State of the Agency Market: What You Need to Know
Ad-agency employment has reached its highest level since 2001, agency stocks this month scored all-time highs and U.S. ad spending this year is finally in position to pass its prerecession peak. It's a good time to be in the agency game -- at least if you're connected to digital.
U.S. agency revenue rose 5.4% to a record $43.6 billion in 2014. Growth was driven by digital work, which captured nearly 40% of U.S. agency revenue in 2014.
Revenue and growth rates are based on Ad Age Datacenter's bottoms-up analysis of more than 1,000 agencies, agency networks and agency companies included in Agency Report 2015.
The full Agency Report is now available online to Ad Age Datacenter subscribers. The report will appear in Ad Age's May 4 print edition.
The 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 networks, only one is owned by an established agency company: No. 5 Wunderman, owned by WPP.
IBM Corp.'s IBM Interactive Experience ranks as the biggest digital network, followed by Deloitte Consulting's Deloitte Digital, Accenture's Accenture Interactive and Alliance Data Systems Corp.'s Epsilon.
Michael Roth, chairman-CEO of Interpublic Group of Cos., acknowledged how the field is changing in comments at a March 2015 investor conference. "There's no question that we're competing against companies that we never competed against before: Deloitte Consulting, Accenture, IBM…," Mr. Roth said. "It's a very difficult competitive market out there, and we just have to be on our game."
Digital continues to grab share from non-digital work. Publicis Groupe, for example, said its worldwide 2014 digital revenue generated 7.3% organic growth; "analog" (non-digital) work fell 1.4%. Organic growth adjusts for the effects of acquisitions and exchange rates.
WPP said 36% of 2014 worldwide revenue came from digital, up from 35% in 2013.
Publicis said 41.9% of its 2014 worldwide revenue came from digital activities, up from 38.4% in 2013. Digital accounted for 50.2% of first-quarter 2015 revenue; that includes revenue from Sapient Corp., which Publicis acquired in February.
For the overall U.S. agency market, digital captured 39.7% of agency revenue, including digital work for all agency types from ad agencies and media agencies to public relations and digital pure plays, according to Ad Age Datacenter's analysis.
The surge in agencies' digital revenue mirrors growth in digital ad spending.
The internet last year accounted for one-fourth of U.S. major-media ad spending, triple the level of 8.2% in 2007, according to data from Publicis' ZenithOptimedia.
U.S. digital-media employment last year jumped 13.8%, topping 175,000 in January 2015 for the first time, according to figures from the Bureau of Labor Statistics. Digital-media firms have added more than 50,000 U.S. jobs over the past three years. Last year, U.S. digital-media ventures added an average of 54 jobs each day -- five times the job additions at ad agencies.
U.S. revenue growth by discipline
Agency Report revenue figures for agencies and agency networks adjust for the effects of acquisitions and apply average annual exchange rates to revenue for non-U.S. companies.
All major U.S. agency disciplines grew last year, with revenue gains from 4.4% for ad agencies to 10.3% for the resurgent field of health-care communications. Customer-relationship management/direct marketing, promotion and public relations grew in the range of 5% to 6%.
Media agencies last year registered robust revenue gains, propelled by digital. That includes growth in programmatic media buying, where in some cases agency companies account for media billings as revenue because they buy and then resell media to clients.
WPP, for example, said Xaxis, a programmatic platform, generated $775 million in 2014 worldwide sales (billings), up about 30% from 2013.
WPP records Xaxis billings as revenue, but the company also discloses WPP's "net sales," a figure that strips out those media billings as well as pass-through revenue. WPP believes net sales is a more meaningful and accurate reflection of top-line growth.
Omnicom Group disclosed it had 2014 programmatic buying revenue of slightly less than 2% of worldwide revenue, or slightly less than $306 million, up about $140 million from 2013.
Philip Angelastro, Omnicom's exec VP-chief financial officer, discussed the issue of programmatic accounting on an earnings call last fall. "We follow GAAP (generally accepted accounting principles), and we've always tried to be clear and consistent and straightforward about it," said Mr. Angelastro, noting that "there is a difference in the [media-agency] model vs. the Accuen [Omnicom's programmatic buying unit] model. In the Accuen model, we agreed to some specific advertiser performance objective up front. We agreed to the price. And the price includes the whole package. And the cost of the execution risk is Accuen's."
