What's Up at Agencies? Revenue, Jobs, Stocks -- and Digital

U.S. Agency Revenue Rises 6.5% in 2015. Digital Accounts for 41% of Agency Business

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Agencies are hiring, agency stocks have been climbing and revenue is rising as digital drives growth across the spectrum of agency disciplines.

U.S. agency revenue increased 6.5% to a record $46.8 billion in 2015. Digital's share of agency revenue topped 40% for the first time.

Revenue and growth rates are based on Ad Age Datacenter's analysis of more than 1,000 agencies, agency networks and agency companies included in Agency Report 2016.

The full Agency Report is available online to Ad Age Datacenter subscribers. A portion of the report appears in Ad Age's May 2 print edition.

Double-digit digital

Digital revenue for U.S. agencies surged 13.5% in 2015 to $19.3 billion, including digital work for all agency types from ad agencies and media agencies to public relations agencies and digital pure plays, according to Ad Age Datacenter's analysis.

Digital's share of marketing spending continues to grow. Digital captured 41.3% of U.S. agency revenue in 2015 ($19.3 billion out of $46.8 billion), up from 39.7% in 2014 and 25.8% back in 2009.

"You can't discuss a go-to-market strategy with a client if you're not offering best-in-class digital offerings integrated with the media as well as the creative parts of our business," Michael Roth, chairman-CEO of Interpublic Group of Cos., told investors in March.

Going Digital
Digital's share of revenue for U.S. agencies from all disciplines topped 40% in 2015.
Source: Ad Age Agency Reports.

Publicis Groupe disclosed that 51.9% of 2015 worldwide revenue came from digital activities, up from 41.9% in 2014. The acquisition of Sapient Corp. in February 2015 drove that growth.

WPP said 37.5% of 2015 worldwide revenue came from digital, up from 36.3% in 2014.

Agency Report illustrates how the agency landscape is changing, and how old-line agency companies face increasing competition in digital marketing from consulting and tech-services firms.

Of the world's five largest digital agency networks, only one is owned by an established agency company: No. 5 Wunderman, owned by WPP.

Accenture's Accenture Interactive ranks as the world's biggest digital agency network, followed by IBM Corp.'s IBM Interactive Experience, Deloitte Touche Tohmatsu's Deloitte Digital and Alliance Data Systems Corp.'s Epsilon.

Accenture Interactive said its revenue rocketed 70.8% in the U.S. and 57.8% worldwide for the fiscal year ended August 2015. That revenue includes "customer-facing" digital work (for example, web development), marketing analytics and marketing-related work from Accenture's mobility practice. Accenture Interactive had the fastest worldwide growth among the World's 50 Largest Agency Companies. It said less than 1% of its U.S. and worldwide growth came from acquisitions.

Excluding Accenture Interactive's stated growth rate, U.S. agency revenue in 2015 rose 5.3%, matching the 5.3% average organic revenue growth of the top four agency companies (based on WPP, Omnicom Group and Interpublic U.S. organic growth and Publicis North American organic growth).

The surge in agencies' digital revenue mirrors growth in digital ad spending.

The internet in 2015 accounted for 28.3% of U.S. major-media ad spending, double the level of 2009, according to data from Publicis' ZenithOptimedia. It expects the internet to capture 31.5% of spending in 2016 and 34.8% next year. ZenithOptimedia's forecasts show the internet passing TV in 2017 to become the biggest U.S. ad medium.

Growth by discipline

U.S. revenue rose last year in all major agency disciplines, with gains from 3.8% for customer relationship management/direct marketing to 8.7% for healthcare marketing.

Healthcare agencies profited from a surge in pharma advertising, driven by TV spending. U.S. measured-media spending (excluding internet) for prescription-drug marketers jumped 24.3% in 2015, with TV spending up 31.7%, according to data from WPP's Kantar Media.

U.S. ad agency revenue increased 4.8% in 2015. Public relations and promotion disciplines grew 5.0% and 5.1%, respectively.

