boomed during the 1950s.

"Staffs were again enlarged, new agencies formed, and mergers strengthened existing organizations. Branch offices proliferated, and small agencies formed networks to provide reciprocal services for their clients in cities across the country," Paul Harper recalled in Advertising: Today, Yesterday, Tomorrow.

As new product categories proliferated, the overwhelming reliance on television advertising made millions for ad agencies. From 1976 through 1988 total U.S. ad spending grew faster than the economy as a whole. Meanwhile, the three television networks, which completely dominated the market, demanded and received continual advertising rate increases.

An industry downturn began in 1988. Industry observers suggested that the recession of the early 1990s only emphasized the diminished power of traditional advertising to sell products and services. "Even before the recession, the industry began lagging behind gross national product growth. Total ad spending grew just 5 percent in 1989 and 3.8 percent in 1990--well below nominal GNP growth," reported Mark Landler in Business Week.

Industry analysts suggested several explanations for the apparent loss of effectiveness of advertising. First of all, consumers became less receptive to the continual assault of commercials and also became more price conscious and less brand loyal. The days of a "Colgate family" or a "Crest family" effectively ended, as large numbers of shoppers bought primarily on the basis of price.

At the same time, technological advances and the proliferation of alternative communication tools transformed the way advertisers reached their customers. For example, computerized market research allowed manufacturers to collect detailed information about their customers. Direct marketing increased in usage and popularity, along with in-store promotions and price discounts. "Companies now spend 70 percent of their marketing budgets on promotions, leaving just 30 percent for ads," Landler stated in Business Week.

Advertising agencies responded to these changes by expanding their services into new areas and developing new specialties like direct marketing or, later, Internet services. Some also expanded their reach by absorbing smaller shops located in strategic cities.

The proliferation of television viewing options also took its toll on the advertising industry. The networks of ABC, CBS, and NBC used to account for 93 percent of the U.S. homes watching TV. By 1993, however, the big three maintained only a 60 percent share, while cable television and alternative networks claimed the difference. In 1997, network commercials accounted for about $13 billion in advertising revenues, or about 29 percent of total television advertising. During the early 1990s, network television stations responded to the increased competition of cable TV by cutting their ad rates in an attempt to draw back advertisers. But since agencies obtained most of their commissions from placing media ads, they lost money with the implementation of rate reductions.

In addition, as clients searched for greater creativity and lower costs, many advertisers divided their ad jobs by assigning media and creative work to different agencies. Larger companies even began to bring some of their marketing, advertising, and promotional work in-house. Smaller advertising agencies appeared to be more capable of adjusting to the evolving marketing needs of their clients. A lack of bureaucracy and emphasis on creativity helped smaller agencies become the fastest-growing segment of the industry by capturing large accounts. Some large advertisers demanded that main line agencies change their work habits and entrenched processes to accommodate all aspects of a marketing campaign, including packaging, in-store promotions, direct mail, direct response, toll-free comment lines, database marketing, coupon redemption programs, and cable programming.

According to the Television Bureau of Advertising, the total dollar value of U.S. advertising spending rose by 7 percent in 1997, to reach $187.5 billion. This figure seemed to indicate that the advertising industry had fully recovered from its depression in the 1980s, a recovery that began in the early 1990s. By segment, television accounted for the greatest share of the industry, with 23.8 percent, accounting for more than $44.5 billion in ad revenues. Newspapers, despite their declining readership, recorded advertising revenues of $41.7 billion, or a 22.2 percent share. Direct mail posted $36.9 billion, or 19.7 percent, of total ad revenues. Radio brought in $13.5 billion, or a 7.1 percent share; the Yellow Pages sold $11.4 billion in ads for a 6.1 percent share; and magazines drew $9.8 billion, or 5.2 percent. The remaining revenues were generated by farm publications, business papers, outdoor ads, and miscellaneous media.

If television was the second revolution in the advertising industry, few would argue that the Internet represented the third revolution. In 1996, Advertising Age reported in its own online forum that the dollar size of the Internet segment of the interactive industry had grown from $366 million in 1994 to $771 million in 1995 and $1.5 billion in 1996.

In the days that followed the terrorist attacks of September 11, 2001, the advertising industry suddenly stagnated. World-leader Interpublic Group's stock fell 23.1 percent, and Omnicon's stock dropped 18.4 percent. Overall media billings dropped by 10 percent in 2001, the worst decline in the industry since 1987. As declining sales put downward pressure on advertising prices, agencies responded by cutting costs through staff reductions, which fell across the board by 10 percent.

