Secondly, it depends what you mean by traditional ads. I loath television and spend far more time on the internet (and don't use adblock) and yet interstitial ads on the tv and radio (and on the net, eg youtube) are far more present in my mind than anything I've seen on the net.
In fact, apart from those silly bottom feeding ads about how some single mom found out some weird old tip and various medical professionals dislike her for it (because they're out to get you? I don't get those ads..) I can't recall a single web ad. I can tell you about Pizza Hut's cheap pizza Tuesdays though.
As for non interstitial ads, like print ads in newspapers, yeah, I imagine they're about as useful as internet ads.
I'm just guessing here... If ad agencies earn a % of ad spend, it's in their interest to spend more. It's easier to spend more on TV, plus it's difficult to prove it's ineffective. Targeted ads on the 'net may someday be really good, but it would cost less and undermine ad agencies' fat fees.
Agencies, in effect, earn a percentage of the spend. But this amount is determined up front. Clients go to market saying "We have $x for client y and we want to know which shops will give us the most bang for the buck."
Shops that over-promise then fail to maintain reasonable profit margins don't survive. At the same time, there's pressure on clients to work with established players, since a campaign gone bad is even harder to defend when it turns out the the marketing budget was blown on inexpedienced and / or desperate people who were willing to seriously undercut competitors just to land the account.
