Augustine Fou- 1 -
Dr. Augustine Fou
http://linkd.in/augustinefou
May 2014
Investment Thesis:
Ad Agency Sector
2014
Augustine Fou- 2 -
Executive Summary
THESIS
We remain bearish on the ad agency sector, represented
by agency holding compa...
Augustine Fou- 3 -
Current Financials
Augustine Fou- 4 -
Omnicom (NYSE:OMC)
$14.6B revenues
$1.8B operating
income
Augustine Fou- 5 -
Publicis (PINK:PUBGY)
$6.6B revenues
$1.0B operating
income
Augustine Fou- 6 -
Interpublic (NYSE:IPG)
$7.1B revenues
$0.6B operating
income
Augustine Fou- 7 -
MDC Partners (NASD:MDCA)
$1.1B revenues
-$0.03B
operating
income
Augustine Fou- 8 -
AGENDA
1. Macro Trends – Headwinds and Shrinking Industry
2. Micro Trends – Eroding Top Line
3. Operati...
Augustine Fou- 9 -
Macro Trends
Overall Headwinds
Augustine Fou- 10 -
• Shift to digital making industry
more efficient – smaller pie
Augustine Fou- 11 -
TV is $69B Digital is $48B
TV vs Digital Ad Spend
TV DigitalPrint Radio
Out-of-Home $8 (5%)
Other $2 (...
Augustine Fou- 12 -
TV Ad Spend Topping
Ad rate (per 30 second spot) falling
Augustine Fou- 13 -
TV is $69B Digital is $48B
Broadcast vs Cable TV
TV Digital Print Radio
Out-of-Home $8 (5%)
Other $2 (...
Augustine Fou- 14 -
In 2013
Digital marketing was $42B
Broadcast TV was $40B
Cable TV was $34B
Network TV vs Cable TV
Augu...
Augustine Fou- 15 -
Measured Ad Spend FY 2013
March 2014 Data
Augustine Fou- 16 -
Broadcast TV $20 cpm
Cable TV $18 CPM
Radio $5 cpm
Magazines $20
Newspaper $35
Out of Home $4
Internet...
Augustine Fou- 17 -
• Polarizing ad spend to branding
vs performance – shift away
Augustine Fou- 18 -
Left-side Right-side
branding performance
“Soup and Soda” “Cars and Computers”
• Low cost
• Low comple...
Augustine Fou- 19 -
1st screen 2nd screen 3rd screen
• Television
• Magazines
• Newspaper
• Radio
• Display Ads • Search A...
Augustine Fou- 20 -
• Users’ consumption and
habits/expectations changing
Augustine Fou- 21 -
Time Spent TV vs Internet
In 2013 share of
time spent per day in
Digital
(314 mins or 5.2 hrs)
exceede...
Augustine Fou- 22 -
Live Broadcast vs Online TV
Source: Diffusion Group March 2014 via MarketingCharts
Augustine Fou- 23 -
Streamers Watch Less Pay-TV
Source: GfK July 2013 via Marketing Charts
Augustine Fou- 24 -
Why People Stream Video
I can’t find what
I’m looking for
on a licensed site
Source: BusinessInsider P...
Augustine Fou- 25 -
What People Stream
I stream TV
series and
movies
Source: BusinessInsider Poll April 2014
Augustine Fou- 26 -
DVR Owners Watch 23m
Source: Nielsen Dec 18, 2013 Source: Netflix
DVR owners watch exactly 23
mins (i....
Augustine Fou- 27 - Augustine Fou- 27 -
Marketing Science March 2014
Augustine Fou- 28 -
Micro Trends
Eroding Top Line
Augustine Fou- 29 -
• Specialization and insourcing
Augustine Fou- 30 -
Source: ANA via eMarketer, Sept 2013
Brands Use In-House “Agencies”
- 30 -
56% have
already
started
mo...
