80% of my advertising is wasted and I know exactly which advertising holding company is wasting it.tl;dr: There’s a reckoning coming for WPP, Omnicom, and the rest. To understand agency holding companies and just how much trouble they might be in, we must first take a walk back through history. You see, nowhere in the formation of these vast agency networks was there ever an intention to create value for clients or the consumer. No, these were always financial entities built to exploit valuation arbitrage. What is valuation arbitrage? Well, boiling it down, the important bit is that the stock market was willing to value a dollar of agency revenue owned by a publicly traded holding company more highly than that same dollar of revenue if the agency were privately held. A bit of jazz hands magic that led to a kind of financial alchemy: By doing little more than buying agencies, the holding companies could grow their stock price and drive up their market valuation because each additional dollar of revenue purchased was worth more than they’d paid for it. Now, if you’re reading this and thinking it sounds a bit like a Ponzi Scheme you’d be correct. As a strategy, valuation arbitrage bears more than a passing resemblance to exactly that. A fact that has become increasingly apparent in recent years. You see, adding revenue via acquisition is one thing, but it must still sit atop the revenues of the businesses you’ve already bought. And, unfortunately for the holding companies, the guiding thought behind their acquisitions was rarely to purchase great future-facing companies and build a complementary operating portfolio, but instead to buy under-valued revenues that could be booked as profits immediately. Which is all fine and good unless the world changes. And, yeah, that’s right. A digital revolution in marketing meant the world did change and the holding companies weren’t ready. As their operating performance began taking a hit, the stock market started questioning what a dollar of holding company revenue was really worth, advertising tech stocks sucked away investor attention with promises of vastly improved returns, and the detritus of 20+ years of non-integrated “buy low” acquisition behavior started to show through. Now, we shouldn’t really be surprised. You see, because buying agencies was their primary means of value creation, it became the only area of excellence they ever really had to foster. That’s why at an operating level the holding companies have always been filled with odious, aging old ad guys (and yes, they’re almost always guys) who hold court in packed Midtown restaurants screaming non sequiturs like “That’s capitalism, baby!” over the din of lawyers at the other tables. (And yes, I have had this experience, and yes it was exactly as horrible as it sounds). But enough of the history lesson already. Let’s bring this up to where we are today. The holding companies were never really built to be operating entities, they’re led by people whose primary competence is in buying agencies rather than running them, and their historical arbitrage advantage has now dried up as their own valuation multiples have dropped. Which means competition from consulting companies is squeezing them out from the best acquisition opportunities, which they can no longer afford to participate in. (Hello, Droga5) This means what you’re left with are businesses under tremendous pressure to squeeze every last drop of revenue and profit, by any means necessary, from a grab-bag, rag-tag portfolio of acquisitions they’ve made over the past twenty years, many of which aren’t particularly relevant to what clients are looking for. (Which, as an aside, makes being the CEO of any holding company agency a really awful job). So, what could possibly go wrong from here? In a single word, media. Media will be for the holding companies what sub-prime mortgages was to the banks. Media planning and buying is one of the last big profit pools for the agency holding companies, all of them depend on it, and media has two big problems converging at the same time. The first is a shift toward privacy beginning to upend the advertising surveillance business model of recent times (you know ad-world is worried when they respond with lawsuits), and the second is the fact that advertisers are becoming increasingly wise to, and unaccepting of, the sheer scale of how badly the surveillance advertising ecosystem has been ripping them off. Dr. Augustine Fou, who is the canary in the coalmine on this subject, recently wrote a great primer. In it, he describes just how nefarious media buying practices have become, how the holding companies double-dip, double deal, and operate via a network of shady and non-transparent entities. And how an increasing number of brands are now refusing to do media deals with them as a result. Sure, the going has been good. But history suggests that if you’re getting there by destroying rather than creating value for your clients, then things definitely won’t be good forever. The moment there’s a groundswell of major brands taking a long-hard look at their media buying and ad-tech relationships, which is exactly what changes in privacy and do not track mechanisms are likely to cause, then the agency holding companies which are already weakened by their failure to effectively keep up with change, stand to be the biggest losers. And guess what. Unlike the banks, not a single one of them is “too big to fail.”
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