Agencies have recognized that in a landscape where consumers control their own media consumption, brands need to be authentic, interesting, and useful. In response, they’ve formed branded entertainment and social media teams to help brands thrive in this - the new landscape.

Fragmentation, for example, is a defining trait of digital media, and agencies have not adopted significant technology to buy this fragmented channel effectively. Purchasing media over phone, fax, and e-mail introduces a major constraint on how many sites can be included on a media plan. Agencies themselves can’t aggregate a digital audience that is both sufficiently large and sufficiently targeted so they turn to ad networks. Once ad networks are responsible for a portion of spend they are also responsible for the optimization of that spend, which they are well-equipped to do.

Agencies have handed two key business opportunities around digital media: aggregating audiences and optimizing spend based on response to outside partners with the required technology. The most important issue here isn’t even that agencies are passing over two very high-value activities at a time when they are struggling to achieve acceptable profit margins. What is most problematic is that audiences are being aggregated and campaigns are being optimized based on sell-side interests, instead of aligned client and agency interests. Mike Nolet of Appnexus does a fantastic job of explaining the implications of this flawed incentive structure. (See the post.)

To be clear, I am not suggesting that agencies become technology companies or masquerade as such. Instead, I am saying that agencies have not adopted sufficient technology to continue in their historic role of reasonably compensated agents of the client’s interest. It is a positive indicator that forward-thinking agencies are spinning out separate business units focused on data-driven targeting, just as aQuantive did with DrivePM in 2004. But the real victory isn’t creating island of excellence where a select few are able to leverage technology, sometimes proprietary, on behalf of clients. The real victory, and the greater challenge, will be deeply integrating technology into the day to day activities of everyone at the agency who is thinking digitally.

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