AI won't kill ad agencies. Here's why.

It's become fashionable to predict that AI automation will kill ad agencies. In order to understand why this is wrong, you have to understand why marketers hire agencies in the first place.

Source: Marketing AI Institute

To lots of folks in tech, it feels natural to conclude that AI will disintermediate, replace, and eradicate ad agencies in much the same way tech has disintermediated travel agents, cab companies, newspapers, movie theaters, department stores, stock brokers, and many other businesses.

The thinking goes like this: when AI gets sufficiently good at emulating the work of an agency (an ad creative execution, a campaign plan, a website), then marketers will just “go direct” to AI agents for all their marketing needs and cut agencies out of the picture.

This logic is, however, flawed. It's based on a superficial understanding of (or obliviousness to) at least four things:

1. What marketers do (and don’t do) in real life

2. Why agencies exist

3. Basic accounting & finance

4. The rate at which marketing gets more complex and the phenomena of “induced demand”

How marketers and agencies work together (in the real world)

So what are the respective roles played by marketers and agencies? I mean the roles they play in the real world, not in the idealized fantasies of tech engineers who have never worked on a marketing team.

A marketer in the salt mines.

What marketers really do

A popular premise is that marketers are a hands-on bunch: spending their days buzzing about; brainstorming and launching dazzling campaigns for brand-building, new customer acquisition, customer retention, and so forth.

When you do a Google Image Search for “marketing team,” these are the high-energy depictions you see:

Yes, brand-building, customer acquisition, and retention are some of the functions that marketing serves in a business. But many (I would argue most) marketers focus their efforts on deploying marketing budget and other company resources to external vendors such as agencies, freelancers, consultancies, and tech vendors. It is these external vendors who do much of the actual execution.

(In-house marketing teams are a partial exception to this, but even the in-housiest of in-house teams outsources plenty of labor, technology, and expertise.)

Marketing teams expend much of their effort thusly:

1. Assimilate a set of business problems aligned to marketing.

2. Use the marketing budget to offload those problems to external specialist vendors.

It looks like this:

In short: many of the best CMOs and marketing teams are adept at efficiently externalizing their problems versus internalizing the difficult, time-consuming work and specialized expertise of directly solving those problems.

Keeping time and budget constant (read those words again, then look up the definition of “opportunity cost”), an effective outsourcing strategy will almost always beat the DIY approach to marketing.

(In-housing may seem like an exception to this rule, but the fact is that in-housing requires its own outsourced consulting vendors, careful planning, and airtight strategic justifications; successful in-housers don't just fall ass-backwards into some magical self-serve marketing cockpit.)

Now let’s talk about the role of agencies

Agencies exist to say “Yes” to client asks. In other words: agencies exist to soak up problems clients can’t or won’t solve on their own.

When a client (a marketer) approaches an agency with a problem (“can you fix our SEO?” or “can you draft a media plan to launch this hand cream in Argentina?”), the client has already determined they do not want to or cannot do that work, or cannot accomplish the work themselves in an acceptable timeframe.

Given this scenario, let’s think about everyone’s goals and motivations:

• The client needs an agency to say Yes, because the client needs to externalize the problem and can move on.

• The agency wants to say Yes because Yes means more revenue; saying Yes is how agencies grow.

• The agency can’t say “No” or “we can’t” too many times, otherwise the client will find another agency because clients don’t have the bandwidth to manage a large number of picky or overly specialized agencies.

• The pie is finite, so saying No makes competitors richer. When an agency says No, they are risking that a competing agency will say Yes, win the business, and grow their market share.

Okay, I’ll humor you. Let’s imagine a utopian future.

AI-driven marketing utopians are basically presuming a future where clients “go direct” using AI and cut out intermediary ad agencies that they currently rely on for planning, creative, buying, analysis, and so forth.

Looks good on paper, doesn’t it!

However, it’s complete bullshit. Adtech and martech have been chasing the “self-serve” carrot for decades now and some elevated state of marketing nirvana remains elusive. Every new tech innovation (CRM, CMS, SEM, SEO, RTB, etc) brings with it layers of new complexity and a new wave of intermediaries, gatekeepers, and specialists. Remember when WordPress was supposed to make it easier to build and manage websites?

The Platonic ideal of “self-serve,” disintermediated marketing is an illusion. AI won’t change that.

Reminder: this is not a bad thing! It creates jobs and growth! And new reasons to go on conference boondoggles!

The cost of marketing expertise

In an idealized Post-AI scenario, the marketer would have to hire new FTEs who “know what good looks like” to oversee AI tools in niche areas that agencies used to handle.

Just imagine it: you’re a brave, principled CMO asking your CFO for hundreds of thousands (perhaps millions) in new budget to hire a bunch of expensive specialists who can then be very prescriptive in telling AI applications what to do. Yay! Self-determination.

