By Patrick Coffee

Tech and media companies' race to automate advertising poses a threat to the giant agency holding companies that have for decades dominated that work, industry analysts say.

Share prices of agency networks including Publicis Groupe, Omnicom, WPP and Interpublic fell by approximately 3% to 4% last week following a Wall Street Journal report that Meta Platforms plans to release AI tools by the end of 2026 automating the entire process of creating and placing ads.

Most of the companies have recovered some or all of those losses in the days since.

But Google and Amazon are also following Meta in developing new tools to help advertisers automate more creative work on their own platforms. And Comcast, parent of NBCUniversal and the Peacock streaming service, plans to provide companies this summer with a free AI-driven tool that will automate creative production for commercials on streaming TV, a spokeswoman said.

Their efforts crystallize a long-term challenge to the agencies' business, said Michael Nathanson, an analyst at equity research firm MoffettNathanson.

Agencies long billed clients by employee hours, but in recent years have experimented with compensation pegged to outcomes, as their own use of AI has sped up their work. Those experiments will need to expand for agencies to remain competitive once brands have access to powerful creative tools, Nathanson said.

Meta's plan is a reminder "of the risks around these creative industries that are very much human capital businesses, with the model based on a billing model using a time sheet," he said. "It doesn't mean that they're doomed, but it means that the way they get paid has to change."

Full creative automation will allow brand-side marketing teams to handle campaigns on their own while looking to their agency partners primarily for strategic guidance, said Jessica Serrano, chief marketing officer at Dig, a chain of farm-to-table-themed restaurants.

Technology like Meta's proposed products will appeal most to startups and smaller companies, according to Serrano, who previously held senior marketing roles at Burger King and Taco Bell. "If I had an e-commerce business with one to three employees, I'd be pretty excited about a tool like this," she said.

AI is more likely to displace agencies that focus on so-called performance marketing, since the tools are better-equipped to drive consumers to a specific action, like clicking on a link or downloading an app, than to conceive campaigns that define a brand, Serrano added.

"If agencies are not quickly evolving to this, they'll get left behind," she said.

Agencies might not be easily replaced. Large advertisers that place heavy emphasis on brand perception are less likely to entrust their campaigns to algorithms, according to Chris Beresford-Hill, chief creative officer at the storied creative agency BBDO, part of Omnicom.

"One thing I do know from working with the big brands, which are certainly the bread and butter for agencies like mine, is that they want consistency and brand stewardship," said Beresford-Hill. "AI may be able to create a visual or even create a video, but the idea of developing a unique concept seems far-fetched."

That gap could provide agency networks some insulation, at least in the short term, said Youssef Squali, head of Truist Securities' internet and digital media research group. But larger and larger advertisers may start experimenting with AI tools as they become more sophisticated.

"Maybe some midsized companies will say, 'Hey, to the extent that we can improve our return on investment on ad spend, if we can cut some costs, yeah, we'll do it,' " he said.

Certain industries may be particularly drawn to the idea of creating ads entirely in-house with AI. Luxury fashion brands looking to cut costs in response to slowing sales in key markets like China, for example, have already begun experimenting, said James Hill, who has worked with marketers such as LVMH and Armani, and is the founder of consulting firm Gladiator Media.

Gucci, part of the luxury group Kering, in February released an ad made entirely with AI to promote its latest collection. And LVMH, parent company of brands such as Givenchy and Dior, this month called AI key to addressing the broad slowdown and waning demand.

Beauty giant L'Oréal, meanwhile, on Wednesday announced a collaboration with chip powerhouse Nvidia to scale up its work with artificial intelligence in areas including ad creation.

Meta has tried to reassure agencies on their future -- even as it built its AI ad tools.

Last month, CEO Mark Zuckerberg drew a backlash when he said brands would no longer need creative services once Meta released its more mature AI advertising tools. Quickly after, CMO Alex Schultz clarified on LinkedIn that Meta doesn't want to replace agencies.

"We believe in the future of agencies," Schultz said in a post.

Meta is indeed working with various agencies while developing its latest AI products, a spokesman said this week.

The vital role agencies play "will be more important than ever" as marketing evolves, the Meta spokesman said. "We are proud to partner with them on some of the most exciting areas in advertising today like generative AI and business messaging."

Nonetheless, the largest ad holding companies will have to downsize in response to a technology that is speeding the commoditization of their services, said Nathanson, the analyst.

"You don't need a 1,000-person team anymore," he said. "You need three or four great people with a vision."

Some investors seem to agree. Shareholders remain skeptical of Omnicom's proposed acquisition of rival IPG because they see it as a bet on the existing industry model, said Nathanson. Both companies' stock prices have plummeted approximately 20% since the deal was announced in December.

Write to Patrick Coffee at patrick.coffee@wsj.com

(END) Dow Jones Newswires

June 12, 2025 06:00 ET (10:00 GMT)

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