DIGITAL MARKETING HUB v2.0 - AdExchanger

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Digital Marketing Hub <strong>v2.0</strong> BMO Capital Markets Exhibit 3. Agencies Capture More Budget as Brands Focus on Owned/Earned Media Paid Media Brand #1 Brand #2 Primetime TV 100 80 % to media/platform owner 90% 90% % to agency 10% 10% Mobile Display Ads 0 5 % to media/platform owner na 90% % to agency na 10% Social Display Ads 0 5 % to media/platform owner na 90% % to agency na 10% Owned Media Mobile Apps 0 5 % to media/platform owner na 0% % to agency na 100% Owned Media Free Social Presence 0 5 % to media/platform owner na 0% % to agency na 100% Total budget to: Media/Platform owner 90 81 Agency 10 19 TOTAL BUDGET 100 100 Source: BMO Capital Markets 100% 80% 60% 40% 20% 0% Media/Platform owner 10 90 Brand #1 (all paid media) Agency 19 81 Brand #2 (mix of paid, owned, earned) This is a an important point as brand procurement officers have come to play a more prominent role in guiding marketing budgets. The largest buckets from which to seek efficiency in total marketing budgets are paid media (advertising, direct mail, etc.). We expect successful agencies will buttress pressure from procurement on their own fees by helping guide brands toward more cost-efficient earned and owned media platforms, where they can play the role of product designer and curator. Said another way, in the above example, Brand #1 could cut its budget by more than 40% and so long as it was reallocated like Brand #2, its absolute revenue would remain on par. Disintermediation risk is still frequently brought up in the discussion about the increasing role of technology in marketing services, but it’s mostly mistaken. First, as we hope this report will help bear out, advertising technology and marketing automation are not new; there are technologies that go back to the 1960s. In particular, skeptics point to media buying as the area that will be disrupted. It’s true that this is the part of the holding company model undergoing the most change, and automation of certain types of ad buying is happening. However, not enough of the marketing budget will be automated such that the role of the media agency will be displaced. In fact, the rise of search and display ad bidding technology, for example, has provided the opportunity to expand the scope of service. Media agencies still possess volume-based data advantages due to their wider view of the advertising marketplace and their service personnel can scale knowledge of the technology vendor landscape – functionally serving as a media tech planner and system integrator – at a lower cost than brands themselves. A member of BMO Financial Group 10 June 7, 2012
Digital Marketing Hub <strong>v2.0</strong> BMO Capital Markets Instead, where new competition in the IP marketing era is real, is from business service providers whose primary constituency is the CTO or CIO. Companies like IBM, Accenture, and Deloitte are capitalizing on their IT know-how and entering the marketing discussion as the CMO and CIO/CTO increasingly collaborate on business solutions. Agencies are responding; for example, WPP recently partnered with Infosys to work on behalf of GlaxoSmithKline. Our OUTPERFORM ratings currently lean toward small caps that are more quickly seizing upon this trend (SAPE, and MDCA) as well as IPG as it completes its turnaround. Sapient and MDC Partners have always been recognized as being more “digital” – or as we prefer, more “IP.” Be it through earned/owned media management or more “systems integrator” approach, these two companies have consistently grown organic revenue growth at 2x-3x the rate of the larger peers in recent years. Direct Marketers with Higher Exposure to Data-Rich Assets Established database/direct marketers are the original math men of the industry, but their differing asset sets offer investors different opportunities. The direct marketing industry grew up around the practice of managing brands’ customer marketing databases, which were primarily activated by direct mail. While we believe there is much resiliency in direct mail (see below), diversification for IP marketing and even greater data intensity offers more opportunity over the long term. Companies like Experian, Alliance Data Systems, and Acxiom all offer classic database marketing services, but also business models with stronger longterm opportunities than direct mail. These include coalition loyalty programs, credit bureaus, and consumer databases. Brands Ninety-seven of the Advertising Age Top 100 US national advertisers (see Exhibit 12) are public companies, the exceptions being the US Government (#28), Mars (#59) and SC Johnson (#82). Never before have marketers had so many options on which to spend their budgets in order raise awareness of their goods and services amongst potential customers. Certainly this raises concerns around clutter; however as noted above, earned and owned media opportunities can offer cost-saving opportunities and greater application of analytics to paid media should also drive efficiencies. This effect could put downward pressure on marketing budgets over the long term. The counterbalancing forces include resistance from CMOs at the micro level and increased competition among brands as globalization continues to flourish at the macro level. Major Television Franchises Television advertising is largely consolidated between a few vertically-integrated players, which we expect to protect their share of advertising and marketing impression spending. These players will continue to leverage competitive advantages from their assets in other areas of the TV distribution chain – namely professional movie and TV studios and cable/satellite systems – to protect broadcast and cable TV advertising revenues. In fact, integration with video distribution like cable and satellite is likely becoming more valuable to advertising revenue lines as their owners are only beginning to tap the IP data in set-top boxes and cable head-ends. While the technology development has been slow, these relatively dormant A member of BMO Financial Group 11 June 7, 2012
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