Omnipotent, or omnishambles?

CROSS-COUNTRY deals in the advertising industry can be painful affairs. Look what happened to Guy MacKendrick, the young executive sent by his London-based agency to oversee its acquisition of a New York rival, in “Mad Men” (yes, it is now compulsory to refer to the hit television series in all articles about the ad business). The staff throw a party to celebrate the takeover, and a drunken secretary drives a lawnmower through the office, shredding Mr MacKendrick’s foot.

On July 28th, however, there were no bizarre gardening accidents as executives of two real-life advertising firms toasted their merger with champagne in Paris. Maurice Lévy, the boss of the French Publicis Group, and John Wren, the head of its American competitor Omnicom, toasted the birth of Publicis Omnicom, which will overtake British-based WPP as the world’s largest advertising and marketing agency, with combined 2012 revenues of $23 billion and a market value of $35 billion.

To placate French fears of foreign domination of one of the country’s most prominent companies, for the time being the combined firm will keep headquarters in both Paris and New York and be listed on exchanges in both cities. Mr Wren and Mr Lévy will serve as joint chief executives for two-and-a-half years, after which Mr Lévy will become non-executive chairman and Mr Wren will continue alone as boss.

This is no love affair, but there are reasons for mutual attraction. Publicis has more exposure to emerging markets and digital advertising (on websites, mobile devices and the like), the main sources of growth for tomorrow’s admen. In return Omnicom provides Publicis with scale—it is the bigger of the two—and a solution to its succession problem. Mr Lévy, who is 71, has been trying to find a replacement for years. He proposed the merger when he met Mr Wren at a party in New York.

There are risks, of course. Some advertisers who are great rivals—such as Coke and Pepsi, or AT&T and Verizon—will find their accounts being handled by subsidiaries of the same group, and may need persuading not to take their business elsewhere. There may be transatlantic cultural clashes between the “berets” and “bow-ties” at executive level; and creative people lower down may also balk at working for such a vast conglomerate.

However, scale also promises to bring big benefits. Messrs Lévy and Wren predict the merger will help them cut around $500m a year in costs, and some analysts think it could be even more. And by combining the two firms’ “media buying” divisions, which purchase advertising space in bulk, Publicis Omnicom may be able to negotiate better rates for their clients. Overall, the combined group will be responsible for about 20% of advertising spending worldwide, and up to 40% of ad slots at some publishers and television networks, reckons Brian Wieser of Pivotal Research Group, which studies the industry.

Perhaps the greatest rationale for the merger is the inexorable rise of digital advertising. Last year online ads were worth $88 billion, or 18.3% of global advertising spending, up dramatically from 2006 (see chart). Advertisers like them because they can be aimed more precisely at a target audience (with a particular demographic profile and browsing history) than, say, television or radio ads. They also get a better idea of whether anyone is actually looking at the ads they are paying for.

Internet killed the agency star

Advertising agencies used to be indispensable when it came to advising clients where best to place ads. They miss those days even more than they miss those three-martini lunches. Now, a host of technology firms, like Adobe, Salesforce and IBM, offer analytical services and software to help advertisers achieve the best bang for each buck.

Big internet firms like Google and Facebook can provide a wealth of data about their vast audiences: this is encouraging many advertisers to deal with them directly to book slots, rather than going through a traditional ad agency’s media-buying division. Google alone now controls around a third of all online advertising spending, according to eMarketer, a research firm. A few advertisers are doing without ad agencies altogether, creating their own campaigns and slogans.

Online advertising is getting speedier and smarter. Many online ads are now bought and sold automatically with “real-time bidding”. In days of old, ad executives would ring round various publishers to find good rates, and then consult the client before placing the ads. Now, advertisers can specify which sort of audience they want to reach and how much they want to pay, and use ad “exchanges” to buy space on websites that fit their requirements, all in a fraction of a second. Michael Rubenstein, the president of AppNexus, one such exchange, say this has improved ad-buying in the same way that eBay was a big improvement on garage sales. It brings price transparency, efficiency and precision to a notoriously fuzzy industry.

All these developments make the future role of the advertising agency a lot murkier. Omnicom and Publicis are trying to take part in this technological revolution, operating “trading desks” that buy display ads for their clients on the new exchanges. But some big advertisers, such as Procter & Gamble, a consumer-goods maker, now operate their own trading desks. Media websites are increasingly, as Google does, selling their slots directly to advertising clients. Ultimately, predicts the head of advertising at a big American news firm that already sells a lot of its space through real-time bidding, “We are not going to need the agencies.”

So far real-time bidding is still a small part of the online-advertising business—around 19% of online display ads in America are now bought and sold in this way. But it is growing quickly and may account for 29% of them by 2017. And it is only a matter of time before digital radio, outdoor and television commercials start to be sold this way too. Paper posters on billboards, bus shelters and elsewhere are rapidly being replaced by electronic screens which can be updated instantly, and thus sold via real-time bidding.

To stay relevant, the agencies will need to transform themselves into “advertising platforms”, says Michael J. Wolf of Activate, a consultancy: this means providing clever technology to their clients to automate the buying process. The problem is that tech companies may prove much better at providing this. But at least, by getting bigger, the merged Publicis Omnicom will improve its chances of success: “You need a big base to make the most of the technology investment,” says Paul Zwillenberg of the Boston Consulting Group.

Being the world’s largest agency group could also, in theory, help Publicis Omnicom persuade clients that it could negotiate better rates for ads with Google and Facebook than they could negotiate for themselves. In practice, though, some of the biggest and most profitable ad clients may feel that they are strong enough to fend for themselves.

Math Men

The talent for creating memorable and persuasive ad campaigns will always be in demand, and not all advertisers will be capable of doing it for themselves. So the agency business will not die out. But, as Wall Street traders found when their trading floors were automated, the move towards buying ads on exchanges will mean that their margins are squeezed and life gets a lot tougher.

Publicis and Omnicom are betting that sheer size is their best chance of surviving in this harsh new climate. But to complete the merger—which they hope to do by early next year—they will need approval from antitrust authorities in more than 40 countries. They may try arguing that the large market share of the combined group should be overlooked because so much of their business is going straight to Google and other digital giants. Penguin and Random House, two merging book publishers, made a similar argument last year about Amazon: it seemed to work.

Assuming the deal is allowed, it is likely to intensify the ad industry’s consolidation. Last year Dentsu, a Japanese advertising firm, bought Aegis Group for $4.8 billion. WPP, not used to second place, may seek to regain the top spot by making acquisitions. Its boss, Martin Sorrell, said further big mergers in the industry were “inevitable”. However much the traditional agency groups bulk themselves up, their glory days will not return. The glamour of the “Mad Men” era is in the past; these days the power is increasingly in the hands of the “Math Men”.