Author Ken Auletta discusses his book on the evolution of, and current challenges facing, the advertising industry.

frenemiesThe ad business today is far from what it once was. The traditional patterns of promoting products have drastically changed in the last decade because of the reliance on smartphones, tablets and other digital devices. The advertising industry and the firms that have created elaborate campaigns for decades have had to change radically as well. Media critic and best-selling author Ken Auletta looks at this dramatic shift in his new book, Frenemies: The Epic Disruption of the Ad Business (and Everything Else). Auletta joined the Knowledge at Wharton radio show on SiriusXM to talk about his book. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge at Wharton: You say that the ad industry is in crisis right now. What’s causing it?

Ken Auletta: The title Frenemies is based on two larger points. One is that traditional ad agencies, as featured in places like [the television show] “Mad Men,” are being disrupted by people who used to be their friends but are increasingly their competitor. Clients are taking more and more [projects] in-house away from the agencies. But the biggest frenemy, I would argue, is the public, which doesn’t want to be interrupted by advertising, particularly on the dominant device of our age, which is the cellphone.

Knowledge at Wharton: How significant are these issues for the ad industry?

Auletta: Oh, they’re huge. Think about how the world has moved to smartphones, which are really the most personal devices. You don’t lend your smartphone the way you wouldn’t lend your wallet or your purse. Suddenly, to be interrupted by an ad that consumes your battery life, that’s not pleasing to watch on your small screen. We hate pre-rolls, we hate banner ads, and it’s just annoying. So, the advertising community’s challenge with this was to figure out a way to make an ad feel like it’s not interrupting you, like it’s not a bother to you. What they said is, “We have so much data about you that it won’t feel like an ad. It will feel like a service to you.”

You’re walking along the street, and we know you bought a sport jacket a month ago at Barney’s. We can follow you on your GPS. If you’re only two blocks from Barney’s, walk in and we’ll give you 20% off a new sport jacket. How will you feel about that? Will you say, “Hey this is a great service, a great discount.” Or will you say, “This is kind of creepy. How do you know so much about me?”

You’re talking about an industry in turmoil. One of the reasons I wrote this book is because you can see … how newspapers and magazines and television have been disrupted by the Googles and Facebook in the digital world. Well, who funds all of these media institutions? Who funds 97% of Facebook’s revenue? Advertising. Who funds 90% of Google? Advertising. Who funds newspapers? Advertising. If advertising is suddenly being hit by the same kind of disruptions that all of these other industries are hit by, then the funding mechanism is threatened. Therefore, all of media is threatened.

Knowledge at Wharton: Advertising has had the use of data for as long as the industry has been in existence. How different is it now because of the volume, accuracy and speed of data collection?

“The people who sit at the head of the table are the people who have the data.”

Auletta: The data that we have today because of the digital world is different. Digital takes a fingerprint and has a record of everything you’ve watched, every search you’ve done, everything you’ve read, how much time you spend on Netflix. Traditionally, [advertisers] didn’t have that. [It wasn’t] digitized.

Google, Facebook and Amazon have the best data of all. That data is not matched by what the ad agencies have. Increasingly, the people who advertise are saying, “Hey, why shouldn’t I go directly to Facebook and Google, and increasingly Amazon, rather than deal through the agencies?”

Knowledge at Wharton: How have people in the industry evolved over time?

Auletta: In the “Mad Men” days, the creative guy like Don Draper was in charge. He sat at the head of the table. Today, that no longer is true. The creatives don’t sit at the head of the table. The people who sit at the head of the table are the people who have the data. The media agency, the media buyers, the people who buy the ads and shape their strategy and target the ads on particular people — they are the dominant forces at the agency. But increasingly, the agency is being disrupted by other forces. Consulting companies, which used to consult with them or used to be their accountants, are now aggressively getting into the advertising business. PR agencies are getting into advertising, particularly as newspapers and the traditional publishing platforms are saying, “Wait a second, we can become ad agencies, too.” The New York Times has a sales force of over 300 people. One-third of them are bypassing the agency and going directly to clients and the advertiser and saying, “Let us create your ads.” That just creates a tremendous amount of turmoil in the advertising world.

Knowledge at Wharton: Will advertising agencies even be around in 10 or 20 years?

Auletta: They won’t be there the way they were 30 years ago. The odds are they will be there in some form, but it will be a very different form. They will probably be smaller than they are now; they will probably have to get into other businesses. Increasingly, they will be challenged by others who weren’t in the ad business 30 years ago — the Facebooks and Googles and publishing platforms who increasingly say they can do it. Or the clients will say, “Why are we spending all of this money on ad agencies? Let’s create our own in-house ad agency.”

The world is changing. But two of the big issues in the future that we can’t know the answer to is, one, the privacy issue. Will the public at some point say, “You have all of this data and you say you want to use it to target me, but what about my privacy?” Will the public raise that privacy issue as they have, say, in Western Europe, where they have imposed some real changes in the data that can be collected? We don’t know the answer to that.

The second question is, will the government at some point [decide that] Facebook, Google, Amazon and Apple are [too] big? Are there monopoly questions? Are there questions of privacy? Are there regulations that we should impose to level the playing field?

You saw that when Mark Zuckerberg was summoned to appear before Congress. Even though many of the questions he was asked were semi-literate, they expressed the concern for privacy and monopolization power that a company like Facebook potentially has. By the way, it’s a bipartisan issue. I don’t see a cleavage between Republicans and Democrats on this issue; there is a shared concern.

