If the rationale given by John Wren and Maurice Levy for the merger of Omnicom and Publicis into the ad industry’s new dominant player is genuine, then it will ignite a frenzy of similar mergers as the rest of Madison Avenue consolidates to create the scale necessary to compete in a new ad world order being driven by “digital media giants” and the Big Data they generate.
“Five years ago, Google, Facebook and Twitter didn’t even exist,” Omnicom CEO John Wren said, in principle, if not as actual fact, when explaining the logic behind the merger in a call with journalists on Sunday. “We have many new competitors.”
Wren and Publicis CEO Levy -- who will serve as co-CEOs for the new Netherlands-based Publicis Omnicom for 30 months until Levy retires and Wren becomes sole CEO -- both cited the increasing pressures of “digital media giants,” “Big Data,” and the “acceleration” of industrial change as the core rationale behind the deal. If true, it gives impetus to others -- especially former ad giant WPP Group, which will be dwarfed by Publicis Omnicom in every key metric, including market value, revenue, profit, and especially marketplace leverage.
“Martin Sorrell is a competitor -- a strong competitor, a very strong competitor -- and he will remain a very strong competitor,” Levy said of the WPP chief, adding, however, that the deal was not so much a function of WPP’s clout as it was the overall acceleration of the communications industry’s digital infrastructure, and the speed of change that comes along with that.
“We do not define our strategy in regard to what he will think or what he will do,” Levy said of Sorrell. “We define our strategy for what is good for our clients and shareholders.” Given the public and sometimes bitter nature of ad industry bragging rights -- especially digital ones -- between Levy and Sorrell over the past couple of years, that comment itself is likely to spark a new war, which at the moment, Levy appears to be winning.
While the deal is not expected to be completed until early next year, Publicis Omnicom will have a market capitalization of $38 billion, giving it a market value that 68% larger than WPP. While comparative media billings aren’t easy to calculate, Publicis Omnicom likely will emerge with an equally dominant position in terms of media marketplace share, putting WPP -- and its GroupM media unit -- in the uncharacteristic position of an industry also-ran. Based on an eMarketer compilation of 2012 revenue data, Publicis Omnicom will emerge with a 41.3% share of the six agency holding companies that currently represent Madison Avenue, compared with a 30% share for WPP.
In response to a reporter’s question, Omnicom’s Wren called the combined company’s 40% share of media billings “fantasy,” but declined to elaborate. That’s likely because in the world of media -- especially the rapidly changing digital media marketplace -- Madison Avenue has been playing in increasingly shrinking role, not a dominating role, as big digital platforms enable more “long-tail” players to access the kind of media and marketing prowess that only the biggest agencies could have leveraged in the past.
At least one influential observer believes the Publicis Omnicom deal could help stem that tide and give more market leverage back to the ad industry.
“The news is a significant negative for many owners of media properties around the world, given potential for their negotiating positions to weaken in the future if the combined entity adopts bulk buying of media as presently practiced by WPP’s GroupM,” Pivotal Research Group analyst Brian Wieser speculates in a report sent to investors on the eve of the Publicis Omnicom announcement. “While the impact would not play out for many years, long-term media cost inflation would likely be at least partially contained.”
One thing that is likely to play out sooner, he predicted, is some capitulation from other agency holding companies -- most likely WPP.
“Tie-ups involving [Interpublic], Havas and Dentsu are now much more likely to occur,” he wrote, implying that the Publicis-Omnicom deal could actually free WPP to make more merger deals than it otherwise might have been in a position to.
“What would have been unthinkable previously would now make sense, with WPP adding incremental scale and profitability,” he explained. “Beyond the synergies WPP could extract, cashflows generated by [Interpublic] in particular would be much more valuable in WPP’s hands."
“Havas could alternately attempt to purchase [Interpublic] in partnership with private equity or (a wild card, in our view) with the newly cash-rich Vivendi. Vivendi shares a common shareholder with Havas in Vincent Bollore, a renewed focus on media and a history with Havas given its ownership of the agency group prior to 1999.”Japanese agency holding company Dentsu, which recently completed its acquisition of Aegis Group, could also try to buy both of Interpublic and Havas, and possibly even an ascendant MDC Partners, to “maintain competitiveness and scale,” Wieser suggested.
This is a game changer for sure. It's very interesting the comments (spin or not) that this is not about taking down WPP, but about taking back share from the long-tail in digital. It speaks volumes to the fact that agencies are being disrupted, just like media was long ago, but the wave of new digital players like Google and Facebook. Their business model is rapidly changing. Squeezing media outlets only goes so far in the name of scale, as media outlets to are going direct to clients more often or leveraging the long-tail players. In the long tail world, those who get the distribution in media pay the most (not the least), so then entire agency playbook has to change if they are to really compete in this big data realm. The relationship between media and agencies has become to adversarial. That's only driving the disruption further as it forces media brands to both go direct and leverage the long-tail buying platforms more aggressively. After all, in the end aren't we all just trying to help the clients grow their brands? Aren't we? Sometimes its hard to tell.