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Is Google becoming an agency?
In my opinion, it sure looks like Google is trying to position itself as an agency. Just look at features on Adwords like the Conversion Optimiser, Budget Optimiser, etc.
Now that it has a full-blown campaign management system at its disposal, I think it might become increasingly difficult to sell bid and campaign management tools etc as Google releases them free of charge on Adwords. This means that agencies will have to make greater effort to position themselves as marketing specialists and not just service providers with great tools. More companies will most likely do or try to do their marketing campaigns in-house.
See a trend
If you take a step back and look at the Internet and how it has become more user-friendly over the past couple of years, especially with the emergence of Web 2.0, one can start to see a trend.
A few years ago, companies had to pay fortunes to get websites done for them and pay even more to have a content management system behind it. These days, with hundreds of web development tools, content management systems and blogs freely available, it has become much easier and cheaper to get your company online.
I believe the same is happening with the marketing of these sites. It's fast becoming much easier to effectively manage your own campaigns, etc with the launch of every new product. The difference is that when you want an exceptional website or an exceptional marketing campaign, you still and will always need a specialist with passion for what he or she does, in order to make the project stand out from the rest.
In the long run, I believe there will always be a need for specialist online marketing agencies as online marketing is not a science, but rather an art form, which needs a passionate artist to make it a big success.