The gathering storm #1: holding companies
An extraordinarily bleak picture is being painted for the future of ad agencies, writes Dominic Mills - and things look similarly stark for UK TV ad revenues
Holding company CEOs and CFOs aside, the ad industry doesn’t normally pay too much time to City or Wall Street analysts. They are too far removed, speaking a language that’s incomprehensible, and don’t really, truly, understand the business and so on.
Yeah, well. Even if that were true - which it isn’t - they’re enormously influential, and right now they’re having a massive downer on the holding companies. Ten days ago Exane BNP Paribas analyst Charles Bedouelle gave WPP a kicking with a double downgrade, rating the shares ‘underperform’ and dropping his target price by 27%. His thesis: marketing is moving in directions where agencies can’t compete.
Analysts like to hunt in packs - they’d rather be all wrong together than be an outlier - and Bedouelle is not alone in calling time on the holding companies. He was joined by the daddy of the media analysts, Pivotal’s Brian Wieser, who took part in the game too.
Arguably, however, the dye was set earlier in the year by a forensic report titled ‘Ad Agencies Marginalised’ by the analysts from Redburn. This is a 90-page, top-down examination of the landscape with a compelling narrative.
Individual parts of the narrative will be familiar to readers, but rarely have I seen the whole stitched together to paint such a negative picture.
Here’s a summary - essentially the same lines of argument put forward by the other analysts.
- As incremental ad spend - 75-80% by most estimates - heads towards Google and Facebook, so agency holding companies are increasingly unable to capture this spend.
- Aggregated media spend - traditionally the strengths of the powerhouse media buying arms - is less relevant in programmatic. Media buying, up to now the driver of holding company growth and profitability - about a quarter of revenues but almost a fourth of profits - is increasingly challenged.
- Data, the backbone of programmatic, is best served by CRM/enterprise software operators like Oracle and Acxiom who are merging with the new breed of data management platforms like Datalogix, Krux and DemDex (no, they’re new to me too).
- The rise of the walled gardens, arguably the source of the most valuable data, means agencies are marginalised and increasingly restricted to less profitable advisory roles.
- Consultancies like Accenture, Deloitte and IBM are helping clients bring more data management in-house, at the same time stepping up activities - digital transformation, data management, content production and so on - that encroach on once-core agency areas.
- Loss of trust that prevents agencies/holding companies asserting their primacy in key areas of activity.
If you want it boiled down to one sentence, this is it: the shifting marketing landscape has marginalised agencies’ traditional areas of expertise and forced them to go into areas where there is intense competition from new suppliers who are better at those activities.
The result: slower growth and pressure on profitability that feeds through into the share price. This in turn diminishes their ability to acquire specialists in these new areas, further weakening the holding companies.
Is this too bleak? The holding companies retain immense power. They are hugely resourceful and enterprising. But it feels like the ground is shifting inexorably under their feet.
This narrative will run for many years yet though.
The gathering storm #2: UK TV ad revenues
EasyJet's Carolyn McCall will have one immediate task when she steps into Adam Crozier’s shoes as CEO of ITV in January: focus on its softening ad revenue.
As with the holding companies in the lead story, much of this appears to be down to forces beyond the control of the broadcasters. Those who are in the market say there are several factors at work.
First, general market anxiety fed by Brexit and a government that doesn’t seem to know what it is doing. Unlike other media, the TV market is disproportionately dependent on upfront commitments. Given the uncertainty, advertisers are reluctant to commit any further ahead than is strictly necessary.
Second, the bulk of TV revenue comes from big-brand advertisers, especially those in retail and packaged goods. Yet these are the businesses most under pressure, not just from Brexit but also from far-reaching market changes.
Third, many of these advertisers are European- or US-owned, and the decline in sterling is hitting them hard. Business being business, they are still required to remit profits to their foreign-domiciled HQs, preferably at the same levels as before. Yet they have to do this with a declining pound, meaning that to remit the same level of $ or € they have to run faster just to stand still.
How can they do this? Simply by cutting TV advertising and boosting short-term promotional activity in cheaper, more tactical media. The fact that, long-term, this may hit price inelasticity and brand health - two areas TV makes a huge difference to - is, for the moment, irrelevant.
Fourth, the digital duopoly - notwithstanding well-documented problems with measurement and brand safety - continues to hoover up adspend. This is reinforced by a cultural issue among advertisers, especially at CEO level, who assume that, as their businesses digitise, their adspend should go the same way.
The fact that TV breaks contain a significant volume of spots from GAFA and other digital businesses seems to pass them by entirely.
So there we have it. The question, as with the holding companies, is whether this is just a bump in the road or a fork to a whole new world.