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Why the mega merger of advertising giants Omnicom & Publicis impacts tech business

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Earlier this year I wrote that we have entered an era where every company is a technology company and technology is every company. Not a day goes by when the idea isn’t reinforced by the headlines. Today, it is a mega-merger of ad-giants, Publicis Groupe of Paris, France and Omnicom of New York.

A decade ago, a big ticket merger in advertising world wouldn’t merit any attention in Silicon Valley, but we are living in new and exciting times  — media, content and technology are now in a sailor’s knot. Today the idea of what is media is being transformed by the emergence of two new mediums — wired and wireless broadband. All our concepts of media containers — television, newspaper, magazines are being tested by changing demographic and consumer behaviors.

These are as much a challenge (and an opportunity) for startups and new media leviathans like Facebook(s fb) as they are for advertising companies and that is why I find the merger between two of the six biggest advertising giants — Publicis and Omnicom — interesting.

The deal

The two companies jointly announced their merger plans earlier Sunday and said that the new company — in which each will own a 50 percent stake — will be called Publicis Omnicom Group (s OMC) and will have revenue of $23 billion and market capitalization of $35.1 billion. It will trade under the ticket OMC on the New York Stock Exchange and Euronext. The holding company will be based in Netherlands.

This new company will zoom past current market leader WPP, which has revenue of $5.6 billion and market capitalization of $20 billion. According to AgeAge, Publicis Omnicom’s combined US revenues will be $11.4 billion, twice as much as WPP. Needless to say, there are going to be interesting antitrust implications. And there are other issues. For instance, PepsiCo is an Omnicom account while Coca Cola is with Leo Burnett, a Publicis company. AT&T (s T) is with Omnicom and Verizon (s VZ) is a Publicis account. The list of conflicts is about as long as the press release itself.

Internet deflates

The aggregation of clients makes some sense, especially as we continue to see a shift to the digital. Since 1920, US advertising industry revenues have hovered between 1 percent to 3 percent of the US gross domestic product. This pie is now shared between television, newspapers, magazines, radio, cable with Google(s goog), Facebook, Twitter, Yahoo and thousands of other digital outlets. Of course, Internet often brings measurability, targeting and interactivity — which leads to a sort of deflationary pressure on industries that have traditionally benefited from ambiguity. Stock brokerages and travel industry were the first two industry to be baffled by this new reality.

According to Understanding the Economics of Digital Compared to Traditional Advertising and Media Services, a report by Joe Burton for 4A’s, a New York-based trade association representing the advertising agency business, “if traditional ad services require staffing and fees that imply an effective commission rate in the range of 12%–15%,” then the digital typically requires “resources equating to an effective commission rate ranging from 25%–30%.” The only difference is that while the agencies are spending more money on digital, the media spend is going to be lower mostly as a result of better targeting, measurement and proven effectiveness increases.” So, the ad-industry’s on-going economic shuffle is one way to understand the imperative of this deal.


The Silicon Valley connection

That said, Publicis Omnicom Group will have a lot of say in Silicon Valley. eMarketer estimates that digital advertising will be a $116 billion market this year, with North America alone snagging $45.12 billion of that total. And spending on mobile advertising worldwide is expected to increase 79.7 percent to $15.8 billion this year, eMarketer estimates, up from just $8.8 billion last year.

Given the reliance of Google, Yahoo (s YHOO) and Facebook on ad-dollars and thus their fiscal health leads to them acquiring startups. The new advertising giant will therefore have a bearing on the fortunes of upstarts such as Foursquare, Twitter,  Snapchat and dozens of others that are experimenting with new advertising and marketing formats. The Publicis-Omincom combo controls a lot of dinero!

153076Of course, the giant company knows that it too has to think about the new digital future. While announcing the deal, Publicis CEO Maurice Levy hinted at the need for advertising agencies to embrace the data culture. The new merged company plans to extensively invest in big data and essentially look for ways to narrow target audiences.

He acknowledged that, like all traditional media companies, the challenge is Google, Facebook and Twitter. Levy has been snapping up digital ad agencies fast, spending $575 million on Rosetta earlier this year and about $1.3 billion on Digitas in 2007. Digital now accounts for 37 percent of Publicis’ revenues, but Omnicom doesn’t share those numbers.

16 Responses to “Why the mega merger of advertising giants Omnicom & Publicis impacts tech business”

  1. pierreloic71

    Both companies have very big ambitions in digital and want to find ways to play a bigger role in tech and new media. My company works with many of their agencies and they are definitely eager to increase their footprint in social marketing.

    With that said, I really don’t see how this merger would help them in the slightest get better or faster access to technology. If anything it will slow them down for a while as they focus on integrating processes, changing leadership, merging backoffice, etc.

    I really don’t see anything else in this merger but a move to appease shareholders with the prospect of improved EBITA (which in the history of large mergers rarely materializes).

  2. Do you think you will find the likes of WPP acquire Interpublic or even acquire a Silicon Valley Start-Up similar to Twitter? For example would WPP benefit from buying/merging with Pinterest or even acquiring Path?

