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Pivotal Research Group LLC: Madison and wall 3 30-12

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Madison & Wall …

Madison & Wall
A Recurring Review of Topics Affecting Advertising-Supported Media
March 30, 2012
Welcome to Pivotal Research’s “Madison & Wall”. The title refers to our work which
sits at the intersection between the advertising industry and the financial world. We
hope you’ll find these brief notes useful for their contrast to the hyperbole that
pervades much of the chatter at that location.

Published in: Business, Technology

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  • 1. PIVOTAL U.S. Equity Research Internet / Advertising Pivotal Research GroupMadison & Wall March 30, 2012A Recurring Review of Topics Affecting Advertising-Supported MediaWelcome to Pivotal Research’s “Madison & Wall”. The title refers to our work which Brian Wieser, CFAsits at the intersection between the advertising industry and the financial world. We 212-514-4682hope you’ll find these brief notes useful for their contrast to the hyperbole that brian@pvtl.compervades much of the chatter at that location.A MATCH MADE IN DETROIT - General Motors awards Chevroletaccount. The durability and desirability of the outcome is a matter ofperspectiveRISING ONLINE ADVERTISING INDUSTRY CLIMBS HIGHER UP“SILICON HILL” - Politics is the continuation of business by other means Pivotal Research Group 853 Broadway, Suite 1406 New York, NY 10003 Important Disclosures Are Located In The Appendix
  • 2. A MATCH MADE IN DETROITGeneral Motors awards Chevrolet account. The durability and desirability of the outcome is amatter of perspectiveAssessing Detroit’s future prospects is something of a Rorschach test on optimism vs. pessimism inovercoming massive economic challenges. Plenty of stories of human triumph and growth have emergedin the last couple of years (urban farming anyone?) as the city and its regional economy attempts toimprove. But it’s still a place that is a shell of its former self, and one which faces numerous challengesgiven the structural decline associated with the city’s severely diminished importance as a hub for theautomotive industry.A similar Rorschach test can be applied to this week’s news of both Interpublic and Omnicom winning theChevrolet creative account (business which both agencies were already significantly involved with)through a new agency called Commonwealth. You can see a hopeful new model for bringing great talenttogether to produce unified messaging or you can see a corporate mess waiting to implode at no smallcost.For a refresher on recent history, Interpublic’s Campbell-Ewald was the incumbent agency on theChevrolet brand from 1919 until 2010, when the account covering activities in the United States wasswitched into Publicis Groupe’s Publicis agency. Months later the account was switched again by newlyappointed CMO Joel Ewanick to Omnicom’s Goodby Silverstein. Much of the branding work in manyinternational markets remained with Interpublic at McCann-Erickson, but up to 70 different agencies wereinvolved with the brand worldwide. This week, the parties announced the resolution of the global pitch forthe account with the creation of Commonwealth, which will nominally be a stand-alone agency, with aboard featuring leadership from Goodby and McCann, and work assignments and revenues – whichcombined should be well under $100mm – associated with each holding company’s respective activitiesrecorded separately by Interpublic and Omnicom.Agencies coming together in this manner could help their client achieve some important goals. Thestructure of the account should allow GM to eliminate some “non-working” spending, either to supportoverall cost savings or to reinvest in the Chevy brand. GM will undoubtedly benefit from access toresources inside of both holding companies as well. But most importantly, it is apparently an effort tofacilitate more efficient interactions between GM and its agencies, and improve the consistency ofmessaging in markets around the world by virtue of a massive reduction in the number of agencies GMwill work with for Chevrolet. While this effort is new in the context of bringing two holding companiestogether to service one creative account, cross-holding company efforts to service accounts across bothmedia and creative are actually very common. Collaboration in the creative sphere is also common withmany accounts using one agency as a lead agency, with others to do related project work. For the mostpart, nominally competitive professionals can collaborate to satisfy the client’s needs, while always beingmindful of being undermined in a future review. This relationship isn’t necessarily so different, ifconsidering that the work is mostly divided up on a regional basis rather than a functional one.But on the flip side, several problems are evident. First, the financial structure of the relationship will bechallenging: assigning revenues and costs between individuals and activities attached to different holdingcompanies may impact who does or can do what. Further, there are real risks that individuals within theorganization will be undermined by their competitors ahead of what will likely be regular account reviews,and this can create a politically difficult or toxic environment. Worst of all, the spirit behind the account –reducing the number of agencies to streamline efforts – introduces risk of creating more homogenous,“one size fits all” campaigns vs. the greater number of distinct campaigns for specific markets that mayotherwise have occurred. If for any reason GM sales are weaker in different regions, marketing – and theCMO in particular – may be more likely to get the blame than it would get credit where growth occurs.This creates some risk to the agencies involved in terms of their abilities to retain the account beyond thenext pitch. -2- Brian Wieser 212-514-4682 Pivotal Research Group
