by: Idris Mootee
I was in London with clients last week and I’d also had a meeting with my friend at WPP head office (see picture of their modest head office which houses the best financial minds in the business). We had a great discussion about how they see the ad world’s future.
Despite the challenges that big agencies are having coping with the digital world, they had successfully brought scale and scope to clients. After the meeting, I am asking myself the same old question: Is Google a threat to ad agencies? How real is this threat?
Google and even Microsoft are competing with ad agencies, not in a conventional sense. Google now owns DoubleClick, which makes it a direct competitor to holding companies such as WPP. Today WPP buys estimated $160m of ads space from Google. If Microsoft buys Yahoo, that it becomes a duopoly. Google’s market cap is $160-170bn, WPP’s is $15b and Ominicom is $14.8b, and even including Interpublic ($4b) ($6b) and Publicis we are looking at a total market cap of $43b, only 25% of Google’s. The four agency holding groups have combined revenue of over $33b, 50% bigger than Google. That gives you a sense of what the market is saying about how they see the future of agencies. Google can easily buy two of the largest holding company for $27b and essentially the largest advertising powerhouse that produced and placed 60% of the world’s ad. A fully integrated network that also becomes a monopoly.
The lines are blurring between the buyers and sellers of online media following (WPP's acquisition of 24/7 Real Media) and suggests that agencies may see online as an opportunity to re-enter the media brokerage business. If that’s the case, it would be a full circle for Madison Avenue, whose roots were established when early newspaper advertising reps like NW Ayer & Sons and JWT morphed into full-service agencies, and adopted a commission-based system that derived revenues from a percentage of media billings. That’s the circle of advertising. Not sure many remember that.
Last year WPP generated roughly 46% of worldwide revenue from advertising and media with the rest came from marketing services. WPP digital services accounted for nearly 12% of worldwide revenue, still small but I can see this growing to 20% easily. Two months ago they made an unsolicited offer to buy market-research firm Taylor Nelson Sofres for $1.88 billion. The deal was rejected, but if it went through, it would make them the largest agency holding company in the world. WPP is best positioned among all holding companies in this space despite the challenges with traditional advertising with all big shops.
The competitive ground for the agency groups in the next 3 years will be ‘Digital and China’. Period. Those are the two growth pillars. The biggest problem in the industry is in the traditional media and old school ad agencies, there’s a serious talent and capability gap that no way can be filled, no matter how hard they try. Then there’s a big cultural problem as they are organized around creative directors. It is kind of a star culture; it is the opposite of the web. Our culture is not only collaborative and multi-disciplinary in nature. The opportunity is in the digital. Asking old school agencies to do bring digital to the core is like asking a sushi chef to prepare steak tartar, you think there’s no cooking needed for both. It simply won’t work.
Ad agency growth through consolidations became a common strategy for the last 20 years; the question is ‘size’ the competitive advantage and are large networks more productive? Agencies with global reach have the advantage of offering a single point of contact for coordinating marketing activities, improved efficiencies, greater coherence in marketing ‘voice’, and access to global talent pool. The Interpublic Group is the world’s first communication holding company set up to get around the conflict of interest issue. Member agencies could function autonomously and handle competing accounts without compromising client confidentiality. IPG is still struggling hard today. The total number of global ad agencies has been reduced from 8 in 02 to only 6 agencies in 05. I think we will end up having only 4 left in 2-3 years, ignore the tiny ones MDG etc.
The six current players comprise Omnicom and Interpublic, WPP, Publicis and Havas from France, and Dentsu from Japan. As for performance, Omnicom has the highest revenue and second highest revenue growth rate. WPP had the second highest revenues and the third highest revenue growth while Publicis showed the highest revenue growth with relatively modest total revenues. Havas showed both the lowest total sales and revenue growth. This gives you a sense of how each agency group is doing.