Publicis-Omnicom Merger Won't Save the Madmen

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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A "merger of equals" is how Omnicom Group Inc. and Publicis Groupe SA describe their trans-Atlantic combination. It's true in the sense that the companies are equally doomed -- for reasons that their Madmen Merger won't do much to forestall.

To paraphrase the chief executive officers, Maurice Levy of Publicis and John Wren of Omnicom, the rationale behind their surprise deal can be summed up as the three S's: size (good for pricing muscle), synergies (good for cost-cutting) and software (good for Big Data analysis).

But the problems facing the two advertising giants, and traditional advertising in general, have little to do with a lack of size or an absence of synergies. They have a lot to do with revolutionary changes in the advertising landscape, including the arrival of new media giants like Google Inc., Facebook Inc. and Twitter Inc., the explosion of Big Data and changes in consumer behavior.

In recent years, these changes have brought forth such innovations as automated trading of ad space and data-driven analysis of consumer buying habits. Messages can be tailored to individuals like never before, because companies are collecting and analyzing mass quantities of data that consumers reveal about themselves as they surf the Web, compose blogs, post personal details on social media and purchase items with credit cards.

The ability to push an ad for engine tune-up service to the mobile device of someone who just searched the Web for the nearest auto repair shop is more important than the relationships of yore -- among corporate ad buyers, ad agencies' creative talent and media space buyers, and the sales staffs for newspapers and TV and radio outlets.

Television is still the major beneficiary of U.S. ad spending, with about $66 billion this year. Yet online ads are gaining, with about $43 billion. Of that, mobile devices are the biggest target, with about $4 billion in ads and growing fast, according to eMarketer.

Automated ad buying, or programmatic purchasing, is in its infancy, with about $3.4 billion in sales. But it will grow quickly because real-time bidding for space is efficient and less costly -- precisely because it cuts middlemen like Publicis Omnicom out of the picture.

Such digital disintermediation has forced wrenching change in many an industry, including music, television, book publishing, newspapers, stock exchanges and financial services. Many companies tried to forestall those changes by merging -- a strategy that is expensive and largely proven not to work.

Google is the biggest digital winner of all. The top five ad agencies would have to merge before their annual sales added up to Google's 2012 revenue of $50 billion, most of which came from its advertising business. Google sells online search ads and operates one of the biggest automated advertising marketplaces, which works much like a Nasdaq for online ad space.

Facebook is another big winner. It has more than 1 billion users posting reams of personal details every month, allowing Facebook to build a massive database on buying habits that advertisers can use to target messages.

True, traditional ad agencies now work with Google, Facebook and Twitter, but the tech companies can easily bypass the agencies to work directly with, say, Ford Motor Co. or PepsiCo Inc.

The integrated ad agency, moreover, is under attack from still other new entrants, including IBM Corp., Oracle Corp. and Microsoft Corp. All have spent heavily to acquire the talent and develop the software to analyze consumer data for large companies.

The merger of Publicis and Omnicom may give the new company market muscle when it comes time to buy space for clients looking to cut their advertising costs. But it won't do much to help them compete against the force of creative destruction known as Silicon Valley.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Paula Dwyer at pdwyer11@bloomberg.net