Over the weekend France's Publicis and America's Omnicom announced plans for a "merger of equals" that would create by far the world's largest advertising agency (or, rather, a kind of holding company that owns ad agencies) and dominate the world. Except it turns out that there are actually a ton of problems with this merger, starting with the fact that it will need antitrust clearance from 45 (!) different national antitrust regulators. So why do it? It's simple—fear that information technology is poised to ravage the entire industry.
The biggest problem here is that although such an enormous merger will face a lot of regulatory scrutiny, it also seems like the combined firm will suffer from significant diseconomies of scale. As you know from your loyal reading of the Mad Men TV Club, client conflicts of interest are a big problem in advertising business arrangements. And when you take two giant firms and merge them together, you get dozens of conflicts. The merged firm will represent Coke and Pepsi, McDonald's and Taco Bell, Johnson & Johnson and Procter & Gamble, AT&T and Verizon, and Google and Microsoft. As ad agencies have tended to merge, they've developed techniques to assuage clients about conflicts. The pitch here would be that work for Coca-Cola can be stovepiped into certain offices that are managed entirely separately from the ones doing Pepsi work. But obviously even if this argument persuades some clients, it's not going to persuade 100 percent of them. And of course pitching a merger by specifically arguing that your different business units won't cooperate or collaborate in any way raises the question of why merge in the first place.
Mergers of equals are also hard in general, and the fact that one of the companies is French probably makes it an unusually tough merger of equals, since the French government tends to be pretty skeptical about cross-border mergers.
But in a lot of ways this is more about fear than about business opportunities. The traditional advertising business involved a lot of smoke and mirrors. You can buy a glossy full-page ad in a magazine somewhere, but there's absolutely no way to know how many subscribers even opened the issue much less read the ad. The trends in digital technology are toward being able to target your customers more precisely but also in a less elaborate way. If data mining and analysis can do a really good job of matching product offers with customers, then a very straightforward pitch might be the most effective one. That's how Google's become such an advertising juggernaut and Facebook seems to be becoming one as well. The ultrapersonalized advertising of Minority Report is meant to be dystopian, but in principle the better-targeted ads can be the more focused they should be on basic information and less on fun narrative content. The fear is that big firms will contract directly with the Googles of the world to do their marketing, with less room for ad agencies as middlemen and sources of creative ideas. Consolidating is both a defensive move against a possibly shrinking future for the industry, and also an effort to obtain enough scale so that the agency itself can become a major data-crunching player.