As the economy improved and consumer confidence grew, the year 2003 marked a major recovery for advertising agencies, growing collectively by 8.6 percent. For 2004, the 33 nationally ranked agencies grew an average of 7.7 percent. The smallest nationally ranked agency earned $53 million in revenue and the largest saw $545 million in earnings that year.

Internet spending continued to be a dominant trend in the mid-2000s. Online ad spending totaled more than $2.8 billion in the first quarter of 2005, a 26 percent increase during the same period in 2004 and the highest quarter of growth to that date. Higher spending in this category was partly due to the fragmentation of TV viewership from cable and pay-TV to capitalize on the fact that 56 percent of households that had online service used broadband or high-speed connections.

Current Conditions

Like many U.S. businesses, advertising agencies were negatively affected by the economic recession of the late 2000s, as companies cut back on spending in order to survive the downturn. Figures from Advertising Age showed that U.S. ad agencies' revenue fell 7.5 percent in 2009, the most significant drop on record. Nevertheless, total revenues for U.S. advertising agencies in 2009 exceeded $48 billion, according to Dun & Bradstreet. Although some in the industry expressed optimism for a recovery as 2010 ended, others expected the recession to continue to take its toll into the third decade of the twenty-first century. Still others noted the effects of technology on traditional ad agencies' role. According to a December 2010 article in Adweek, "agencies and clients [have] confirmed what many already suspected: that clients are shifting more marketing dollars into social media, e-mail and mobile marketing." Indeed, an IDC survey showed that company spending on digital programs grew more than 50 percent in 2010, whereas funds for traditional ad programs dropped by almost as much.

According to Advertising Age's Agency Report 2010, advertising accounted for about 33 percent of all ad agency revenues in 2009. The second largest category was direct marketing and customer relation management, with 17 percent, followed by digital (14 percent), public relations (11 percent), promotion and health care (each about 9 percent), and media (7 percent).

Industry Leaders

Omnicom Group Inc.
Omnicom Group Inc., held the position of the world's largest corporate media services conglomerate, posting revenues of $11.7 billion in 2009. This New York-based holding company operated three of the top ten global advertising networks--BBDO Worldwide, DDB Worldwide, and TBWA International. It also operated various smaller advertising agencies as well as Diversified Agency Services, which is a global public relations/direct marketing network of more than 160 companies. Omnicom credited its growth to an aggressive acquisition campaign enacted in the mid-1990s. Among such acquisitions were Ross Roy Communications, one of the largest full-service marketing communications services companies; Ketchum Communications Holdings and Fleishman-Hillard, two top public relations firms; and London-based GGT Group. Omnicom offered its services to clients worldwide on a local, national, pan-regional, or global basis.

WPP Group PLC.
WPP Group PLC, a marketing conglomerate built by takeovers, was another one of the world's largest ad agencies based on billings in 2010. Comprised of 2,400 offices in more than 100 countries, WPP recorded revenues of $13.8 billion in 2009. Included in this London-based collection of companies were the large advertising agencies J. Walter Thompson Company and Ogilvy & Mather. In addition to advertising services, WPP had operations in media planning, buying and research, information and consultancy, public relations and public affairs, and specialist communications.

WPP began in 1958 as Wire and Plastic Products, a small manufacturing firm. During the late 1980s the company, renamed WPP, ventured into advertising by acquiring several small marketing firms. In 1989, it became the world's largest advertising company by purchasing Ogilvy Group in a transaction that nearly crippled the company by overloading it with debt during an industry-wide recession. After recovering by the mid-1990s, WPP turned to fueling growth through the establishment of international offices rather than through large acquisitions. By 1997, however, the firm reverted to its acquiring ways and purchased a number of firms throughout the remainder of the decade, among them Batey Holdings, Management Ventures, and Goldfarb Consultants, as well as acquiring stakes in Asatsu and AGB Italia Group. In 2008 the company strengthened its market research division with the purchase of rival TNS Inc.

The Interpublic Group of Companies, Inc.
The Interpublic Group of Companies, Inc. was another of the world's largest advertising groups in 2010.Based in New York, this holding company operated Universal McCann, Lowe Lintas & Partners Worldwide and also Western Initiative Media Worldwide. These subsidiaries actually served rival clients while using the resources of the parent. Although Interpublic had, historically, focused on advertising services, in the mid-1990s it expanded into such new areas as interactive technology and brand consultancy.