Omnicom President-CEO John Wren, who once worked at accounting firm Arthur Andersen, discussed programmatic financial reporting on the same call: "The accounting is pretty straightforward. The accounting is defined by a bunch of people who sit behind GAAP … . I've learned years ago simply to accept what they say, not to argue with what they say." Omnicom discloses revenue but does not disclose net sales.
|Discipline||Revenue||% change, 2014 vs. 2013|
Digital (including media agencies) 1
|Ad agencies||$12.1 billion||4.4%|
|CRM/direct marketing||$7.4 billion||5.4%|
|Health care||$4.3 billion||10.3%|
|Public relations||$4.3 billion||5.3%|
Media agencies (excluding digital work) 3
U.S. ad-agency employment in December reached its highest point (192,400) since the early-2000s dot-com bubble, though staffing remains far below the all-time peak (207,400 in 2000).
Employment at U.S. public-relations agencies this year scored an all-time high (59,800), reflecting strength in a discipline that is finding new revenue and growth through social media.
U.S. ad agencies have hired 31,500 people since agency employment hit its downturn nadir in early 2010. Back in the dark days of 2009, ad agencies in aggregate cut an average 41 jobs a day. Last year, agencies added about 10 jobs a day.
|Discipline||Number of U.S. jobs||% change in employment, 2014 vs. 2013|
Digital media 1
Media agencies 2
Agency stocks at all-time highs
There's no denying that established agency companies face multiple challenges -- the shift to digital, inroads by consultancies, pressure from marketers to do more for less.
But investors remain bullish on agency giants. Shares in Dentsu Inc., Publicis and WPP hit all-time highs in April. Omnicom reached its highest-ever adjusted closing price in March. Interpublic in February traded at its highest price since 2002.
U.S. major-media ad spending -- internet, magazine, newspaper, out-of-home/cinema, radio, TV -- will grow 3.7% to $182.8 billion in 2015, finally topping prerecession 2007's peak, according to a March forecast from ZenithOptimedia.
The projected growth rate is a step down from 4.9% growth in 2014, when spending was boosted by advertising for elections and the Winter Olympics. U.S. ad spending last year climbed at the fastest clip since 2004.
U.S. marketing spending -- major-media ad spending plus marketing services (direct mail, directories, public relations, sales promotion/events and telemarketing) -- will grow 3.3% to a record $407.0 billion in 2015, vs. 3.9% growth in 2014, according to ZenithOptimedia's forecast.
ZenithOptimedia expects worldwide major-media ad spending to grow 4.4% to a record $543.8 billion in 2015. Spending rose 5.2% in 2014, the fastest growth since 2010.
On Publicis' earnings conference call last week, Chairman-CEO Maurice Levy estimated industrywide global ad-agency organic revenue will rise 3.0% to 3.5% in 2015 -- "probably closer to 3% rather than 3.5%." That's based on a model in which Publicis has found ad-agency revenue in recent years has grown at roughly two-thirds the rate of major-media ad-spending growth.
Taking two-thirds of ZenithOptimedia's 2015 U.S. ad-spending growth rate (3.7%) would yield an organic revenue increase for U.S. ad agencies of about 2.5% in 2015. There's good reason to believe other agency disciplines in 2015 will continue to outperform ad agencies.
The past year saw a few big deals, including the $3.7 billion purchase of Sapient by Publicis and the $2.3 billion acquisition of Conversant, a digital marketing-services company formerly known as ValueClick, by Alliance Data. Conversant became part of Alliance Data's Epsilon network.
Other acquisitions included:
- Vision7 International, a marketing-communications network based in Canada, acquired by BlueFocus Communication Group, a fast-growing China agency firm that is expanding into North America.
- Olson, a Minneapolis-based agency, acquired by ICF International, a consulting and technology-services firm.
- Nurun, a digital agency based in Canada, bought by Publicis.
Always-acquisitive WPP in 2014 completed 65 mostly small transactions, equal to more than a deal a week.
Interpublic in 2014 completed nine acquisitions, including London-based digital agency Profero (now Lowe Profero) and Boston digital agency Genuine Interactive.
Omnicom last year completed 10 small acquisitions. The company said none of its acquisitions in the past three years "was material to our financial position or results of operations."
Omnicom appears ready to open its checkbook. "We've just formed a new dedicated acquisition group, one that we haven't had in several years," Mr. Wren said last week on his earnings call. "And we've been looking at quite a number of opportunities probably on a more formal basis than we have in the last several years. And so I expect over time we will be doing more, but no big bang type things. Sensible acquisitions, midsize that fit what we see as our strategic growth areas, both in the United States, in certain product areas and in certain key emerging markets." Mr. Wren added: "They're not going to be large."
Of course, the really big deal was the one that failed last May when Publicis and Omnicom ditched their plan to form the world's biggest agency company, Publicis Omnicom Group. A chastened Mr. Wren said at the time: "I think it'll be a very long time before I try to do a merger of equals again."
Graphics by Chen Wu