LONDON, Nov 10 (Reuters Breakingviews) – For years, the “Big Four” Western ad holding companies – WPP (WPP.L), Omnicom (OMC.N), Publicis (PUBP.PA) and Interpublic (IPG.N) – have been the tortoise to Alphabet (GOOGL.O), Meta Platforms (META.O) and other Big Tech groups’ hare. That’s now changing, and recessionary risks could exacerbate the effect.
In the three years to the end of 2021, Alphabet, Meta and Snap (SNAP.N) raced ahead. They grew at an average 36% clip each quarter, relative to the same period 12 months previously. On the same metric and time period, WPP and its three traditional rivals could only muster 1.5% organic growth. The upshot was the Big Tech groups boasted 2021 revenue of $380 billion, most of which was digital advertising. WPP and its three rivals don’t break out their digital ad top lines, but their overall revenues for the same year were only around $40 billion.
In the third quarter of 2022, the growth rates sharply reversed. Alphabet, Meta and Snap saw revenue up a miserable 2.4%, on average. The traditional adland quartet, in contrast, saw growth of 6.8%.
Why? For one thing, digital ad giants’ stellar 2021 made maintaining the pace trickier. For another, WPP and rivals have found ways to grow other than via ads, most noticeably by helping clients build apps and crunch data. Most importantly, privacy changes to Apple’s (AAPL.O) iOS operating system made it harder for marketers to connect users seeing ads with users making purchases across different apps, rendering the original ads less valuable.
The third-quarter growth inversion may not be a flash in the pan. Previously platforms like Google and Facebook were able to rope in first-time marketers and massively expand their advertising pie, according to Berenberg. But a sharp recession may mean those same businesses can’t afford to carry on advertising: Redburn analysts reckon digital advertising is easier to “switch off” at the first sign of macroeconomic trouble. The tech interlopers are also more exposed to small and medium-sized businesses that are most likely to be affected by soaring input costs. One Jefferies survey of small businesses found 87% of them used Facebook for digital marketing, and 75% Instagram.
In contrast, ad agencies are relatively more exposed to bigger clients, which are more likely to maintain their advertising budgets. WPP Chief Executive Mark Read noted last month that Swiss behemoth Nestlé (NESN.S) was actually looking to increase its marketing spend in the second half of 2022. Meta and Alphabet will still see some of this cash given traditional ad players will use platforms like Google for these big clients’ digital advertising. But for the first time in ages, the adland veterans are not the poor relations.
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UK ad holding company WPP on Oct. 26 reported third-quarter revenue less pass-through costs of 3 billion pounds. That was up 3.8% year-on-year on a like-for-like basis.
Editing by George Hay and Pranav Kiran
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