Knowledge at Wharton: Have ad agencies already started to make changes in their operations?

“The thought that [subscriptions] could substitute for advertising is crazy. It’s not going to happen. It’s a false god.”

Auletta: There’s no question they have. It’s an insecure industry as any industry is when they are going through tumultuous change. One of the things they have done is created these five giant holding companies, and they are no longer just dominated by ad agencies. They now have public relations firms they buy, lobbying firms they buy, polling firms and design firms.

Increasingly, they are realizing they have to not just rely on advertising, they also have to get into the marketing business. That has been the change that has taken place over the last 10 years, and it is a profound change. Beyond that, they are asking, “Are we too big? Can we move fast enough? Do we have to get smaller, do we have to slim down?” Those are questions that will haunt them for many, many years.

The other [problem], which they tend not to want to talk about, is that the pay scales in the advertising business are among the lowest of any major industry. If you are someone in college and you are about to graduate, you would much rather go to work at LinkedIn or Facebook or Google than you would for an ad agency, where your salary would be half of what it would be at a digital company.

Knowledge at Wharton: How much has the mystique surrounding the industry changed because of the digital shift?

Auletta: Go back to “Mad Men” again — Don Draper, the glamour of the ad business and the so-called three-martini lunch. Graduates saw it as a glamorous business. You had David Ogilvy and these prominent names in the ad business. It was really a romantic industry. That doesn’t exist the way it once did, and in part it doesn’t exist because the pay scales are so porous.

Knowledge at Wharton: The way people consume the content is changing. For example, you have a lot more subscription services out there now than even five years ago. Does that impact the industry?

Auletta: It does. One of the things I address in my book is that there are people who believe that the way you substitute for ads that may decline is you go to subscription models. But think about that: The one thing that Donald Trump and Hillary Clinton agreed on in the 2016 presidential campaign is that the working class, the middle class, the bulk of the American population hadn’t had an income rise in a decade. The average subscription cost today for the American home is $280, and that doesn’t include gas and electricity. The thought that [subscriptions] could substitute for advertising is crazy. It’s not going to happen. It’s a false god. Advertising is essential to keep alive so many industries.

Knowledge at Wharton: How then do these new approaches change when you are talking about reaching that next generation? Millennials are driving a lot right now, but Gen Z is right on the cusp of making a significant contribution as well.

“People don’t like ads, so what replaces the traditional ads that they don’t like? That’s a fundamental question.”

Auletta: Think about them watching television on their cellphones. Are you are going to interrupt them with a 30-second ad on their cellphone while they are watching it? No way. It becomes a real challenge. What is the new form that advertising takes that will entice Generation Z and millennials to pay attention to it? Twenty percent of Americans have an ad blocker on their cellphone. One-third of Western Europeans do. That means ads can’t get through. When you record a program on your DVR, according to Nielsen, 55% of people skip the ads when they watch that program.

People don’t like ads, so what replaces the traditional ads that they don’t like? That’s a fundamental question. We don’t know the answer to that, but among the answers people talk about is the six-second ad. If you had a two-minute ad block and you had six-second ads, that means 20 ads [in that block]. How would you like to be the 10th ad in that two-minute block? Not very appealing.

What the ad world has to do, and they are doing it, is throw stuff up against the wall and see what sticks. Try a lot of different things. We don’t yet know what the replacement is, what the future holds. But we know you’ve got to try things, and we also know that advertising is essential to support media. How do you have a free-enterprise system? How does the buyer learn what the seller is selling except through advertising? It’s a fundamental process, as annoying as it often is.

Knowledge at Wharton: The idea of frenemies speaks to the relationship between the ad agency and all of these other entities that can be friendly, but they are rivals as well. Will that relationship continue to get closer, or will the divide grow larger?

Auletta: I think the odds are there will be a bigger divide because people worry about themselves. Let’s say you are The New York Times or NBC and you see your ratings, your audience and your ad revenue shrinking. What other source of revenue can we generate here?

One of the other sources of revenue would be to become an ad agency … and to sell ads. So, everyone in the media world and in the world of industry is constantly saying, “What other new source of revenue can we generate? What are the threats we have to worry about, and what do we do to counter those threats?” As they do that increasingly, it is very hard to imagine how people who have traditionally been partners or friends get closer.

Knowledge at Wharton: If some of those entities, like the newspapers, had taken that approach 10 to 20 years earlier, where would they be sitting now?

Auletta: I think 20 years ago they wouldn’t have done that because they were so heavily reliant on advertising and on ad agencies. And they didn’t see the digital threat coming. What they should have done 20 years ago is seen the digital threat coming and created digital newspapers. And when they did create digital newspapers, what did they do? They said, “But we can’t post news on it until the next morning after it appears in the newspaper.” Well, that’s insane.

Initially, the other mistake they made was they gave their information away for free. Now, as they charge, newspapers are finding that people won’t pay a subscription for their local newspaper. They won’t pay for digital local newspapers, so havoc is being wreaked on traditional newspapers in smaller cities, and it is a real issue. Papers like The New York Times, The Wall Street Journal, The Washington Post, with deep-pocketed owners, can survive that onslaught. But it is very hard for papers like The Detroit News, the St. Louis Post-Dispatch, the [New Orleans] Times-Picayune to equally survive.