Squeezed By The Baumols

The most important idea in the advertising industry that nobody in the advertising industry bothered to learn.

In 1966, economist William Baumol pointed out that a Mozart string quartet takes exactly as long to perform today as it did in 1787. You still need four musicians. They still need twenty-eight minutes. And no amount of technological progress, management consulting, or process optimisation has ever, or will ever shave a single bar off the runtime. You can’t really offshore the violin to a lower-cost market and reconnect her via fibre optic.

All this should have been obvious, but apparently wasn’t until Baumol noticed it. And when that happens you know you’re dealing with a moment of genius.

This is Baumol’s Cost Disease. The most important idea in the advertising industry that nobody in the advertising industry bothered to learn.

The Disease

Some industries, think manufacturing, logistics, software, get more productive over time. Technology lets one person do what ten used to. Costs per unit fall. Output scales. Chart moves up and to the right.

But other industries, things like education, the performing arts, and (hey! look at that) creative services are what Baumol would call “stagnant sectors.” The labour is the product. You can’t automate the bit that matters. A teacher still teaches. A nurse still nurses. A strategist still sits in a room and thinks until something emerges that wasn’t there before. The work takes as long as it takes, the work is the thinking, thinking doesn’t succumb to industrial logic.

Baumol’s disease kicks in because wages in stagnant sectors have to keep pace with wages in progressive sectors (otherwise anyone with a brain leaves to go work in tech) but productivity doesn’t keep pace. So costs rise without a corresponding increase in output. The string quartet gets relatively more expensive every decade even though the quartet hasn’t changed. Meanwhile, a new TV gets cheaper.

Now. You’d think the rational response would be to accept this. To say: right, the economics of creative work are structurally different from the economics of making ball bearings, and we should probably price and structure accordingly.

You’d think that.

OH, THE HOLDING COMPANIES

What actually happened, I’m compressing about fifty years of institutional vandalism into a few paragraphs here, is that the industry looked at Baumol’s Cost Disease and, rather than accepting the diagnosis, decided to attempt to cure it.

The cure was unbundling.

Separate the very ‘progressive industry’ parts like media buying from more ‘stagnant industry’ parts like creative. Hive off production because that is more ‘progressive’. Outsource strategy to management consultants because that is stagnant but clients will pay top dollar for credentials. Disaggregate the full-service agency into a rag tag constellation of specialist units, each of which could be individually squeezed for “efficiency.” The logic was there if you’d never actually built a brand: each component, isolated, could be optimised.

And it did reduce costs. People agonise about cost cutting. But reducing costs is in fact very simple if you’re willing to destroy the thing that justified the costs in the first place. Consider how much cheaper healthcare becomes if you institute mandatory euthenasia.

The reason a full-service, media-and-creative-in-one-shop, agency worked wasn’t because Bill Bernbach had a nice office. It was because the proximity of media thinking to creative thinking to strategic thinking created a kind of cognitive density that inevitably produces better work. The media planner who sat twelve feet from the creative team understood what the work needed to do, and could find environments where it would do that thing. The strategist who watched the scripts being written understood the difference between a brief that looked smart on paper and a brief that actually produced something good. Creatives who went out to expensed dinners with the media planners probably picked something up in the process too.

The whole thing was, and as much as I truly despise the word synergy, here we are, genuinely more than the sum of its parts. Unbundling fragmented the cognitive density that made brand work so creative.

Why Agencies Are Worse and Cost More

Baumol’s whole point was that stagnant sectors look inefficient compared to progressive sectors, but they aren’t broken. They’re just different. The string quartet isn’t failing to become more productive. The notion is patently ridiculous. Some things are never supposed to get more efficient. It’s more than okay to have a value proposition that is “irreducible human labour of exceptionally talented people”.

But the holding companies and the coterie of consultants who advised the CMOs that greenlight these restructurings treat the “inefficiency” of some agencies as a bug, not a feature. They Goodharted the entire thing. They found metrics they could optimise (cost per FTE, billable utilisation, overhead ratios) and optimised furiously until the underlying thing, the quality and effectiveness of the creative output, was just a faint memory, a mythology.

This is the Baumol Squeeze. The screw that tightens every time someone tries to make creative work more “productive” using the logic of progressive sectors.

You see the residue everywhere. Media strategies that are mathematically optimal and strategically idiotic. Creative work that’s been briefed by a convoluted strategy deck that was written by someone who’s never met the media team. Production approaches that have been salami-sliced against individual deliverables rather than built around the entirety of a campaign.

Nobody enters this industry to make crap work, but the Baumolised structure now makes good work almost impossibly expensive to produce. The integrated model, Baumol’s string quartet, has been disassembled. Reassembling it means paying for and enduring coordination costs that used to be free, when everyone was in the same building, working on the same thing.

The Irony of the Re-Bundle

So what happens now? Consultancies buy agencies. Holding companies launch “integrated offerings.” Everyone starts talking about “full-funnel solutions” and “connected creativity.” Publicis call theirs Power Of One, or POO, and that always tickles me given that a communications company, the second largest in the world no less, could actually name their integrated offering after shit.

The muscle memory is gone though. The media planners who understood creative are now “activation leads” at a platform company. The strategists who watched work get made are now writing decks for management consultants. The knowledge that came from proximity, the tacit, embodied, irreducibly human knowledge of how these disciplines actually interact, has terminally atrophied.

And here’s Baumol’s revenge: the re-bundled version costs more than the original integrated model ever did. Because now you’re paying for project management layers, intercompany transfers, alignment meetings, shared Microsoft Teams channels between agencies that don’t actually share anything except a holding company invoice. You’ve added coordination costs on top of the original labour costs without adding any of the original benefits of cognitive density.

Baumol’s string quartet is now scattered across several floors of a large office building, four soloists, a conductor, a logistics manager, a team PM, several account supervisors, and a Gantt chart. And unsurprisingly, it sounds like shit.