Growth by Agency Discipline
2015 estimated U.S. revenue by discipline, and digital revenue from all disciplines, for networks and 900-plus agencies in Agency Report.
Discipline Revenue % change, 2015 vs. 2014

Agencies from all disciplines 1

$46.8 billion
+6.5%

Digital (including media agencies) 2,3

$19.3 billion
+13.5%

Ad agencies 3

$12.5 billion
+4.8%

CRM/direct marketing 3

$7.4 billion
+3.8%

Healthcare 3

$4.8 billion
+8.7%

Promotion 3,4

$4.8 billion
+5.1%

Public relations 3

$4.5 billion
+5.0%

Media agencies (excluding digital work) 3,5

$3.4 billion
-2.6%
Source: Ad Age's Agency Report 2016. Revenue and percent change based on data collected and/or adjusted in 2016. 1. All agencies in Agency Report. 2. Digital work for all networks and agencies in report, including ad, customer relationship management/direct marketing, digital, experiential/event marketing, healthcare, media, multicultural, promotion and public relations agencies. 3. Disciplines may overlap. For example, a healthcare agency may generate a portion of its revenue from CRM/direct marketing, or a PR agency may generate a portion or all of its revenue from healthcare marketing. 4. Including experiential/event marketing. 5. Non-digital work at media agencies.

Worldwide revenue declined for major ad agencies and showed only small gains in other disciplines. Worldwide growth rates, in dollars, were depressed in 2015 for both U.S. and non-U.S. companies by the strength of the dollar against other major currencies. (See "Effects of FX: How a Strong Dollar Sliced Global Revenue.")

U.S. media agencies last year registered robust revenue gains, with growth in digital more than offsetting a decline in traditional media.

Consider that WPP's biggest media relationship is with Google. WPP (including Essence, a digital agency acquired by WPP) last year boosted Google worldwide spending on behalf of clients by 25% to $4 billion. WPP expects its business with Google to top $5 billion in 2016. WPP last year pumped $1 billion into advertising on Facebook, up from $650 million in 2014.

Ad Age's rankings of media agencies exclude programmatic media buying ventures, such as WPP's Xaxis and Omnicom's Accuen, where revenue includes billings for media bought and resold to clients.

Xaxis worldwide revenue rose about 20% to around $930 million in 2015 from $775 million in 2014.

Omnicom doesn't disclose programmatic revenue, but it offers clues. Omnicom's programmatic media business -- including digital programmatic unit Accuen and programmatic buying at Omnicom media agencies -- accounted for "a little less than 2%" of 2014 worldwide revenue, Chief Financial Officer Philip Angelastro told investors on an earnings call.

That implies Omnicom's 2014 worldwide programmatic revenue was a little less than $306 million.

Accuen's 2015 organic revenue grew by about $140 million, according to statements Omnicom made on earnings calls.

Add those two figures, and that implies Omnicom's 2015 worldwide programmatic revenue surged to a little less than $446 million -- possibly more, assuming programmatic buying at Omnicom media agencies grew, or possibly less, in the event programmatic buying at Omnicom media agencies shrunk.

Help wanted

One sign of the times: U.S. digital media employment in January 2016 passed broadcast and cable TV employment, according to Ad Age Datacenter's analysis of figures from the Bureau of Labor Statistics.

U.S. digital media employment jumped 13.0% last year and reached a record 197,500 in February 2016, according to BLS data. Digital media ventures last year on average added 58 jobs a day. Digital media employment has doubled since the beginning of 2011.

Ad agencies also have been staffing up. U.S. ad agency employment in December reached its highest point (198,900) since the early-2000s dot-com bubble, though jobs remain below the all-time peak (207,400 in 2000), according to BLS figures.

Employment in the BLS classification of media buying agencies and independent media representatives hit an all-time high in December (47,200) after breaking through its 2000 peak earlier in the year.

Staffing at U.S. public relations agencies broke a record last August (57,900).

