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Tech client caution has held agencies back this year. When might ad spend return?

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By Sam Bradley | Senior Reporter

November 2, 2023 | 10 min read

Agency leaders are optimistic following positive earnings reports at Meta and Snap. Analysts say they shouldn’t hold their breath.

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Meta’s most recent results have sparked optimism in adland / Katka Pavlickova

Since the first quarter of this year, the biggest firms in advertising have had to struggle to record commercial growth. WPP, Interpublic Group (IPG) and S4 have each issued profit warnings (WPP twice) owing to a range of factors – primarily, falling investment in advertising among tech clients.

Meta first began to slow investment activity in April 2022 and paused hiring a month later, for example – in part due to a slowdown among its own advertising clients, predominantly smaller e-commerce businesses. Competitors, and then layoffs, followed.

The ripples from those decisions took a while to show up on the balance sheets of agency groups. But by the first quarter of 2023, when IPG first recorded a decline in US revenues (where most of those previously profligate companies are based), holding companies were beginning to hurt. And the agencies that have suffered the most this year are also the ones that draw the most revenue from the tech sector.

Consider WPP, IPG and S4’s client roster. At the close of 2022, the former took 26% of its revenue from tech and telco clients, while IPG took 15% and S4, which had pursued said clients particularly aggressively, 46%. By this year’s third quarter, all had seen revenues decline, particularly in the US – where those tech clients constitute an even larger slice of the pie.

US holding company Stagwell finds itself in a similar position. Its third-quarter results, released today, showed US revenues fell 9.9% relative to last year’s numbers, in part due to the pause in spending by the tech sector – from which it takes around 18% of its overall revenue.

The company’s revenue declines (5% year-to-date, compared with the same period last year) led it to cut hundreds of jobs – equivalent to 7% of its global workforce. Despite that, chairman Mark Penn tells The Drum there’s no intention to reduce the proportion of income it takes from the category.

“We think that those are long-term growth companies and a long-term growth sector in our society... even if they sometimes sit back after achieving and reaching a mountain, they then just go on to the next mountain. I think that that’s pretty well been proven out by the last 20 or 30 years,” he says.

Brian Wieser, principal at Madison & Wall, tells The Drum: “Tech-related marketers have been cutting their spending pretty universally. It’s definitely been a drag for agencies.” Though agency businesses are always exposed to their clients’ category concerns (tech isn’t the only category to fall, as spending among automakers and in the public sector has also dropped), tech caution has weighed heavily on those agencies with heavy exposure.

In contrast, the agencies with less exposure to the tech industry, such as Publicis, Omnicom and Havas, have seen positive growth. Omnicom’s tech clients account for 10% of its income, while the former took 13% of its revenue from tech and telecoms in 2022 – and was able to revise profit expectations upwards, while close competitor WPP, which takes double the amount of revenue from that sector, issued a profit warning.

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There are other exposure factors. WPP, in particular, seems to be repeatedly finding itself in the wrong places at the wrong times, taking more revenue from the UK than its competitors at a time when the country is skirting a recession and consumer disposable income has declined. It also takes a bigger chunk of revenue from China – still only slowly recovering from the double economic impact of Covid and a subprime mortgage crisis. But it’s tech spending that holding company CEOs such as Philippe Krakowsky and Mark Read blame and tech spending that they want to see again.

Agency leaders might start to look hopefully toward the tech sector soon, given healthier readings from Meta, Snap and Microsoft this quarter. The Snapchat publisher returned to positive growth, while Microsoft released an optimistic revenue forecast for 2024. Meta, too, has seen revenues curve upwards in its latest quarterly results. According to Mark Penn, tech spending is due to return and the “negative factors” that have haunted agency bosses in 2023 are “in retreat.”

Perhaps they shouldn’t hold their breath. Wieser says that just because tech companies such as Meta and Snap’s bottom lines look more promising doesn’t mean they will begin spending at the same rate once more.

The sector has collectively thought about advertising in a different way to counterpart marketers at CPG and auto brands, he notes: “In many cases, not all, they are less mature organizations. The process by which they’ve allocated money to advertising has been very subjective.”

In many cases, he notes, “they may have started spending based on an attribution model that said that for every dollar they spend on advertising, they get a certain amount of return. But these organizations may not have appreciated that if you torture data long enough, it will tell you anything you want it to.”

Whether or not cutting brand marketing investments is wise in the long run aside – Wieser adds that such cuts are likely “zero-based budgeting by another name, probably being implemented just as badly” – is immaterial to the agencies on the other end. As those companies have “matured” and come to resemble in structure and outlook the corporate giants of the past, Wieser says it’s no surprise they’ve reconsidered previous approaches to ad spend. Those changes could last. “Is it a shock that they cut? Well, no. Is it possible that they keep cutting? Absolutely,” he says.

Mark Zuckerberg, after all, hailed 2023 as the “year of efficiencies” for his company. It’d be a big swing to go from that position to opening the cash faucets again. And in any case, Wieser notes, advertising is just one area among many that might command investment. “There are lots of different ways you can build a business.”

This doesn’t mean agency groups are hostages to fortune. Publicis and Havas’s lesser exposure to tech caution isn’t the only reason they’ve found success; they’ve either found additional organic growth or found past investments well-positioned for industry-wide trends, such as retail media investments.

“Are they positioned for the long run? Are they investing in the right places? The acquisition of Flywheel for Omnicom was a pretty big deal and it’s a good example of where there clearly are growth opportunities for agency service businesses,” says Wieser. “There clearly are opportunities where there is growth and some agencies are capitalizing on that better than others.”

Competition – perhaps in the AI space – could be the thing that unlocks tech spending once more. Wieser says that seeing your rivals increase their marketing investments can be a powerful motivator to increase your own.

“Often, if your competitor is spending money, there are a lot of good reasons why you then also spend money on advertising to match them. But it doesn’t need to be the only way.”

That’s Penn’s hope. He says spending has begun to trickle in once more in the form of projects and digital transformation work despite the company’s revenues from that part of its business continuing to fall over the last three months. “[Zuckerberg] called it the year of efficiency, not a decade,“ he says.

“We’re seeing that they are putting out more RFIs and more proposals. One company that had cut back from 42 proposals to, like, two is now beginning to come back. Logically, they’ve gotten past the crunch that they were concerned about their efficiency.”

Those clients can’t let rivals steal a march on them, he argues. “You’re going to see more competition in the cloud, more competition in AI. Consequently, that’s also going to produce more work; whether it’s for the B2B shows, whether it’s for new products, whether it’s for designing customer interfaces, I think you’re going to see more work in that direction.”

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