Tuesday 27 September 2016

Mad Men still making a lot of commercial sense

John Lynch

Published 19/10/2015 | 02:30

George Orwell described advertising as 'the rattling of a stick in a swill bucket'
George Orwell described advertising as 'the rattling of a stick in a swill bucket'

Deep thinking about the world of advertising can bring out the very worst in people - British novelist George Orwell considered it "the rattling of a stick in a swill bucket".

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More recently an American critic came to the conclusion that "society drives people crazy with lust and calls it advertising". But it takes more than a few cynics to stop the gallop of an industry that has become so pervasive in modern society. Indeed, the advertising game has reached the point where its practitioners are often very much larger than the major industries they serve.

Decades of mergers and acquisitions in the business have resulted in the consolidation of six big dominant advertising companies, who generate revenues worth as much as $350bn. The names are generally well known. There is WPP, working out of the UK; Omnicom and Interpublic in the United States; and smaller rivals Dentsu in Japan, Havas in France and our company this week, Publicis, the third largest advertising company in the world.

The Publicis Grouppe was founded in 1926 in Paris. But it really only took off after World War II. Today, it offers all aspects of advertising and marketing services, and is a major media buying operator in the US. Like other advertising behemoths, Publicis is the product of some frantic acquisitions snatching up rivals like Saatchi and Saatchi, Nelson Communications and Leo Burnett. In recent times it's been in the market for digital companies, including Sapient, a world leader in digital communication, consultancy and business transformation, an acquisition that's regarded as a game changer. Today, Publicis has a market value of €17bn, operates in over 108 countries on five continents and employs 72,000.

Two years ago the advertising world was agog with the announcement of the merger between Publicis and the US-based Omnicom. Billed optimistically as the 'merger of equals,' had it gone ahead it would have been the world's largest advertising company. However, the deal failed for many reasons, which no doubt will be a case study in the business schools on 'how to screw up a merger'. A mix of clashing personalities, disagreements on integration as well as legal and tax issues, derailed the deal within nine months. Publicis also balked at Omnicom demanding management control.

A problem for the advertising titans is the rapidly evolving technology, a shift from the TV series Mad Men to Maths Men. Today, they use programmatic advertising with online technology, the vision of the Maths boys, targeting specific audiences, with a personal message, at a designated time and with a capacity for measuring the result. For some, things are getting out of hand, prompting a counter-revolution. To combat these programmed adverts, for instance, Apple is rolling out ad-blocking software. This enables web pages to roll faster and removes undesirable clutter. It is estimated that last year ad-blocking software cost the industry almost €18bn in lost advertising revenue. Ad-blocking could make programmatic advertising difficult and force advertisers to revert to 'old media' of TV and newspapers. An additional problem is technology companies like Google, Twitter and Facebook, who can work directly with companies and cut out the traditional advertising agency.

These difficulties do not appear to have affected Publicis' results. Latest revenues were 4pc ahead of the previous year at €7.2bn and operating income of €1.1bn was showing only a slight decline.

Digital activities now account for 52pc of total revenue and continue to grow. Publicis shares are trading in the low €60s, down from its 10-year record of €80 earlier this year, with a price/ earnings multiple of 17.

One immediate problem for the big six global agencies is the demands by their clients that costs are reduced. How do you prove this? Well, some €36bn of advertising business is currently up for tender, almost double any normal year. Will mergers and acquisitions be back on the agenda?

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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