Advertising Primer - J.P. Morgan PDF

Global Equity Research
12 March 2018
Media
Advertising 101: A Primer with a Focus on the 2018
Outlook
 Comprehensive overview of the advertising industry. In this primer we examine Media

macroeconomic trends, the domestic and international markets, and the major media AC
Alexia S. Quadrani
that participate in this industry. (1-212) 622-1896
alexia.quadrani@jpmorgan.com
 An analysis of key industry trends, including the drivers of slower industry
Bloomberg JPMA QUADRANI <GO>
organic revenue growth, with a review of cyclical and structural factors; a closer
J.P. Morgan Securities LLC
look at spending from the FMCG vertical, including recent commentary from major
David Karnovsky, CFA
brand groups; an update on the evolving digital marketing world and overview of
(1-212) 622-1206
the digital operations of the Big 4 agencies; and a summary of recent new business david.karnovsky@jpmorgan.com
trends and the potential impact of Mediapalooza 2.0. J.P. Morgan Securities LLC
 Close look at current macro trends and health of the ad market in 2018. We Parris J Taylor
detail advertising patterns through economic cycles, highlighting how we expect (1-212) 622-9252
parris.j.taylor@jpmorgan.com
2018 to shape up and which industry sectors may influence spend this year.
J.P. Morgan Securities LLC
 Detailed examination of the business model of an advertising and marketing Julia Yue
services company. We discuss the structure of an ad holding company, study the (1-212) 622-9896
growth drivers behind the agencies and other businesses, and highlight current julia.yue@jpmorgan.com
trends that influence its outlook. J.P. Morgan Securities LLC
European Media & Internet
 Company-specific outlooks. We provide pertinent financial information and AC
Daniel Kerven
investment summaries for five of the top advertising agencies that we cover in the
(44-20) 7134-3057
industry: Interpublic, Omnicom, WPP, Publicis, and Dentsu, including an overview daniel.kerven@jpmorgan.com
of each company’s business mix and client base. Bloomberg JPMA KERVEN <GO>
J.P. Morgan Securities plc
 Sentiment remains cautious for agency stocks, though we believe 2018 could
AC
shape up as a stronger than expected year. A slowdown in organic growth in Marcus Diebel
2017 has left investors cautious on agencies and has provided some support to (44 20) 7742-4447
marcus.diebel@jpmorgan.com
bears, which attribute the deceleration to structural factors. While we continue to
Bloomberg JPMA DIEBEL <GO>
push back on the usual theories (e.g., consultants, media buying disintermediation), J.P. Morgan Securities plc
we do believe the industry is cycling through a pullback in spend from key verticals
Meera Bava
such as FMCG, which could weigh on growth for the near term. Agencies are
(44-20) 7134-3602
trading at sizable discounts to the market, somewhat unusual for this stage of the meera.bava@jpmorgan.com
cycle, though we recognize a re-rating will require a steady improvement in organic J.P. Morgan Securities plc
growth. Our recent survey work of the top global advertisers has given us optimism Internet, Games, Media
on ad spend for the coming year, and we further believe FMCGs will need to AC
Haruka Mori
increase budgets at some point to support volume growth; at the very least the large (81-3) 6736-8632
holding companies are likely to benefit from a consolidation of agency rosters at haruka.mori@jpmorgan.com
these large brands. Overall the macro environment continues to support healthy Bloomberg JPMA MORI <GO>
advertising spend, and we think U.S. corporate tax reform could provide an JPMorgan Securities Japan Co., Ltd.
unexpected benefit to client budgets as we move through the year. For U.S.-based
names, we like IPG and OMC, both rated Overweight. In our European media
coverage we see risk/reward for both WPP and Publicis (both rated Overweight) as
attractive with a potential re-rating from currently low valuation triggered by
improved organic revenue growth. In Japan, we like Dentsu (rated Overweight)
given strong performance in account reviews in 2017.
See page 135 for analyst certification 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. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
Alexia S. Quadrani Global Equity Research
(1-212) 622-1896 12 March 2018
Table of Contents
Executive Summary .................................................................3
A Macro View ..........................................................................23
International Trends ...............................................................36
Advertising Spending by Major Media..................................44
The Advertising and Marketing Services Company ............63
Advertising and Marketing Services Company Growth
Drivers .....................................................................................71
Industry Trends ......................................................................74
Compensation Structure........................................................95
Financial Outlook ...................................................................97
Valuation ...............................................................................100
Company Profiles .................................................................102
WPP Group ...........................................................................103
Omnicom Group ...................................................................108
Interpublic Group .................................................................113
Publicis Groupe ....................................................................118
Dentsu ...................................................................................123
Appendix I: Billings ..............................................................129
Appendix II: Working Capital Changes...............................130
Appendix III: Glossary.........................................................131
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(1-212) 622-1896 12 March 2018
Executive Summary
2017 was the second straight 2017 was a volatile year for agency holding company stocks. Sentiment became
year of agency organic growth increasingly negative as investors focused on possible secular challenges that may be
deceleration
the culprit for moderating organic revenue growth. The bear thesis that has continued
to gain momentum includes: 1) advertisers are disintermediating media buyers and
going direct to digital platforms; 2) consultants are increasingly competing with
agencies and threatening to win business; and 3) the consumer packaged goods
vertical is structurally broken, which is translating into permanently less marketing
spend. We dig into each of these a bit deeper below; however, we argue that the
bigger challenge for the agency business has become overcapacity. In our view this
has skewed the balance of power too far to the advertisers, resulting in above-average
pricing pressure and softening domestic organic revenue growth.
Table 1: Big 4 Agencies Stock Performance vs. S&P 500 & MSCI Europe
Year Big 4 S&P 500 MXEU

2018 YTD 2.7% 4.2% -3.0%
2017 -17.0% 19.4% 7.3%
2016 9.0% 9.5% -0.5%
2015 7.2% -0.7% 5.5%
2014 2.2% 11.4% 4.1%
2013 53.0% 29.6% 16.4%
2012 21.0% 13.4% 13.4%
2011 -8.6% 0.0% -10.9%
Source: Bloomberg. Note: Big 4 is average performance of IPG, OMC, PUB, and WPP. YTD is as of 3/9/18.
We began to see a deceleration in organic revenue growth for the U.S. in Q3’16
almost universally across the large holding companies, followed by three consecutive
quarters of aggregate domestic declines (the first negative performance of the cycle).
While it is not uncommon to see one company go through a period of weakness
given account losses, the fact that this was widespread suggested some underlying
change in client spending. Given the backdrop of a relatively healthy economy
during that period, it is easy to understand why so many secular theories have
emerged suggesting the ad agency business is likely challenged going forward.
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Figure 1: Aggregate Agency Organic Growth

%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0% 2010 2011 2012 2013 2014 2015 2016 2017
Total North America International
Source: Company reports and J.P. Morgan estimates. Note: Total includes IPG, OMC, WPP, PUB, HAV, MDCA (from Q1’12; excludes
ACCENT), and Dentsu Aegis Network (from Q4’14). North America and International are Big 4 + HAV.
We have spoken to a number of agency executives who have suggested to us the real
change in the industry from several years ago is the simple fact that given the
loosening of client conflict policies, advertisers appear to have a much greater choice
of ad agencies than before. This has skewed the supply/demand dynamic, putting
agencies in the compromised position of having to accommodate advertisers’
requests much more so than in the past for fear of losing business. The result has
been an uptick in account reviews/client movements, agencies doing more for less,
and pressure to both organic growth and profitability.
A modest number of other factors continue to weigh as well. We do believe there is

notable pressure from a pullback among FMCG clients. These companies, which are
plagued with little to no growth, continue to look at cost cutting in order to protect
profitability. In our view, this does not seem like a viable long-term strategy,
especially as volumes decline, and we would therefore assume a reversal in this trend
at some point. However, we recognize this may not happen for a while, and fewer
players may be left when this tide has finally turned. Meanwhile, we are seeing the
biggest hit to agency revenue come from discretionary/project based spending (e.g.,
PR/digital) rather than traditional media/creative.
We also do not believe these advertisers are done rationalizing their agency rosters
(somewhat related to our point above about less client conflict and greater ease for a
marketer to rethink its relationships). When we hear P&G speak about moving from
6,000 to 2,500 agencies (and still feel there is room to winnow down from that level),
we are reminded how fragmented some of these large CPG clients have been with
their agencies, and naturally they will now look for more efficiencies with
consolidation. We note this dynamic doesn’t have to be all bad for the winners of
new business, but even the agencies playing the role of consolidator will probably
take a while to see a ramp in growth given concessions provided along the way to
acquire the accounts. It isn’t surprising in hindsight that we have yet to see a notable
improvement at Omnicom post the P&G win in December 2015. While there are
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always a lot of moving pieces at OMC (other wins/losses), it is unusual not to see
some evidence of a potential tailwind following a win of that size.
The other secular theories concern us a bit less. We do hear of consultants taking
some business, and at minimum they are most likely exacerbating the supply/demand
imbalance by adding more competition at least in certain disciplines (once again
giving more negotiating leverage to the marketer). We don’t believe the overlap is
enormous, and we’ve also heard of more missteps on the creative side (business won
only then to be lost), which we believe really limits this threat at least for the time
being.
We also do not give much credit to the concept that agencies/media buyers are being
disintermediated by advertisers going direct to Google/Facebook. The media buying
business appears to be the one area consistently outperforming, and if the agencies
were being displaced from the digital side, we don’t think we would have seen this
strong growth. Furthermore, we have spoken to large marketers who have informed
us that they continue to get a much better rate (even after a media buyer fee) going
through an agency rather than trying to buy media directly from tech platforms. We
would also point out that both Google and Facebook are reputed to be very
technology centric and not necessarily marketing friendly, making it even harder for
an advertiser to work directly with them. While we do not see the disintermediation
theory as a reason for the recent weakness in agency growth, we do not entirely
dismiss the concern longer term. Given the meaningful and continued consolidation
of digital spend at just two giant players, we will watch carefully how this dynamic
unfolds over time.
Looking ahead, we expect to see a bit of a reprieve from the industry pressures in
2018. We are beginning to get some data points already of a strengthening in the ad
market and believe tax reform will result in more meaningful increases in budgets as
we get further into the year. J.P. Morgan recently did a survey of the Top 100 global
advertisers, examining transcripts from calendar year-end calls and recent
conferences regarding advertising spending plans for 2018. Our analysis found that
of the 72 firms providing some outlook for next year, 80% planned to increase their
ad budgets, a better result than our survey the year prior. The outlook was
particularly encouraging from online platforms, luxury goods, and telecom and tech,
while CPG was more mixed. In addition to this, we have received generally positive
commentary from media owners and entertainment companies, which have noted a
strengthening ad market, in particular a further tightening in scatter prices, which are
now upward of 40% over Upfront levels for some day parts.
The stronger ad market will likely result in better organic growth than is currently
expected at most of these agencies, which based on guidance suggests a very modest
acceleration from last year, though to a level still well below the growth realized in
2016. More robust client budgets should also alleviate, at least temporarily, some of
the pressures on pricing and other cutbacks in services. We are not suggesting that
the challenges discussed above will be resolved but rather that the next data point is
likely to be incrementally positive, potentially improving the current outlook.
Finally, there is another big round of account reviews underway, a potential repeat of
Mediapalooza 2015, which will influence the outlook for these agencies depending
on where the new business lands. So while we expect some better industry growth in
2018 than what is built into consensus, we also see the possibility for more
bifurcation in performance in late 2018/early 2019 resulting from this above-average
level of reviews.
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Agency Organic Growth and Margins in 2017

Aggregate holding company organic growth was 1.1% in 2017, decelerating from
3.1% in 2016. Global ad spend as measured by the major agency forecasters
moderated last year, though this was partly due to the absence of quadrennial events
and does not fully explain in our view the slowdown in agency growth. Performance
was weakest in Q2, before recovering slightly in the back half.
Figure 2: Ad Agency Aggregate Organic Growth Historical by Year

7.0%
6.4%
6.0% 5.7%
5.0% 4.4% 4.4%
4.0%
3.2% 3.1%
2.9%
3.0%
2.0%
1.1%
1.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017
ACCENT), and Dentsu Aegis Network (from Q4’14).
Figure 3: Ad Agency Aggregate Organic Growth Historical by Quarter

