Why the mega merger of advertising giants Omnicom & Publicis impacts tech business

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 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 — wired and wireless broadband. All our concepts of media containers — television, newspaper, magazines are being tested by changing demographic and consumer behaviors.

These are as much a challenge (and an opportunity) for startups and new media leviathans like Facebook(s fb) 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 Sunday and said that the new company — in which each will own a 50 percent stake — will be called Publicis Omnicom Group (s OMC) 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.

This 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, Publicis Omnicom’s combined US revenues will be $11.4 billion, twice as much as WPP. Needless to say, there are going to be interesting antitrust implications. And there are other issues. For instance, PepsiCo is an Omnicom account while Coca Cola is with Leo Burnett, a Publicis company. AT&T (s T) is with Omnicom and Verizon (s VZ) 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, 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(s goog), 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 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-industry’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 estimates that digital advertising will be a $116 billion market this year, with North America alone snagging $45.12 billion of that total. And spending on mobile advertising worldwide is expected to increase 79.7 percent to $15.8 billion this year, eMarketer estimates, up from just $8.8 billion last year.

Given the reliance of Google, Yahoo (s YHOO) and Facebook on ad-dollars and thus their fiscal health leads to them acquiring startups. The new advertising giant will therefore have a bearing on the fortunes of upstarts such as Foursquare, Twitter,  Snapchat and dozens of others that are experimenting with new advertising and marketing formats. The Publicis-Omincom combo controls a lot of dinero!

153076Of 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 at 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 fast, spending $575 million on Rosetta 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.