1841. Who invented the advertising agency

The moment

Philadelphia, 1841. Volney B. Palmer takes a room at the north-west corner of Third and Chestnut streets and puts himself in the city directory as the agent of newspapers across the country [2]. A merchant who wants his notice in the country papers walks in, picks the towns, hands over his own copy and his money. Palmer sends the copy and the money on to the publishers and keeps a quarter of what they are paid [4]. He writes nothing. He is paid by the papers, so he advises what the papers need. By 1849 he has a paper of his own and an offer to draw up advertisements for merchants with no time to write them [7]. The business has every part of a modern agency except a client who pays the agent.

What came before

The problem was arithmetic. There were 75 newspapers in the United States in 1790, more than 360 in 1820 and more than 1,400 by 1840. A wholesaler who wanted the farm towns could not write to a thousand editors, and the editors could not sell their own space. Someone had to stand in the middle [6].

London had stood there first. William Tayler advertised himself in 1786 as agent of the country printers and booksellers. George Reynell opened an office in Chancery Lane in 1812 to place legal notices, and his firm stayed in the family for six generations. Both worked for the printers. Palmer ran the same business in America, and the record does not settle the year he started. The Smithsonian guide to the Ayer records and Duke’s Hartman Center say 1841, Tungate and Hower say 1842, and Fox says 1843 [10, 11, 7, 8, 2, 6, 1].

The space brokers who followed him refined the model and kept its flaw. George P. Rowell sold ads for a theatre programme in the holiday season of 1864, cleared $600 in a few weeks, and opened his own agency in Boston the following year, buying space in bulk and reselling it by the inch. He then published the first directory of American newspapers with circulations and rates, more than 5,000 titles. William James Carlton began canvassing for several papers in December 1864, mainly Methodist magazines; James Walter Thompson joined him as bookkeeper in 1868 and bought the one-man firm in 1878 for $500. Daniel Lord and Ambrose Thomas formed Lord and Thomas in Chicago in 1881, still a space broker. All of them lived on the publisher’s discount, which ran from 10 to 50 per cent depending on the paper and how quietly the deal was done [1, 2, 9, 14, 3, 5].

What it changed

The turn came in Philadelphia too. Francis Wayland Ayer had spent a year soliciting advertisements on commission for a Baptist weekly when, in 1869, he persuaded his father Nathan to put $250 into N. W. Ayer and Son [7]. In 1875 he offered a Pennsylvania rose grower, Dingee and Conard, what he called the open contract. The advertiser gave Ayer a budget and the authority to buy whichever space served it best; Ayer bought at the published rate, took no secret discounts, and was paid a set commission that advertiser, agent and publisher all knew. Fox marks it as the end of buying space low and selling it high [5][1]. Two years later Ayer bought Coe, Wetherill and Company, Palmer’s successor firm, and could claim the oldest line in the trade [7].

What a marketer could do the day after was hire someone who worked for him. Ayer proved it in 1880 by researching the grain output and farm papers of the whole country before pitching a Michigan maker of threshing machines, and refusing to sell the resulting book to anyone who was not a client [6]. The commission rate settled at 15 per cent of the gross rate by the early 1890s, and the American Association of Advertising Agencies, founded in 1917, fixed it there in 1918 [4]. Ayer almost always got the full 15 per cent; around 1898 Lord and Thomas got less, and Albert Lasker’s answer was to write the copy himself [3]. In 1904 he hired John E. Kennedy, a Canadian-born copywriter who told him advertising was salesmanship in print, at $16,000 a year when Lasker’s copywriters earned about $1,400 [3]. By 1906 Lasker could say that ninety per cent of the thought, energy and cost of running the agency went into copy [5].

Media buying, research and creative work, bundled and paid for out of one cut of the media money. That is the full-service agency.

Current dollars (US$ m)2007 dollars (US$ m)

The agency Palmer founded sold space in a market worth under $2 billion a year; the full-service agencies of the 1960s worked a market of $12 billion to $19 billion, and the holding companies of 2007 one of $280 billion [15].

Source: Robert J. Coen historical series (McCann Erickson) as compiled by Douglas Galbi, Coen Structured Advertising Expenditure Dataset, galbithink.org, revised 14 Sep 2008; 2007 dollars computed with the Federal Reserve Bank of Minneapolis Consumer Price Index series, 1913 to present (1982 to 1984 = 100). Redrawn by Brave New Media.

