That aside, it is preposterously arrogant and naïve to claim that the global giant communication groups are merging primarily because of the threat to traditional media. Advertising dollars follow attention, always have, always will, irrespective of which channels the audiences can be found in.
The global groups own most of the media buying companies - the new Publicis Omnicom Groupe will see over 41% of all US and 31% of all EU advertising spend channelled through its books. That includes a portion of Google's $43bn 2012 ad revenue, as well as Facebook's relatively paltry $5bn**. Netflix doesn't have any advertising revenue, it's a subscription only revenue model, which may not remain so for much longer either.
One crucial thing Stratz fails to account for is that the vast majority of clients don't want to deal with a multiplicity of media channels. They have businesses to run. They want a service provider to do that for them, and agency networks make up the bulk of these service providers - be it on TV, OOH, Facebook or any digital platform you care to list. Successful subscription-only content providers are very few and far between, with most yet to prove their sustainability any more than the print media is able to prove its long term sustainability.
Omnicom and Publicis are merging for three primary reasons, in the following order:
Just like banks, telcos, media owners or any other business sector, sustaining steady shareholder returns is paramount to a listed company. Growth is essential. Neither party can obtain meaningful growth without acquisition, and since there's not much left to acquire they merge to create it.
In doing so they will find economies of scale by de-duplicating resources through rationalisation. Maurice Levy and John Wren point to $500m of expected savings over five years. The dividend pay-out ratio of Publicis Groupe was 24% in 2011 and 25% in 2012, while Omnicom's was 30% and 33%. The anticipated dividend policy of the combined group is circa 35% - look no further than that for the primary motivation.
The single biggest cost to service based companies like communications agencies is human capital. These are not industrial players requiring billions in stock, plant or machinery, nor are they technology players with the massive capital intensive needs of a telco or server farm.
Depending on the business, a typical communications agency expends between 50% and 60% of its income on human capital. Real talent is rare, difficult to manage and prone to volatility. A greater share of the rare talent pool is an unquestionable competitive edge when you have more options to offer it.
This is where I do concur with Stratz, but not on the same basis he professes. When one player accounts for over one third of global advertising spend, even the most successful new players like Google pay attention. Google's revenue model is about scale.
To compete the communication services companies need a scale married to their already massive media clout to give them a sound footing in online behavioural data metrics, that is presently largely the preserve of tech media players. They also need the talent to mine that data.
Omnicom, WPP, Publicis, IPG, and other groups already have such talent and will compete fiercely with media owners, old and new, for a greater share of it.
When considering the role of big data, fragmenting media and diversifying advertising spend, it is prudent to remember several things to maintain perspective:
*Mr Stratz was employed by MEC, a media buying company in the WPP stable from 2002 to 2008 and is now CEO of Namely, a cloud based human resource analytics company.
**By comparison, measured adspend in the US alone in 2012 was in excess of $250bn, of which the single largest spender was P&G at a shade under $4,9bn.