5.0%
4.4% 4.4% 4.4% 4.4% 4.5% 4.7%
4.5% 4.4%
4.2%
4.0% 3.8%
3.7%
3.5%
3.0%
2.7%
2.4%
2.5%
2.0% 1.8%
1.5%
0.9% 1.0%
1.0%
0.7%
0.5%
0.0%
ACCENT), and Dentsu Aegis Network (from Q4’14).
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Historical Agency Organic Growth Rates

Figure 4: Ad Agency North America Organic Growth Historical by Year Figure 5: Ad Agency International Organic Growth Historical by Year
11.0% 7.0%
6.2%
8.7% 6.0%
9.0%
5.0% 4.4%
7.0% 4.3%
5.1% 5.0% 4.0% 3.7% 3.7%
3.4%
5.0% 4.5%
2.9%
3.5% 3.0%
3.0% 2.0%
1.8% 1.6% 2.0%
1.0% 1.0%
-1.0% -0.1% 0.0%

2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Source: Company reports and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and HAV. IPG and OMC growth is U.S.; Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and HAV
WPP, PUB, and HAV growth is North America.
Figure 6: Ad Agency North America Aggregate Organic Growth Historical by Quarter Figure 7: Ad Agency International Aggregate Organic Growth Historical by Quarter
7.0% 6.0%
5.8%
5.3% 5.0% 4.8% 4.6%
4.8% 5.0% 4.7% 4.3% 4.4%
5.0% 4.3%
4.4% 4.1%
4.3%
3.7% 4.0% 3.7% 3.8% 3.6% 3.7%
3.3% 3.3%
3.0% 3.2%
3.0% 2.7% 3.0%
1.8%
2.0%
1.5%
1.0% 0.4% 0.6%
1.0%
0.2% 1.0%
-0.6%
-1.0% -0.6% -0.6% 0.0%
Source: Company reports and J.P. Morgan estimates. Note: Includes IPG, OMC, WPP, PUB, and HAV. IPG and OMC growth is U.S.; Source: Company reports and J.P. Morgan estimates. Note: Aggregate includes IPG, OMC, WPP, PUB, and HAV
WPP, PUB, and HAV growth is North America.
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Even with the slowdown in growth, the domestic agencies managed to grow margin
in 2017. WPP margins were down slightly y/y, though flat on a constant currency
and like-for-like basis. PUB margins were also down, though up 40bps when
excluding a -50bps impact from restructuring costs
Figure 8: Agency Operating Margins

20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017
OMC IPG WPP PUB
Source: Company reports and J.P. Morgan estimates. Note: operating margin definition differs by firm. WPP is PBIT margin.
The period between 2014 and 2016 saw PUB underperform its peers in every single
quarter, which further boosted growth at IPG, OMC, and WPP. This trend reversed
beginning in Q2’17.
Figure 9: PUB organic growth performance relative to peers

2.0% 1.6%
1.0% 0.5%
0.2%
0.0%
-1.0%
-2.0% -1.2% -1.0%
-2.0%
-3.0%
-2.8% -3.0%
-4.0% -3.4% -3.6%
-5.0% -4.4%
-6.0%
-5.9%
-7.0%
Source: Company reports and J.P. Morgan estimates. Note: Peers are IPG, OMC, WPP, and HAV.
Using current guidance and commentary from management teams, J.P. Morgan
currently estimates Big 4 + Dentsu Aegis Network aggregate organic growth to
improve to 1.7% in 2018 but still track below the levels seen prior to last year.
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2017 was characterized by lower advertising spend for major FMCG players.
FMCG (fast-moving consumer goods) companies have cut costs under private equity
ownership, or in response to disruptors, activist investors, and fear of a potential
takeover following Kraft-Heinz’s failed bid for Unilever earlier this year.
Table 2: FMCG companies under activist pressure

FMCG company Sub-sector Fund name Stake Comments
Main FMCG companies
Nestle Food Third Point 1.3% Dan Loeb
P&G Food and HPC Trian Partners 1.5% Nelson Petz
PepsiCo Beverages n/a n/a Activism from Trian Partners between 2014 and 2016
Unilever Food and HPC n/a n/a Kraft Heinz tried to buy UNLV then withdrew its offer
AB InBev Beverages 3G Capital 35%
Coca-Cola Beverages n/a n/a Berkshire Hathaway owns 9.4%
Mondelez Food Pershing Square and Trian Partners 6.4%/ 2.8% Bill Ackman / Nelson Petz
L'Oreal HPC Third Point through Nestle 23% Fears of activists with recent passing of Liliane Bettencourt
Kraft Heinz Food 3G Capital / Berkshire Hathaway 50%
Danone Food Corvex <1% Keith Meister
Colgate Palmolive HPC n/a n/a Potential acquisition target according to press reports
Reckitt Benckiser HPC n/a n/a Food business for sale after plan to acquire Mead Johnson
Henkel HPC n/a n/a Henkel family owns >60%
Other Staples/Consumer
Avon Barington Capital 0.6%
Tiffany and Co Jana Partners 4.5%
Pandora Corvex 8.6% Keith Meister
Source: J.P. Morgan.
FMCGs have cut advertising spend as a percentage of sales, put pressure on agency
fees (potentially leading to a less experienced “B” team managing their brand), and
shifted spend from long-term brand advertising, the benefit of which is hard to
measure in the short term, to performance-based marketing, which is easier to
measure but whose ROI is likely to decline as brand value and awareness decay over
time.
Increasing competition from digital natives and Amazon. FMCGs also face
increasing competition from digital natives utilizing online channels and digital
advertising and own-brand competition from Amazon and its Essentials range and its
push into groceries with Amazon Fresh and now Whole Foods.
Some would suggest that the fact that it is now possible to build a brand without
using TV—via social media, YouTube, influencer networks etc.—is a negative for
TV. This is not the case in our view: 1) these are brands that would not have existed
in the past because of the high barriers to entry; 2) once they become established and
reach a certain scale, then they will start advertising on TV as it remains the most
efficient platform for maintaining brand awareness at scale (“reach and repeat”); and
3) they force existing brands to spend more on advertising to defend their market
share.
Amazon-own brands, together with Amazon Alexa and Amazon subscribe and save,
which take products out of the traditional shopping basket, further increase the
importance of strong brands.
FMCGs not only face challenges in developed markets but also from ultra-nimble
local brands in emerging markets. Chinese FMCG retail spending continues to see
good growth, but Chinese brands are taking share, putting pressure on multinationals
and their agency partners.
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While there is a short term risk FMCGs respond to slowing top-line growth and
volumes by continuing to cut advertising spend to try and protect margins, we
believe that it is only a matter of time before FMCGs have to respond to slowing top-
line growth, and structural pressures, by launching new products (rather than
consolidating the number of brands to reduce costs) and investing more in existing
brands to support volumes and, importantly, their pricing power.
Table 3: Big 4 Agencies Revenue by Vertical

Vertical IPG OMC WPP PUB
F&B 13% 13% 14% 12%
CPG 7% 10% 17% 14%
Tech & Telecom 19% 14% 11% 14%
Auto 17% 10% 12% 13%
Financial 8% 7% 8% 15%
Retail 6% 6% 6% 6%
Health Care 22% 12% 12% 13%
T&E na 6% 6% 7%
Other 8% 22% 14% 6%
Source: Company reports. IPG is for Top 100 Clients.
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Figure 10: Change in A&P spend as a % of sales for FMCGs Figure 11: FMCGs' global organic growth and margin evolution
60 4.9%
43 39
40 30 3.7% 3.4%
22 26 2.9%
12 2.8%
20 2.3% 2.3%
2.0%
0
-20 -9
17.8% 18.1% 18.4% 18.7% 19.5% 20.2%
-40 -23
0.0% 0.0%
-60 -48
2012 2013 2014 2015 2016 H117 H217 2017
-80 -71
H1 15 H2 15 H116 H216 H117 H217 2015 2016 2017 2018E EBITA margin Organic growth
Source: J.P. Morgan estimates, company data
Source: J.P. Morgan estimates.
Figure 12: L'Oreal A&P sales margin vs Inflation Figure 13: P&G A&P sales margin vs Inflation
4% 32% 5% 11.5%
3% 4% 11.0%
31%
2% 3% 10.5%
30%
1% 2% 10.0%
29%
0% 1% 9.5%
-1% 28% 0% 9.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 20082009 2010 2011 2012 20132014 2015 20162017
France Inflation Western Europe L'Oreal
US inflation P&G Ad spend
Source: J.P. Morgan estimates, company data, Bloomberg. Source: J.P. Morgan estimates, company data, Bloomberg.
Figure 14: Nestle A&P sales margin vs Inflation Figure 15: P&G A&P growth vs Inflation
4% 36% 5% 0.2
0.15
4%
3% 32% 0.1
3% 0.05
2% 28%
2% 0
1% 24% -0.05
1%
-0.1
0% 20% 0% -0.15
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 20082009 2010 2011 2012 20132014 2015 20162017
Western Europe Inflation Nestle
US inflation P&G
Source: J.P. Morgan estimates, company data.
Source: J.P. Morgan estimates, company data, Bloomberg.
Recent FMCG commentary suggests a sustained focus on cost efficiencies and

agency roster consolidation. 2017 saw the successful reduction in the FMCG
giants’ ad spend, which resulted in increased efficiency of spend. As they look to
2018, commentary continues to be around a drive toward cost efficiency, including a
reduction in the number of agencies, though not necessarily spend per agent. As a
result, we expect to see a redirection of spend away from numerous smaller ad
agencies and toward the large global players given their scale and creative depth.
This benefit, though, is likely to take some time to translate into ramped organic
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growth, given that the new business winners are likely to offer some concessions
along the way to acquire the accounts.
“We also maintained the absolute level of brand and marketing spend in local
currencies with media up and production costs down. . . . Brand and marketing
investment for the year was up marginally in absolute terms in local currencies.
Importantly though, our media and in-store spend increased by around €250 million.
The impact of this increase was even higher, as it was offset by efficiencies, largely
in advertising production, from Zero-Based Budgeting. To put it simply, we used to
make too many pieces of traditional TV advertising and we used to take them off air
before they reached their full effectiveness. We’re not making fewer adverts and
reinvesting savings and showing the best ones for longer while stepping up our
investment in digital media. [2018] We continue to maintain competitive brand levels
of marketing and brand spend; and compared to 2017, this will once more be more
weighted, in this case, towards the first half versus the second half.” – Unilever
02/01/2018 FYQ4 Earnings
“We’ve already reduced a number of agency nearly 60% from 6,000 to 2,500,
saved $750m in agency and production costs and improved cash flow by over
$400m additional through 75-day payment terms. In the next phase, we’re targeting
to save another $400m, reducing the number of agencies by another 50% and
implementing new advertising and media agency models. We need the contribution
of creative talent and are prepared to pay for that. . . . We’ll move to more fixed
lower arrangements with more open sourcing of creative talent and production
capability, driving greater local relevance, speed and quality at lower costs. We’ll
automate more media planning, buying and distribution, bringing more of it in-
house. . . . We did increase advertising in the quarter, to be clear. We’re up about
2%. I continue to expect that we’re going to be investing in both R&D and
advertising.” – P&G 01/23/2018 FYQ2 Earnings
“Marketing expenses were slightly down on a constant currency basis. The main
driver of this decrease comes from marketing efficiencies through reduction of
agencies on consolidation of activities above market. . . . So overall during the year,
we are slightly marginally declined our marketing cost. You remember that in
London, we indicated clearly the fact that we didn’t want to ring-fence marketing
spend but we wanted to make sure that we would reach efficiencies as well . . . we
were targeting efficiency savings in marketing of about CHF 0.5 billion by 2020.
This comes, for example, from reduction of agencies that we work with or
consolidation of activities of our market.” – Nestle 02/15/2018 FYQ4 Earnings
Encouragingly, we’ve seen recent commentary from FMCGs emphasizing the

importance of brand investment:
“Brands matter most because the investment behind advertising, the investment
behind promotions, the investments behind new products that come to market not
only helps the brand, but stimulates overall category demands for everybody who is
operating in those categories.” – Kraft Heinz 02/16/2018 FYQ4 Earnings
“We’ve maintained our commitment to advertising and trade promotional spend in

places where we continue to see strong returns." – Mondelez 02/20/2018 Investor
Conference
Beyond FMCG companies, recent forward commentary on advertising spend has

