GroupM Media Agency Reorganization Reflects Industry Trends -- Pivotal Research

Media agencies are generally the most important business units of global agency holding companies as they typically represent the bulk of organic revenue growth and profit expansion produces Thus industry pressures which disproportionately impact media agencies are important to monitor The presence of zerobased budgeting andor the fear of activist investors who might push marketers to reduce costs loom large as facts of life for agencies Commoditization of services doesn39t help with most global media agency networks indistinguishable to all but the most seasoned of practitioners Media contract transparency issues remain topofmind issues and present ongoing headwinds Inhousing of programmatic media buying amp8211 or otherwise more involvement from marketers in vendor selection and process management in this space amp8211 is another drag Further opportunities from incentivebased compensation are probably ephemeral as marketers would generally prefer to reduce absolute compensation to their agencies There are saving graces as some marketers exhibit a willingness to allow their agencies to engage in highermargin arbitrage based activities and as most marketers end up requiring agencies to help manage a highly fragmented constantly evolving media industry enabling opportunities for agencies to produce revenues from yettobebenchmarked and still opaquely priced servicesWith this context we note today39s announcement that WPP39s GroupM media agency division is reorganizing in part combining two of its main global media agencies businesses Maxus and MEC and enhancing the position of the recently acquired EssenceFor Maxus and MEC two networks with different and mostly successful histories but ultimately similar businesses with MEC rebounding from last year39s ATampampT loss and Maxus striving to establish a global client base the combination produces what will now be the world39s third largest standalone media agency by headcount after Omnicom39s OMD and Dentsu39s Carat on data from industry tracker Comvergence This should support enhanced operational scale which is to say higher margins and a similar organic revenue growth profile vs leaving the businesses as standalone entities For Essence amp8211 acquired in 2015 amp8211 this appears to represent an effort to firmly establish a business best known as Google39s media agency as a new fourth and relatively differentiated pillar of GroupM alongside the combined MaxusMEC Mindshare and Mediacom To the extent that Essence is provided with incremental resources and internal investment retains existing management and adds others Essence should be able to establish itself as a competitive alternative in increasing numbers of regional global media pitches and continue contributing towards GroupM39s overall growth Differentiated positioning is going to be increasingly important for every media agency division given the successes of Omnicom39s Hearts ampamp Sciences with ATampampT and PampampG wins in the United States in particular and what we think will be an improved position from Publicis39 media agencies as competencies associated with Sapient are embedded in those businesses over timeOverall the news is neutral for WPP stock vs prior expectations Ongoing developments in media agencies remain as important ones for investors to monitor given the critical nature of media agencies to their holding company parents We continue to rate WPP HoldVALUATION We value WPP39s business with a DCF framework incorporating a 75 nearterm discount rate an 115 longterm discount rate and a 50 longterm growth rateRISKS Agency risks relate to blowback from the transparency issue squeezing fees from clients competition from adjacent industries reduced competition between marketers and demand for advertising servicesFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE WPP 6117pdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

APPLY FOR JOBS | SUBMIT YOUR RESUME | REGISTER FOR FREE MEDIAVILLAGE CONTENT

GroupM Media Agency Reorganization Reflects Industry Trends -- Pivotal Research

Author

Publish date

Channel

Brian Wieser

APPLY FOR JOBS | SUBMIT YOUR RESUME | REGISTER FOR FREE MEDIAVILLAGE CONTENT

GroupM Media Agency Reorganization Reflects Industry Trends -- Pivotal Research

Enjoying This Commentary? There's More to Love

Brian Wieser

Cookies