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1、MediaAdvertising 101: A Primer with a Focus on the 2020 OutlookComprehensive overview of the advertising industry. In this primer, we examine macroeconomic trends, the domestic and international markets, and the major media that participate in this industry.An analysis of key industry trends, includ

2、ing: the drivers of slower industry organic revenue growth, with a review of cyclical and structural factors including overcapacity, in-housing, pressure in the FMCG vertical, and impact of consulting firms. We also provide a deeper look the evolving strategies of the major holding companies in the

3、face significant industry change.Close look at current macro trends and health of the ad market in 2020. We detail advertising patterns through economic cycles, highlighting how we expect 2020 to shape up on a global and regional basis.Detailed examination of the business model of an ad agency (adve

4、rtising and marketing services company). We discuss the structure of an ad agency holding company, study the growth drivers behind the agencies and other businesses, and highlight current trends that influence its outlook.Company-specific outlooks. We provide pertinent financial information and inve

5、stment summaries for five of the top advertising agencies that we cover in the industry: Interpublic, Omnicom, WPP, Publicis, and Dentsu, including an overview of each companys business mix and client base.Recession weighs on stocks, but fundamentals likely to outperform other traditional media. The

6、 highly diversified business models of the advertising and marketing services companies and variable cost structures provide a buffer to earnings in weak economic periods. Good balance sheets and limited exposure to any one vertical also minimizes risks in these unprecedented times. While ad spendin

7、g historically has lagged an economic downturn, we dont necessarily see that to be the case with national advertising in this cycle given the unique nature of this disruption and could see declines lessening a bit in Q3. We also believe the agencies will weather the storm better than most companies

8、and expect the stocks to outperform while the economic climate remains weak. For U.S.-based names, we like IPG and OMC, both rated Overweight. In Europe, we prefer WPP (Overweight) to Publicis (Neutral) as it trades on an EV/NOPAT discount. In Japan, we rate Dentsu Neutral.Global Equity Research03 M

9、ay 2020MediaAlexia S. Quadrani AC(1-212) 622-1896 HYPERLINK mailto:alexia.quadrani alexia.quadraniBloomberg JPMA QUADRANI J.P. Morgan Securities LLCDavid Karnovsky, CFA(1-212) 622-1206 HYPERLINK mailto:david.karnovsky david.karnovskyJ.P. Morgan Securities LLCAnna Lizzul(1-212) 622-6139 HYPERLINK mai

10、lto:anna.lizzul anna.lizzulJ.P. Morgan Securities LLCZilu Pan(1-212) 622-6522 HYPERLINK mailto:zilu.pan zilu.panJ.P. Morgan Securities LLCEuropean Media & Internet Daniel Kerven AC(44-20) 7134-3057 HYPERLINK mailto:daniel.kerven daniel.kervenBloomberg JPMA KERVEN J.P. Morgan Securities plcMarcus Die

11、bel AC(44 20) 7742-4447 HYPERLINK mailto:marcus.diebel marcus.diebelBloomberg JPMA DIEBEL J.P. Morgan Securities plc Internet, Games, Media Haruka Mori AC(81-3) 6736-8632 HYPERLINK mailto:haruka.mori haruka.mori Bloomberg JPMA MORI JPMorgan Securities Japan Co., Ltd.See page 116 for analyst certific

12、ation and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Inves

13、tors should consider this report as only a single factor in making their investment decision. HYPERLINK / Table of Contents HYPERLINK l _bookmark0 Executive Summary 3 HYPERLINK l _bookmark1 The Advertising Market 14 HYPERLINK l _bookmark2 International Trends 24 HYPERLINK l _bookmark3 Dissecting Adv

14、ertising Spending 26 HYPERLINK l _bookmark4 The Advertising and Marketing Services Company 50 HYPERLINK l _bookmark5 Advertising and Marketing Services Company Growth HYPERLINK l _bookmark5 Drivers 61 HYPERLINK l _bookmark6 Industry Trends 65 HYPERLINK l _bookmark7 Compensation Structure 75 HYPERLIN

15、K l _bookmark8 Financial Outlook 76 HYPERLINK l _bookmark9 Valuation 79 HYPERLINK l _bookmark10 Company Profiles 81 HYPERLINK l _bookmark11 WPP Group (Overweight) 82 HYPERLINK l _bookmark12 Omnicom Group (Overweight) 88 HYPERLINK l _bookmark13 Interpublic Group (Overweight) 93 HYPERLINK l _bookmark1

