Posted by Tom Foremski - July 29, 2013
Foremski's Take: Yesterday's announcement of the Omnicom and Publicis $35bn merger to create the world's largest advertising company, is all about gaining the upper hand in the disruption of their business by Google, and other Silicon Valley media companies.
Google, Facebook, Twitter, and others, will have to work with a smaller number of very large agencies who are increasingly united on what works for them. The shift in the scale of the advertising agencies is a huge shift in the balance of power.
Suzanne Vranica and Ruth Bender at the Wall Street Journal reported:
David Bank, an analyst with RBC Capital Markets, said, "The bigger an ad agency is, the more likely they are to have more access to consumer data and data around the pricing of online ad impressions," which helps them get the best price when buying from "digital behemoths like Google and Facebook."
It also helps them from bidding against each other in the auction process for buying advertising — which is increasingly the same as those used by Wall Street firms and hedge funds.
Jonathan Nelson, head of Omnicom's digital business group, told the Wall Street Journal:
"We are borrowing black-box trading techniques out of Wall Street; we are looking at genetic algorithms; we are looking at artificial intelligence; we are looking at predictive models; we are looking for anything that might give marketers an edge."
Google also has a lot of Big Data on individuals and advertising. But it doesn't know how effective its ads are compared with their cost to advertisers, and how much revenue those ads drive. But the large ad agencies know far better than Google, what works and what doesn't, and at what price.
They can provide their clients with far better metrics, far better account of dollars spent in converting sales, and far better ad buying strategies that improve conversions.
WPP, currently the world's largest ad firm, will be able to pick up some new accounts because of the conflicts between clients who don't want to be represented by agencies with the same holding company as used by competitors.
And WPP will also benefit from the combined pressure two large agencies can bring to bear on Google and other large Silicon Valley media firms, because both giant firms share common interests.
As the forces of digital disruption tear into the big agencies they are fighting back. Scale counts, that's how Google succeeds, Facebook, Twitter, etc.
Leverage is even more effective than scale.
Analysts estimate that the merger of Omnicom and Publicis will control 20% of global ad spending, valued at about $100 billion a year.
In their relationship with their digital disruptors, the big agencies have woken up, they realize they hold the purse strings -- but they don't want to be stuck holding the handbag.
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