Augustine Fou- 31 -
Source: ANA via eMarketer, Sept 2013
What In-House “Agencies” Do
- 31 -
• Magazine ads
• Social media
...
Augustine Fou- 32 -
Specialization Rules
Source: SoDA 1H 2013 Digital Marketing Outlook
Augustine Fou- 33 -
Outsourced Digital Marketing
Of the services that
advertisers outsource,
traditonal ad agencies
have l...
Augustine Fou- 34 -
• Self-serve, direct-buying, and
programmatic
Augustine Fou- 35 -
Buying Direct from Facebook
Source: AdAge RBC Capital Survey September 2013
More clients/advertisers a...
Augustine Fou- 36 -
It turns out that cord-cutting isn’t the only threat facing cable channels.
Several of the big ad-supp...
Augustine Fou- 37 -
• Procurement involvement and
Fee, Project, Performance
Augustine Fou- 38 -
Procurement Involvement
Source: Assoc. of National Advertisers, via MarketingCharts June 2013
Augustine Fou- 39 -
Changed from 70% commission and 30% fee to 81% fee and
only 5% is commission; Increasingly clients add...
Augustine Fou- 40 -
Performance-based Incentives
Source: Adweek, August 2013
Augustine Fou- 41 -
Operating Model Challenges
– Limiting Cost Savings
• Billable rate (capped by project) vs cost of labo...
Augustine Fou- 42 -
Lower Cost Alternatives
Brands now have ways to produce quality original content at a
fraction of what...
Augustine Fou- 43 -
Crowdsourced Creativity
Brands can now crowdsource ideas from fans and then produce
the original conte...
Augustine Fou- 44 -
Other Points
• Clients view “small is better” now – more
specialized experience, less overhead
• Clien...
Augustine Fou- 45 -
Dr. Augustine Fou – Digital Consigliere
“I advise clients on optimizing
advertising across all channel...
Augustine Fou- 46 -
Related Articles
Augustine Fou- 46 -
http://www.slideshare.net/augustinefou/viewability-of-display-ads...
Augustine Fou- 47 -
APPENDIX
Augustine Fou- 48 -
Trends
1. Insourcing - Brands/clients take tasks in-house (e.g. in-source
social media, analytics, and...
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Investment Thesis Ad Agency Sector by Augustine Fou April 2014

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The ad agency sector faces overall headwinds, top line erosion, and limited cost savings due to macro trends, micro trends, and operating model inefficiencies.

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  • I love reading you. Thx.
    But do you think comparing a CPM that is skipped on TV to a pre-roll that is forced on-line (which I hate but still exists) is a fair deal. If, as AdAge sais few years back, only 5% of spots are actually seen on TV, shouldn't we do times 20 for the CPM?
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Transcript of "Investment Thesis Ad Agency Sector by Augustine Fou April 2014"

  1. 1. Augustine Fou- 1 - Dr. Augustine Fou http://linkd.in/augustinefou May 2014 Investment Thesis: Ad Agency Sector 2014
  2. 2. Augustine Fou- 2 - Executive Summary THESIS We remain bearish on the ad agency sector, represented by agency holding company stocks (OMC, IPG, etc.); we believe they have started a secular decline – precipitated by the onslaught of digital alternatives in general and specific tactics like video advertising – which will lead to accelerating erosion of top-line revenues and years of depressed net income.