16、4 Publicis Groupe (Neutral) 98 HYPERLINK l _bookmark15 Dentsu Group (Neutral) 103 HYPERLINK l _bookmark16 Appendix I: Billings 110 HYPERLINK l _bookmark17 Appendix II: Working Capital Changes 111 HYPERLINK l _bookmark18 Appendix III: Glossary 112Executive SummaryAgencies saw a moderation in organic

17、growth in 2019 following a year of acceleration2019 was another volatile year for agency holding company stocks. Organic growth for the industry slowed to the lowest levels of the cycle, and sentiment remained negative sending valuations to their lowest levels in recent years. The challenges for the

18、 industry and bear case which continue to have momentum include: 1) overcapacity and reduced client conflict have provided greater leverage to clients in terms of both pricing and service; 2) marketers are moving more commoditized functions in-house in an effort to lower costs, sometimes with the he

19、lp of consultants or ad-tech service firms; 3) client verticals such as FMCG remain under pressure, which is translating into a reduced scope of creative work; and 4) holding companies are burdened by underperforming non-core businesses which they are still in the process of divesting. We dig into e

20、ach of these deeper below; however, we note that even amid this disruptive environment, weve seen significant divergence in organic growth, with some agencies outperforming and even thriving. This demonstrates, in our view, that the agency model is hardly broken, and that a well-executed offering ca

21、n continue to provide substantial value-add to marketers. Furthermore, while creative remains an area under clear pressure, full service agencies are benefitting from stronger demand for media, events, and other marketing services disciplines.Table 1: Big 4 Agencies Stock Performance vs. S&P 500 & M

22、SCI Europe YearBig 4S&P 500MXEU 2020 YTD-32.8%-13.1%-19.3%20197.0%28.9%22.4%2018-11.4%-6.2%-13.1%2017-17.0%19.4%7.3%20169.0%9.5%-0.5%20157.2%-0.7%5.5%20142.2%11.4%4.1%201353.0%29.6%16.4%201221.0%13.4%13.4% 2011-8.6%0.0%-10.9% Source: Bloomberg. Note: Big 4 is average performance of IPG, OMC, PUB, an

23、d WPP.Agency Organic Growth in 2019Aggregate agency organic growth was 0.2% in 2019, decelerating from 1.6% in 2018, and was the lowest level of growth in the economic cycle despite ongoing robust ad spend. In Q419, the industry went negative for the first time since 2009. Across seven holding compa

24、nies that we track, growth decelerated in 2019 for all with the exception of Omnicom (2.8% from 2.6% prior), which saw notable improvements in advertising and healthcare offset softer CRM. IPG was again the best performing group on an annual basis, though it saw a slowing to 3.3% (from 5.5%), largel

25、y driven by new business losses (FCA, VW, US Army) at the end of 2018. Consistent with the theme of competition and pricing pressure described above, we did not observe the account losses translate to equivalent growth at winning agencies. We saw a similar dynamic for WPP (organic moved to -1.6% fro

26、m-0.4%), where losses from Ford appeared to outpace gains to Omnicom; outside of GTB (dedicated Ford agency), WPP cited softness at other specialist agencies(AKQA, Geometry). At PUB, organic moved to -2.3% from 0.1%, with management calling out a 200bps impact from attrition (i.e. existing clients s

27、pending less), media losses, and a repositioning at Sapient. Dentsus International business (Dentsu Aegis Network) saw a significant deceleration last year (organic was -1% from +4.3% in 2018), driven by headwinds in the APAC region where the network announced a restructuring at the end of 2019. For

28、 agencies that disclose it (WPP, OMC) PR moved from positive to negative.Figure 1: Ad Agency Aggregate Organic Growth Historical by Year2010 2011 2012 2013 2014 2015 2016 2017 2018 20190.0%0.2%1.0%1.1%1.6%3.0%2.0%3.1%2.9%3.2%4.0%4.4% 4.4%5.0%5.7%6.0%6.4%7.0%Source: Company reports and J.P. Morgan es

29、timates. Note: Total includes IPG, OMC, WPP, PUB, HAV, MDCA (from Q112; excludes ACCENT), and Dentsu Aegis Network (from Q414).Figure 2: Ad Agency Aggregate Organic Growth Historical Quarter0.0%-0.5%0.0% -0.2%0.3%0.5%0.6%0.7%0.9%1.0%1.0%1.2%1.5%1.5%1.8%1.9%1.8%2.5%2.0%2.4%2.7%4.5%4.0% 3.8%3.7%3.5%3.

