Microsoft Splits Media Operating System Between SMG, Incumbent UM

Microsoft Friday ended a review resulting in the split of its $1 billion-plus global media services account between incumbent Universal McCann and Starcom MediaVest Group. Publicis' SMG unit will handle the U.S. and Canada, while Interpublic's UM retains 35 markets worldwide.

The account is an important flagship for reasons that go beyond its billing and fees, because Microsoft is both an influencer of cutting edge media, as well as a leading edge adopter of it.

Interestingly, both SMG and UM are two of the biggest Madison Avenue players utilizing the technological backbone of MediaBank's enterprise software and media processing systems, though it was unclear whether that played a specific role in the outcome of Microsoft's decision.

The loss to the U.S. and Canada will have a bottom line impact on Interpublic, but it won't be devastating enough to hurt the resurgent agency holding company's turnaround. In a report issued of the weekend, Deutsche Bank's equities research team said it was staying pat with a "buy" recommendation for Interpublic's stock, and said its near-term estimates for the company's earnings performance remain unchanged.

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"We estimate the lost business is worth $50 million in annual revenue to Interpublic, or 0.8% of 2010 revenue," wrote lead Deutsche Bank analyst Matthew Chelser, adding, "While the loss hurts and will likely lead to layoffs in the San Francisco offices, it is far from devastating the way that it may have been a number of years ago, and it does not affect our underlying investment thesis."

Chesler termed the Microsoft outcome "hard to sugar coat," but noted, it "could have been worse," because had Universal McCann retained the full account, it most likely would have had to reduce its fees - and consequently its profit margins - to hold on to it.

"The pressure is now on for positive outcomes in the U.S. Army and SC Johnson reviews," he noted, citing two other big Interpublic accounts currently up for review. "We believe that a decision on the Army, in mandatory review since August 2010, could come within the next six weeks. Interpublic has two agencies competing - incumbent McCann Erickson and DraftFCB. An SC Johnson decision could follow as early as June, where DraftFCB is primarily battling it out with WPP agencies as others have lots of conflicts. "

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