tracked positively. This month, we surveyed the Top 100 global advertisers,
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examining transcripts from calendar year-end calls and conferences regarding

advertising spending plans for 2018. Our analysis found that of the 72 firms
providing some outlook for next year, 80% planned to increase their ad budgets, a
better result than our survey the year prior. The outlook was particularly encouraging
from online platforms, luxury goods, and telecom and tech. Overall, we find global
marketers looking to 1) maintain or increase marketing as a percentage of sales
(Samsung, Google, Colgate-Palmolive); 2) increase marketing investment
opportunistically to support investments in key growth initiatives and brand
awareness (AB InBev, Estee Lauder Cos., Diageo); and/or 3) position their
marketing efforts toward upcoming product launches (Fiat Chrysler Automobiles,
Bayer, Johnson & Johnson) such as a continued ramp in vehicle releases and/or a
pipeline of products launches this year.
The uptick in holding company organic growth in 2014-2015 coincided with an

acceleration in digital ad spend and a significant shift within digital channels as
well.
As we’ve written previously, we believe the shift to digital was a boon to the holding
companies as it increased the complexity and scope of traditional advertising and
marketing services offered by agencies (for more on digital businesses, see the Key
Industry Trends section of this note). This sentiment has been echoed by agency
management teams, who have stated that the fragmenting media landscape is to their
benefit.
We believe the environment between 2014 and 2016 was especially favorable for
agencies as digital growth jumped significantly in both absolute and percentage
terms. Within digital, the transformation was equally profound as desktop and
traditional display advertising stalled and growth shifted to search, social media,
online video, and mobile. Furthermore, while display wasn’t growing, that market
was shifting from traditional sold campaigns to programmatic buying.
Figure 16: Global Digital Ad Spend Growth in Absolute Dollars and Percentage Change
30,000 25%
25,000 20%
20,000
15%
15,000
10%
10,000
5,000 5%
0 0%
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Digital Absolute Growth ($m) Digital Y/Y % Growth
Source: Zenith, J.P. Morgan estimates.
In this rapidly changing environment, we believe marketers and their CMOs were
more apt to outsource functions to their agencies and possibly push back less on
pricing. At the same time, the rapid transformation during this period likely resulted
in some work for digital agencies that was either one-time in nature (e.g., an
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e-commerce transformation) or has since become more commoditized. How much of

the increase in organic growth rates in 2014-2016 was related to the digital shift is
hard to pinpoint, though we do believe it had at least some small impact. It is also
hard to ignore that the subsequent deceleration in organic growth coincided with a
more normal growth environment for digital, as well as a period where we heard
from several marketers of a pause or reversal in digital spend and reallocation back to
traditional channels. As digital work has become more commoditized, it is also likely
some elements are being brought in house or assumed by some more
specialty/consultant firms in that area, adding to the slower growth at the agencies.
Regardless, we continue to believe digital will remain a key growth driver for the
holding companies and would view a reacceleration in online spend as potential
upside. The channel continues to evolve rapidly, and we believe the adage that
“confusion is good” for agencies will endure.
Other Structural Concerns Are Largely Overdone

While we believe the above factors may likely be having a modest negative impact to
organic growth, we push back against concerns that agencies are facing structural
headwinds or competition likely to impair their business models.
Agencies are facing limited competition from non-traditional players

We believe the role of advertising agencies continues to evolve, and technological
changes are opening doors to significant new revenue sources. The increasing
importance of digital and an ever-increasing fragmentation in the space put
advertising agencies at the heart of any company’s growth strategy. Agencies have
increasingly been required to not only advise and create advertising campaigns and
brand perception exercises but to partner with marketers to help them adjust their
business to new digital advertising. By offering consulting and IT services to clients,
we see the advertising agencies progressively getting access also to CIO and CTO
managed IT services budgets totaling nearly a trillion dollars. However, this process
moves in both directions, with the likes of Accenture, Alliance Data Systems,
Deloitte, and IBM having significantly moved into the digital marketing space.
Those consultancy firms already have an established position in the marketing
segment, and we estimate that the top four dedicated digital marketing services
agencies are non-traditional agencies. However, we think that true competition
between the companies is limited to 5-10% of the ad agencies revenues and that in
the majority of cases they work together as partners.
Transparency is less of an issue than headlines imply

In June 2016, the ANA published a report from K2 Intelligence detailing an
investigation into media buying practices. The report was not the “bombshell” that
was feared as it alleged use of rebates without any sources and detailed
programmatic buying methods that were hardly news to advertisers or anyone who
follows the industry.
For marketers that read the report (we believe roughly half), the most direct result
was an uptick in client audits and more onerous contract terms; overall the effect has
been described to us as adjustments rather than big changes. The ANA report also
had a greater impact with pure domestic marketers as advertisers in Asia and Latin
America were more accustomed to rebates/volume discounts, and global marketers
had already taken steps to ensure more clarity in their agency contracts.
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We do not believe transparency is an automatic negative for agencies, and it could

even lead to more rational or favorable price structures as well as better relationships.
We do acknowledge the view, however, that as digital increasingly matures and
clients seek greater transparency that some media agencies could be at risk for
decelerating organic growth.
Marketers still aren’t going to FB and Google directly

A common concern we hear from investors is that if all incremental digital ad spend
is going to FB and Google, then there is a risk that clients will look to contract with
these companies directly, cutting the agencies out of the process. For advertisers that
do concentrate spend with these platforms, especially those with tech resources and
talent, we do believe this argument has some logic and therefore bears monitoring,
especially given the massive concentration of digital spend to just these two players.
Still, in-housing marketers remain in the minority, and we believe ultimately lack the
scale in both buying power and data that exists at the media agencies (meaning
agencies still provide better rates even after their fee than large advertisers would get
by going direct). We also note that tech platforms have yet to develop agency-like
services and that marketers remain somewhat wary of contracting directly given
recent measurement issues. Regarding the latter, we note past statements from P&G
that it would require third-party measurement from all its digital partners and would
be willing to use its spending to force the issue.
Mediapalooza 2.0 Could Lead to Diverging Performance

New business tailwinds were more favorable for domestic agencies heading into
2017; WPP appears better positioned for 2018
PUB’s organic growth in 2017 was negatively impacted by account losses with
Sprint, Toyota, and Newell brands as well the lingering effects of losses in
Q4’15/Q1’16 with Walmart, L’Oreal, and P&G. WPP meanwhile was hurt by the
loss of AT&T and VW (OMC’s gain), which we’ve estimated as a -1% impact to the
company’s FY17 growth.
Looking ahead, WPP appears to be in a better position starting 2018 as it laps these
large losses. Among the Big 4, the holding company is at the top of our 2017 new
business tables, boosted by significant wins with PSA Group, Walgreens Boots
Alliance, T.J. Maxx, LVMH, and Sanofi (offsetting losses with AB InBev,
Lionsgate, Coty, and Mattel). Following significant client losses in 2015 and 2016,
PUB’s performance was more stable last year, boosted by media wins with
MillerCoors, Southwest Airlines, KFC, and Lowe’s.
Domestic agencies OMC and IPG meanwhile will start 2018 with less of a tailwind
than in years prior, which we estimate will contribute to softer Q1 organic revenue
for both companies. At IPG, the agency still needs to lap some 2017 account losses,
including with Sprint and MillerCoors. On its Q4 earnings call, management did
state it sees a ~20bps tailwind to growth in 2018 from new business, with the impact
coming after the first quarter. For OMC, we estimate the company will be impacted
in the early part of the year from prior-year losses at media shop OMD (Walgreens,
Lowe’s, PSA, Bel Groupe) and some creative losses at smaller networks such as
GSD&M.
DAN acquired a net $5.2 billion in new business in 2017, far and away its highest
total ever. DAN attributes the strong 2017 showing to an overwhelming abundance
of offensive pitches. The pitch environment is booming again in 2018, and while
DAN expects to make more defensive pitches this year than last (Microsoft’s account
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review is a near-term risk factor), we think M1 is making it increasingly competitive

centered on the US.
Table 4: Top 4 Ad agencies: Volume of net account wins

Gross billings in $ million
Q117 Q217 Q317 Q417 FY2017 Q118 YTD
WPP 996 1,122 1,392 -1,691 1,819 197
Publicis 1,075 -615 -1134 311 -364 330
OMC -1,255 -847 591 201 -1,310 -367
IPG -1,152 -52 56 178 -970 -160
Total Top 4 -336 -392 905 -1001 -824 0
Table 5: Top 4 Ad agencies - Volume of net account wins

Estimated net revenue impact from account wins/losses (all in USD)
Potential impact
on revenues in
Q117 Q217 Q317 Q417 FY2017 FY17 revs 2018
WPP 42 25 28 -38 57 18,257 0.3%
Publicis 23 -18 -18 7 -6 12,020 0.0%
OMC -61 -31 53 24 -15 15,274 -0.1%
IPG -11 -17 -3 12 -20 7,882 -0.2%
Total Top 4 -7 -41 60 4 17
Mediapalooza 2.0 could create a divergence in performance

Mediapalooza refers to the period when over $20bn of global media accounts came
under review between spring 2015 and the end of 2016. We see potential for a
Mediapalooza 2.0 this year, with over $10bn worth of media business up for review,
including sizable accounts with Mars, Microsoft, Mondelez, Quicken Loans, and
HSBC. The list below does not include firms like P&G or Nestle, which are in the
process of consolidating their agency rosters, or Ford, which appears to be holding a
sort of closed review of its business with WPP.
Table 6: Pending Large Account Reviews
Source: Company reports; J.P. Morgan; media reports.
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Solid Global Growth This Year, Expected Up 4.2%

We expect global ad spend to improve in 2018, with roughly steady underlying
trends boosted by cyclical events including the FIFA World Cup and Winter
Olympics. Overall, the macro environment remains supportive of advertising growth,
and JPM’s economic forecasts currently look for global real GDP growth of 3.5%
y/y in 2018 (vs. 3.3% in 2017) and developed market growth of 2.5% (vs. 2.2% in
2017). We estimate global ad spend growth of 4.2% in 2018 and the US at 4.0%.
 U.S. We expect ad budgets in 2018 to increase on a reported basis, boosted by

cyclical events including the Winter Olympics, FIFA World Cup, and midterm
elections. On an underlying basis, we believe growth will be roughly consistent
with 2017, as advertisers fight for market share, launch new products, and focus
on driving revenue growth. The economic environment could provide an upside
surprise, particularly later in the year if marketers reinvest tax savings in new
products or initiatives, which ultimately would have to be supported by marketing
dollars. Overall, the macro picture remains healthy, with unemployment at cycle
lows and consumer confidence at cycle highs. To the downside, there is some risk
from uncertainty created by possible changes to trade laws or tariffs. We once
again expect national ad spend to lead local (on a core basis).
 Europe. The region has seen a significant divergence in performance over the
last several years. The UK and Germany saw quick recoveries in ad spend post
the financial crisis with overall ad spend now +40% (UK) and +6% (Germany)
above the pre-crisis levels of 2007. In contrast, Spain (still down -33% versus
2007) and Italy (-24%) offer meaningful catch-up potential. UK ad growth has
been similar to the US in recent years and has previously outperformed its
European peers at c5% growth in 2016; however, as expected, we saw spend
growth slow to 0.7% in 2017following Brexit (and in line with Germany, Spain,
and Italy) vs. total Western Europe advertising expenditure of c1.5%. We saw a
pickup in Central and Eastern Europe’s ad spend as macro stabilized (8.1% in
2017 vs. -3.8% in 2015). France has been the strongest performer of the bigger
European markets with an estimated ad spend growth rate of a 2.0% in 2017.
Importantly, European revenues at ad agencies are skewed toward US-based
multinationals (about c60% of European ad revenue), which suggests slightly
better revenue performance than ad growth in the overall region. European Ad
Agencies also have c45% of their revenues derived, on average, from North
America.
 Asia/Pacific and Latin America. The emerging markets continue to be a key
area of investment for the agencies for good reason as they’ve consistently
outperformed the developed markets on ad growth as a whole. The Asia Pacific
region remains one of the largest growth opportunities, led by strength in India
and Indonesia as well as smaller markets like the Philippines. In China, the #2
market is forecast to decelerate to mid-single-digit rates over the next few years.
Growth in Latin America improved in 2017, with strong performance in
Argentina, Mexico, and Chile making up for a cyclically weaker Brazil
(Olympics comp). With a continued recovery in the Brazil economy, ad spend for
the region is expected to improve in 2018.
 Japan. The ad market expanded 1.6% YoY in 2017. Further stable growth is
expected in 2018 accompanying gradual economic expansion (DAN group
company Carat forecasts +1.6% YoY), and since 2H 2017 multiple agencies have
pointed out that market conditions are tending to recover. It appears that the
digital shift in marketing budgets at leading advertisers has been accelerating
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since 2017, mainly accompanying uptake of internet video ads, and growth in the
internet ad market accelerated YoY in 2017 (+13.0% YoY in 2016, +15.2% in
2017). This trend is expected to continue, and we think it will drive the overall ad
market.
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Positives for the Stocks