  • 3. No doubt, this solution offered certain advantages for each of the parties involved: McCann received abadly needed win and some incremental revenue, while Goodby maintained a piece of a global accountand GM secured cost savings. But whether or not it’s a durable or desirable solution will depend on yourperspective.RISING ONLINE ADVERTISING INDUSTRY CLIMBS HIGHER UP “SILICON HILL”Politics is the continuation of business by other meansOnline advertising is creating new centers of growth around the country, with names riffing off of SiliconValley (such as Silicon Alley in New York and Silicon Fen in Cambridge, UK). Silicon Hill is theappropriate name for the tech community around Washington, DC (whose most prominent new companymay be LivingSocial), but we wonder if it’s not most appropriately used as a term to describe the growingtechnology lobby focused upon the Capitol itself.This week we hosted a conference call to discuss the state of media regulation in general – and onlineadvertising in specific – with Adonis Hoffman, a lawyer who is currently an adjunct professor atGeorgetown and formerly general counsel for the 4As (American Association of Advertising Agencies) aswell as a former FCC staffer.The growth of Internet advertising has created an off-shoot for regulators seeking to apply their mandatesto a world in which technology is increasingly important. This means that lobbyists and consultants areincreasingly active in advising and advocating policies to regulators (primarily the FTC and FCC) andCongress.Key among our topics of discussion related to this week’s news from the Federal Trade Commissionwhich recommends best practices for the industry in protecting consumer privacy in a technology-drivenera. Happily, it appears that the FTC is relatively balanced in its efforts to secure consumer rights withoutslowing the evolution of the industry. It is primarily doing this encouraging self-regulation, while remindingpublishers to do well by consumers or face the prospects of sanctions. However, to get there, the agencyinvested significant time and resources, as did many consumer groups, industry lobbyists and otherinterested parties.On a seemingly separate topic during the call, we discussed how the anti-Google lobby is becomingincreasingly well-organized in DC. As that company becomes larger and larger – and its directcompetitors feel more and more threatened – it will continually find itself under more and more regulatoryscrutiny and this presence will undoubtedly need to consistently grow.The common thread between these and other topics: given the ongoing efforts of regulators andpoliticians alike, it is becoming increasingly important for Google as well as its competitors to establishthemselves to influence both regulation and politics, as these arenas are increasingly becoming a form ofcompetition by other means. While efforts to create jobs from emerging technologies are typically desiredby business people and politicians alike, we’re not so certain these are the jobs they had in mind,however. -3- Brian Wieser 212-514-4682 Pivotal Research Group
  • 4. Appendix: Important DisclosuresAnalyst CertificationI, Brian W. Wieser, hereby certify that the views expressed in this research report accurately reflect mypersonal views about the subject company and their securities. I further certify that I have not receivedand will not receive direct or indirect compensation related to specific recommendations or viewscontained in this research report.Legal DisclaimersPivotal Research Group LLC is an independent equity research company and is neither a broker dealernor offers investment banking services. Pivotal Research Group LLC is not a market maker for anysecurities, does not hold any securities positions, and does not seek compensation for investmentbanking services. The analyst preparing this report does not own any securities of the subject companyand does not receive any compensation directly or indirectly from investment banking services.Stock RatingsPivotal Research Group LLC assigns one of three ratings based on an expectation of absolute total return(price change plus dividends) over a twelve month time frame. The ratings are based on the followingcriteria:BUY: The security is expected to have an absolute return in excess of 15%.HOLD: The security is expected to have an absolute return of between plus and minus 15%.SELL: The security is expected to have an absolute return less than minus 15%.Ratings DistributionPivotal Research LLC currently provides research coverage of 16 companies, of which 75% are ratedBUY, 19% are rated HOLD, 0% are rated SELL and 6% are unrated. Our company does not offerinvestment banking services. This data is accurate as-of March 29, 2012.Price Chart and Target Price HistoryOther DisclaimersInformation contained in this report has been prepared from sources that are believed to be reliable andaccurate but are not guaranteed by us and do not represent a complete summary or statement of allavailable data. Additional information is available upon request. Furthermore, information and opinionsexpressed are subject to change without notice and we are under no obligation to inform you of suchchange.This report is has been prepared solely for our institutional clients. Ratings and target prices do not takeinto account the particular investment objectives, financial and/or tax situation, or needs of individualinvestors. Investment decisions should take into account all available information, not just that which iscontained in this report. Furthermore, nothing contained in this report should be considered an offer orsolicitation by Pivotal Research Group LLC to buy or sell any securities or other financial instruments.Past performance is not indicative of future performance and estimates of future performance containedin this report are based on assumptions that may not be realized.Material in this report, except that which is supplied by third parties, is Copyright ©2012, by PivotalResearch LLC. All rights reserved. No portion may be reproduced, sold, or redistributed in any formwithout express written consent of Pivotal Research Group LLC. -4- Brian Wieser 212-514-4682 Pivotal Research Group
  • 5. Commission Sharing ArrangementsPivotal Research Group LLC has commission sharing arrangements (CSA) with numerous broker-dealers. Please contact Jeff Shelton at 212-514-4681 for further information. Additional Information Available Upon Request -5- Brian Wieser 212-514-4682 Pivotal Research Group