    This sounds a bit far fetched but you never know, what is the future of ad agencies? There’s no doubt the mediums of the past will still be relevant but to what extent can digital influence the advertising industry.

    I think that this merger is partly because WPP have had the advertising crown for over the last few years but also because they are competing against the likes of Google and Facebook, and on their own this just isn’t possible.

  3. With all due respect, I dot know how much of this is really about digital where aggregate buying power is less meaningful than in broadcast. While dollars are shifting from broadcast to digital, the pace is slower than the broader industry believes it to be.

    The money in this space is in media and agencies have trouble finding unique value in digital programmatic commoditized media. There are efficiencies in staffing and particularly in technology, but these are minimal. The cost of entry in digital is low and the value the holding company offers to the agency in their buying and planning platforms is low. Clients see very little hard impact from these offerings. The digital holding company wide platforms are often a lot of talk and positioning with limited demonstrable value.

    The concern around client conflict at the holding company level is a bit far fetched. All holding companies have conflicts across their agencies. This isn’t going to cause account movement.

    If the agency holding companies really want to break their mold, they need to take Startups and new platforms more seriously. They need to fund innovation. They need to buy media platforms, not just buyers. They need to stop acting like agencies. But th harsh reality is that there is little reward in the un-agency model. Clients want to buy what they know. And agencies want to sell what clients want to buy. It’s a cycle that rewards gradual versus radical innovation. And as long as this is where the money is today, it’s where the business will keep marching for tomorrow.

  4. I agree data is at the heart of the new digital world but culling insights from the data and taking meaningful action is another story. It calls for agility and massive organizations are simply not built for that.

    I think the “win” here is for independents and others that build their business models around data and social platforms. I also expect quite a few brands to start looking around at new approaches when they start to get lost in the shuffle. Having lived and breathed social data/big data for over a decade, i can say with some confidence the battle ahead isn’t over who has more data, but who can cull through that messy noise to find those actionable nuggets that can help change a campaign, brand and industry — and integrate those insights into an organization. That’s a challenge that sheer scale simply can’t solve.

    Rob Key
    CEO, Converseon

  5. seave2013

    I don’t understand the merger, because both companies are both so big, they already have been at scale for most of the things discussed in the column and in the comments. Om, weren’t those two companies big enough on their own to support data analytics functions already? What is the required scale anyway? And in addition, there are absolutely no barriers to entry in the ad agency business. So this merger doesn’t stop entry of new companies or expansions of scope of the tech companies named.

  6. jimtrotter

    Gosh. Good luck to them. Did either company do much research in to how many successful French American mergers there have been? Alcatel and Lucent are still banging the square peg in the round hole 7 years on…

    Culturally it will be an enormous challenge, the Americans and French have never been the most natural bed fellows.

    Being big certainly has its merits…but I seriously doubt that this tie-up will be beautiful…

  7. I don’t understand your definition of media. Surely wired and wireless broadband aren’t 2 new media channels ? And didn’t they both emerge years ago ? The media channel is the internet which is delivered via a variety of technologies including wired and wireless broadband.

    • Mark

      They might have emerged many years ago but now they have scale and wider market penetration cutting across demographics and geographies to be viewed like a media platform. Remember it was a long time before cable became a legitimate platform for marketers and media makers to take seriously. I hope that helps give context to my definition of media/platforms/distribution channels.

  8. Hristo Stefanov

    I think it’s about lowering selling and operating costs – the reasons why this activity has been going on since the 90’s. These are holding structures designed to avoid client conflict (keep all clients withing the “family” and away from competing families like WPP) but optimize support functions. They are making more focused, smaller tech acquisitions to compete with Google. For now they just want to be Google-like. They are focused on providing better campaign management services to large companies which account for most of the marketing spend. Google is making most of its money from selling automated, self-managed campaigns to smaller, local advertisers.

    • Hristo

      I think they want to be like Google but in reality it is about trying to keep the economics working for them — as I explain in the post. The lock in on the end customers aka advertisers is a good way to keep the size and scope of their business intact.

      Also, Google is starting to get smarter companies coming directly and managing their own ad-spend. It is not a major trend right now but it is going to happen at scale in a few years.

      Thanks for your smart comment.

  9. Bhupendra Khanal

    Very well summarized. I share the thought that this merger is aimed at bigger goal (or may be threat) towards adopting technology. It is more aimed at Big Data and Analytics, and to major tech advertising giants like Facebook and Google, than WPP.

    We saw this threat on Media agencies late last year, when BPO companies and Software Integrators started taking out Social Media Listening platform, Simplify360, and started offering services that directly competed with Media Agencies. The trend is very strong now and most of the BPOs are setting up Social Media Command Center or Digital CRM practices.

    It will be interesting to see how WPP and other players react.

    Bhupendra, CEO Simplify360

  10. I would say media, content and technology will continue to mesh, and I would add to that the marketing, sales, PR, and customer support functions. These 7 activities are now ane and impossible to separate.

    The classic “Michael Porter Competitive Advantage Value Chain Functions” of procurement, production, sales, marketing and service are now: procurement, production and distribution, where distribution is done on social networks, web, mobile, and all content, advertising and PR is merged in the same activities.