Unit: US$ millions

Show the data

Year	Current dollars (US$ m)	2007 dollars (US$ m)
1919	1930	23127
1920	2480	25705
1921	1930	22351
1922	2200	27146
1923	2400	29095
1924	2480	30065
1925	2600	30799
1926	2700	31622
1927	2720	32406
1928	2760	33264
1929	2850	34349
1930	2450	30412
1931	2100	28640
1932	1620	24693
1933	1325	21292
1934	1650	25526
1935	1720	26026
1936	1930	28783
1937	2100	30231
1938	1930	28375
1939	2010	29976
1940	2110	31243
1941	2250	31730
1942	2160	27470
1943	2490	29837
1944	2700	31802
1945	2840	32707
1946	3340	35507
1947	4260	39601
1948	4870	42065
1949	5210	45380
1950	5700	49029
1951	6420	51187
1952	7140	55644
1953	7740	59869
1954	8150	62807
1955	9150	70776
1956	9910	75527
1957	10270	75764
1958	10310	73954
1959	11270	80009
1960	11960	83760
1961	11860	82227
1962	12430	85041
1963	13100	88746
1964	14150	94622
1965	15250	100360
1966	16630	106074
1967	16870	104705
1968	18090	107760
1969	19420	109694
1970	19550	104451
1971	20700	105953
1972	23210	115106
1973	24980	116630
1974	26620	111934
1975	27900	107503
1976	33300	121320
1977	37440	128074
1978	43330	137765
1979	48780	139285
1980	53570	134770
1981	60460	137881
1982	66670	143220
1983	76000	158181
1984	88010	175596
1985	94900	182832
1986	102370	193625
1987	110270	201223
1988	118750	208089
1989	124770	208587
1990	129968	206139
1991	128352	195355
1992	133750	197622
1993	140956	202216
1994	153024	214048
1995	162930	221623
1996	175230	231518
1997	187529	242210
1998	206697	262873
1999	222308	276617
2000	247472	297915
2001	231287	270727
2002	236875	272953
2003	245477	276562
2004	263766	289458
2005	271074	287730
2006	281653	289616
2007	279612	279612

The commission era (to 1956) and the fee era (after 1960) sit on the same line: the share the economy gives to advertising moved with wars and recessions, not with how agencies were paid.

Source: Douglas Galbi, Annual U.S. Advertising Expenditure Since 1919, galbithink.org, 2008 (Coen advertising data; GDP from Johnston and Williamson and the U.S. Bureau of Economic Analysis). Redrawn by Brave New Media.

Unit: per cent of GDP

Show the data

Year	Ad spend (US$ m)	GDP (US$ bn)	Ads as % of GDP
1919	1930	78.3	2.5
1920	2480	88.4	2.8
1921	1930	73.6	2.6
1922	2200	73.4	3.0
1923	2400	85.4	2.8
1924	2480	87.0	2.9
1925	2600	90.6	2.9
1926	2700	97.0	2.8
1927	2720	95.5	2.8
1928	2760	97.4	2.8
1929	2850	103.6	2.8
1930	2450	91.2	2.7
1931	2100	76.5	2.7
1932	1620	58.7	2.8
1933	1325	56.4	2.3
1934	1650	66.0	2.5
1935	1720	73.3	2.3
1936	1930	83.8	2.3
1937	2100	91.9	2.3
1938	1930	86.1	2.2
1939	2010	92.2	2.2
1940	2110	101.4	2.1
1941	2250	126.7	1.8
1942	2160	161.9	1.3
1943	2490	198.6	1.3
1944	2700	219.8	1.2
1945	2840	223.1	1.3
1946	3340	222.3	1.5
1947	4260	244.2	1.7
1948	4870	269.2	1.8
1949	5210	267.3	1.9
1950	5700	293.8	1.9
1951	6420	339.3	1.9
1952	7140	358.3	2.0
1953	7740	379.4	2.0
1954	8150	380.4	2.1
1955	9150	414.8	2.2
1956	9910	437.5	2.3
1957	10270	461.1	2.2
1958	10310	467.2	2.2
1959	11270	506.6	2.2
1960	11960	526.4	2.3
1961	11860	544.7	2.2
1962	12430	585.6	2.1
1963	13100	617.7	2.1
1964	14150	663.6	2.1
1965	15250	719.1	2.1
1966	16630	787.8	2.1
1967	16870	832.6	2.0
1968	18090	910.0	2.0
1969	19420	984.6	2.0
1970	19550	1038.5	1.9
1971	20700	1127.1	1.8
1972	23210	1238.3	1.9
1973	24980	1382.7	1.8
1974	26620	1500.0	1.8
1975	27900	1638.3	1.7
1976	33300	1825.3	1.8
1977	37440	2030.9	1.8
1978	43330	2294.7	1.9
1979	48780	2563.3	1.9
1980	53570	2789.5	1.9
1981	60460	3128.4	1.9
1982	66670	3255.0	2.0
1983	76000	3536.7	2.1
1984	88010	3933.2	2.2
1985	94900	4220.3	2.2
1986	102370	4462.8	2.3
1987	110270	4739.5	2.3
1988	118750	5103.8	2.3
1989	124770	5484.4	2.3
1990	129968	5803.1	2.2
1991	128352	5995.9	2.1
1992	133750	6337.7	2.1
1993	140956	6657.4	2.1
1994	153024	7072.2	2.2
1995	162930	7397.7	2.2
1996	175230	7816.9	2.2
1997	187529	8304.3	2.3
1998	206697	8747.0	2.4
1999	222308	9268.4	2.4
2000	247472	9817.0	2.5
2001	231287	10128.0	2.3
2002	236875	10470.0	2.3
2003	245477	10961.0	2.2
2004	263766	11713.0	2.3
2005	271074	12456.0	2.2
2006	281653	13178.0	2.1
2007	279612	13807.0	2.0