Staffing Up
Ad agency employment has reached its highest point since 2001.
Number of U.S. jobs % change, 2015 vs. 2014
Ad agencies
197,800
+3.3%

Digital media 1

197,500
+13.0%
PR agencies
56,000
+2.3%

Media agencies 2

46,100
+8.0%
Source: Bureau of Labor Statistics. More info: bls.gov; AdAge.com/adjobs. Number of jobs in February 2016. Growth based on yearly average employment, 2015 vs. 2014. 1. Digital media businesses. 2. Media buying agencies and independent media rep firms.

The job gains offer evidence of how ad, media and PR agencies are adapting to a world of digital marketing.

U.S. ad, media and PR agencies have added 56,300 jobs since agency employment hit its downturn nadir in early 2010. Back in the deep recession days of 2009, these sectors in aggregate cut an average 59 jobs a day. Last year, they added 29 jobs a day.

Staffing tends to move directionally with agency revenue because labor is agencies' biggest cost. WPP said its worldwide staff cost to net sales ratio, including severance and incentives, dropped to 63.2% in 2015 from 64.0% in 2014, "indicating increased productivity."

WPP Group Chief Executive Martin Sorrell noted on a March earnings call: "We know that when our headcount rises faster than revenues or net sales, we get into trouble. And when it doesn't, we know that we can manage the business effectively."

Agency stocks on the rise

There's no denying that established agency companies face multiple challenges -- the shift to digital, inroads by tech-savvy consultancies, pressure from marketers to do more for less.

But investors are bullish on agency stocks. In April, WPP hit an all-time high, Omnicom reached its highest-ever adjusted closing price and Interpublic traded at its highest level since 2002. Dentsu Inc. and Publicis trade below all-time highs reached in August 2015 and April 2015, respectively.

U.S. Agency Revenue Growth, 2001-2015
Revenue for agencies from all disciplines grew 6.5% in 2015.
Source: Ad Age Agency Reports. 2001, 2008 and 2009 were recession years.

Mergers and acquisitions

The agency world last year scored one big deal -- the $3.7 billion purchase of Sapient by Publicis -- and more than 100 smaller deals.

WPP in 2015 poured about $1 billion into acquisitions and investments, completing 52 transactions -- equal to a deal a week. "There were some tiddly ones," Mr. Sorrell said in March. "I don't want to diminish those tiddly ones, but they were tiddly." Among the non-tiddly deals, WPP bought a majority stake in Essence, a U.K.-based digital agency.

Essence was one of four members of Ad Age's 2014 "Five Hot Digital Indies on Adland's Shopping List" to be acquired over the past year. The other three snapped up shops: Code and Theory (majority stake bought by Stagwell Group, which is run by former Microsoft executive Mark Penn), Digital Kitchen (acquired by Hakuhodo DY Holdings) and Resource/Ammirati (bought by IBM). The fifth firm, VaynerMedia, remains independent.

Dentsu made 36 acquisitions in 2015, the largest number in its history, as it continued to build out Dentsu Aegis Network, its network outside Japan. About half of the acquisitions were digital businesses, including eCommera, a U.K.-based digital agency.

Publicis made 10 acquisitions including Sapient.

Omnicom said it completed eight acquisitions in 2015, none "material to our results of operations or financial position." Omnicom's DDB Worldwide in January 2016 bought Grupo ABC, its longtime partner in Brazil. Grupo ABC was the world's No. 25 agency company in last year's Agency Report.

Interpublic in 2015 completed five strategic acquisitions including Magic Group (now GolinMagic), a 100-employee PR agency in China.

The consolidators of Madison Avenue now must deal with an expanded set of deep-pocketed buyers. Mr. Sorrell said in March: "We've seen IBM acquire three digital agencies" in early 2016 (including Resource/Ammirati). "We've seen Deloitte (and) Accenture. … There are consulting companies and service companies starting to look at the digital agency space with increased intensity."

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