Modest organic growth and With the group trading at a sizable discount to the market, we see good value among
margin expansion, boosted by these stocks. The long-term EPS growth profile is relatively consistent and healthy,
tax reform and continued
shareholder returns, should on average, in the high single digits. This is supported by low-single-digit revenue
power continued solid EPS growth and boosted by modest margin improvement and healthy share buybacks; tax
growth in 2018 reform will also provide a one-time benefit to domestic agencies in 2018. In addition,
capital expenditures for these businesses remain modest and FCF therefore healthy.
With dividend yields now over 3%, total returns, even without multiple expansion,
equate to10-15%, not bad in our view for relatively lower risk plays in the media
space. We also see potential for organic revenue to even accelerate and prove current
company guidance somewhat conservative, as it often has in the past.
Mixed organic growth trends expected in 2018, though better in aggregate. We

are projecting organic revenues to grow 2.50% at OMC, 2.50% at IPG, flat at WPP
(net sales basis), 1.8% at PUB, and 4.0% at Dentsu Aegis Network (Dentsu’s
international business). On an industry basis, this implies 1.7% growth in 2018 vs.
1.1% in 2017 and 3.1% in 2016. For U.S.-based agencies, FX should shift to a
tailwind: we forecast an impact to revenue of +2.0% at OMC, +1.5% at IPG, and -
4.9% for France-based PUB and -3.6% for UK-based WPP.
Agencies look for flat or modest margin expansion in 2018. IPG is guiding to
20bps of margin expansion in 2018 following a 40bps increase last year. OMC for
now has not committed to a margin target for the year (OMC has a history of
focusing on top- and bottom-line growth and often shies away from committing to
margin expansion). WPP is targeting margin development of flat at constant FX per
annum given market disappointment in 2017. However, the dual focus for 2018 to
grow revenues and enhance margins will drive the unchanged long-term net sales
margin target of c20%. Lastly, PUB is targeting operating margin expansion over the
next few years after guiding for a 17.3-19.3% margin in 2018 previously. We believe
the company will continue to benefit from its current restructuring efforts and further
synergies (Sapient synergies, benefits from the recent ERP switchover, and shared
services between agencies) with benefits feeding through this year in addition to
(some) revenue growth also dropping through.
Financial leverage still a plus. Despite the overall softer growth environment
relative to past years, we expect all of these companies to produce robust free cash
flow in 2018. We also look for continued returns of cash to shareholders: we forecast
OMC to repurchase $600m in addition to a dividend yield of ~3.25%. We expect IPG
to maintain a healthy buyback (JPMe $300m) along with a very healthy ~3.5%
dividend yield. We expect WPP to repurchase 2% of its share capital (c£400m) and
continue with its 50% payout target, giving a dividend yield of 4.8%. We expect
PUB to increase its payout ratio to 50% post the restructuring of the business,
offering a dividend yield of 3.9%.
Valuation. On a 2018E P/E basis, agencies currently trade below their respective
broader market benchmarks. IPG trades at 13.9x and OMC at 13.0x our 2018 EPS
estimates vs. the S&P 500 at 17.8x. On our 2018E EPS, WPP trades at 10.1x and,
PUB at 12.7x, below the MSCI Europe Index at 14.5x. Dentsu trades at 16x on our
2018E adjusted EPS (24x on nominal EPS) vs. TOPIX at 14.4x.
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Risks for the Stocks

There are some risks to these stocks as well, with the most obvious being the state of
the global economy and currency fluctuations, in our view. If the US economy were
to stall or Europe to move backwards, we would likely see negative earnings
revisions across our group. FX is a positive for domestic agencies based on current
exchange rates, but that benefit could reverse. The emerging markets have stabilized
somewhat, though renewed instability in Brazil or Eastern Europe would be a
negative.
 Ad growth depends on economic strength. Below-average economic growth in

any major region could have a negative impact on earnings for the group.
 New business movement remains impactful given the high volume of accounts
in play. Accounts won or lost may have above-average impact on revenues,
influencing earnings growth.
Summary Outlook for Individual Stocks

 Interpublic Group of Companies Inc. (Overweight). In 2017 IPG organic
growth decelerated to 1.8% off a tough 5.0% comp and 17% growth in the prior
three-year period; original guidance for the year was for 3-4% growth. Company
operating margin expanded 37bps to 12.4%, slightly below the outlook provided
at the start of the year for an additional 50bps. Shares declined -14% for the year,
roughly consistent with OMC and PUB (though ahead of WPP) and below a 19%
gain for the S&P. Management is guiding to a more modest 2-3% organic growth
in 2018, though we believe there is upside to this forecast, particularly if client
budgets pick up through the year supported by tax savings. Consistent with the
slower organic forecast, IPG is guiding to 20bps of margin expansion this year. In
total, we look for 22% EPS growth, with 6% operating income growth boosted by
a reduced effective tax rate (28% from 36% in 2017) and continued share
repurchases. YTD shares have outperformed, which we feel reflects the
company’s Q4 acceleration in US and total company organic revenue. Shares
currently trade at 13.9x on our 2018E EPS (12.7x on 2019E), an over -20%
discount to the broader market, relative to the stock historically trading in line.
We believe healthy ad trends and execution on the company’s margin target can
again lead to outperformance ahead toward our year-end price target of $27.
 Omnicom Group (Overweight). We generally view Omnicom as the best-in-
breed holding in the group with broad agency strength and stability and a track
record of peer-leading performance, including ROE and ROIC. 2017 was a more
modest year of organic growth at 3.0% versus 3.5% and 5.3% in 2016 and 2015,
respectively, although in line with its original guidance for the year for 3.0-3.5%
growth. International remained strong, accelerating to 6.2% organic growth and
bringing the trailing three-year period increase to 18%. The US, however, saw a
slowdown to 0.5% growth from 1.9% in 2016 and 4.6% in 2015. Company
EBITA margins improved 45bps (on top of 37bps in 2016), partly driven by the
divestiture of some lower margin businesses at the start of the year. Omnicom
also saw a notable -4.2% impact from dispositions, which included the
company’s print media business, Novus. For 2017, management has targeted 2-
3% organic revenue growth and has not committed to a margin expansion target.
Based on FX rates around Q4 earnings, FX is expected to be a nice tailwind of
around 2%. Overall we look for operating income growth of 4% and EPS growth
of 11%, with the latter boosted by a lower tax rate (28.5% vs. 31% in 2017) and
ongoing share repurchases. Shares currently trade at 13.0 on our 2018 EPS,
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a -27% discount to the broader market and -6% discount to IPG. We note though
that OMC has a long history of executing on its guidance targets, and we could
see an added benefit later in the year if higher client spending flushes through
from tax cuts. While expectations for a lackluster Q1 (following a softer than
expected Q4) could keep shares range bound near term, we see the current
valuation as a good entry point for longer term investors.
 Publicis (Overweight). Publicis saw a strong margin performance in 2017,
reaching 15.5%, up 40bps at constant restructuring charges (down 10bps when
taking FX into account), despite the absence of revenue growth (particularly in
H117). Going into 2018, the company indicated further margin expansion in the
next few years (after guiding for a 17.3-19.3% margin in 2018 previously), and
we see potential for further margin surprises. We believe the company will
continue to benefit from its current restructuring efforts and further synergies
(Sapient synergies, benefits from the recent ERP switchover, and shared services
between agencies) with benefits feeding through this year in addition to (some)
revenue growth also dropping through (we refer to our recent detailed note on
Publicis here). We continue to see a strong H118 but expect momentum from net
new business to slightly slow in H218 due to the loss of Sanofi in Q317. We see
Publicis slightly more exposed to the current accounts under review in
Mediapalooza 2.0 and forecast organic revenue growth of +1.8%/+1.9% in
2018/2019, which already includes the assumed headwinds from the Richemont,
Sprint, and Sanofi account losses. We see the current valuation of 12.7x/12.2x
2018E/19E P/E, a c9% discount to MSCI Europe, as an attractive entry point for
a solid top-line turnaround story where there are low expectations and which also
offers an attractive 2018E/19E 9.6%/10.1% Eq FCF (pre bolt-on M&A). We rate
PUB OW with a Dec 2018 price target of €78.90, implying 38% potential upside.
 WPP Group plc (Overweight). Despite a cautious outlook for flat organic net
sales growth and margins, we continue to recommend purchase of WPP as 1) we
see current guidance as conservative given its dual focus to enhance revenues and
margins in the year; 2) the company is strongly positioned to benefit from $1.8bn
positive net new business at the end of 2017; and 3) valuation is attractive. The
shares trade at 10.4x 2018E P/E, a -26% discount to MSCI Europe vs. a historical
premium of +9%, and equity FCF yield of 9%.
 Dentsu (Overweight). We remain positive on Dentsu’s key international
business (expect +4.0% YoY organic growth) despite lingering uncertainty on the
operating environment as we expect FY2017’s strong new business acquisition to
lift growth ahead of that of rivals. The US operation has been gradually
rebounding from a 2Q FY2017 bottom, and we expect it to drive the recovery in
overseas organic growth on a major contribution from new business acquisition
by the Merkle M1 platform launched last year. Conditions, meanwhile, remain
unsettled in major EMEA and APAC markets (UK, France, Germany, China), but
we see no need for excessive concern as comps are low, new business will be
contributing, and ad rates are not particularly unfavorable. We expect profits to
decline in FY2018 (FY2018 JPMe operating margin 17% vs. company guidance
15.7%) as Dentsu increases domestic and overseas investment by more than we
anticipated, but we also think guidance is overly conservative and see substantial
scope for an overshoot, especially in the Japan business despite ongoing spending
on labor environment reforms. The account review by major client Microsoft is a
near-term risk factor for the shares, but we expect 1Q results with their tough
comps to exhaust the bad news for now. We rate Dentsu OW with a Dec 2018
price target of ¥5,800, implying 23% potential upside. This equates to an
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EV/EBITDA of 8.1x and P/E of 16x based on our FY2018 adjusted EPS
estimates.
This report is an overview of the advertising and marketing services industry. We

Scope of this report start with an overview of the industry’s size and growth dynamics in relation to GDP
and consider the growth of advertising as a global industry. We then look at the
different media in which advertising is placed before thoroughly investigating the
structure of an advertising and marketing services company. With this understanding,
we discuss industry growth drivers and trends, including the compensation structure.
Finally, we provide a financial outlook for the industry, a look at valuation of the five
advertising and marketing services companies under our coverage, and snapshots of
each of the leading global advertising and marketing services companies.
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A Macro View
The advertising and marketing Most broadly defined, advertising is everything that comes out of a marketing
services industry today budget. It includes traditional advertising (the dollars behind a media buy as well as
the creative work to support it) and also many other forms of marketing, including
direct mail, promotional sales (coupons or incentive-based advertising), public
relations, market research, event marketing, and specialist forms of marketing,
including health care communications. Depending on the definition, advertising
expenditures in the U.S. account for anywhere between 1% and 3% of GDP, or an
estimated $433 billion in 2017, according to leading forecaster ZenithOptimedia,
which includes marketing services spending such as direct mail, or $197 billion if
only including major media. The U.S. is the largest advertising market in the world,
accounting for 36% of the $556 billion in global major media spending in 2017.
Advertising is a critical revenue stream for most media companies, including

television, digital, cable, radio, newspapers, and other new media, which can
fluctuate based on the health of the overall industry. The term “diversified
advertising and marketing services companies” is most commonly used today to
describe the major holding companies that own a variety of agencies that create,
manage, and place marketing campaigns, as well as offer many other marketing
services such as public relations, direct marketing, market research, and digital
businesses.
In this section, we provide an overview of the advertising and marketing services

industry, taking a look at the correlation between advertising spending and GDP. We
also look at how advertising spending reacts to economic cycles in the United States.
This is followed by a look at the effect of two significant events on advertising
spending every two years, the U.S. political elections and the alternating summer and
winter Olympic Games. Finally, we examine trends in international advertising
expenditures.
Tracking Ad Expenditures
A number of organizations track advertising expenditures and forecast spending by
medium. The most notable sources include ZenithOptimedia (part of Publicis),
GroupM (WPP), Kantar Media (WPP), and MAGNA (IPG).
 Zenith. Part of Publicis, Zenith tracks global advertising expenditures in more

than 75 countries across major media, including Internet, TV, newspapers,
magazines, radio, cinema, and outdoor. For the US, Zenith also tracks several
marketing services disciplines, such as direct mail, PR, and event sponsorship.
Zenith updates its forecasts and publishes comprehensive global advertising
expenditure books on a quarterly basis.
 GroupM. Led by Futures Director, the aptly named Adam Smith, GroupM
publishes a global “This Year, Next Year” forecast semiannually. These reports
also include forecasts for marketing services disciplines, including direct and
specialty, public relations, market research, and sponsorship.
 MAGNA. Interpublic’s research arm uses a top-down methodology focused on
ad revenues received by media properties rather than a bottom-up look at ad
expenditures by marketers, which would include agency fees and production
costs. US forecasts are updated quarterly and global forecasts semi-annually.
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 Kantar Media. Formerly TNS Media Intelligence before being acquired by