The mechanism had a flaw its inventors knew. Paid on spend, an agency earns more when the client spends more, and nothing on advice to spend less or somewhere that pays no commission. Fees fixed that and introduced the next flaw, since an agency paid for hours earns more when the work takes longer. The ANA’s 2022 survey found 82 per cent of marketers paying by fee, and among advertisers spending $500 million or more a year, 53 per cent paying fixed or output-based fees, up from 5 per cent in 2016 [20]. The number of agencies did not shrink while the money changed hands.

199813624

200013866

200312596

200814312

201013248

201313101

201513356

201813737

202014279

202315512

The count of agencies did not fall when the commission went; employment in them rose from 147,102 in 1998 to 200,465 in 2023 [18].

Source: U.S. Census Bureau, County Business Patterns, U.S. summary files 1998 to 2023, NAICS 541810 Advertising agencies, establishments with paid employees. Redrawn by Brave New Media.

Unit: establishments

Show the data

Year	Establishments	Paid employees (week of 12 March)
1998	13624	147102
2000	13866	167215
2003	12596	155939
2008	14312	165062
2010	13248	149095
2013	13101	185514
2015	13356	188781
2018	13737	187908
2020	14279	181742
2023	15512	200465

The Mad Men thread

The series gives readers a mid-sized Madison Avenue shop in 1960 that bills its clients a percentage of what it spends on their behalf. The real agencies did, and the pressure on the model was already public. In February 1956 the Four A’s signed a consent decree with the Justice Department’s antitrust chief, Stanley Barnes, agreeing to end the requirement that members collect a 15 per cent commission, to drop its ban on rebating, and to stop policing the industry. In November 1960 Shell asked Ogilvy, Benson and Mather to work for a fee instead; the fee was the actual cost of running the account plus 25 per cent, and the New York Times reported it as a surprise. To its advocates, Fox writes, the fee put the agency on the footing of an attorney or physician, paid for work done rather than for what the agent could spend [12, 1, 4].

Palmer’s office became Coe, Wetherill, which became part of Ayer in 1877. Carlton’s firm became J. Walter Thompson, which led the industry in billings from 1922 to 1972. Lasker became a one-quarter partner in Lord and Thomas in 1904 and sole owner in 1912, and in December 1942 worked out a plan to dissolve it. Foote, Cone and Belding opened at the turn of the year with three equal partners and the same staff in Chicago, New York, Los Angeles and San Francisco. The agency in the series is invented. The commission it lives on was built in these offices [7, 14, 3, 13].

What the commission had been doing showed once it was gone. In the 1990s the holding companies spun their media departments out as separate buying companies, MindShare at WPP, OMD and PhD at Omnicom, Zenith at Saatchi and Cordiant. By 2010 only 3 per cent of ANA members still used commission in any agreement; by 2016 it was back to 12 per cent, almost all of it for media buying and programmatic work. The medium Palmer brokered was by then losing most of its advertising money [9, 19].

The medium Palmer brokered carried the agency business for 160 years; in 2020 newspapers earned more from circulation ($11.1 billion) than from advertising for the first time in the series [17].

Source: Pew Research Center, State of the News Media, Newspapers Fact Sheet, 29 Jun 2021; data from the News Media Alliance (formerly Newspaper Association of America) through 2012 and Pew Research Center analysis of year-end SEC filings of publicly traded newspaper companies, 2013 to 2020. Redrawn by Brave New Media.

