Why Omnicom Opts Out of Digital Spotlight

No. 2 Holding Co. Has Been Quiet on the Interactive Front. Is It Failing to Evolve or Does It Know Something the Others Don't?

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Omnicom CEO John Wren
Omnicom CEO John Wren

All roads lead to digital, but when it comes to the Big Four agency holding companies, one of them -- Omnicom Group -- is taking the road less traveled.

French holding company Publicis Groupe has spent billions swallowing up massive digital agencies Digitas, Razorfish and most recently Rosetta; WPP has been rolling up a series of smaller acquisitions to create Possible Worldwide, its first global digital-only network; and Interpublic Group of Cos. has been working to export older acquisitions R/GA and Huge around the world. But U.S.-based Omnicom, the No. 2 holding company with $12.5 billion in global revenue, has been quiet when it comes to its digital strategy.

Its philosophy has been to inject digital competence into its core agency brands, DDB, BBDO and TBWA, and grow capabilities within its highly profitable Diversified Agency Services (DAS) division, which handles below-the-line work. But by integrating -- or as detractors might say, burying -- digital capabilities within its larger, more well-known brands, is it building the agency of the future, one in which digital isn't a silo but inherent in everything? Or is it devaluing the complexity of the technology needed to market in 2015 and beyond?

"I love the promise of [the integrated agency]. I love the idea in theory," said Shiv Singh, global director of digital for PepsiCo beverages and former Razorfish exec. But, he added, "I don't think anyone is truly there in reality."

During the company's second-quarter-earnings call, an analyst pressed Omnicom CEO John Wren about Omnicom's revenue from digital and what to make of competitors' acquisitions. His response spoke volumes: "Our belief is that all of our services are digital and will become digital ... and it's my personal belief, two years from now you won't even use that word to make a distinction."

Mr. Wren doesn't trumpet how the company is adding digital services to its mix like his competitors do, because he says Omnicom shops are doing digital from the inside out. (Incidentally, the word "digital" was used 11 times in Omnicom's earnings transcript vs. 44 for WPP and 36 for Publicis.)

Whether Omnicom's approach will beat tacking on or combining digital agencies is to be determined. But one thing's clear: as an ad holding company, there's good reason for wanting to make sure clients are well aware of your digital capabilities, since they're pouring more and more of their marketing budgets into digital spending.  

The pool of digital ad dollars is soon expected to rival current levels of TV spending, according to Forrester Research. U.S. interactive marketing spending will reach $76.6 billion by 2016, equal to TV spending this year, and will grab 35% of total ad budgets. That's up from digital accounting for 19% of all spending in 2011.

"WPP and Publicis, in making big digital acquisitions, have been very splashy," said Daniel Salmon, equity research analyst, BMO Capital Markets. "There are questions from investors about Omnicom's digital strategy and whether not they've been aggressive enough." WPP and Publicis have said digital accounted for 29% and 28%, respectively, of 2010 worldwide revenue. Omnicom doesn't report this number.

Omnicom says it plans to make the entire company more digital through training programs, centralized digital-media capabilities and technology partnerships. It's not about creating digital behemoths on an island, but moving the entire $12 billion company into the future, its senior management says.

That task is shouldered by Jonathan Nelson, Omnicom Digital CEO. "We are a services company," said Mr. Nelson, during a meeting at Ad Age 's New York headquarters this month. "Our job is to add value on top of the data and the platforms."

That's a very different tack than, say, Publicis who has spent at least $2.4 billion in the past five years to buy Digitas, Razorfish and Rosetta. Meanwhile, Omnicom is investing to digitize its legacy agency networks DDB, BBDO and TBWA and its media agencies.

"They're all asking the same questions, and Omnicom is making its bet: It doesn't want to be a technology company," said Chris Stutzman, a principal analyst for Forrester. "Publicis has made bets and is becoming a communications-technology company."

A low-key approach to digital hasn't hurt Omnicom on the new-business front -- something its executives point to as early validation of the strategy. Omnicom is the leader among the Big Four holding company by year-to-date net gross reported billings with nearly $2 billion in new business, according to a J.P. Morgan analysis.