WPP, Kantar tracks historical advertising expenditures in the top 100 U.S.
markets for more than two million brands across media, including television
(network, Spanish language network, spot, syndicated, and cable), magazines
(consumer, business-to-business, Sunday, and Hispanic), newspapers (national,
local, and Hispanic), radio (network, national, and local spot), freestanding
inserts (FSIs), Internet display, and outdoor. Kantar also provides advertiser-
specific data and ad spending by industry group. Kantar releases monthly ad
spending data to subscribers and quarterly updates publicly. It no longer
publishes forecasts.
Figure 17: U.S. Advertising Growth Projections, 2015-18E

$ in billions
2015 % Change 2016 % Change 2017E % Change 2018E % Change
Zenith
Dec-17 $182.7 3.6% $190.8 4.4% $197.5 3.5% $204.0 3.3%
Sep-17 $182.7 3.6% $190.8 4.4% $197.5 3.5% $204.2 3.4%
Jun-17 $182.7 3.6% $190.8 4.4% $197.5 3.5% $204.1 3.3%
Mar-17 $182.7 3.6% $190.8 4.5% $197.9 3.7% $204.8 3.5%
GroupM
Dec-17 $173.3 1.8% $178.8 3.2% $182.8 2.2% $189.1 3.4%
Sep-17 $173.3 1.8% $178.8 3.2% $182.8 2.2% $189.1 3.4%
MAGNA
Dec-17 $169.0 2.9% $182.0 7.7% $185.8 2.1% $195.1 5.0%
Sep-17 $169.0 2.9% $182.0 7.7% $185.3 1.8% $194.1 4.8%
Jun-17 $169.0 2.9% $182.0 7.7% $184.9 1.6% $193.9 4.8%
JPM GDP $18,120.7 4.0% $18,624.5 2.8% $19,386.8 4.1% $20,394.9 5.2%
Note: Major media only. MAGNA’s figures represent ad revenues at media properties as opposed to ad spending from the advertiser
side for the others.
Source: MAGNA, GroupM, Zenith, BEA, J.P. Morgan estimates.
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Advertising Relative to GDP

As a percentage of GDP, U.S. advertising spending has averaged 2% since 1950,
hitting a peak of 2.4% in 2000 with the dot-com bubble, though it has been in a slow,
steady decline since then. Ad spending has a lagging cyclical relationship with the
economy (see Figure 9), typically by six to eight months. The advertising industry
generally moves through long cycles: in the first year or two out of an economic
recession, ad spending tends to lag nominal GDP growth, then match GDP growth in
the second or third year, and then surpass it in subsequent years. The most recent
recovery initially followed this trend with major media spending lagging the
economy in 2010/2011, then slightly exceeding GDP growth in 2012-2014. Since
then, ad spend relative to economic growth has mixed.
New media has altered traditional spend patterns

Fragmentation of media and An important secular factor has interceded into the historical ad cycle: media
shift to digital weighs on pricing fragmentation, most obviously in the form of online and interactive advertising,
and overall ad spend
which brings with it lower pricing. In the previous expansionary cycle (2001-2007),
ad spending predictably surpassed nominal GDP growth in 2004, the third year of
economic recovery. However, ad spending fell short of GDP growth in 2005-2008,
which we see as likely due to (1) less pricing power by traditional media as
advertisers moved dollars elsewhere, particularly online, and (2) the shift of budgets
to often unmeasured marketing channels away from traditional media (e.g., a
Facebook page or YouTube posting has no explicit media cost). This trend is most
evident by the steep declines in newspaper ad revenues over the last decade.
Digital continues to gain share, We note that while the shift toward digital and some less measureable forms of new
though continued TV scatter media is ongoing, television has held its place as a crucial medium for advertisers.
market strength has shown the
resilience of the television ad Following the 2015-2016 upfront, the second straight with a decline in spending for
medium both cable and broadcast, many industry watchers speculated that television was
seeing the increased impact of a broad shift of advertisers to digital. The TV market,
though, showed incredible resilience in the back half of 2015 and into 2016, with
scatter pricing up significantly, prompting some execs to call it the best market they
had seen in years or ever. This led into the 2016-2017 upfront, which saw an increase
in spending commitments. Several factors have been cited for TV’s strength,
including continued weakness in ratings (leads to an increase in make-goods) and a
voluntary reduction in ad loads at some networks, both of which result in a
subsequent decline in available inventory. In our opinion, though, the greatest driver
of strength has been an increased appreciation for the TV medium by advertisers,
especially for companies looking to raise awareness across a mass audience and in a
brand safe environment. We believe the ongoing strength indicates greater marketer
demand, possibly reflective of some ad spend moving back to traditional TV from
digital, albeit at small volumes. More recently, spending growth for the 2017-2018
upfront actually accelerated from 2016-2017. While we anticipate ad dollars will
continue to shift to digital long term, particularly as issues such as viewability, fraud,
and measurement are worked through, we expect TV to remain a key medium and
favorite for advertisers looking for mass reach.
Agency revenue performance lags media spend

We note that as ad spending tends to lag the economy by at least six months, agency
revenue performance additionally tends to lag media spend by another three to six
months, reflecting their fee structure (as opposed to a commission on spend) where a
quick increase or pullback in a client’s media spend will have a limited immediate
impact on agency financial performance. It is generally only after a meaningful shift
in budget or strategy (i.e., scope of work) that fees are renegotiated.
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Looking back at the 2008 downturn, while many media companies saw sharp ad
revenue pullbacks in the third and fourth quarters (particularly on the local level), the
agencies maintained good revenue growth in Q3 and only modest declines in Q4
(WPP was even positive) before seeing their steepest double-digit declines mid 2009.
The strongest rebound then hit in mid 2010, roughly two quarters after the TV
networks.
At this stage in the cycle, we would typically expect growth at both the media players
and agencies to be roughly in line, though we do believe that, as ad spend continues
to migrate away from traditional media, the agencies could outperform as they
maintain a full digital offering and tend to keep a greater share of spend in digital.
The following exhibits show ad spending figures, along with comparisons to GDP.
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Figure 18: U.S. Advertising Expenditure vs. Nominal GDP Growth, 1970-2018E
$ in billions
Advertising
Advertising % Change Nominal % Change Expenditures as
Year Expenditure in Ad Exp GDP in GDP a % of GDP
1970 $19.6 0.7% $1,075.9 9.3% 1.8%
1971 20.7 5.8% 1,167.8 8.5% 1.8%
1972 23.2 12.2% 1,282.4 9.8% 1.8%
1973 25.0 7.7% 1,428.5 11.4% 1.7%
1974 26.6 6.6% 1,548.8 8.4% 1.7%
1975 27.9 4.9% 1,688.9 9.0% 1.7%
1976 33.4 19.4% 1,877.6 11.2% 1.8%
1977 37.5 12.5% 2,086.0 11.1% 1.8%
1978 43.5 15.8% 2,356.6 13.0% 1.8%
1979 49.0 12.7% 2,632.1 11.7% 1.9%
1980 54.0 10.3% 2,862.5 8.8% 1.9%
1981 60.9 12.8% 3,210.9 12.2% 1.9%
1982 67.2 10.2% 3,345.0 4.2% 2.0%
1983 76.6 14.0% 3,638.1 8.8% 2.1%
1984 88.6 15.7% 4,040.7 11.1% 2.2%
1985 95.6 7.8% 4,346.7 7.6% 2.2%
1986 103.2 8.0% 4,590.1 5.6% 2.2%
1987 111.2 7.8% 4,870.2 6.1% 2.3%
1988 119.9 7.8% 5,252.6 7.9% 2.3%
1989 126.1 5.2% 5,657.7 7.7% 2.2%
1990 130.0 3.9% 5,979.6 5.7% 2.2%
1991 128.4 -1.2% 6,174.0 3.3% 2.1%
1992 133.8 4.2% 6,539.3 5.9% 2.0%
1993 141.0 5.4% 6,878.7 5.2% 2.0%
1994 153.0 8.6% 7,308.7 6.3% 2.1%
1995 165.1 7.9% 7,664.0 4.9% 2.2%
1996 178.1 7.9% 8,100.2 5.7% 2.2%
1997 191.3 7.4% 8,608.5 6.3% 2.2%
1998 206.7 8.0% 9,089.1 5.6% 2.3%
1999 222.3 7.6% 9,660.6 6.3% 2.3%
2000 249.1 12.1% 10,284.8 6.5% 2.4%
2001 232.8 -6.5% 10,621.8 3.3% 2.2%
2002 238.1 2.2% 10,977.5 3.3% 2.2%
2003 247.2 3.8% 11,510.7 4.9% 2.1%
2004 266.6 7.9% 12,274.9 6.6% 2.2%
2005 275.9 3.5% 13,093.7 6.7% 2.1%
2006 289.5 4.9% 13,855.9 5.8% 2.1%
2007 290.4 0.3% 14,477.6 4.5% 2.0%
2008 282.9 -2.6% 14,718.6 1.7% 1.9%
2009 252.4 -10.8% 14,418.7 -2.0% 1.8%
2010 255.7 1.3% 14,964.4 3.8% 1.7%
2011 259.4 1.5% 15,517.9 3.7% 1.7%
2012 267.9 3.3% 16,155.3 4.1% 1.7%
2013 272.9 1.9% 16,691.5 3.3% 1.6%
2014 284.3 4.2% 17,427.6 4.4% 1.6%
2015 292.3 2.8% 18,120.7 4.0% 1.6%
2016 301.4 3.1% 18,624.5 2.8% 1.6%
2017 306.7 1.8% 19,386.8 4.1% 1.6%
2018E 313.2 2.1% 20,394.9 5.2% 1.5%
Note: Pre-2009 Ad Spend figures are based on Robert Coen, adjusted for Internet spending using IAB historical data and eMarketer
estimates. Subsequent historical growth rates are based on Zenith (major media plus direct mail and directories).
Source: Zenith, MAGNA, IAB/PwC, Bureau of Economic Analysis, J.P. Morgan ad spend and GDP estimates.
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Figure 19: Change in Ad Expenditures vs. Nominal GDP 1970-2018E

Ad spend typically lags GDP 20%
growth by 6-8 months
15%
10%
5%
0%
-5%
-10%
-15%
Recession Ad Spending %chg GDP %chg
Source: Zenith, MAGNA, IAB/PwC, Bureau of Economic Analysis, NBER, J.P. Morgan ad spend and GDP estimates.
Figure 20: Advertising Spending as % of Nominal GDP, 1970-2018E

