AI Is Slamming the Advertising Business. This Company’s Earnings Are Another Warning.

The shift to digital advertising has been a positive for Meta Platforms. (Alex Wong/Getty Images)

WPP became the latest casualty of artificial intelligence’s assault on the advertising industry.

Experts warn that AI is causing brands to promote themselves more through digital players, rather than traditional agencies.

WPP is a London-based advertising giant with clients like Wendy’s, Unilever, and Ford Motor. That doesn’t make it immune to broader industry changes. American depositary receipts of WPP sank 18% on Wednesday after the company provided disappointing financial guidance as clients pull back spending.

While WPP highlighted the impacts it is seeing from client concerns over an uncertain economic environment, there’s another headwind investors should be paying attention to: AI.

“AI is redefining the traditional brand-agency-platform dynamic,” Emarketer analyst Jeremy Goldman told Barron’s. “Platforms like Meta, TikTok, Google, and Amazon are doubling down on AI-powered self-serve tools that let brands generate and optimize campaigns with minimal external help.”

A spokesperson for WPP said in a statement to Barron’s that the company doesn’t see AI as a threat, “but as a powerful accelerant for creativity and innovation, fundamentally reshaping how we deliver value for our clients.”

“The complexity of the digital landscape means brands increasingly need strategic guidance, integrated solutions, and human ingenuity—all of which AI augments, allowing us to deliver more impactful and personalized campaigns at scale,” the spokesperson added.

Digital advertising allows a client to promote itself through social media or online channels—and that’s less expensive than promoting large brand campaigns through traditional advertising agencies, making it more accessible for small- to medium-size businesses. According to research done by advertising agency Abbey Mecca, global ad spending will surpass $1 trillion for the first time in history this year, and digital advertising should make up 75.2% of global ad spend, reaching $777 billion.

Meta and Google’s Alphabet make most of their revenue from advertising, so this shift to digital has been a home run for them. Plus, the tech giants have a unique advantage when it comes to creating AI tools that improve ad reach and efficiency, as they already have the team and infrastructure to build out that software.

Meta reported first-quarter advertising revenue of $41.4 billion in April, beating Wall Street estimates. First-quarter Google Advertising revenue of $66.9 billion also surpassed analyst expectations.

“Businesses used to have to generate their own ad creative and define what audiences they wanted to reach, but AI has already made us better at targeting and finding the audiences that will be interested in their products than many businesses are themselves, and that keeps improving,” Meta CEO Mark Zuckerberg said on the company’s April earnings call.

There are those on Wall Street who are concerned that ad agencies will be left behind as this shift to AI-driven digital advertising continues. American shares of WPP have tumbled 43% this year, while Interpublic Group has fallen 12%, Omnicom Group has dropped 16%, and Publicis’ ADRs are down 1.7%.

“AI will profoundly and irrevocably transform the industry,” Barclays analyst Julien Roch wrote in a note on June 25. “While we still believe that agencies will adapt, survive, and ultimately thrive (the questionable industry joke often told goes ‘we are cockroaches, not dinosaurs’), it will take time, money, and good execution.”

Agencies are working to adapt now. WPP recently launched WPP Open, an intelligent marketing operating system powered by AI.

“It is our intention to continue to prioritize selective investment in the business, with a focus on WPP Media, and our data and tech offerings through WPP Open,” WPP Chief Financial Officer Joanne Wilson said on the earnings call. “We believe this is critical for the longer-term success of the business.”

Write to Angela Palumbo at angela.palumbo@dowjones.com