Signal special evening edition: Omnicom + IPG is more about becoming Applovin than Accenture.

Today the Omnicom and IPG merger was announced. The takes are plentiful but beyond scale and efficiencies what could be the real investment hypothesis behind the deal. My thinking is that the collective scale of these two businesses as they presently operate combined provides the required scale and resource to fundamentally evolve and improve the returns this scale can provide.

When we read about the future of holding companies we've been led to believe they will present in a model that looks like Accenture. The real business to look closely at is Applovin. It is Applovin that represents where these current agency groups see their future growth.

Is this deal about cost efficiency? Not really.

Collectively IPG and Omnicom in 2023 spent around $12-13 billion USD in salaries, about $2 billion in rental costs and around $4-5 billion in third party service costs. These are businesses with a large amount of expenses.

The release summarising the merger suggests cost synergy benefits of $750m USD. This represents around 3.75% of total costs related to salaries, service and occupancy costs. Assuming half of this projected saving is realised and goes to the bottom line, that’s $375 in net income. At Omnicom’s current 12x multiple that would contribute $4.5 billion in valuation if the multiple held. Omnicom is paying $13 billion for Interpublic, which means if this is about efficiency it’s not a particularly efficient buy.

It is challenging to see the combined OMNIPG making significant brand and people rationalisations when the companies that have been the most aggressive in this area have performed the worst in terms of growth and valuation since they began slashing agency brands (WPP and Dentsu). Both Omnicom and IPG have history in supporting and nurturing their individual agency brands and culturally and commercially this has served them well.

Is the deal about billings? Moreso.

This is where it gets more interesting. The collective OMNIPG is likely to have total billings between $65-70 billion. Billings in and of themselves aren’t that interesting, but the leverage and adjacent opportunities they can provide a holding company can be very interesting.

At that scale of $65-70 billion, the OMNIPG collective will be the largest billings group in the world, giving them access to a bigger pool of advertising funds than any other group.

Is the deal about enhanced client access? Yes to a point.

The wording in the announcement is important in terms of what the collective companies believe the combined entity represents.

The broadest and most innovative services and products, driven by the most advanced sales and marketing platform. The company will deliver end-to-end services across media, precision marketing, CRM, data, digital commerce, advertising, healthcare, public relations and branding.

I may be taking this too literally but I believe the order in which these disciplines are mentioned relates to their importance as revenue and growth drivers. There’s the first 5 areas that will be the core primary engine with an expectation of significant growth  (media, precision marketing, CRM, data, digital commerce) and then there’s everything else that is likely lower growth that can help recruit clients to the core area, with potentially some elements likely to be spun out.

Media, precision marketing, CRM, data, digital commerce - both Omnicom and IPG do this already don’t they? Yes, but it’s about to really change.

Omnicom acquiring IPG is not about Omnicom becoming a bigger agency group. It is about Omnicom becoming a bigger version of Applovin.

You may not know much about Applovin. It’s on the surface mobile advertising network, it’s worth over $100 billion USD and has a net margin of 36%. 

Holding companies don’t want to be Accenture anymore. They want to be Applovin.

AppLovin creates meaningful connections by empowering your business to bring ideas, products, and content to your ideal customers.

AppLovin ultimately serves two parties. It serves advertisers, predominantly mobile app marketers looking to generate installs. And it serves mobile app owners looking to monetise their audience through advertising. 

AppLovin has a piece of technology called AXON which collects billions of data signals from campaigns, server to server conversion APIs, other APIs, pixels and tracking that are collecting a lot of information on who downloads what, how much they spend, how engaged they are, and predict (or directly see) what someone is about to do.

This technology allows Applovin to demonstrate to both advertisers and inventory owners that it can generate them superior returns to alternative options. It generates inventory supply through inventory owners believing Applovin provides better monetisation. And it generates more demand as marketers believe it generates better campaign reporting outcomes than other options. Both sides provide leverage that helps Applovin with the other side. More demand provides more incentives for supply to join the ecosystem; more supply provides more areas for demand to mine.

Applovin as a business has full view into media, precision marketing, CRM, data, digital commerce for its advertising clients. It provides the inventory, its technology leverages CRM, data and digital commerce from app owners and marketers across apps, commerce, web, mobile to drive precision marketing outcomes that are deemed superior to alternatives. It has built a model where it can obtain this data for free through wrapping it into an end to end acquisition service where both the demand and supply sides are invested enough to hand it over.