2.6%
2.4%
2.2%
2.1%
2.0% 2.1%
1.8%
1.8%
1.6% 1.7%
1.4%
1.2%
1.0%
Recession Ad Spend as % of GDP
Source: Zenith, MAGNA, IAB/PwC, Bureau of Economic Analysis, NBER, J.P. Morgan ad spend and GDP estimates.
Ad spend as a proportion of GDP differs meaningfully

between the major European markets
In Europe, the share of advertising as a % of GDP is 1-3% with different
developments within each market. Germany has still the highest share with 2.4%
(having come down already from 3.7% in 2000). We see the slow shift away from
print to digital (print advertising still takes a 34% share in overall ad budgets) as a
key reason as a small part of ad budgets tends to be lost in this transition. In contrast,
the UK has already seen most of move toward digital advertising (now c60% of ad
budgets), resulting a broadly stable share of ad spend in GDP. France, Spain, and
Italy have converged since 2009, following almost identical movements in the share
of ad spend in GDP.
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Figure 21: Europe: Advertising share of GDP

4%
3%
2%
1%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
UK Italy Germany France Spain
Source: J.P. Morgan estimates and Bloomberg.
Advertising Spending During Recessions

Corporations are quicker to hit the brakes on media spend, though at the risk of
losing crucial market share
Ad spending has declined relative to GDP in the last three recessions of 2009, 2001,
and 1991. In the two prior recessions in the early 1980s, ad spend maintained
outperformance to the economy. We believe the common factor in more severe ad
performance in the last two decades is simply faster corporate reaction to a downturn
that often includes a sharp pullback in media spending to preserve corporate
profitability. Once a downturn bottoms and consumer spending stabilizes or
improves, media spend can quickly return as corporations shift from protecting
margins back to protecting market share and growing revenue.
Ad spending fell 1.2% in 1991 and 6.5% in 2001, dipping as a percentage of GDP in
both years. This behavior was atypical as growth was particularly robust in three of
the last five recessions, increasing on average 6% in 1973-75, 10% in 1980, and 10%
again in 1982 as companies worked especially hard to boost consumption and
differentiate their products. However, ad spending did once again underperform GDP
growth in the most recent severe recession, falling over 10% in the US in 2009
versus a 2.0% decline in GDP.
A robust ad budget is key in “There are few things as detrimental as a lapse in advertising. It costs much more to
difficult times, although it get up advertising momentum than it costs to keep it going. And once you let that
doesn’t always result in ongoing
spending momentum die, you must start almost from scratch again.” — Charles Brower, late
President of BBDO
While it may be a natural reaction to restrain spending during periods of economic

difficulty, a study by the American Association of Advertising Agencies (AAAA)
demonstrates that advertising during difficult times results in much greater market
share gains than in periods of economic prosperity. The study showed that during a
recessionary period, an increase in marketing expenditures resulted, on average, in a
1.5-point gain in incremental market share. The same increase in a strong economy
showed no market share gains, on average. Furthermore, the study pointed out
several examples of companies that aggressively marketed during recessions and
how they fared compared to their competition. For instance, during the Great
Depression of the 1930s, Kellogg maintained its advertising while Post pulled back.
The study goes on to suggest that this decision is likely responsible for Kellogg’s
dominance in the cereal category during the second half of the 20th century.
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While this study does not imply that companies will increase their marketing budgets
in difficult times, it does suggest that the negatives associated with an advertising
pullback are often much more severe than the short-term fix a cut in spending may
do for the bottom line.
2009 marked the worst ad The recession in 2009 was the worst since WWII for ad spending, even since the
recession since WWII 1930s. Major media ad spend fell roughly 13% in the US in 2009. This falloff was
largely driven by a very weak local ad market (notably auto), with more modest
declines at the national level.
The local ad market in the downturn was hampered by (1) the high concentration in
the more cyclically sensitive industries (auto and retail make up close to 50% of the
local ad market), (2) ad dollars continuing the trend of moving out of the local
market into national market due to the “Wal-Mart effect” (small businesses being
eaten up by bigger national chains); and (3) the less resilient nature of local
businesses to spend in a downturn, which leads to bigger cuts in a down-cycle and a
lag in recovery. A decline in audience at many major local media (fewer readers of
newspapers, fewer listeners to radio, and the migration of viewership to cable and the
Internet away from local TV) has also played into the relative weakness.
National ad spending fell as well, largely reflecting declining revenues among major
advertisers. While large advertisers tend to lag on the way into a downturn, just as
many will fight the tide and continue spending as long as they can to preserve market
share and stimulate growth. However, at a certain point ad budgets contract in an
effort to preserve profitability in a declining revenue environment, which is what we
eventually saw in 2009.
Advertising Spending During Economic Expansions

Advertising expenditures have historically outpaced GDP growth through
expansionary cycles, as seen since 1975 below, though we believe new and unpaid
media have altered this trend, as discussed above.
Figure 22: Advertising Expenditure and GDP Growth — Past Expansionary Periods
CAGR of Change in Ad Exp. /
Expansionary Period No. of Months Ad Expenditures GDP Growth GDP Growth
Mar 1975 - Jan 1980 58 13.4% 11.5% 1.17x
July 1980 - July 1981 12 11.6% 9.7% 1.20x
Nov 1982 - July 1990 92 9.0% 7.5% 1.20x
Mar 1991 - Mar 2001 120 6.6% 5.2% 1.27x
Nov 2001 - Dec 2007 73 3.7% 5.3% 0.71x
Jan 2010 - Present 97 2.2% 3.3% 0.69x
Source: National Bureau of Economic Research, Robert Coen, MAGNA, IAB, J.P. Morgan, latest cycle (Jan 2010 - present) compares
combined annual growth rate from 2009-2018.
The previous full expansion (2001-2007) saw ad spending growth only exceeding
GDP growth in 2004 and otherwise growing at a slower rate. In the current
expansionary cycle, major media spend initially trailed nominal GDP in 2010/2011
before slightly outpacing GDP growth in 2012-2014 and again in 2016. For 2018, we
expect advertising expenditures to grow slightly below GDP despite the benefit of
quadrennial events. As discussed elsewhere in this report, we believe reported media
spend is more muted than the overall marketing environment as a result of the secular
shift to unmeasured formats (notably digital, such as social). Exemplifying this shift
in spend has been the agencies’ own reported organic growth, which has largely
exceeded industry media spend in the current recovery and over the last decade as
they are still paid for these less traditional marketing campaigns.
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There are three generally discernible stages of ad recovery:
 Direct and promotional spending increases. Usually, this is the first area to see
increased spending as marketers like the proven return on investment and
customers are encouraged to purchase a product. Direct and promotional
spending did indeed increase at a faster pace than the industry overall in the early
stages of the most recent recovery, albeit at a slower pace than broadcast TV.
 New products enter the market. Companies try to boost sales by launching new
products. This is supported by an increase in traditional advertising dollars.
Examples include an increased number of new car model launches in 2013 by the
automakers and a multitude of new tablets and phones not only from Apple but
also from Samsung, Microsoft, and many other consumer electronics
manufacturers.
 National and global branding campaigns emerge. With improving
profitability, companies develop campaigns to grow or support brand images. The
US auto makers have exemplified this stage with new corporate campaigns to
refresh their image after the bankruptcies in the recession, for example,
Chrysler’s “Imported from Detroit” and Ford’s “Introducing the Lincoln Motor
Company,” along with numerous new model launches. Large-scale branding
campaigns also emerge, especially as M&A activity in a healthy economy brings
about new corporate entities.
2018 looks to be a ninth We were impressed by how quickly the ad market bounced back in 2010, and it has
consecutive year of healthy ad remained steady into 2018, particularly in the U.S.
growth
In 2018, we believe spending will grow in the low to mid single digits. Advertisers
in general continue to benefit from healthy balance sheets and good cash flow, in our
view, though pressure to grow revenue continues while competition for market share
remains fierce. Companies are actively launching new products and employing more
aggressive marketing plans to grow share at this stage of the cycle. We believe the
healthier consumer will encourage stronger spend in 2018, and budgets could see an
additional boost from corporate tax reform. We expect US ad spending to increase
4.0%. Abroad, Europe appears still mixed but with some signs of it turning for the
better, and while emerging markets have been more volatile, overall we expect them
to outperform.
In the US, we expect national advertising to once again outpace core local growth
(excludes political) this year for several reasons: 1) the increasing digitization and
consolidation of many industries (think Amazon in retail or Wayfair in furniture) has
led to a shift in media spend from local to national businesses; 2) national advertisers
in general seem to be in better financial health and are more aggressively pursuing
market share; 3) weakness in specific local verticals, such as retail, where department
stores are either shifting spending to national media or pulling back entirely; and
4) displacement from the presidential election cycle.
Political and Olympic Advertising Provide a Boost to Ad

Spending in Even Years, Albeit Less in Recent Cycles
2016 political spending was Every two years the advertising industry benefits from U.S. elections and the
below expectation Olympic Games as mass audiences in the U.S. and abroad tune in to monitor the
progress of each event.
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Every calendar year can be classified as a congressional, presidential, or off-election

year (although some state and local elections may occur in off years). In
congressional years, one-third of the Senate, all of the House of Representatives, and
approximately 75% of state governors are elected. In presidential years, the
president, one-third of the Senate, all of the House of Representatives, and 25% of
state governors are elected. Odd-numbered calendar years are off-election years.
We estimate roughly 75% of political advertising is spent on local television, which

includes broadcast and cable. Digital (mainly Facebook) accounts for 10-15%, with
the balance split between direct mail, radio, and print. While the share of Internet has
been increasing, this has mostly been at the expense of non-television forms of
media. We expect local TV to continue to capture the vast bulk of political ad
dollars, reflecting the medium’s broad reach, easy measurability, and continued
popularity with an older demographic that is more likely to vote.
Historically, political advertising-related expenditures on local TV have consistently

increased over previous election years. For example, the 2006 congressional
elections exceeded all previous years, including the 2004 presidential campaign, with
an estimated $1.5 billion spent on advertising in intensely contended House and
Senate battles. In 2008, the historic presidential election and compelling primary
races helped drive another solid political year for TV, in spite of a weak overall
advertising market, with an estimated $1.9 billion spent on advertising. In 2010, we
had yet another record year with political ad spending surpassing the 2008 mark,
coming in at an estimated $2.1 billion just on TV, according to MAGNA.
2012 shattered records on virtually all fronts, with an estimated $6 billion in total
campaign spend by some estimates. A key difference in this election cycle was the
rise of Super PACs, which were first created in 2010 as a result of the Supreme Court
ruling in the landmark Citizens United case. Super PACs nearly spent a remarkable
$650 million. TV (local, network, and cable) got the lion’s share of total political
spend, bringing in roughly $3 billion, up more than 35% over the $2.1 billion spent
in 2010, the previous record, according to Kantar Media’s CMAG. Spending from
conventions to Election Day alone were up significantly over 2008, drawing in
nearly $500 million (+65%). In 2014, political ad spend for local TV was $2.4b,
higher than in 2010, though below the levels seen for the record presidential year in
2012.
In 2016 growth stalled with local broadcast spend up only 2% over the 2012 cycle.
Total local TV spend was $2.76b, as estimated by Magna, well below its $3.0b
forecast at the end of 2015. The disappointing result was driven by a decline in
presidential advertising: Trump spent less, making greater use of social media and
free exposure on cable news networks, and as a result Clinton spent less too.
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Figure 23: 2012 and 2016 Presidential Campaign Ad Spend