  3. 3. Augustine Fou- 3 - Current Financials
  4. 4. Augustine Fou- 4 - Omnicom (NYSE:OMC) $14.6B revenues $1.8B operating income
  5. 5. Augustine Fou- 5 - Publicis (PINK:PUBGY) $6.6B revenues $1.0B operating income
  6. 6. Augustine Fou- 6 - Interpublic (NYSE:IPG) $7.1B revenues $0.6B operating income
  7. 7. Augustine Fou- 7 - MDC Partners (NASD:MDCA) $1.1B revenues -$0.03B operating income
  8. 8. Augustine Fou- 8 - AGENDA 1. Macro Trends – Headwinds and Shrinking Industry 2. Micro Trends – Eroding Top Line 3. Operating Model Challenges – Limiting Cost Savings • Shift to digital making industry more efficient • Polarizing ad spend to branding vs performance • Users’ consumption and habits/expectations changing • Specialization and Insourcing • Self-serve and programmatic • Procurement involvement and Fee, Project, Performance • Billable rate (capped by project) vs cost of labor • Giving ideas away; making money on low/no margin production • Departments prevent knowledge sharing / innovation
  9. 9. Augustine Fou- 9 - Macro Trends Overall Headwinds
  10. 10. Augustine Fou- 10 - • Shift to digital making industry more efficient – smaller pie
  11. 11. Augustine Fou- 11 - TV is $69B Digital is $48B TV vs Digital Ad Spend TV DigitalPrint Radio Out-of-Home $8 (5%) Other $2 (1%) $75 billion 42% $43 billion 24% $32 18% $17 10% Display $8 billion 19% Search $18 billion 43% Video $3 (7%) Mobile $4B$3B display search 17% Other $5 11% Lead Gen $2 (4%) • classifieds • sponsorship • rich media Source: IAB Full Year 2013 report Augustine Fou- 11 - branding performance
  12. 12. Augustine Fou- 12 - TV Ad Spend Topping Ad rate (per 30 second spot) falling
  13. 13. Augustine Fou- 13 - TV is $69B Digital is $48B Broadcast vs Cable TV TV Digital Print Radio Out-of-Home $8 (5%) Other $2 (1%) $75 billion 42% $43 billion 24% $32 18% $17 10% Broadcast $40 billion Cable $34 billion Source: IAB Full Year 2013 report 54% 46% Augustine Fou- 13 - Digital exceeded cable in 2011Digital exceeded broadcast in 2013
  14. 14. Augustine Fou- 14 - In 2013 Digital marketing was $42B Broadcast TV was $40B Cable TV was $34B Network TV vs Cable TV Augustine Fou- 14 - Source: IAB Full Year 2013 report
  15. 15. Augustine Fou- 15 - Measured Ad Spend FY 2013 March 2014 Data
  16. 16. Augustine Fou- 16 - Broadcast TV $20 cpm Cable TV $18 CPM Radio $5 cpm Magazines $20 Newspaper $35 Out of Home $4 Internet $11 Direct mail $40 CPM Comparative Media Costs Cost per Thousand (CPM): Cost to reach 1,000 users or impressions Source: OAAA, 2011 Augustine Fou- 16 -
  17. 17. Augustine Fou- 17 - • Polarizing ad spend to branding vs performance – shift away
  18. 18. Augustine Fou- 18 - Left-side Right-side branding performance “Soup and Soda” “Cars and Computers” • Low cost • Low complexity • Low consideration • High cost • High complexity • High consideration Metric: Size of Audience Metric: Actions of Users
  19. 19. Augustine Fou- 19 - 1st screen 2nd screen 3rd screen • Television • Magazines • Newspaper • Radio • Display Ads • Search Ads • Search Optimization • Email • Social Media Marketing • Mobile Marketing awareness consideration choice purchase advocacy • In-store The Marketing Continuum branding performance
  20. 20. Augustine Fou- 20 - • Users’ consumption and habits/expectations changing
  21. 21. Augustine Fou- 21 - Time Spent TV vs Internet In 2013 share of time spent per day in Digital (314 mins or 5.2 hrs) exceeded share of time spent on TV (271 mins or 4.5 hrs)
  22. 22. Augustine Fou- 22 - Live Broadcast vs Online TV Source: Diffusion Group March 2014 via MarketingCharts
  23. 23. Augustine Fou- 23 - Streamers Watch Less Pay-TV Source: GfK July 2013 via Marketing Charts
  24. 24. Augustine Fou- 24 - Why People Stream Video I can’t find what I’m looking for on a licensed site Source: BusinessInsider Poll April 2014
  25. 25. Augustine Fou- 25 - What People Stream I stream TV series and movies Source: BusinessInsider Poll April 2014
  26. 26. Augustine Fou- 26 - DVR Owners Watch 23m Source: Nielsen Dec 18, 2013 Source: Netflix DVR owners watch exactly 23 mins (i.e. skip exactly ALL ads)
