Things are about to turn nasty in the media industry. Advertising giants Omnicom and Carat – already gearing up for a fight over the 200m billings of Eurospace – are about to come to blows over the independent media shop Manning Gottlieb Media.
Omnicom and Carat (both rival shareholders in MGM) are bidding against each other for control of the company, according to sources.
For Omnicom, the deal could be the catalyst for a consolidation of its media brands across Europe after more than a decade of speculation.
For Carat, the purchase is a means to put the brakes on any such development and salvage some corporate pride, which last week took a knock when it emerged that TBWA was terminating its contract with Eurospace, TBWA’s media operation which is entirely owned by Carat (MW July 3).
Eurospace has 200m billings from TBWA’s clients across Europe, including the Nissan car account, the medical company Beiersdorf (owner of brands such as Nivea) and drinks manufacturer Seagram. It was set up in 1991 to provide TBWA with a full service function, but is now completely owned by Carat.
Last week, Alasdair Ritchie, president of TBWA International, confirmed the three-year contract due for renewal by TBWA at the end of June (with a six-month notice period) would not be renewed.
He said in a prepared statement: “We are working closely with Omnicom on a number of initiatives in media, which should come to fruition later in the year. Given our historic excellent relationship with Carat we felt we were honour-bound to give them notice of our intentions, even though it’s premature for us to unveil our plans, particularly since if we had renewed our contract, we would have had no flexibility for some years.”
This apparent vacuum in TBWA’s media buying operation has left clients confused and local TBWA management unimpressed, according to the Carat camp.
Of course the Omnicom band claims it is part of a bigger strategic plan. But in life timing is everything, and the notice to quit the Eurospace contract has undoubtedly given Carat the opportunity to exploit its existing working relationships with clients.
One industry onlooker says: “Alasdair Ritchie has probably jumped the gun by putting Carat on notice on the Eurospace business. At the moment there is no clear position on what they are going to do. It looks a mess.”
So what is the Omnicom masterplan? Sources suggest the break- up of the Eurospace relationship is part of a scheme being mapped out by Bruce Crawford, chairman of Omnicom, for his group’s European operation.
If the original Omnicom deal is signed next week as planned and not overtaken by a counter-bid from Carat, MGM could provide the key to the future of Omnicom’s European media strategy.
If the deal goes forward, it would involve MGM pulling its 55m volume TV buying out of TMD Carat and putting it into a volume operation with Omnicom sister agency BMP Optimum, to create a bigger buying point for TV deals. MGM’s clients include Nike, Virgin, Sony PlayStation and News International.
This new negotiating con cern – which is thought to have a working title but no definite new brand – could potentially include pooled volume from New PHD, linked to Omnicom through the group’s minority stake in New PHD’s owner Abbott Mead Vickers.BBDO, and from TBWA clients which previously used Eurospace.
Whatever the outcome, one thing looks certain. Colin Gottlieb and Nick Manning, the founding partners of MGM, are about to become very rich. Omnicom wants to buy their 49 per cent stake, a transaction that would value the entire company at more than 10m. The advertising giant already has a 32 per cent stake in the company, through TBWA, while Carat has a 19 per cent share.
Omnicom’s new grouping would not only pool the TV buying of all Omnicom agencies in their dealings with the TV sales houses, it would also consolidate backroom operations, such as finance and supplier relations.
The model is nothing new, and of course Carat and CIA already operate in this way. It is the scale of ambition that surprises. CIA has started down this road by setting up The Negotiation Centre, which handles all TV buying for CIA Medianetwork, IDK Media, BJK&E Media, Media Solutions London, CIA Media Solutions Manchester and Morgan CIA in Scotland.
But one rival agency boss is sceptical that Omnicom could ever corral the separate fiefdoms of BMP Optimum and New PHD, (in which it has only a minority stake anyway), because of internal agency resistance. Without active collaboration, any new negotiating point would not be big enough to have an impact.