$ in millions
$600 $550
$500
$500
$409
$400
$300
$200 $161
$100
$0
Obama '12 Clinton '16 Romney '12 Trump '16
Source: Kantar Media.
The long-term concern for broadcasters (and investors) is whether Trump’s victory
has fundamentally changed how campaigns will allocate their ad spend. In our
opinion, there is cause for concern but not alarm. The 2016 cycle was unique in that
one of the leading candidates was already a well-known TV personality. As the
television medium is particularly useful for candidate branding, this mitigated
Trump’s need to spend on local ads and allowed him to focus on communicating
directly to voters through digital channels. While it’s possible some candidates
(especially those lacking in funds) will seek to run this playbook in future
campaigns, we think it’d be very difficult to execute with the same effectiveness.
Still, it’s reasonable in our opinion to assume that Trump’s victory has elevated the
place of social media in the minds of paid political consultants who allocate
campaign funds. While we wouldn’t expect a decline in TV ad spend in future
cycles, we do think the rates of growth seen from 2000 to 2012 may be difficult to
repeat.
The early outlook for 2018 appears promising. The Cook Political Report lists as
Likely, Lean, or Toss Up (implying more competitive races) 17 Senate seats and 23
governor seats. The next cycle is also likely to see increased issues spending.
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Figure 24: Political Advertising on Local Broadcast and Cable Television, 1970-2021E
$ in millions
Total TV Total TV
Year Type of Elections Spend Year Type of Elections Spend
1970 Congressional $12.0 1996 Presidential $407.9
1971 Off-Election Year 5.5 1997 Off-Election Year 51.5
1972 Presidential 24.6 1998 Congressional 421.4
1974 Congressional 23.3 2000 Presidential 578.6
1976 Presidential 50.8 2002 Congressional 762.3
1978 Congressional 57.6 2004 Presidential 1,252.6
1980 Presidential 90.6 2006 Congressional 1,472.1
1991 Off-Election Year 37.3 2017E Off-Election Year 348.8
1992 Presidential 299.6 2018E Congressional 2,875.6
1994 Congressional 355.0 2020E Presidential 3,034.3
Notes: Congressional: One-third of Senate, all of House, and about three-quarters of governors. Presidential: President, one-third of Senate, all of House, and one-quarter of governors.
Off-Election Year: Some local and county elections.
Source: MAGNA; J.P. Morgan estimates.
The summer 2016 Olympic In 1994 the summer and winter Olympic Games changed cycles. The quadrennial
Games in Rio generated less
incremental spend than
cycle was replaced by a biennial cycle. As a result, the Summer Olympics coincide
expected with a presidential election year and the Winter Olympics with congressional
elections. Similar to political advertising, the big gainers from Olympic Games
spending are network and spot television, with digital capturing some dollars.
Ad spending on the Olympics is not all incremental as many advertisers will simply
reallocate dollars to the Olympics from other programming or will shift dollars to the
Olympic Games from other times in the year. However, official sponsors do increase
their budgets, many advertisers develop new Olympic-themed campaigns to push
their products (meaning much new work for the agencies), and pricing is high around
the event. Therefore, the Olympics do have a modest inflationary impact on the
overall ad market.
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Figure 25: U.S. Share of Incremental Olympics Ad Spend by Medium

%
Digital 5%
Local Broadcast
13%
National
Broadcast 56%
National Cable
26%
Source: Magna Global.
In May 2014 NBCUniversal signed a new $7.65 billion deal (plus an additional $100
million signing bonus) with the International Olympic Committee for the media
rights to the Olympic Games through 2032 once the current deal expires in 2020. The
new deal is a ~15% premium over the previous contract when broken down by event.
While previously NBCU acquired the rights only after outbidding rivals ESPN and
Fox Sports, the new agreement was a unilateral negotiation. We estimate NBC spent
~$1.22 billion in rights fees for the 2016 games.
Heading into the Rio Olympics, there was anticipation for record ad spending as the
games featured several returning star athletes, compelling storylines, and a favorable
time zone. Viewership though was down -17% for the NBC broadcast network
versus 2012 and -9% for total audience delivery across all NBCU networks and
streaming platforms. Total ad spend was $1.2b, down from $1.33b for the London
games. Incremental ad spend (estimated by Magna) was flat versus London
compared to four-year increases of +8% and +6% for the 2014 and 2012 games,
respectively.
For the recent Winter Olympics in Pyeongchang, NBC stated it sold over $920m in
ads, which compares to an estimated rights fee of $963m. Notably, however, the
WSJ reported that several large advertisers, including GM, P&G, and AT&T cut
their spending relative to the 2014 games in Sochi. NBC broadcast-only primetime
viewership fell -17% for the 2018 games relative to 2014. Total Audience Delivery,
which includes cable and streaming, was down only -7% vs. NBC broadcast.
Relative to other major networks (ABC + CBS + FOX), NBC’s broadcast primetime
advantage was 82%, up from 43% in 2014.
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International Trends
The top advertising and marketing services companies derive roughly half or more of
their revenues from non-US sources, with about 20-35% in Europe and 15-25% from
emerging markets. Geographically, acquisition activity has been concentrated in
emerging markets, and WPP itself has a long-term target of 40-45% of revenues from
these countries.
Figure 26: Advertising and Marketing Services—Geographic Distribution of Revenues, 2017

OMC IPG
Africa & Middle
Other
Latin America East
Asia/Pacific 6%
3% 2%
12%
Asia Pacific
11%
Latin America
4%
Continental
Euro & Other Europe
Europe U.S. 9% U.S.
16% 54% 60%
UK
U.K. 9%
9% Canada
3%
WPP Middle East PUB

Africa 3%
Latin America
AP, LA, AME, 4%
CEE
30% N. America Asia Pacific 11%
37% North America
54%
W Cont. Europe UK Europe 28%

20% 13%
Dentsu
Americas
24%
Japan
41%
EMEA
21%
APAC
14%
Source: Company reports and J.P. Morgan estimates. Note: Gross profit figures are used for Dentsu.
ZenithOptimedia currently expects global ad expenditures to increase 4.1% y/y (at

current prices), with the forecast rate down slightly from September estimates. Figure
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26 below shows Zenith’s 2018 global advertising expenditure estimates, revised

down 10bps from Sep 2017.
Table 7: Zenith Ad Spending Growth Estimates for Top 4 Markets and Globally, 2018
As of Jun-17 As of Sep-17 As of Dec-17
USA 3.3% 3.4% 3.3%
Japan 1.2% 1.2% 2.0%
China 6.2% 6.2% 5.9%
Germany 2.9% 2.3% 2.3%
World 4.1% 4.2% 4.1%
Source: Zenith, Dec 2017
On a percentage basis, Central and Eastern Europe is expected to lead growth again
as the region continues to rebound from past political instability and low oil prices,
which led to a decline in 2014. Growth in North America and Asia Pacific are
forecast to decelerate slightly but remain at healthy levels. In Western Europe, ad
expenditures are expected to accelerate as spending catches up with an improving
economy. A modest improvement is also expected in Latin America, supported by
better trends in Brazil, and a moderating negative impact from Venezuela. On an
absolute basis, North America and Asia/Pacific are expected to contribute 70% of
global growth in 2018.
Table 8: Zenith Ad Spending Outlook by Geographic Region

2014 2015 2016 2017E 2018E
North America 4.7% 3.6% 4.5% 3.6% 3.4%
Western Europe 3.9% 4.3% 3.9% 1.5% 2.4%
Asia/Pacific 7.4% 6.3% 6.4% 5.3% 4.9%
C & E Europe 1.6% -4.3% 4.2% 8.1% 7.7%
Latin America 3.7% 7.8% -0.6% 2.8% 3.4%
Middle East & North Africa 2.5% -8.0% -10.0% -18.6% -6.3%
Rest of world 10.7% 10.1% 9.9% 10.8% 12.4%
World 5.3% 4.6% 4.7% 4.0% 4.1%
Western Europe: European periphery growth to accelerate

Following years of lackluster growth amid the political and policy shocks last year,
the economic outlook for Western Europe remains relatively stable. Our economists
see an acceleration in all regions’ real GDP growth this year (except for Spain) with
outperformance forecasted in Germany and Spain.
Table 9: JPM Real GDP growth, % YoY

2017 2018E 2019E
Western Europe 2.3% 2.7% 2.2%
Germany 2.5% 3.0% 2.3%
France 1.9% 2.5% 2.1%
Italy 1.5% 1.7% 1.5%
Spain 3.1% 2.9% 2.3%
UK 1.7% 2.0% 1.9%
Source: J.P. Morgan estimates as of March 3, 2017.
Western European ad spend saw a dramatic drop in 2009 owing to the financial crisis
combined with structural issues in media involving the sharp decline of newspaper
readership alongside regulatory issues in France and the UK. Figure 2 illustrates the
impact of substantial ad spend declines on both Spain and Italy while the UK and
Germany saw quick recoveries.
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Figure 27: Western Europe Adspend growth (%) Figure 28: Adspend in Europe by geography, 2007 vs 2017
8% 50% 42.9%
6.7% 6.6% 41.3%
6% 4.3% 40%
3.9% 3.9%
4% 2.4% 30%
2.0% 1.5%
2% 20%
0% 10% 6.3% 6.0%
3.5%
-2% -1.0% -0.6% 0%
-4% -1.9%
-10%
-6%
-20%
-8%
-30% -24.2%
-10%
-10.5% -40% -33.5%
-12%
UK Sweden Germany France Italy Spain Average
Source: J.P. Morgan estimates, Zenith data.

Source: Zenith Optimedia.
Table 10: JPM Media Team Ad Spending Growth Forecasts for Major European Countries, 2017-2018E
UK Germany France Italy Spain
2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E
Online 9.5% 8.5% 6.0% 8.0% 10.0% 10.0% 4.0% 10.0% 5.0% 11.5%
Press -10.0% -9.2% -7.0% -6.5% -8.0% -7.8% -9.6% -9.0% -8.4% -7.1%
TV -3.0% 1.0% -0.5% 2.0% 0.0% 1.5% -1.8% 2.5% 0.2% 2.0%
Total 3.8% 4.7% -0.5% 1.3% 1.9% 3.0% -0.9% 3.2% 0.2% 3.4%
The following figure shows the media mix among the top six European countries.
Figure 29: Media Mix for Major European Countries, 2018E

100%
10% 8% 10% 11% 15% 10%
90% 18%
80%
36% 30%
70% 31%
38% 50%
60% 61% 64%
50%
40% 23%
46% 39%
30% 30% 24%
20% 21% 16%
32%
10% 14% 15% 16%
9% 12% 13%
0%
UK Sweden Germany France Italy Spain Average
Print TV Digital Other (incl. Outdoor)
Source: Zenith data
United Kingdom
The UK remains the second largest advertising market in Europe (after Germany)
and has been relatively resilient since the economic downturn in 2009. As we
expected, uncertainty around Brexit and its impact on the UK economy created
volatility in the UK advertising market in 2017. Overall, we see an acceleration in
growth and forecast a c+4.7% rise in UK ad budgets this year. The Internet’s share of
advertising (61%, ahead of magazines + newspapers at 9% and TV at 21%) is among
the highest in the world, partly due to the restrictions on TV advertising and the
general developed nature of the market. The most important free-to-air player in the
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UK is ITV, which solely serves the UK mass audience with 23% share of total
viewing in February 2018.1
Germany
We forecast positive ad spend growth of c1.3% in 2018. The relatively subdued
growth leading up to 2016 is attributable to the continued decline of print advertising
(with a 2018E share of 32% in overall ad spend, -20bps YoY). We continue to expect
Germany to hold a higher share of digital (c36% in 2018E) vs. Italy and Spain. We
expect TV advertising growth in 2018 of +2.0% after -0.5% in 2017 with the two
largest FTA TV players, ProSieben and RTL, representing the largest part of the TV
advertising market. ProSieben management expects a further expansion of its market
share this year given a strong start to the year and positioning for negotiations.
France
Ad spend came in surprisingly strong last year at c2%, according to J.P. Morgan and
Zenith forecasts, despite growing at only 0.3% on average since 2007. We forecast
further acceleration in growth rates (+3.0% in 2018E) owing to strong GDP growth.
The French digital advertising trend is expected to continue to evolve at the expense
of print, while all other mediums keep a constant ad share. With the expansion of
Internet, we see digital to exceed TV share of advertising at c38% (after contributing
equal share to ad spend in 2016).
Italy
The Italian advertising market remains underdeveloped. With an estimated 2017
advertising share of 46%, TV in Italy captures the highest proportion of advertising
expenditure among Western European countries and the lowest proportion in terms
of digital at c30%. We expect the TV ad market to continue growing in 2018 (+3.2%,
after an estimated -0.9% decline in 2017).
Spain
In 2008, the boom in Spain turned to bust, led by the property market, leaving ad
spending particularly prone to a downturn. After a tough 2009 (-21%) and 2010 up
4%, but including the Football World Cup (which Spain won), we have seen a 6.0%
y/y decline in 2011, -16% in 2012, and -8% in 2013. 2014 was a year of recovery in
Spain, and the advertising market returned to growth of +11% with the strength
continuing in 2015, 2016, and 2017 which were up 6.6%, 4.3%, and 0.8%. We
expect 2018 ad spend to grow by c3.4%, driven by a continued macro recovery.
Central/Eastern Europe: Solid growth to continue as macro

environment stabilizes
Central and Eastern European (CEE) countries recovered quickly following the
downturn in 2009 (-17.4%), enjoying healthy growth in 2010-2013 despite the
weakness in the neighboring Eurozone. 2014, however, saw more muted growth of
+2.7%, hampered by the Ukrainian crisis and sanctions imposed on Russia by the US
and the EU as well as the lower oil price (c70% of Russia’s exports). On the back of
this, 2015 showed a decline of -3.8% y/y but followed by a return to growth in 2016
and acceleration to +8% in 2017 given steady macro. In 2018, Zenith Optimedia
expects further growth to +7.7% on the back of a continuation of the stabilization in
the environment.
1
www.barb.co.uk.
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Figure 30: Central & Eastern Europe ad spend (%)

