From July 29, 2013 Forbes: The Publicis-Omnicom Merger A Sign of Strength or Weakness? by Avi Dan
The re-engineering of the advertising industry that the Saatchi brothers and Martin Sorrell initiated in the 1970s reached a new level this weekend with the news of the merger between Omnicom and Publicis, the second and third largest ad companies in the world, in a deal that will reshape the advertising landscape by creating a behemoth with $23 billion in revenues.
Scarcely any of the growth of Saatchi & Saatchi was organic. Instead, they ushered in an era of acquisitions, often of agencies much bigger than them. Between 1972 and 1986 they bought 45 companies, implementing an acquisition formula perfected by their CFO, Martin Sorrell.
That acquisitive appetite scared the venerable BBDO agency and in 1986 it engineered a three-way merger with DDB and Needham, creating Omnicom, too big for Saatchi & Saatchi to devour. Omnicom is an ad conglomerate, operating separate (and conflict-free) agency divisions. Saatchi & Saatchi kept up the arms race, and regained its position as top dog by quickly turning around and acquiring the world’s no. 3 ad agency, Ted Bates, for an unheard of ransom of $500 million.
While this circus was going on Martin Sorrell left Saatchi & Saatchi, and using the listed status of a manufacturer of wire shopping baskets called Wire and Plastics Products which he bought into, began to issue stock and raise capital, which in turn he used for agency acquisitions. Some two hundred deals later, WPP was the world’s largest communications company with revenues of $17 billion. These bragging rights have now been snatched up in part by Publicis, a French communications company, which in the year 2000 acquired… Saatchi & Saatchi.
Even though on paper it looks like a merger of two powerhouses, it belies a fundamental issue: the ad conglomerates are mature businesses and profitable organic growth is harder to come by.
Omnicom posted modest profits in the second quarter and first half of this year amid low single-digit revenue growth. First-half revenue climbed 2 percent, while Publicis reported overall organic growth of 1.3 percent in the first quarter, but the company’s European operation reported a drop of 6.5 percent, a worse decline than had been predicted.
Worldwide measured media growth this year is estimated at 3.5 percent, about half the pre-recession rate. With mature markets flat, the advertising industry relied on developing countries for growth. However, total media ad spending in Asia-Pacific is barely growing, at 0.6 percent, and total ad spending in China is increasing slower than expected, growing 8.1 percent, at a significantly lower rate than the previous estimate of 12 percent.
The seismic shift in advertising did not happen in Paris this last weekend when the merger was announced. It started almost 20 years ago when AT&T purchased the first banner ad. By 2015 internet advertising will account for a quarter of all advertising, as social and online video grow by 30 percent annually, while traditional media by only 1 percent. The traditional agency model is profitable but clients are moving away from it chasing eyeballs in a fragmented market, and the growing reliance on a more labor intensive source of income makes the shift to digital less profitable for the ad conglomerates.
Technology and digital media distribution are now more valued than the creation of content: the combined market capitalization of the new company is $35 billion, while Google ’s market cap is $295 billion, almost 10 times as bigger on revenues of $31 billion, with a third as many employees as Publicis Omnicom’s 130,000 staff. The world has changed as it moves at the speed of technology, and the indispensability of scale is going the way of the three-martini lunch.
So what’s in it for clients?
Not much. Perhaps, on the margin, it would give advertisers bigger negotiating muscle with the media, but if you need search in your plan, or social, you still have to go to Google or Facebook . And the quality of the creative work has little to do with size. Relieved from the burden of delivering “the numbers”, smaller, independent shops can often invest in great talent. At the end of the day, every client engages a “small” agency, anyway. Of the thousands of employees of the new company, the average brand manager will continue to interface daily with no more than 10 or 20 on their agency team.
It’s hard to see how advertisers would benefit from better efficiencies and collaboration. While the merger would result in some “back room” consolidation and staff reductions, real efficiencies would require combining agencies, and that’s hard to do because of the tough stance clients take on conflict considerations. Agencies, even within the same ad conglomerate, “silo” their profits on separate P&Ls since the business model of these companies treats disparate agency brands as distinct financial divisions. Agencies are wired to meet profit targets separately of each other, and sometimes at the expense of each other. This is not a recipe for collaboration.
In fact, as companies grow bigger they tend to get less efficient, slower and more bureaucratic because they become harder to manage. It would be a while before the combines company figures out its org chart, leading management to focus internally and not on client business.
Since the recession the relative balance of power in corporate America has shifted toward finance and procurement, with greater emphasis on cost cutting, often at the expense of marketing investment. Agencies saw their source of income squeezed as marketers slashed fees and extended payment terms. Slow to streamline and become more efficient, agencies often downscaled the last places that one wants to touch if one has the long view: recruiting and training.
The answer is not mergers. The answer for the advertising industry is to change its model and the way it prices its product. Agencies give away their highest value product – their strategic thinking – for free and try to make a profit off implementation work. However, implementation is often a commodity. It reduces the client-agency relationship to a mere transactional level, of buyer and vendor. And, as time marches on and agency margins drop, the cost of doing business for the agency goes up, putting further strain on the relationship. That can be directly traced to the willingness of agencies, unique among service providers, to give their product away for free.
That is no way to run a railroad or bake a baguette.