$43.6B U.S. agency revenue
When it comes to the proposed $32 billion union of Sprint and T-Mobile, nothing is settled. But if history is a guide, the merger of the third- and fourth-largest U.S. wireless companies will lead to a surge of new ad spending, in the short-term.
T-Mobile and Sprint will likely boost spending to create awareness for the combined -- and possibly rebranded -- company, while much-larger rivals AT&T and Verizon Wireless will likely respond, seeing an opportunity to wrest away subscribers confused about the deal.
"There's going to be a big influx of spending," said Carrie MacGillivray, VP-mobile services at IDC. "AT&T and Verizon are going to be loath to create significant noise."
At first glance, an initial winner is Publicis Groupe, which through various agencies consolidates the ad accounts of both T-Mobile and Sprint. Sprint works with Publicis agencies DigitasLBi, Starcom MediaVest and Leo Burnett, while T-Mobile works with Publicis Seattle, Razorfish, Zenith Optimedia.
In recent years, the pair of telecoms have emerged as the most daring and interesting advertisers in the industry. They spend big and take risks to differentiate themselves and pick of subscribers from much-larger Verizon and AT&T. Both are led led by outsized personalities -- T-Mobile CEO John Legere and Sprint parent Softbank CEO Masayoshi Son -- heavily involved in their brands and openly intolerant of what they see as inadequate performance by their rivals.
But over time, the combined spending will fall to achieve the efficiencies that are at least partly the rationale for the deal. Recent consolidation in the industry follows a similar pattern: there's a blip in spending, to spread and frame the new brand. Then there's a move to cut the fat, to please Wall Street.
As one agency executive put it, "One plus one won't equal two."
In 2006, AT&T closed its $86 billion acquisition of BellSouth, and then spent a considerable amount to fold the brand into its own. That year, AT&T jumped to the second slot of top U.S. advertisers, spending $3.3 billion, a 26% increase from the prior year, according to the Ad Age DataCenter. After that, its ad spending tapered off to $2.8 billion, in 2009, and has not returned to the 2006 level. The company had promised shareholders that 20% of its savings post-merger would come from marketing dollars.
Sprint did the same after buying Nextel Communications, in 2004 – its ad spending rose for three years, then leveled off.
Unlike Sprint, T-Mobile is gaining subscribers, at a rate outpacing rivals, with unconventional and confrontational, marketing of its 'Uncarrier' campaign. The company's advertising spending almost doubled over the last three years, exceeding $1 billion in 2013, according to the Ad Age DataCenter.
Mr. Legere has a penchant for taking very public barbs at competitors – including Sprint. (He once referred to Sprint as a "pile of spectrum" and has launched a Twitter hashtag devoted to bashing Sprint's 'Framily' motto.)
Enter the 'framily'
In November, Sprint dropped Leo Burnett from its broadcast work (although the agency still retains retail accounts) in favor of Figliulo & Partners, which created the first spot to showcase the company's 'Framily' plan March. The ads, based partially on off-beat spots run by parent company Softbank in Japan, have been received favorably by Sprint subscribers, according to Ace Metrix, an analytics firm, but have not landed well with others.
"I suspect that T-Mobile will be the brand that wins, because they've made such a name for themselves in the market," said one agency veteran, who asked to remain anonymous because the deal has not closed. "It would be very dumb to get rid of that noise and consumer attention."
According to a Bloomberg report last week, Mr. Legere will be tapped as the CEO of the combined company.
The irony is the harder T-Mobile and Sprint go after AT&T and Verizon, the less cash there is to go around. While T-Mobile has upped its ad spend, from 2.7% of revenue in 2010 to 4.1% last year, it is bleeding money; the company lost around $100 million last quarter paying off the early termination fees for subscribers that join the network.
Sprint would likely need to cut prices to keep the steep discounts T-Mobile has rolled out. Mr. Son has vowed to kick-start a price war with AT&T and Verizon, a move the new entity will would have to promote aggressively.
How long that noise will last, who will make it, and how? Those questions are keeping ad agencies on their toes. "If they do come together," said another agency leader close to the companies, "why on earth would they do business as usual?"