He says: “Unless Omnicom is now going to establish one very clear and consistent brand with a clear and consistent approach both on a local market level and across Europe, this is nothing more than just a rebalancing of existing arrangements – it is not enough to be a threat.”
Omnicom already has an umbrella media brand, called Optimum Media Direction, or OMD, which was launched last year. The new service combines the media buying clout of Omnicom networks DDB and BBDO in certain markets such as Italy, Spain and Portugal but largely restricts its remit to a research and co-ordination unit. It has even been argued that the launch of OMD will in fact enable New PHD and BMP Optimum to continue running independently of each other, while acting as a useful “conduit into Europe” for both of them.
Yet if Omnicom can use MGM as the key to maximise its buying power across the three networks – DDB, TBWA and BBDO – it will accelerate consolidation within the other big networks.
The model would allow Omnicom to avoid problems of client conflict because the different media brands would be kept separate, only coming together for the negotiation of the TV deal where volume is so important, and enabling them to be both big and smart, rather than big and dull. In the past, the big media agencies have experienced a ceiling on size, with restrictions caused by the potential for client conflict and the problems of co-ordinating hundreds of personnel.
The picture that emerges is of future dealings involving a tiny number of key players, representing perhaps two or three large- to medium-sized media agencies, negotiating massive deals and consequently massive discounts.
This sort of TV buying operation made up of just a few “media mandarins” would be relatively cheap to run and would speed up the buying process.
Consolidation would bring more than just economies of scale. There is a belief in the industry that the three TV sales houses, Carlton, Laser and TSMS, will themselves consolidate into one or two selling points (although as regulation stands at the moment that cannot happen). Faced with this challenge, buyers will inevitably need more volume to achieve more clout.
Smaller media buying agencies have always marshalled an impressive list of arguments against consolidation. These are basically threefold:
It has never been easier to buy cheap media. It has never been harder to gain share of mind.
Consolidation is going on for reasons of defence. Getting the lowest price is not a measure of value.
The big agency shops fit their clients into the deal, not the other way round. Clients don’t get the value – the agency does.
In a large- to medium-sized agency, they argue, if you work for a few major clients with a disproportionate share of your total billings, you have to shoehorn the rest in – where the big clients go the rest have to follow.
But if Omnicom can manipulate all its volume into a huge operation, where deals are nearer 1bn than a few million pounds, these arguments could be outdated. The issue of price becomes irrelevant, as a polarisation of tariffs between the big three – Omnicom, Interpublic and WPP – and the rest of the universe begins to take shape.
One analogy is today’s football transfer market, with its two-tier pricing between the mega-million pound deals of Manchester United and the likes of Crystal Palace.
“The small buying shops won’t be able to compete. They’ll eventually have to pass the buying into those huge companies and then the only area they can develop will be in strategic thinking,” says an observer.
The suggestion from this school of thought is that a massive buying pool gives flexibility, not arrogant rigidity, because whatever a client wants, the options for implementation will exist (and without the client paying a premium).
If Omnicom can exploit its volume potential, Interpublic may well be forced to speed up consolidation of Initiative, Western International and Universal McCann, while WPP will have to rethink its position. Since WPP chief executive Martin Sorrell snapped up 14.4 per cent in CIA, takeover rumours have been rife; although a looser alliance, where CIA and the newly-merged JWT/ O&M would act as distinct brands, allowing them to handle conflicting clients, seems a more likely way forward.
The media buying agencies which fail to align themselves could suffer long-term damage. The pressure will grow on the remaining single networks, the likes of Grey, Leo Burnett and DMB&B, to create media coalitions.
Without them, however much organic growth and new business the individual media agencies achieve, they can never have the same buying power as a single point representing the volume of two, three or even four brands.
But for the moment, even if the momentum towards consolidation is inexorable, much remains in the realm of speculation. This week all eyes are on MGM, and whether it will fall to Carat or Omnicom – an outcome which seems likely to determine the shape and speed of future change.