  27. 27. Augustine Fou- 27 - Augustine Fou- 27 - Marketing Science March 2014
  28. 28. Augustine Fou- 28 - Micro Trends Eroding Top Line
  29. 29. Augustine Fou- 29 - • Specialization and insourcing
  30. 30. Augustine Fou- 30 - Source: ANA via eMarketer, Sept 2013 Brands Use In-House “Agencies” - 30 - 56% have already started moving work in- house to save costs
  31. 31. Augustine Fou- 31 - Source: ANA via eMarketer, Sept 2013 What In-House “Agencies” Do - 31 - • Magazine ads • Social media • Online display ads • Search engine marketing • Newspaper ads • Search engine optimization • Mobile advertising • Out of home advertising • Radio advertising • Tv advertising • Social Media • Display Ads • Search Marketing • Search Optimization • Mobile Ads Are being done in house because they can buy direct or use ad networks themselves.
  32. 32. Augustine Fou- 32 - Specialization Rules Source: SoDA 1H 2013 Digital Marketing Outlook
  33. 33. Augustine Fou- 33 - Outsourced Digital Marketing Of the services that advertisers outsource, traditonal ad agencies have little to no experience or credibility -- these services are outsourced to small specialist agencies.
  34. 34. Augustine Fou- 34 - • Self-serve, direct-buying, and programmatic
  35. 35. Augustine Fou- 35 - Buying Direct from Facebook Source: AdAge RBC Capital Survey September 2013 More clients/advertisers are buying direct from Facebook (similarly with Google Adwords, Twitter, etc.); so the “buying power” rationale is no longer valid, or will be less so going forward,
  36. 36. Augustine Fou- 36 - It turns out that cord-cutting isn’t the only threat facing cable channels. Several of the big ad-supported online video outlets, including Google Inc’s YouTube, AOL and others, plan this upfront season to target some of the ad dollars that currently flow to cable channels, industry executives say. The web video outlets see a vulnerability in second tier cable networks, and to a lesser extend in the local TV-station market, executives say. According to multiple media buyers and ad sellers in the Web video industry, digital media companies are looking to draw direct comparisons between their audiences and cable TV networks, a match-up Web video outlets think they can win. Buyers say Google is likely to be the most aggressive on this front, given YouTube’s massive size and its young demographics that don’t necessarily watch a lot of TV. The company has been selling directly against cable networks, with pitches like “X YouTube net reaches more women than E! or Awesomeness TV reaches more tweens than ABC Family.” In one pitch, for instance, YouTube cited Nielsen data from November showing that it reached 49% of all 18 to 34 year olds, versus 45% for FX, 44% for TBS’ comedies, 41% for Comedy Central and 40% for AMC. YouTube also thinks it can capture more local broadcast and cable ad dollars from national advertisers looking to boost spending in certain markets. The company is targeting automotive and wireless advertisers in particularly, said executives with direct knowledge of YouTube’s plans. Loss of Ad Dollars to YouTube Source: WSJ March 2014 Don’t forget about Facebook video ads which debut at $1 - $2.5 million a day. Source: Business Insider, March 2014
  37. 37. Augustine Fou- 37 - • Procurement involvement and Fee, Project, Performance
  38. 38. Augustine Fou- 38 - Procurement Involvement Source: Assoc. of National Advertisers, via MarketingCharts June 2013
  39. 39. Augustine Fou- 39 - Changed from 70% commission and 30% fee to 81% fee and only 5% is commission; Increasingly clients add in performance clauses Fee-based Compensation Source: Association of National Advertisers
  40. 40. Augustine Fou- 40 - Performance-based Incentives Source: Adweek, August 2013
  41. 41. Augustine Fou- 41 - Operating Model Challenges – Limiting Cost Savings • Billable rate (capped by project) vs cost of labor – choose junior staffers to work on after the pitch • Giving ideas away; making money on low/no margin production – procurement involvement has led to lower cost sources • Departments prevent knowledge sharing / innovation – account people separate from IT, analytics, digital, etc.