Unit: US$ billions

Show the data

Year	Advertising revenue (US$ bn)
1956	3.22
1957	3.27
1958	3.18
1959	3.53
1960	3.68
1961	3.6
1962	3.66
1963	3.78
1964	4.12
1965	4.43
1966	4.87
1967	4.91
1968	5.23
1969	5.71
1970	5.7
1971	6.17
1972	6.94
1973	7.48
1974	7.84
1975	8.23
1976	9.62
1977	10.75
1978	12.21
1979	13.86
1980	14.79
1981	16.53
1982	17.69
1983	20.58
1984	23.52
1985	25.17
1986	26.99
1987	29.41
1988	31.2
1989	32.37
1990	32.28
1991	30.35
1992	30.64
1993	31.87
1994	34.11
1995	36.09
1996	38.08
1997	41.33
1998	43.92
1999	46.29
2000	48.67
2001	44.3
2002	44.1
2003	46.16
2004	48.24
2005	49.44
2006	49.28
2007	45.38
2008	37.85
2009	27.56
2010	25.84
2011	27.08
2012	25.32
2013	23.59
2014	22.08
2015	20.36
2016	18.27
2017	16.48
2018	14.35
2019	12.86
2020	9.6

The four largest groups descended from this lineage, Publicis, WPP, Omnicom and Interpublic, reported 2024 revenue of $62.6 billion between them. The publisher’s discount is gone. What replaced it is still a cut of what clients spend on attention [23, 24, 25, 26].

Commission, fixed rateCommission, sliding scale

Offline media planning5%

Offline media buying12%

Digital, search and social planning14%

Digital, search and social buying24%

Programmatic services40%

Palmer's model, a cut of the money passing through, is at its strongest in the newest channel: the ANA found 28 per cent paying a fixed-rate commission and 12 per cent a sliding scale on programmatic services, against 4 and 1 per cent on offline planning [22].

Source: ANA, Media Agency Compensation Practices, September 2019, n = 86 client-side marketers, survey fielded April 2019, Section I. Redrawn by Brave New Media.

Unit: per cent of respondents

Show the data

Compensation method	Offline media planning	Offline media buying	Digital, search and social planning	Digital, search and social buying	Programmatic services
Commission, fixed rate	4	10	8	17	28
Commission, sliding scale	1	2	6	7	12
Labor-based fee	54	48	48	38	25
Fixed fee (deliverables)	24	25	23	21	18
Value-based fee	1	0	0	0	1
Media performance-based fee	0	0	0	0	1
Combination of fees and commissions	14	13	13	15	11
Other	2	2	2	1	4

Applied: if you are a B2C brand

Say you sell a mid-price skincare line and must decide between an agency, a freelancer network and an in-house team. Before you look at a single portfolio, ask each option who pays it and on what. An agency paid a percentage of media has Palmer’s incentive, to grow the spend and steer it to where the percentage is earned. An agency on labour fees has the opposite one, and will staff your account generously. A freelancer network paid per deliverable has Ayer’s 1880 incentive in miniature, to do the work up front and win the next brief, which suits you until the brief needs a plan nobody is paid to write. An in-house team on salary has no reason to prefer one channel to another, which is also why it rarely challenges the channel it already knows.

So write the contract before the pitch. We sit on the agency side of this table, and the compensation clause is the page nobody reads at a pitch, on either side. Ask for the media plan with the agency’s own earnings shown line by line, as the ANA has pushed for since its 2016 transparency work. If the plan leans towards channels where the agency earns a commission, you are looking at the problem Ayer’s open contract solved in 1875, and it gets fixed in the contract [19].

Applied: if you are a B2B brand

Say you make industrial pumps and your media is trade press, LinkedIn and two conferences a year. Nobody earns a commission on any of it. Media-neutral advice, in this market, means advice from someone whose income does not change when you move money from the stand to the sponsored post. That is a different thing from advice that is right.

Ayer’s 1875 contract put the neutrality in the terms, so put yours there too. Pay for the plan as a fixed deliverable with a stated scope, so the adviser is not rewarded for a longer plan. Pay for execution separately and keep the right to execute in-house, as 30 per cent of ANA members already do for programmatic buying. Then test the adviser as the threshing-machine maker could test Ayer in 1880. Ask for the research before the recommendation, and read whether it argues from your buyers or from what the adviser happens to sell [22].

What to do with it

1. Before any agency, consultant or network pitches you, write down the base each one will be paid on: media spend, hours, deliverables or outcomes. Reject any proposal where that base is not written into the contract.
2. Require a media plan that shows the agency’s own revenue on every line. Any channel where the agency earns more than its blended rate needs a written justification before you approve the plan.
3. If you pay for hours, cap the hours per deliverable in the scope and check the timesheets against the cap every quarter. That is the control the ANA’s 2022 respondents were moving towards with fixed fees [20].
4. Keep media buying and advice as separate clauses so you can move either without moving both. The 1990s unbundling served the agencies; make it serve you.
5. Once a year, have someone with no stake in the plan re-run the channel allocation from the buyer evidence alone, and compare it with the plan you bought.