Advertising's Big Reckoning Gets Postponed to 2022

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Consumers are going to spend a lot more money in 2021 than they did in 2020. And that’s great news for the advertising industry — not just Google, Amazon.com Inc. and Facebook Inc., who together attract 44% of all ad spending, but also struggling old-school agencies such as WPP Plc., Interpublic Group Inc., Publicis Groupe SA, Dentsu Inc. and Omnicom Group Inc.

That rebound will hide more existential problems, however, for the ad world denizens of Madison Avenue and London’s Soho. A revolution is set to hit online advertising in the coming months. So although the rising tide will lift all ships for now, we won’t know which companies have truly made the right strategic decisions until at least 2022, according to Bloomberg Intelligence analyst Matthew Bloxham.

Two huge changes this year will upturn the way that online ads target consumers. First, Apple Inc. is making it harder for advertisers to track the activities of iPhone users. Second, Google is phasing out the use of so-called third-party cookies on its Chrome browser, which allow companies to follow your activities across the web.

Both moves mean that brands will have less insight into which apps and websites consumers are using — information that advertisers use not just to target ads, but also to understand whether their efforts are effective. At the moment they might be able to see, for instance, how many times you saw an ad for a pair of sneakers before deciding to buy the product.

The loss of such third-party data has prompted some of the big ad companies to invest in owning first-party data. This is personal information, such as an e-mail address, that users willingly hand over.

Publicis, which owns agencies Saatchi & Saatchi and Leo Burnett Worldwide, bought Alliance Data Systems Corp.’s Epsilon division for $4.4 billion in 2019. That company uses its own pool of data to help brands identify and reach new customers. This followed IPG’s $2.3 billion deal for Acxiom Corp.’s similar marketing services arm and Dentsu’s takeover of Merkle in 2016.

These deals represent an effort by the traditional ad industry to take on Google and Facebook by relying on its own customer data. It’s risky, but the likes of Publicis are adamant that the acquisitions have helped them attract new clients by making it easier to target consumers.

WPP is taking a different tack. Rather than trying to compete with the tech giants on data, it’s knuckling down to focus on core competencies: creative and digital brand-building for clients. In the new advertising reality, WPP may be smaller than it once imagined, but it will have a niche farther away from the tech companies’ reach. It’s not the bet-the-house, financial gamble of the Publicis approach, but it also has less upside.

Which strategy is better? If you think Google, Facebook and Amazon.com Inc. will inexorably continue to gobble up most advertising spending, then WPP looks like the safer route. But if antitrust action curtails the tech giants’ encroachment, then Publicis may be well placed.

We’ll probably have to wait until next year to see how this turns out, because of the distorting one-off upswing in spending this year and the ad firms’ opacity. WPP now lumps more than three quarters of its 12 billion pounds ($17 billion) of revenue into a category it calls “global integrated agencies.” That means investors have little consistent sense of which strategic efforts are driving growth. Publicis is even worse, breaking down revenue by region and industry of the client, but no more.

Long-term rivals, WPP and Publicis are both trading at a similar multiple of forward earnings. That might be because neither firm is giving investors much insight into the financial impact of their respective strategies. But they are very different approaches, and come 2022, that’s likely to be reflected in their earnings. It’s hard to see how they both win.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

©2021 Bloomberg L.P.

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