Digital Strategy Paying Off for Publicis

  • 04 Apr 2011 3:29 PM
    Message # 564070
    Anonymous

    PARIS undefined When Microsoft this month awarded a big chunk of its North American advertising account to Publicis Groupe, the Paris-based marketing company, the news felt like vindication for the chief executive of Publicis, Maurice Lévy.

    In the tradition-bound advertising industry, Mr. Lévy has been one of the strongest advocates of new digital forms of marketing, and he has backed up his words by writing big checks. Five years ago, he spent $1.3 billion of Publicis shareholders’ money to buy Digitas, an Internet advertising agency, prompting rivals and some analysts to sneer that he had paid too much. Yet Mr. Lévy pushed ahead, adding other digital agencies, including Razorfish for $530 million in 2009.

    Now, as the advertising industry recovers more strongly than expected from a deep downturn, with digital advertising leading the way, Mr. Lévy is not shy about saying “I told you so.” The company’s growth has outpaced the market, he noted during an interview, and the digital skills it has acquired are helping it with technology-conscious clients like Microsoft, for which Publicis will manage more than $600 million in North American ad spending.

    “We looked at digital and we invested in digital early on,” he said. “We then decided that the shift would be huge, so we invested massively. It happens that we were right.”

    After a 2009 that many people in the advertising industry would like to forget, Publicis, which owns agencies like Saatchi & Saatchi and Leo Burnett, reported last month an 8 percent increase in its revenue for 2010, after adjustments for currency fluctuations and other factors, and a 30 percent gain in earnings.

    The recovery, in which other advertising companies have shared, has prompted a sigh of relief across the ad industry. So much for the idea, in vogue not long ago, that the combined effects of the digital revolution and the recession would hasten the obsolescence of paid-for advertising, as well as the media that rely on it for financial support. Instead of killing the ad industry, the digital revolution has proved to be one of its primary drivers of growth.

    ZenithOptimedia, a media buying agency owned by Publicis, predicts that overall ad spending will rise about 5 percent a year worldwide over the next three years. Internet spending will rise a total of 48 percent during that period, the agency says. Mr. Lévy said he expected digital ads to account for a fifth of global spending within the next seven years, up from about 13 percent now.

    “Advertising came out of the downturn much more strongly than expected,” Mr. Lévy said. “Can it continue to grow? My contention is yes.”

    Digital business accounted for 28 percent of revenue at Publicis last year, putting it neck and neck with WPP Group, the world’s biggest advertising company. While WPP also invested in digital advertising, it did so less aggressively. But it too is reaping the benefits of the recovery, reporting solid gains in revenue and profit for last year.

    “What we have seen since the beginning of 2010 undefined it was almost like somebody turning on a light switch,” said Martin Sorrell, chief executive of WPP, during a Deutsche Bank Securities conference in Palm Beach, Florida, this month.

    Nevertheless, the advertising turnaround has been uneven. While some traditional media, like print, continue to lag behind, spending has bounced back strongly on television. And emerging markets, which barely stumbled during the crisis, continue to push ahead.

    Not everyone in the ad industry is convinced that big acquisitions are the right way to prepare for the digital future. Omnicom Group, the second-largest advertising company, has shied away from large-scale deals after overspending on digital agencies during the dot-com boom.

    John D. Wren, the chief executive of Omnicom, which is based in New York, has said it was unwise for ad agencies to commit large amounts of shareholders’ money on deals that turn them into technology wannabes, while Internet companies like Google and Facebook retain the real expertise. Despite a smaller exposure to digital business, Omnicom was not far behind Publicis last year in revenue growth, and ahead of some other industry leaders.

    Yet as the market improves, other advertising companies are redoubling their efforts to expand their digital capabilities. Havas, which like Publicis is based in Paris, recently announced plans to spend €750 million on acquisitions, with Internet advertising a main area of focus.

    Analysts say that even if agencies are playing catch-up with technology giants, it is important for them to appear up to speed with the latest technological developments.

    “It’s becoming much more of a determining factor in terms of who wins the new business,” said Conor O’Shea, an analyst at Kepler Capital Markets in Paris. Of Publicis, he added: “Their strategy certainly looks like it’s working at the moment, though they did have to pay for it.”

    For Mr. Lévy, there is a fringe benefit to the investments that Publicis has made in its digital business. They have bolstered his image as an expert on new media in France undefined despite being, at 69, well past the ordinary retirement age.

    President Nicolas Sarkozy recently asked Mr. Lévy to help organize a gathering of policy makers and Internet company executives in connection with the Group of 8 summit meeting that is set for Deauville, France, in May. The first-of-its-kind meeting, dubbed “G-8 du Web,” is set to discuss issues like digital piracy, privacy and security.

    There is also still work to do internally before Mr. Lévy retires undefined something he had planned to do at the end of this year, before the board asked him to stay for an indefinite period. Mr. Lévy acknowledged that Publicis was still working on breaking down “silos” and integrating digital specialists into the broader marketing mix, which includes agencies specializing in areas like advertising creation, media buying, public relations and market research.

    Publicis also remains weaker than rivals like WPP in the other fast-growing area of advertising: the emerging markets of Asia, especially China.

    Mr. Lévy said the proximity of Publicis to Internet companies could help with one of the next big challenges for the technology and advertising industries alike: how to harness the enormous popularity of social networking for marketing purposes. Even with more than 500 million users worldwide, for example, Facebook generated less than $2 billion in ad revenue last year, according to eMarketer, a research firm.

    “I am pretty sure there is a business model that has yet to be invented that will generate a lot of revenue for the social networks,” Mr. Lévy said. “I don’t know if it will be as successful as people are expecting, or as successful as Google with search.”

    The unexpected strength of the advertising turnaround has bolstered the cash position of Publicis, and analysts wonder whether Mr. Lévy might be planning to make another big purchase.

    There has long been speculation, for example, that he was interested in a bid for Interpublic Group, the fourth-biggest advertising company worldwide, which is based in New York and has a strong digital business in the United States. While stopping short of ruling out such a deal, he questioned the logic at a time when Publicis was already enjoying the upswing in its fortunes.

    For the moment, he said, the company was focusing on smaller, “targeted” deals. Since the beginning of the year, for example, Publicis has acquired four small agencies in Britain, each of which brings a specific area of expertise.

    “Some acquisitions are interesting to look at because of the scale they would bring to Publicis,” he said. “But it would be problematic to spend two or three years just building scale.”

 

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