While much of the talk around Sunday’s blockbuster merger between Omnicom Group and Publicis Groupe SA has focused on creative agency brands such as DDB, Leo Burnett and TBWA, industry experts say there are significant implications for the media networks involved, as well as their clients and vendors.
Lauren Richards, a former Starcom MediaVest Group (SMG) executive who now operates the Toronto-based media communication consulting firm Pollin8, said she was surprised by the early press coverage of the deal, which largely overlooked the “powerhouse” media brands included in the transaction.
“Even today, with how huge and powerful and how much these media brands have contributed to the bottom line, the agency brands get all the talk,” she said. “I think it’s going to be very interesting to watch how they come together. Both companies are respectful of the individual identities of their various brands and management, so I think it will be a healthy joining of strengths.”
If approved by shareholders, Sunday’s deal will create the world’s largest marketing communications firm, with annual revenues in excess of US$22 billion and more than 130,000 employees worldwide.
It also brings together three of the world’s four largest media agency networks by billings. According to the most recent research from Paris-based RECMA, Publicis Groupe’s SMG is the global leader with US$39.2 billion in billings in 2012, ahead of Omnicom Group’s OMD (US$37.5 billion) and Publicis ZenithOptimedia (US$32.8 billion). (For more on RECMA’s findings on the proposed merger, read RECMA shows global media impact of Publicis/Omnicom merger.)
Those three networks alone control nearly one third (32.1%) of global media billings. The deal also includes Omnicom’s PHD network, which had US$11.7 billion in billings last year according to RECMA.
While increased buying clout and/or negotiating power is typically seen as a byproduct of media agency mergers, some observers predict it’s going to be difficult – if not impossible – for a merged Omnicom/Publicis entity to extract better deals from Canada’s major media vendors, such as Rogers Communications or Bell Media.
“I would say they’ve already maximized any discounts they can garner, so I don’t see big as being better,” said Sherry O’Neil, a former OMD Canada executive who now runs the Toronto independent Cairns O’Neil Strategic Media with another former network media executive, David Cairns.
“A 20% discount is a 20% discount is a 20% discount,” said O’Neil. “You can get bigger, but [media vendors] have got no room to give more. Ask Rogers or Bell Media if they’re making their quarterly budgets – they’re not. They can’t afford to give more.”
Media Experts founder and CEO Mark Sherman echoed O’Neil’s remarks. “At the end of the day, the media has to pay for its programming and its salaries and its costs and so on, and there’s a limited amount of inventory there,” he said. “It’s not like a consolidated investment could be moved out of TV as a threat. It’s not like a party could say ‘We’re giant and we’re not going to put this advertiser on television unless you drop your price by 20%.’ That’s not going to happen.”
Added Richards: “The sellers really can’t leave significant gaps between buyers or the infrastructure [collapses].” A more logical manifestation of the agency’s newfound clout, said Richards, is added power to get innovative ideas and content plays into market.
O’Neil predicted that there would, however, be a relentless focus on driving billings growth to make the merger work; Omnicom Publicis Group will constantly be in “pitch mode” she predicted. “When you’re that big, to grow 10%, which is generally what Omnicom wanted, is pretty damn hard even in little old Canada,” said O’Neil.
One inevitable result of the merger will be layoffs, said O’Neil, particularly in areas like research and service. Specialized agency groups are also vulnerable, she said. For example, an OMD group that specializes in integration for TV clients could easily fill that role for five agencies, she said.
“An agency’s cost is so heavily in its staff,” said O’Neil. “The only way to make a merger work in the agency world has to have something to do with staff. How are they going to be more profitable unless they reduce staff? There’s got to be some reason to come together.”
Increased client fees are another likely outcome predicted Media Experts’ Sherman. Client procurement departments have been squeezing agencies on fees for several years he said; with less competition, agency groups will have some leeway to extract more from clients.
That’s an important development as agency groups are now facing increased competition from companies like Google and Microsoft as they make a play in the advertising game.
“If there are only two big shops competing for a global piece of business, they can improve their margins as opposed to having four compete for that same piece of global business,” said Sherman. “If they can improve their fees and consequently their margins, that will enable their long-term survival in the face of this new group of competitors.”
