Brian Wieser's Outlook on Agency Holding Companies -- Pivotal Research

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Among the topics we expect investors to focus on this quarter, GDPR and data privacy are likely to capture some attention. It seems most likely that most agency functions will be generally immune from many of the consequences of GDPR, although each of the holding companies’ “people-based marketing” platforms and programmatic buying capabilities could be negatively impacted if marketers in Europe alter their spending plans in certain ways (for example, by reducing spending through these channels). On the other hand, we think that marketers will find that the optimal solution to restrictions on uses of first and third-party data is to establish improved consumer experiences or otherwise invest in their products and brands. Such a shift in emphasis could require more services from agencies (and IT services firms, too, it should be noted).

As well, another issue increasing in importance relates to the positioning and structure of the holding company concept. At Publicis’ investor day last month, the company put forward a fairly clear and simple proposition to describe the company’s offerings across all of its business units. The apparent simplicity of presenting a holding company as more of a parent company rather than as a collection of businesses which can be recombined in any way the marketer wants is probably going to be a well-received proposition by senior marketers who might otherwise have a hard time differentiating one agency from another, beyond the people they employ.

Other issues which will capture the focus of investors this earnings season include the following:

  • Creative In-Housing: In-housing of creative is probably a more important factor than we have considered previously, as increasing numbers of marketers are establishing “content studios” to develop and distribute thousands of pieces of content to replace some of the traditional creative assets agencies were once solely responsible for. At the same time, we think more marketers are reducing their reliance on conventional Agency of Record (AOR) models, instead going heavy on services for certain periods and then shifting to work often characterized as “project-based.”
  • Media In-Housing: In-housing of media (media contracts in particular, with media execution less common) appears to be more common now vs. two or three years ago among the clients that agencies service, although the impact in any given year could likely be measured in tenths of percentage points.
  • ZBB: Large brands are growing slower than they expect they should, often losing market share to smaller upstart brands or digital disruptors. One reaction has been to implement zero-based budgeting (ZBB) processes, which is having a disproportionate impact on agencies in some instances.
  • Fee Compression / Enhanced Contract Scrutiny: Like-for-like fee compression has been a fact-of-life for agencies for many years. While it’s hard to say that its pace has increased, in the wake of the K2 transparency report, clients have generally tightened up contract language to have the effect of eliminating some of the ways in which agencies generated some of their revenues over the past decade.
  • Digital Standardization:Digital media has historically required more labor and services to manage non-standardized and fragmented activities. Slowing growth of digital media spending among larger marketers and heightened reliance on two major media owners may be restraining related growth for agencies.
  • New Competition: Competition with IT services and consulting firms probably doesn’t have a huge impact, but it might be having one measured in tenths of percentage points.

At current levels, WPP remains our only Buy-recommended agency stock. Relative to its competitors, on a long-term basis WPP continues to have the most favorable geographic focus and long-term business mix exposure vs. peers. These factors contribute to higher long-term growth expectations vs. others in the group.

VALUATION. We value companies on a DCF basis. Key variables driving valuations across the agencies include long-term costs of capital of 12.8% and long-term growth rates ranging from 3.0% (for OMC) to 6.0% (for WPP).

RISKS. Agency risks relate to squeezing fees from clients, competition from adjacent industries, reduced competition between marketers and demand for advertising services.


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