Advertising agencies look for new model in the era of the Internet

Disintermediation-or cutting out the middle man-may jeopardize an otherwise promising future for advertising companies and force them to strive for new business models in the near future, said experts.

"I do believe that ... advertising companies have been losing influence in China's service industry," said Chen Gang, head of the School of Journalism and Communication at Peking University.

In the next five to 10 years, traditional forms of advertising (newspaper ads and TV commercials, for instance) face fundamental change, Chen said.

"Therefore, advertising companies must devise solutions to keep up margins, as conventional methods will no longer work," he said.

"To a certain extent, we are all struggling and mulling the next move," said T.B. Song, chairman of Ogilvy & Mather Greater China.

The increasing speed of technological development has generated a variety of replacements for traditional advertising companies.

"For example, today a large Internet corporation can act as a business enterprise, or a media organization or even serve as an advertising agency," Song said.

He gave the example of Baidu Inc, where parts of the company can completely take over the functions of advertising agencies.

E-commerce and big data analysis, introduced by IT companies, can accurately and efficiently target customers and confirm outcomes, he added.

The decline of traditional media has driven away many advertisers, further cutting margins and weakening the profitability of advertising companies.

"Enterprises like the trend of disintermediation, mostly because it can lower their costs and offer more efficient ad delivery," said Cheng Manli, a media professor at Peking University.

Last year, Lenovo Group Ltd, which had been a reliable income source for many ad companies, announced a cut in spending on traditional media to 40 million yuan ($6.4 million), from 100 million yuan a year earlier.

In January this year, manufacturing giant Haier Electronics Group Co Ltd eliminated its entire ad budget for magazines. In 2013, the industry saw a drop of about 2.7 percent in television commercials and 9.2 percent in newspaper ads, compared with a year earlier.

"It's the technology that has facilitated the trend," said Micho Spring, chairwoman of Weber Shandwick's global corporate practice. Five years ago, she wouldn't have needed to hire designers, producers and studios, but now the company has an entire team.

"We are creating content for our clients, and we are helping them strategize and distribute the content. I think in the world of marketing and communications, the shift we all see is that more marketing and advertising dollars are going toward public relations," she said.

China's ad agencies still produce a large number of online commercials for small or midsized enterprises, according to Chen.

qiubo@chinadaily.com.cn