Remember how major advertising agencies handled the Internet? Let’s recap their 5 stages of grief:

1. Denial: The web is not a big deal. It’s a fad. Let the little Internet agencies form. We’re not losing much in fees.
2. Anger: Who’s coming to our monthly all agency day? The Internet agency? First the Public Relations agency, and now this? Well this much is true: they’re not sitting near the client at lunch.
3. Bargaining: We have an Internet division too. It’s one guy, but he knows what RSS stands for.
4. Depression: We need to reinvent ourselves. Fire someone. Anyone.
5. Acceptance: Let’s buy an Internet agency.

But the Internet agencies did the same thing when it came to paid search. So it’s bad all over.

Now, dear Madison Avenue, I will predict your five stages of dealing with online video. Fortunately, you have some progressive chap that’s smart enough to read WillVideoForFood, so you might have the forethought to skip a stage or two.

1. Denial: Online video is a fad. Big TV is still the key to awareness.
2. Anger: What the heck happened to general awareness? Why is some of our work going to small online-video agencies and amateur producers? We must kill them.
3. Bargaining: We have an online video guy. He has a MySpace and a YouTube account. We don’t let him out much.
4. Depression: We need to change our model. Fire someone. Anyone.
5. Acceptance: Let’s buy a small production house or partner with one.

I could see the look of disdain and fear in the eyes of the agency attendees when I spoke at AdTech last week about doing Mentos ads for $2-$5,000. Then I reminded them (partially to avoid getting booed off the stage) of some good news for agencies.

We consumers aren’t consuming less. We’re just breaking into content-consumption niches and online communities that shape our thinking and purchase decisions. That actually creates a need for more content, and that can make an agency fees actually grow.

I also cautioned that the model I used for Mentos isn’t scalable. As an amateur videographer I dealt directly with the product director. That’s not scalable. For a brand to develop creative content for a variety of different online audiences and channels, the product team needs to hire a variety of lower cost creators. Twelve amateurs instead of a giant “one size fits all” television ad with exotic models and expensive shoots in Hawaii? That creates more — not less — of a need for an agency.

So how can your big agency stay ahead of this and avoid the pain you felt when the Internet and paid search became important? It’s as simple as five different kinda steps:

1. Pay attention to social media, industry changes and viral videos that help market. There’s a lot you can learn from positive and negative example. If you catch your agency staff watching online videos at work, don’t stop them (unless it’s porn). Find out what they’re watching and why.
2. Hire someone who understands this medium. At first it might not feel like headcount you can justify, and you may want to find a subcontractor or consultant. But as a product director myself (yeah I’ve got a day job) I’m going to look elsewhere if I don’t believe your agency has a clue about the impact of online video. Nothing makes me giggle like an agency that boasts that they are pioneers because they made a brand page on MySpace or Friendster, or had a viral video that got viewed ten thousand times.
3. Begin to experiment with lower cost and adaptive forms of video content. The next time you do that “big shoot,” get some footage you can use in other forms. It could be as simple as footage from a decent high definition camera, but be sure to arrange the rights with your models and the shoot’s director (who will probably grow quite irate at this prospect).
4. Pitch your client on doing something experimental online — before they find someone else with a more robust and compelling story. Don’t stop with online-video ads — try creating entertaining content that subtly markets. There is no shortage of inventory for paid promotion, but that’s just one arrow in your online-video quiver.
5. Partner with amateurs who have existing audiences and online “street cred,” and they’ll keep you from doing anything that will be repulsive to skeptical online viewers who have ADHD and love the power of stopping ads and lambasting blatant promotion. If you’re brave, approach some online-video “weblebrities,” (like top YouTubers or amateurs that have had success on other sites). This is a lot of work, so if you want a more turnkey approach hire a specialist to manage it (xlntads, for example, is brokering relationships between big brands and promising amateurs).

We’re approaching the tipping point for a fantastic time in the evolution of media consumption!

Consumers are in control, but advertising is the currency because we consumers are too cheap to pay. Reality television and online video is exploding because we’re tired of perfection: scripted shows, polished ads, good looking models. We want to see people like us, and content that speaks to us individually. Advertisers can help pave the road, or wait until it’s built and buy billboards along the highway. What’s your agency going to do?