30、0%Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, PUB, HAV, MDCA (from Q112; excludes ACCENT), and Dentsu Aegis Network (from Q414).Figure 3: Organic Revenue Growth by Company, 2019DANPUBWPPOMCIPG-3.5%-2.3%-1.6%-2.5%-1.0%2.5%1.5%0.5%-0.5%-1.5%2.8%3.3%4.5%3.5%So

31、urce: Company reports and J.P. Morgan estimates.Looking by region, North America industry growth, measured as an average of the Big-4 holding companies, moved to firmly negative territory (-0.9%) after two straight years of flattish performance. International markets decelerated to +1.8% (from 3.0%

32、the year prior). While this gap could be partly explained by ad spend growth, we mainly attribute the difference to the headwinds cited above, which are more prevalent in the U.S. Looking at specific international regions, Latin America, Europe, and APAC all saw slightly moderation over 2018.2019Reg

33、ionIPGOMCWPPPUBDAN2018RegionIPGOMCWPPPUBDANUS1.9%2.7%nananaUS5.1%0.7%-4.2%nanaNorth Americana2.8%-5.7%-3.5%2.4%North Americana0.4%-4.2%-0.8%4.9%International5.5%2.9%nananaInternational6.2%4.9%nananaUK3.7%3.3%0.3%3.8%naUK9.7%0.7%-0.5%3.8%naEUR7.3%3.0%0.7%-2.0%-0.7%EUR5.3%8.2%2.0%1.4%7.4%APAC-0.3%2.2%

34、-1.1%0.8%-12.3%APAC3.9%7.9%1.2%-1.8%-1.7%LATAM21.8%-0.2%8.8%-4.9%naLATAM11.7%2.0%7.9%4.5%naROW4.6%6.5%1.4%10.0%naROW3.4%-2.9%-3.1%4.6%naGlobal3.3%2.8%-1.6%-2.3%-1.0%Global5.5%2.6%-0.4%0.1%4.3%Figure 4: Holding Company Organic Growth by Region - 2019Source: Company reports. Note: For DAN (Dentsu Aegi

35、s Network) North America is Americas, EUR is EMEA, and APAC excludes Japan.Figure 5: Holding Company Organic Growth by Region - 2018Source: Company reports. Note: For DAN (Dentsu Aegis Network) North America is Americas, EUR is EMEA, and APAC excludes Japan.Alexia S. Quadrani (1-212) 622-1896 HYPERL

36、INK mailto:alexia.quadrani alexia.quadraniGlobal Equity Research03 May 2020Historical Agency Organic Growth Rates-0.1%201820190.0%20102011201220132014201520162017-1.0%-0.9%1.0%1.6%5.0%4.4%3.7%3.0%1.8%5.0%5.1%9.0%7.0%8.9%11.0%Figure 6: Ad Agency North America Organic Growth Historical by YearSource:

37、Company reports and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and DAN. IPG and OMC growth is U.S.; WPP, and PUB is North America. Uses Americas organic growth rate for Dentsu Aegis Network, but we estimate North America makes up more than 90% of the Americas segment.Figure 7: Ad Agen

38、cy International Organic Growth Historical by Year20102011201220132014201520162017201820191.0%0.0%1.8%2.0%2.2%3.0%2.9%3.0%3.3%3.7%3.8%4.0%4.4%6.0%5.0%4.5%6.3%7.0%Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and DAN. International is the Total less A

39、mericas for Dentsu Aegis Network. We estimate North America makes up more than 90% of the Americas segment.-0.8% -0.7%-0.7%-0.8% -0.7% -0.6%-1.0%-0.5%-0.4%-0.1%0.5% 0.5%0.4%1.0%0.8%2.7%3.0%4.5%5.0%Figure 8: Ad Agency North America Aggregate Organic Growth Historical by QuarterSource: Company reports

40、 and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and DAN. IPG and OMC growth is U.S.; WPP, and PUB is North America. Uses Americas organic growth rate for Dentsu Aegis Network, but we estimate North America makes up more than 90% of the Americas segment.Figure 9: Ad Agency Internationa

41、l Aggregate Organic Growth Historical by Quarter0.0%0.8%1.0%1.1% 1.5%1.9%2.0%2.0%2.4% 2.3%2.4%3.0%3.1% 3.2% 3.3%3.2%4.0%4.3%4.4%4.8% 4.8%6.0%5.0%Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and DAN. International is the Total less Americas for Dents

42、u Aegis Network. We estimate North America makes up more than 90% of the Americas segment.2019 was again notable for the divergent performance among the major holding companies. Disparity in organic growth, as measured by the best performing agency minus the worst performing, continued to be signifi