  42. 42. Augustine Fou- 42 - Lower Cost Alternatives Brands now have ways to produce quality original content at a fraction of what it used to cost to produce a glossy TV ad. Ford sponsored video by DevinSuperTramp Showcases new electric Ford car, used in the bike tour to various locations around San Francisco.
  43. 43. Augustine Fou- 43 - Crowdsourced Creativity Brands can now crowdsource ideas from fans and then produce the original content (in this case videos) for marketing. Mini USA engaged their loyal owners to create ideas for the launch of the new Hardtop. 10 winning stories were selected and produced into videos, some of which went viral.
  44. 44. Augustine Fou- 44 - Other Points • Clients view “small is better” now – more specialized experience, less overhead • Clients start to ask who is working on the project, may specify names in contract • Agency consolidation plays have not worked well due to inexperience, and coordination overhead
  45. 45. Augustine Fou- 45 - Dr. Augustine Fou – Digital Consigliere “I advise clients on optimizing advertising across all channels. When users are moving away from traditional TV viewing, advertisers need to find new ways of reaching them and attracting their attention, likely in digital.” FORMER CHIEF DIGITAL OFFICER, HCG (OMNICOM) MCKINSEY CONSULTANT CLIENT SIDE / AGENCY SIDE EXPERIENCE PROFESSOR AND COLUMNIST ENTREPRENEUR / SMALL BUSINESS OWNER PHD MATERIALS SCIENCE (MIT '95) AT AGE 23 @acfou ClickZ Articles: http://bit.ly/augustine-fou-clickz Slideshares: http://bit.ly/augustine-fou-slideshares LinkedIn: https://www.linkedin.com/today/author/84444-augustinefou
  46. 46. Augustine Fou- 46 - Related Articles Augustine Fou- 46 - http://www.slideshare.net/augustinefou/viewability-of-display-ads-vs-video-ads- 2014-by-augustine-fou http://www.slideshare.net/augustinefou/video-ads-vs-tv-ads-by-the-numbers- comparison-by-augustine-fou http://www.slideshare.net/augustinefou/viewability-of-tv-ads-vs-digital-ads-2014-by- augustine-fou http://www.slideshare.net/augustinefou/digital-advertising-benchmarks-2014-by- augustine-fou http://pt.slideshare.net/augustinefou/video-ads-vs-tv-ads-by-the-numbers- comparison-by-augustine-fou http://www.slideshare.net/augustinefou/cord-cutting-phone-tv-by-augustine-fou-and- tery-spataro
  47. 47. Augustine Fou- 47 - APPENDIX
  48. 48. Augustine Fou- 48 - Trends 1. Insourcing - Brands/clients take tasks in-house (e.g. in-source social media, analytics, and digital media buying) 2. Direct buying – Brands have enough leverage themselves to buy direct from Facebook, etc, plus self-serve interfaces 3. Procurement intermediation - departments involved in sourcing by triple-bidding, adding performance clauses 4. Projectization - Shift from commissions to fee-based compensation; from AOR (agency-of-record) to project basis 5. Zero to negative margin production work (e.g. HTML coding, graphic design) no longer profitable for large agencies due to lower cost alternatives (e.g. small firms) and globalization 6. Trend towards specialization – new and highly specific digital tactics require individuals with real hands-on experience, big agencies dont have those.

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