The first question the CFO will ask is: “Wouldn’t it be cheaper to hire an agency who ‘knows what good looks like’ and uses AI versus taking both the AI and the expertise in-house?”

Well, yes it would be cheaper in fact. Why? Because an agency can amortize the cost of expertise across multiple different paying clients. For an agency, expertise is a client-billable profit center. For clients, in-house marketing expertise is always a cost center (if you don’t know basic accounting principles, please look this up, I beg you).

The same principles often hold true for technology. This is why so many clients access technologies like Demand Side Platforms, ad servers, and audience data through their agencies. AI may be yet another marketing technology that sometimes ends up being cheaper for marketers to access via agencies rather than take in-house.

Me, ranting on LinkedIn.

An AI idealist might push their glasses up their nose and counter thusly: “Increased marketing efficiency driven by AI will free up budget to hire more in-house marketing staff.”

Oh Lord, give me the patience to tolerate such naivete. If AI makes marketing “more efficient” (whatever that means) across the board, then all companies will enjoy the same advantages. Once this happens, each company’s CFO will re-examine marketing budgets and efficiency standards based on new “table stakes” that reflect the company’s peer group.

When a job function or a department becomes more efficient on a secular basis, the CFO doesn’t just give the savings back to that department as a perpetual gift. Those savings are reallocated to wherever they can be most productive in the business.

AI doesn’t fundamentally change the rules of capital allocation and marketing is no exception.

Marketing complexity and “induced demand”

“Induced demand” is the reason that, no matter how many lanes are added to freeways, there’s always traffic. Why? Because the more lanes you add, the more travelers are encouraged to hit the road and the more developers build along those roads.

In other words: the more capacity you add to comfortably meet existing demand, the more that demand will grow, causing demand to always exceed some “comfortable equilibrium” in relation to capacity.

Your hair will always be on fire and everything will always be a complete shitshow.

Sound familiar?

For each thing that AI makes more efficient (or obsolete), the market will invent ten more things. However many “freeway lanes” there are for marketing & advertising, the industry will pile into them like so many Labor Day road trippers.

Induced demand will save agencies.

Ever since the beginning of marketing and advertising as we know them (approx. the last 150 years), the industry has grown more efficient. For example: Adobe Creative Suite enables present-day amateurs to run circles around commercial artists working slowly and diligently with pen and ink 75 years ago. Did Adobe CS kill opportunity? No! Better and more efficient tools like Adobe CS have always helped grow the industry because they expand capacity which then boosts demand.

Increases in efficiency would cause agency opportunity to shrink if industry complexity remained constant; if there were never new media channels, ad formats, consumer habits, economic trends, etc. But this simply isn’t the case. The marketing & advertising industry will continue getting ever more complex and fragmented, and this complexity will cause the demand for marketing labor and expertise to outpace clients’ in-house capacity, which in turn will ensure that the need for agencies will persist.

B-b-but what about super advanced AI?

Maybe our imaginary AI idealist will now say: “Myles, you keep saying that CMOs will need to in-house FTE’s to run the AI. This won’t be necessary because marketers will interact with the AI the same way they interact with an agency today. Marketing teams don’t really need to change! Dude, agencies are gonna die! Admit it!”

Don’t drop that mic so fast. In that hypothetical world, I’m not entirely certain what any of us will do all day whether we work in marketing or not. It’s an unserious argument because when you extrapolate it, you must imagine a business world, an economy, a society, a human race that has been turned completely upside down by AI that is able to flawlessly emulate human enterprise. Maybe this will happen, maybe it won’t, but I don’t see how present-day ad industry commentators would be able to predict this any more accurately than a cave person sparking a fire could predict the steam engine.

If we’re going to stretch that far into the future, why stop at AGI? Why not predict the death of marketing itself when all of human consciousness has been uploaded to spacefaring supercomputers?

Time to summarize

Let’s recap:

• Marketers don’t necessarily want to in-house the work and expertise of agencies. This is why they hire agencies in the first place.

• Staff, labor, and expertise are expensive. All things being equal, CFOs don’t like hiring FTEs or in-housing technology for work that can be outsourced at a lower cost. AI doesn’t change this.

• Marketing and advertising will continue growing more complex. As the goalposts keep moving, marketers will always be in need of agencies to make up the difference.

• As AI changes how marketing work gets done, agencies will adapt as they always have.

The last point I’ll raise is that some present-day agencies may indeed get killed by AI. I’m not trying to convince you that every individual agency is impervious to AI disruption. What I am trying to demonstrate is that AI isn’t likely to cause the agency business to die in aggregate. I simply don’t see how AI fundamentally changes marketers’ aggregate calculus for what they take in-house versus what they outsource, nor do I see the sheer volume of work really changing as efficiency gains from AI are offset by an increasingly complex marketing landscape.

Cheers for now! Thanks for reading.