43、cant, in particular in North America.Figure 10: Disparity in Big 4 Holding Company US Organic201220132014201520162017201820191.0%0.0%1.8%2.0%5.0%4.4%4.0%3.0%5.4%6.0%6.6%6.4%7.0%6.0%8.1%9.3%10.0%9.0%8.0%Source: Company reports and J.P. Morgan estimates. Note: equals highest organic growth among IPG,

44、WPP, OMC, PUB in quarter minus lowest organic growth.At least part of the difference we estimate can be attributed to client verticals. FMCG (i.e. F&B and CPG) marketers are still dealing with a combination of slowing top- line growth, upstart and digitally native competitors, and in some cases acti

45、vist investors pushing for bottom line improvement. Clients in this subsector have responded by shifting away from traditional brand investment, producing digital content with in-house studios, and relying more on trade or promotional activity to drive sales. The net result is a reduced scope of wor

46、k for agencies what PUB terms attrition especially for those which over index to the vertical (see Table 2 below). At the same time, better underlying business trends in areas such as tech or healthcare have benefitted the holding companies with greater mix in these categories. Among IPGs top 100 cl

47、ients for instance, the holding company has twice the exposure tech and healthcare relative to FMCG, which we think has contributed to outperformance in organic growth.Table 2: Big 4 Agencies Revenue by VerticalVerticalIPGOMCWPPPUBF&B10%13%na12%CPG8%9%25%12%Tech & Telecom17%12%23%13%Auto13%10%15%15%

48、Financial10%8%4%17%Retail7%5%6%8%Health Care27%14%12%10%T&Ena6%4%8%Other8%23%11%5%Health + Tech/Telecom44%26%35%23%FMCG18%22%25%24%Source: Company reports. IPG is for Top 100 Clients or 55% of rev. PUB is clients representing 87% of revenue.Where we think performance has diverged the most is also th

49、e area under greatest pressure, namely creative, which remains the largest revenue discipline for agencies. The headwinds in creative are broadly known, though we review briefly here (see our Industry Trends section for a more in-depth view): 1) overcapacity and reduced client conflict has put marke

50、ters in a position to be more demanding of their agencies in term of both price and service; 2) marketers have brought some functions in-house that previously would have been handled by a creative AOR. For advertisers, the benefits can include lower costs, greater control, faster speed to market, an

51、d superior knowledge of the product or service; 3) clients, in particular those in the FMCG vertical, have reduced the overall scope of work handled by an agency. P&G provided a relevant example of this on an earnings call last year when management said it was “reinventing advertising from mass clut

52、ter to less doing more,” which essentially means cutting the number of ads per product and changing ads less frequently; and 4) some marketers have shifted from an agency of record model to assigning work on a project basis, leading to greater volatility for agencies.The disparity weve seen in this

53、disruptive environment does highlight some of the more intangible competitive differences among the agency groups. For instance, large clients increasingly prefer to utilize resources from across the holding company organization, regardless of underlying agency; managing this process is no small tas

54、k, and can be challenging from the standpoint of sales, culture, and even accounting. IPG has long organized itself around the concept of open architecture, a client-centric approach where marketers can access talent across various disciplines (creative, media, digital, experiential, etc.). In recen

55、t years, weve seen similar approaches from OMC (practice areas and client matrix organization) and PUB (Power of One), though in general we think that the U.S. based agencies are further along this process, potentially benefitting organic growth.We also think how digital expertise is layered through

56、 a holding company is impactful. For instance, IPG has long emphasized investment in digital at its individual units, as opposed to a building up specialist agencies. In contrast, WPP previously concentrated digital talent/knowledge at dedicated agencies such as VML or Wunderman, a structure it late

57、r unwound by combining those units with more traditional focused networks (e.g. VML + Y&R; Wunderman + JWT). Finally, even subtle cultural differences can impact organic growth. For instance, WPPs CEO Mark Read has commented on more than one occasion that his U.S. based agencies were too New York Ci

58、ty-centric relative to competitors, potentially hurting them with clients.IPGs strong performance in this environment does highlight the continuing value that agencies provide in the advertising process. While the agency role is likely to evolve in the coming years, these companies have access to cl

59、ient relationships and talent that put it in a position to succeed and drive long-term shareholder returns.Decline in Global Ad Spend Expected in 2020Due to the impact of COVID-19, we expect global ad spend to decrease in 2020. J.P. Morgan economists currently forecast real global GDP to contract by

60、 -5% in 2020 relative to -2% in 2009. The ad agencies on their Q1 earnings calls have generally suggested that advertising declines will be worse than that of the last recession (-9% to -15% declines in the US depending on estimates). Given the magnitude of this economic hit coupled with the limited