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 a 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 ? the wired and wireless broadband. All our concepts of media containers ? television, newspaper, magazines are coming under question be changing demographic and consumer behaviors.
These are as much a challenge (and opportunity) for startups and new media leviathans like Facebook 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 today and said that the new company of which they will each own 50 percent will be called?Publicis Omnicom Group 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.
The 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, their US revenues will be $11.4 billion, twice as much as WPP. Needless to say, there is going to be?interesting antitrust implications. And needless to say, there are other issues. For instance,?PepsiCo is an Omnicom account while Coca Cola is with Leo Burnett. AT&T is with Omnicom and Verizon 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, the 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, 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 authored 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-indsutry?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 estimate that the digital advertising globally will be $116 billion this year, while North America alone will snag $45.12 billion of that. And spending on mobile advertising worldwide is expected to increase 79.7% to $15.8 billion this year, eMarketer estimates, up from just $8.8 billion last year.
Given the reliance of Google, Yahoo and Facebook on ad-dollars and (thus in turn their fiscal health, which leads to them acquiring startups.) The new company will have a bearing on the fortunes of upstarts such as Foursquare, Twitter, ?Snapchat and dozens of others who are experimenting with new advertising and marketing formats. The Publicis-Omincom combo controls a lot of dineros!
Of 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 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 with rapid speed spending $575 million on Rosetta and 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.
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