Consolidation continues to rock the big ad agency and holding company world. The latest mega-merger is Omnicom Group’s $13 billion+ acquisition of rival Interpublic Group (IPG). The deal forms the world’s largest ad-holding group, including brands like FCB, Mediabrands, Acxiom, and BBDO.
Big mergers like this are symptomatic of some broader challenges among holding companies that are causing them to pool resources to gain market share and improve margins. But such measures could also accelerate their issues, which can already be seen in about 4,000 layoffs at Omnicom.
There’s a lot to unpack there, so we’ll start with the macro environment that got us here. As Madison Avenue Manslaughter author Michael Farmer told us at Street Fight Live, revenues for top ad agencies and holding companies haven’t grown over the past decade. So they’ve cut costs to preserve margins.
But the consequence has been a big hit to quality. For example, the number of campaigns assigned to a given agent or exec has ballooned, meaning less time and mindshare for each. Staff has also been reduced while high-value work is increasingly done by cheaper and less-experienced creative pros.
Big Squeeze
Now, there’s also a growing squeeze on these agency giants from escalating ad prices, which drives demand down… and drives advertisers into the arms of increasingly-capable alternatives. That last part brings up the other big macro factor putting a squeeze on big agencies: generative AI.
But there’s good news in all the above, which brings us back to Michael Farmer’s breakdown at Street Fight Live, and much of the writing he’s been doing since. For example, as big agencies falter in all the above ways, one big takeaway is the opportunity for small agencies to compete on quality and price.
They can do the former as they differentiate themselves from the low-quality realities of big agencies, outlined above. And they can accomplish the latter with nimble operations and less overhead than big agencies. This opens the door to healthy margins, without all that quality-decimating cost reduction.
“The reality is financial holding company executives have sought to milk agencies, particularly through cost reductions and self-dealing in media operations, rather than do the tough work to bring about changes in pricing, to strengthen the capabilities of their agencies, and to support clients by bringing effective advertising to the brand-growth problem,” Farmer said.
Vicious Cycle
Smaller agencies can also carry an edge if they’re more adaptive and adoptive of emerging tools than holding companies. Their adoption and effectiveness with AI tools – which can further their cost efficiencies noted above – can be done like steering a speedboat, as opposed to a cruise ship.
To be fair, the big agencies are leaning into AI as a streamlining measure. In fact, it plays right into their quest to boost margins by lowering costs. But the question is if AI will help them to run a tighter ship, or if it will accelerate the decline in quality that is already underway amidst all the consolidation.
“The Omnicom acquisition of IPG is a last-minute Hail Mary, designed to remove another billion of costs without any commitment to improving the effectiveness of advertising,” said Farmer. “‘Increased collaboration among agencies’ along with ‘reduced costs’ and more programmatic media is what Omnicom’s C-Suite leaders are promising.”
Altogether, it could mean that the IPG acquisition leads to more of the same moves that got Omnicom – and the rest of the big agency world – in this position in the first place. In that way, it’s a vicious cycle where the fix to the problem could end up making it worse. That’s the part we’ll be watching for.
Header image credit: charlesdeluvio on Unsplash
