My earlier post regarding the future of UK tech PR and journalism has certainly stoked up plenty of comment both here and over at TWL. I've just posted a comment at TWL's place, but I thought I'd repeat it here - regular readers will note that I'm restating a number of things I've posted on individually previously - but this comment draws together a number of observations that I think go to the heart of the issues with UK tech PR and journalism today - comments welcome both here and at TWL:
1. UK tech PR top line revenues have declined – irrespective of whether we compare with 2000 or 2002, I think, at best, tech PR revenues are static or slightly down compared with 5 years ago.
However, the real issue is agency profitability. What is the point of generating more top line revenue if you don’t actually make any more money. When people talk about winning lots of new business, that may well look good for your topline, but if it doesn’t translate into real profit, what is the point?
The real comparison to be made would be of overall profitability of the tech PR business over the last 5 years. Back in the late 1990s, 7-figure net profits were common.
What is the situation now?
Have a look at Companies House data for some of the big tech agency names – yes, you may see growing top line figures, but bottom line profitability in many cases is paltry – 40K net profit on £4.5 million in fees? That’d doesn’t strike me as a very healthy business.
Of course, the directors of these firms may be paying themselves huge salaries (and the overall wage bill will be the single biggest cost to the business) – but directors would surely get a better return by taking the money as dividends (out of profit) – perhaps the reason they can’t is that there isn’t any money there to take.
2. Reasons for the decline in profitability:
- I don’t doubt that some client companies are spending more on PR. But I think the general trend is for companies to spend less. However, even though they are spending less, their expectations have risen – demand for better results, more reporting, etc. Agencies on the whole have only been able to do this by reducing their margin.
Then factor in the “skills shortage”. It is a truism that there is a lack of people at certain levels – post ‘dot bomb’, we all know that the industry lost people, cut back on training, etc – and that in turn exacerbates the problem in the item above ie clients are demanding more for less, but agencies are finding it hard to provide the expertise and experience to fulfil that need. And when do they find that talent, they have to pay a premium for it – which again contributes to reduced profitability – a kind of Catch 22.
3. Ben’s point about agency people moving in-house is a very interesting one – and something I hadn’t considered before. I look at the number of people I used to work with (including Ben) who now hold down senior in-house PR roles. This must apply to others who worked at big tech PR firms in the late 90s/early 00s. They know how agencies operate from the inside – and they know what value they can (and can’t) add. I think the simple truth is that in-house PR buyers view much of the tech PR market as a commodity – ie there isn’t really much difference between what most agencies are really offering ie press releases, case studies, etc – so they either use in-house resource to handle commodity services – or simply apply a commodity market procurement approach – ie lowest price wins – again, if you compete in a commodity market, your profit margin declines – you can only make this up by volume – but, if the overall market is static or declining, then, guess what, your profitability continues to decline – and lets face it, your staff don’t see doing commodity work as a long term career – hence staff churn, etc, etc.
All contributing to the Catch 22.
4. Where’s the exit for PR company founders?
Aside from the usual noble desire to build a business, most PR company founders would have an eye on the exit – ie being acquired – in the boom time dot com days, there was a healthy market for tech PR company sales – because a) there were buyers with money to spend b) tech PR companies made profits that went some way to justifying the price paid for them.
Today, there are very few potential acquirers – and why are they going to shell out millions for a firm that can only generate profit in the 10s of thousands?
So is tech PR and journalism dead?
Of course not.
There may be a smaller pool of titles that journalists write for (and that PR companies interact with), but there is still a need for it – just a smaller market – the problem for tech PR companies is relying on this as their main product – you aren’t going to make your millions for all the reasons cited above.
Tech PR firms are going to have to work out where they can genuinely add value - and at a profit – and all within the constraints cited above. Quite a challenge. However, being a professional optimist, I have no doubt that some bright sparks are already working on how to achieve this.
UPDATE: Another point to bear in mind is the net worth of agencies - crudely speaking, the amount of cash they have in tbe bank or short term cash they have access to - many of the bigger agencies seem to have net worths in the 250K region - bearing in mind that their monthly wage bills are substantial, it only takes a couple of big fee earning clients to walk out the door to have a serious impact on cash flow - which certainly gives the big clients even more negoiating power ie give us more for less or we walk - again, with the knock on effect on margins.
I should say that there is one agency that appears to be bucking the trend with much greater pre-tax profits than their peers and far higher net worth - the fact that one of their owner/directors has a finance background might have something to do with it.