The Internalization of Advertising Services: An Inter-Industry Analysis

Abstract

This study investigates the extent to which U.S. advertisers use in-house rather than independent advertising agencies and examines inter-industry variation in such internalization. Contrary to the widely-held impression that use of an in-house advertising agency is more the exception than the rule, we find that vertical integration of advertising services is much more widespread than has hitherto been appreciated. Drawing on concepts from research on scale economies and transaction costs, we develop a set of hypotheses about differences in the expected depth of internalization across industries. We test these hypotheses in cross sectional analyses of data covering 69 two digit SIC industries at two points in time, 1991 and 1999. In both years, approximately half of advertisers of all sizes operated an in-house agency. Across industries, we find that the likelihood of internalization of at least some advertising services decreases as the size of advertising outlays increase but increases as advertising intensity and technological intensity increase and is greater for “creative” industries.

Build It, Buy It, or Both? Rethinking the Sourcing of Advertising Services

“…At this stage, insourcing was not a direct threat to external agencies whose focus was providing strategic, creative services in support of well-funded national campaigns placed in highly visible, "above-the-line" media. That "low cost and quick turn" has long been understood as the prime rationale underlying the internalization of collateral advertising is consistent with the theory and empirical research on the economics of vertical integration more generally (Lafontaine & Slade, 2007;Williamson, 2010;Horsky, Michael, & Silk, 2012). Over time, however, the project work that was apportioned to in-house agencies grew in both volume and complexity, primarily due to an insatiable corporate appetite for cost savings and control.…”

“…Fast forward half a century, the share of advertisers of all sizes who reported the use of at least some in-house advertising resources was approximately 50% in 1990 and 1999 (Horsky, Michael, & Silk, 2012). These measures of internalization do not distinguish between "partial" and "full" integration and thus include cases of mixing internal and external services.…”

“…The extent to which advertisers have relied on a combination of inside and outside resources to satisfy demand has been subject to shifts over time with wide variability across industries and companies (Horsky, Michael, & Silk, 2012).…”

Build It, Buy It or Both? Rethinking the Sourcing of Advertising Services

“…At this stage, insourcing was not a direct threat to external agencies whose focus was providing strategic, creative services in support of well-funded national campaigns placed in highly visible, "above-the-line" media. That "low cost and quick turn" has long been understood as the prime rationale underlying the internalization of collateral advertising is consistent with the theory and empirical research on the economics of vertical integration more generally (Lafontaine & Slade, 2007;Williamson, 2010;Horsky, Michael, & Silk, 2012). Over time, however, the project work that was apportioned to in-house agencies grew in both volume and complexity, primarily due to an insatiable corporate appetite for cost savings and control.…”

“…It has long been noted that the internalization of advertising services varies widely across industries (Horsky, Michael, & Silk, 2012). Financial services, technologically-intensive manufacturers, and government agencies were among the early adopters of this model.…”