Media, precision marketing, CRM, data, digital commerce. Sounds familiar!

Applovin is on track to do around $5b in revenue for 2024, with around $2.8b in EBITDA. OMNIPG collectively generated $3.7b in EBITDA for 2023 full year from $25 billion in revenue (5x Applovin)

Applovin as a result is worth more than every advertising holding company combined.

OMNIPG believes it can create a large part of its business that operates like Applovin, and that this model of business is where their future growth lies.

The defining difference between Applovin and agencies is that agencies provide advisory and thinking on how to invest advertising dollars, whilst Applovin skips that part and just spends the money and provides sales it can attribute to the spend. It is entirely focused on the ‘ends’, whereas agencies' businesses are based on the ‘means’. And ends trump means.

Principal media is generating a lot of headlines at the moment but it’s only just getting started. Buying a product off someone at x, and then selling more or less the same product later on at a multiple of x is a good short term business but it’s not defensible in a competitive market

My view is OMNIPG wants to be the Applovin for a segment of clients that want this sort of service. Tell us your growth goals and let us handle it. Use our end to end portfolio of services and products and reframe how you utilise media from a collection of individual ingredients to an all-in delivered singular proposition.

Combined with this would be an Applovin like ecosystem of APIs, pixels and data collection across their clients websites and data, as well as the media owners. A data infrastructure that would give them full view into what consumers are doing both in terms of commerce and buying, as well as media behaviours.

In this scenario, OMNIPG aims to become the company that delivers the growth outcomes rather than the service provider that simply facilitates the buying of placements. In the Applovin example the marketer has extremely low visibility into where their activity runs - for Applovin where it runs is secondary to the primary goal of reporting on events.

Couldn’t Omnicom or IPG have done this without merging? Maybe, but has a higher platform for success with the scale the merger brings.

$65-70 billion of billings provides OMNIPG with a lot of leverage over large media owners. It’s unlikely this is enough to give them any leverage over Google and Meta, but it’s absolutely enough to get more leverage over everyone else. Leverage is important as supply is critical for this strategy to work. Without supply everything falls over. Supply provides the leverage to have clients buy into the integrated idea enough to hand over their data for free, and if the clients are on board then the hope is the media companies will do the same and hand their data over for free too.

Holding companies can’t be Google and Meta. But they can be versions of Applovin.

Would this approach be appealing to OMNIPG clients? Yes.

If you look below, this sort of Applovin approach would appeal to pharma, auto, tech, financial services, travel, entertainment, retail and telco customers. This represents around 50% of total billings.

This Applovin ‘all-in’ approach may not be for every client, but it doesn’t need to be. If OMNIPG can convince participants in these key categories that it has the scale, the leverage, the capabilities and the Applovin like engine to deliver new customers then 20-30% of customers buying into this idea would deliver significant value improvements.

What does it mean for everyone else? A catalyst for change.

This is hard to say. It’s reasonable to suggest Publicis is already on a similar journey to what has been explained above and a larger competitor such as OMNIPG will only accelerate this.

Personally I think these moves benefit most participants. They provide a clear difference between holding company agencies and independent/non holding company ones. They provide more choice in the market. And for the people in these businesses they provide pretty meaty transformation challenges to get stuck into that create different problems and opportunities to be solved and realised than those that exist now.

The only place no one will want to be is stuck in the middle. If Publicis and OMNIPG are going in one direction (as per the above), the other large players need to either follow or establish a meaningful differentiated position. Trying to have one foot in the future and the past will be confusing for clients, people and the market. 

Agencies cop a lot of grief for not changing enough, being too slow or too stuck in their ways. A merger of two businesses as complex and globally distributed as Omnicom and IPG is not a trivial thing, it would be much easier for their executive ranks to avoid the challenges that will come with integration and continue on business as usual. They’ve decided the juice is worth the squeeze and the combination of the assets and resources of these two businesses has the potential to create a transformed and rejuvenated new business. It also has the potential to create a bunch of new agencies from leaders within this new business who may decide this approach isn’t for them. Again, more invention and more choice.

Personally I’d love to see this merger succeed. My view is it creates infinitely more opportunity (especially in the long term) than downside.