In media, Omnicom's strategy looks a lot like Publicis Groupe , which funnels digital-media buying and tools through a unit called Vivaki. Omnicom last October formed Annalect Group to centralize digital-media targeting, tools and buying power and moved PHD's U.S. CEO Scott Hagedorn to lead it. Today, Annalect handles about 95% of all Omnicom digital-media business.

Thanks to the even-keeled management of Mr. Wren -- who insiders say is more hands-on in the business than ever -- and Chief Financial Officer Randall Weisenburger, Wall Street remains happy with Omnicom's stability compared to some of its peers. "With WPP, Sir Martin [Sorrell is ] a visionary, no doubt, but you might wake up one day and he's made a $1 billion acquisition," BMO's Mr. Salmon said.

Early this year WPP, the biggest ad holding company by revenue, built Possible Worldwide, its first global digital-only ad network to compete with the likes of Digitas and Razorfish, which brought in $486 million and $406 million in global revenue last year, respectively. Possible is still comparatively small, with $100 million in global revenue, but it's been acquisitive.

Omnicom, too, has in recent times made a few acquisitions, among them, online consumer research firm Communispace and social-media-marketing agency Fanscape. In the quarter those deals were announced, Omnicom paid out $211 million for acquisitions, according to SEC filings.

However, it's weaker in behemoth, digital-only agency brands. While Omnicom has some, they're smaller. Of the top-10 digital agencies by U.S. revenue, Omnicom has one, grown out of direct-response roots: Rapp stands No. 9 with $196 million in 2010, according to Ad Age DataCenter.

Revenue for Omnicom's next largest digital agency, No. 17 Organic , was down 4.8% in 2010, a year when most of its peers saw double-digit growth. (2011 has proved to be Organic 's best new-business year yet, Mr. Nelson said.) Other standalone digital shops under the Omnicom banner include Chicago-based Critical Mass, Tribal DDB and Proximity Worldwide. Again illustrating Omnicom's tendency toward integrating digital, the latter two shops are aligned with two of its legacy agency networks DDB and BBDO. Tribal CEO Paul Gunning, for one, is also chief digital officer for DDB.

"At Tribal, everyone carries two business cards," said one former employee.

TBWA was earlier aligned with Agency.com, which Omnicom acquired in 2003. A few years ago the agency was a premiere interactive brand and the fourth-largest of its kind in the country. Fast forward and Agency.com integration has been messy. It rebooted as Signal to Noise last July and was open just over a year before folding completely, shuttling its two remaining accounts to Tribal and Organic .

Said Sean Corcoran, senior analyst for Forrester Research: "It's still very important to have strong digital agency brands and it's because of two reasons: the ever-changing digital landscape that requires a constant churn of new specialty skills and the slow adaptation of marketing departments and how they're organized for the past rather than the future."

Hot digital brands are very often the fly paper that traps the best talent. It remains to be seen if the brightest minds in digital want to work for a company that 's historically been known for more traditional work. "In digital, it's all about the talent, and the talent moves around," said PepsiCo Beverages' Mr. Singh.

When it comes to PepsiCo, for example, Omnicom shops handle most above-the-line work for beverage brands, but digital agencies include lots of shops outside the family, such as Interpublic's Huge , Engine USA's Deep Focus and indie AMG. Tribal DDB does handle digital work for two brands, Mtn Dew and Amp, and Mr. Singh also says he has an eye on Organic .

"We have a very strong, healthy relationship with Omnicom and Pepsi with [TBWA] Chiat," Mr. Singh said. "They help us with some things digitally, but with big initiatives and deep digital we find that agencies that are digital natives typically deliver the most value."

In the end, it's the marketers who get to decide which approach is right, may it be buying all the digital shops your bank account allows, or slow-and-steady digital integration. Said BMO's Mr. Salmon: "They'll all digitize one way or the other, if not, their clients will flee. That's how agencies die."

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