NEW YORK (AdAge.com) -- Publicis Groupe is having trouble meeting its media-spending commitment to Microsoft, according to several people familiar with the situation. The third-largest agency-holding company entered into the commercial agreement last summer when it bought digital agency Razorfish from Microsoft. Execs put the commitment at "a couple hundred million dollars" annually for ad inventory.
Publicis, parent to media agencies Starcom Mediavest Group and Zenith Optimedia, could face a penalty if it fails this year to meet the spending levels committed to Microsoft search and display. Such a penalty would ostensibly up the cash commitment on the Razorfish sale, though it's yet unclear if Microsoft will opt to levy such a hefty fee on one of its biggest customers, especially when Microsoft was tasked with providing quality inventory on its end of the deal.
Publicis acquired Razorfish for $286.8 million in cash, totaling $544 million, including stock. According to one executive close to negotiations, Morgan Stanley, the bank representing Microsoft in its sale of Razorfish, asked for media commitments equal to or greater than the cash component.
The Publicis-Microsoft deal is just one example of how the upfront model native to TV buying has started to port over to digital. But it also raises several questions: Does the model of guaranteeing client dollars in lump sums work in digital media, where ad spending is still ruled by quarter-to-quarter and comparatively tiny budgets? Add in looming penalties, and are clients' best interests in jeopardy?
Executives familiar with holding-company-level media spending estimate $140 million would be easy for Publicis to spend on display and search spending with Microsoft. But sums north of $200 million would be a struggle.
In one anecdote, relayed by someone familiar with the relationship, an agency buyer for Publicis' Vivaki recently scrambled to spend last-minute dollars with Microsoft "anywhere that's a decent fit" because the team was short of its commitment.
Even if it is struggling to meet that goal, Publicis is said to be spending significantly more with Microsoft year-over-year.
"We are very pleased with the current state of our relationship with Publicis," said Carolyn Everson, head of Microsoft's global advertising sales, in a statement. "Our teams are working well together. ... We are confident that the fruit this relationship is beginning to bear today will continue through the end of the year and well into the future. As far as we're concerned, it's full steam ahead."
"Our partnership with Microsoft has allowed us to deliver such benefits to clients as advantageous pricing and first-mover opportunities to participate in new content and inventory," said a Vivaki spokeswoman in a statement.
In a quick analysis, Publicis clients do not dominate ComScore's list of top Microsoft display advertisers in the second quarter. Microsoft's online advertising revenue increased 8% year-over-year to $1.9 billion for the year ending in June, reflecting higher search and display-advertising revenue.
One recent deal that could help Publicis reach its goals with Microsoft is Starcom Mediavest Group's just-inked four-year $100 million deal with the production company BermanBraun, which holds MSN properties in its portfolio. Berman is responsible for two MSN properties, Wonderwall and Glo, and plans for an MSNBC political site are also underway. While the Microsoft tie-in likely sweetened the deal, Mediavest and Berman are said to have a longstanding relationship that pre-dated the commitment.
The so-called Strategic Alliance Agreement between Publicis and Microsoft was set in play at the Cannes Advertising Festival in 2009, just weeks before Publicis Groupe announced it would acquire Razorfish. Microsoft bought the agency as part of aQuantive, which it acquired in 2007 for $5.9 billion.
The commercial agreement was then introduced at the Razorfish acquisition. In a presentation to investors, Publicis Groupe CEO Maurice Levy announced that Publicis agreed to "aggregate volume purchases" in Microsoft search and display in exchange for favorable rates as part of the five-year agreement.
In turn, Microsoft agreed to continue its agency relationship with Razorfish for a minimum guaranteed fee for the duration of the agreement.