Interpublic began in 1911, when Harrison McCann established a small advertising firm to serve Standard Oil of New Jersey. Through a 1930 merger, this firm became McCann-Erickson Co. After acquiring a variety of strategic companies, McCann-Erickson reorganized itself in 1961 as a holding company that provided resources for its separately operating subsidiaries. Acquisitions continued through the 1990s as the company, then known as Interpublic, strengthened its advertising operations while venturing into such markets as public relations, direct marketing, film production, sports management, and Internet services. In 2009 the company posted revenues of more than $6.0 billion.

Young & Rubicam Brands.
Young & Rubicam Brands (Y&R), based in New York, operated in several areas, including advertising, brand building, consulting and marketing, public relations, and digital advising. It consisted of such companies as Y&R Advertising, Wunderman, Burson-Marsteller, Cohn & Wolfe, Landor, and The Bravo.

Founded in 1923, Y&R achieved several decades of steady growth by fostering an unencumbered, creative atmosphere. The firm made history during the 1960s by producing the first television commercials in color. The 1970s were marked by acquisitions, a strategy that proved unwise when the industry hit a recession in the 1980s. The early 1990s also provided a challenge for the firm, which pleaded guilty to bribery charges in connection with a Jamaican tourism account. In 1993, the company announced its fourth restructuring in eight years. In 1994, one of the company's top executives, Thomas Mosser, was killed by a bomb attributed to the Unabomber. In 1995 the company's luck seemed to turn around, though, when it landed the Colgate-Palmolive worldwide brand advertising account, valued at an estimated $200 million. Still, the company suffered from a heavy debt load. To ease this burden, Y&R ended its 75-year tradition as a private company by holding its initial public offering in May 1998. The company, which was acquired by UK-based WPP Group in 2000, reported annual revenues of around $1.2 billion in the mid-2000s.

Also known as J. Walter Thompson, JWT was one of the top advertising agencies in the United States and a leader worldwide in the early 2010s. JWT clients included Ford, Kimberly-Clark, and Shell. The agency operated more than 200 offices in 90 countries. Founded in 1877, the firm belonged to the networks of the WPP Group. JWT posted annual sales of around $1.3 billion in the mid-2000s.


According to the U.S. Department of Labor, Bureau of Labor Statistics (BLS), approximately 462,300 people held jobs in the advertising and public relations industry in 2008. Of that number, management occupations accounted for almost 15 percent. Other positions in the industry ranged from public relations specialists to salespeople to mail clerks. Nonsupervisory workers earned an average of $747 a week, which was significantly higher than the $608 a week average salary for all nonsupervisory workers in private industry, based on BLS figures.

Similar to other industries, the field of advertising is traditionally dominated by large, public corporations, many a collection of independent agencies. However, most professionals who work in the industry are employed at small agencies. In fact, the average firm had only eight employees, according to Dun & Bradstreet, and nearly four out of every five agencies employed fewer than 10 people. Advertising agencies varied greatly in size and scope of activities. Workers in smaller agencies might be responsible for a variety of tasks, while those in larger agencies find their job duties to be more narrowly defined.

The advertising industry is highly competitive in terms of entry. Most entry-level applicants have earned at least a bachelor's degree, and many have participated in internships or gained some kind of previous advertising work experience. Managers, executives, sales people, and administrative support workers accounted for 9 out of every 10 jobs in the industry.

America and the World

As major U.S. manufacturers of consumer products ventured into overseas markets, U.S. advertising agencies followed. Marketers and ad agencies viewed international expansion as an essential part of their future growth. Compared to the mature U.S. market, such international markets as Asia and Latin America offered tremendous growth possibilities. Other promising regions were China, the former Soviet Union, and Eastern Europe.

Some agencies forayed into Vietnam, a country touted as the next boom market in Asia. With 68 million people--half under the age of 19--Vietnam held tremendous potential for marketers of consumer goods. Agencies that had established a presence there included J. Walter Thompson, Backer Spielvogel Bates Worldwide, Ogilvy & Mather Worldwide, and Saatchi & Saatchi.

"Many Asian countries offer a predominately young and hungry marketplace," A. William Deval, senior vice president, Asia-Pacific, for Grey Advertising told Advertising Age. "In addition to new-found prosperity and a growing population of younger consumers, changing political forces are opening Asian markets to greater numbers of foreign goods." Japanese firms set up dozens of joint ventures after Vietnam relaxed its foreign investment law in 1988. U.S. companies, however, were restricted by a trade ban from investing in Vietnam.

Latin America was also an increasingly popular destination for marketers. This region provided a sizeable market of young consumers, as 65 percent of its population of 450 million was under 30 years old and 37 percent was between the ages of 10 and 29. These age groups represented successful target markets for consumer products.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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