25% 20.9%
20%
15%
10% 8.4% 8.1% 7.7%
5.7% 5.0% 6.8%
3.3% 4.2%
5% 1.6%
0%
-5%
-4.3%
-10%
-15%
-20%
-18.9%
-25%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E
Source: Zenith Optimedia. Note: Current prices.
Russia
Russia, which accounts for the largest portion of the region’s ad spend, saw ad spend
slow in 2014 to 4.3% following four years of double-digit growth. Low oil prices and
sanctions imposed by the EU and US have had a significant adverse effect on ad
spend with 2015 showing a -8.8% decline in 2015 according to Zenith Optimedia.
However, after a significant bounce back in 2016 (+9.8%) and 2017 (+12.9%),
Zenith estimates illustrate a further +11.7% expansion expected in 2018. Our
economists recently expect real GDP growth of +1.7% this year (vs. 1.5% in 2017).
Table 11: Ad Spending Forecasts: Russia

2017 2018E
Newspapers -8.0% -5.0%
Magazines -3.0% -2.0%
Television 12.0% 12.0%
Radio 3.0% 0.0%
Cinema 3.0% 8.0%
Outdoor 8.0% 10.0%
Internet 20.0% 15.0%
Total 12.9% 11.7%
Source: Zenith Optimedia. Note: current prices.
Asia-Pacific: Long-Term Growth Engine

The Asia-Pacific region continues to be one of the largest growth drivers and future
opportunities for ad agencies. Excluding Japan, which has its own unique economic
challenges and is a small market for Western agencies, the region has grown at a
6.6% CAGR over the last five years driven by China, India, and Indonesia, with a
17.2% CAGR in Indonesia, 9.8% CAGR in China, and 13.2% CAGR in India. The
region did slow in 2009 to 2.0% growth (ex. Japan), though “Fast-Track Asia”
(which Zenith defines as China, India, Indonesia, Malaysia, Pakistan, Philippines,
Taiwan, Thailand, and Vietnam) still grew 8% that year. Looking at the next three
years, Zenith forecasts steady mid-single-digit growth for the region (ex. Japan), with
Fast-Track Asia growing mid to high single digits, driven by continued strong
growth in India, Indonesia, and the Philippines. From 2016 to 2019, Asia Pacific is
expected to account for 39% of total growth.
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Table 12: Ad Spending Forecasts for Japan, China, India

China India Japan
2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
Newspapers -30.3% -20.0% -10.0% 6.0% 5.0% 19.5% -3.6% -3.5% -2.6%
Magazines -22.9% -10.0% -5.0% -2.0% -1.0% -1.0% -5.4% -2.6% -4.9%
TV -2.8% -2.0% -1.8% 11.0% 9.0% 12.0% 1.8% 1.2% 1.2%
Radio 6.0% 4.5% 3.0% 8.0% 10.0% 8.0% -1.8% 2.0% 2.3%
Cinema 40.0% 32.0% 30.0% 8.0% 5.0% 12.0% NA NA NA
Outdoor 7.0% 5.5% 3.5% 7.0% 5.0% 12.0% 0.8% 1.1% 1.3%
Internet 15.0% 10.0% 8.8% 24.2% 20.4% 24.8% 8.5% 6.0% 6.4%
Total 7.4% 5.9% 5.6% 9.7% 8.4% 16.3% 2.5% 2.0% 2.2%
China the #2 Global Market

China became the second largest ad market in the world after surpassing Japan in
2010. Ad spending in the country has grown at a 13% CAGR over the last 10 years
and is expected to maintain mid-single-digit growth for the next several years,
including 6% growth in 2018 to $85 billion. Zenith’s estimate is slightly below the
mid- to high-single-digit forecast (2016-2019) provided in December 2016, reflecting
a slowing economy. Looking at the mix, the balance of growth has shifted since the
early 2000s when China was the fifth largest ad market in the world and print and
radio led spending gains for several years. Print is now posting large declines and TV
modest declines, while Internet has emerged as the primary growth driver for the
country.
China is a unique advertising market as most media is controlled by the government

and thus highly regulated. Previously, the government had taken measures to regulate
traditional TV, including restrictions on the types of programming allowed and limits
on ad inventory. The result of such regulation has been to drive ad dollars to the
Internet and online TV, where such measures are less strict. The shift over the past
five years has been dramatic, with Internet spend rising as a percent of total ad spend
from 22% in 2012 to 57% in 2017. During the same period, traditional TV declined
from 43% of total to 24%. Forecasts have this gap continuing to widen in the next
few years, though at a moderating pace.
While much of China’s growth is driven by multinational corporations flocking to

the region to take advantage of the supply side (cheap manufacturing costs) and the
demand side (a very large and increasingly affluent population), many local
companies have achieved critical mass as powerful domestic players and even
emerged as global corporations in their own right.
Table 13: Advertising as a % of GDP

2013 2014 2015 2016 2017E 2018E 2019E
USA 1.01% 1.01% 1.01% 1.02% 1.02% 1.01% 1.00%
W. Europe 0.60% 0.61% 0.61% 0.62% 0.61% 0.61% 0.60%
C/ E Europe 0.51% 0.48% 0.43% 0.42% 0.42% 0.42% 0.41%
Asia Pacific 0.68% 0.69% 0.69% 0.69% 0.68% 0.67% 0.66%
Lat America 0.64% 0.63% 0.64% 0.62% 0.60% 0.59% 0.58%
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India: Another key battleground for the agencies

India is a much smaller ad market than China ($8 billion vs. China’s $80 billion in
2017) but represents a significant advertising opportunity as consumers gain more
disposable income and the government implements structural reforms.
Advertising spending in India, at 0.3% of GDP, is well below the average for other
regions, in part due to its fragmented retail industry. India’s retailers mainly operate
regionally, and there are few foreign retailers competing for consumer dollars,
resulting in less ad spending in the country. This has begun to change, however.
Demonetization has reduced the relative mix of cash transactions and spurred an
increase in e-commerce, which has led to an uptick in digital advertising. Another
factor contributing to lower ad spending in India is the lower penetration levels of
television and broadband; as penetration rates increase and competing marketers
establish broader sales outlets, ad spending should expand significantly.
Cricket and general entertainment are the mainstay content and advertising options,
especially in the broadcast sector. Print is still the leading medium in the country (at
41% of 2016 ad spend), largely thanks to regional and local retail advertising, along
with election campaigning and government-subsidized advertising. Ad spending is
forecast to grow high single digits in 2018, before accelerating in 2019 with the
general elections. On an absolute basis, Internet, television, and newspapers are
expected to drive growth. By 2020, Internet is expected to comprise 15% of total ad
spend, up from 12% today, with share taken from print.
Japan: Continued modest growth outlook

Japan’s advertising market expanded +1.6% y/y in 2017, the sixth straight annual
gain. In terms of total ad spend, though, Japan is still below the peak level reached in
2007. Growth is expected to continue in the next three years toward the Tokyo
Olympics in 2020. In terms of mix, we expect solid growth for TV advertising while
digital is expected to drive market growth and increase as a percentage of total ad
spend (24% in 2017), still well below developed markets in North America and
Europe.
In terms of ad agency presence, Dentsu holds 24% market share and Hakuhodo HD
is at roughly 14%. Within television, however, which is genearlly considered to the
be the most profitable segment, Dentsu holds an outsized 37% share and Hakuhodo
HD 20%. The dominant presence of these two firms makes it difficult for US and
European ad holding companeis to establish a foothold; Japan is therefore a small
piece of the geograhpic pie.
Latin America: Less of a Growth Driver

Ad trends in Latin America have historically been volatile (with data subject to
heavy revision), but economies showed better resilience in the recent downturn than
in previous ones. According to Zenith, advertising expenditures in the Latin America
region were flattish in 2009 before accelerating to 22% growth in 2010 and 15% in
2011 and then slowing to 7% and 4% growth in 2012 and 2013. Ad spend
accelerated to +8% in 2015 driven by Argentina, which was up +32%; a significant
weakening in the Argentine peso at the end of 2015 led to a -13% drop in Argentina
ad spend in 2016 and a -0.6% decline for the region. Growth improved in 2017 to
2.8%, driven by a rebound in Argentina and strong contribution from Chile, Mexico,
and Panama. Venezuela continued its descent, though on an absolute basis it is less
of a factor than in the past (1% of regional ad spend vs. 8% in 2010).
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Ad spend in the region is still largely driven by Brazil, which in 2017 accounted for
44% of total expenditures. From 2012-2017 the country grew at a 7% annual rate,
and it is currently the #6 largest market in the world. Mexico is the third biggest
market in the region, accounting for 15% of total expenditures in 2016. Ad spending
has grown at a 5% CAGR there for the past five years, with the rate of growth
expected to accelerate in the next few years. Over the same period, Argentina is
forecast to be flat, and as a result it could grow into the second largest ad market in
Latin America by 2020.
With Brazil’s economy in recovery and the country coming off easy comps, growth
in Latin America is likely to accelerate in 2018. TV remains the dominant medium in
Latin America, accounting for 55% of total ad spend in 2017. In addition to the
strong economic growth in the region, we believe the rapidly growing penetration of
pay TV is also a primary driver of ad spend growth in these countries. Meanwhile,
digital is growing in importance, but it has a long way to catch up; the medium’s
market share stood at 22% in 2018, slightly ahead of combined print and radio.
Table 14: Ad Spending Forecasts – Brazil

2017E 2018E 2019E
Newspapers -9.0% -6.2% -6.0%
Magazines -9.9% -7.3% -7.0%
TV -0.8% 2.0% 3.1%
Radio -2.7% 0.3% 2.1%
Cinema -3.8% 0.0% 2.0%
Outdoor 2.9% 5.2% 6.1%
Internet 10.5% 11.1% 11.2%
Total 1.5% 4.0% 5.0%
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Advertising Spending by Major Media

Over the past few decades, the media landscape has changed with the birth of “new”
media: cable in the 1980s, the Internet in the 1990s, and mobile devices this century.
The major traditional advertising media now include television, Internet/mobile,
radio, newspapers, magazines, and outdoor. After some growing pains and ongoing
refinement in the early part of this decade, digital (Internet and mobile combined) has
emerged as an advertising medium on par with television and is likely to continue
growing its share of budgets. Digital now represents over 40% of overall advertising
spending, narrowing the gap with the portion of consumers’ time spent with media
reflecting online usage, and we expect digital to continue expanding into a larger
portion of this pie over time. In 2017, the media that are expected to receive the
greatest amount of total advertising dollars are digital (45%) and television (29%).
Figure 31: U.S. Advertising Spending by Medium, 2018E
Directories Direct Mail

OOH 0.3% 8.4%
3.8%
TV
Magazines
28.8%
3.0%
Newspapers
4.1%
Radio
6.3%
Digital
45.4%
Notes: All revenues exclude political and Olympic advertising; Newspapers exclude digital advertising, which is included in the Digital;
Radio includes satellite radio.
Source: MAGNA Global, J.P. Morgan, Dec 2017.
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Figure 32: Shift in Media Mix, 1980-2010

1980 1990
Directories Outdoor Cable TV

6.2% 2.5% Cable TV Directories Outdoor 2.8%
0.2% 8.3% 2.8%
Radio
8.9%
Newspapers Newspapers
Radio
36.4% 34.7%
9.5%
Local TV
(ex. Cable)
10.4%
Local TV
(ex. Cable)
10.1%
Direct Mail
12.2%
Direct Mail National TV
National TV 10.3% (ex. Cable)
Magazines (ex. Cable) Magazines 10.0%
13.1% 10.1% 11.5%
2000 2010
Digital
(Internet &
Cable TV Mobile) Digital
Outdoor 7.1% 4.6% Cable TV
(Internet &
Directories 3.0% 14.2%
Mobile)
7.0%
15.5%
Outdoor
Newspapers 3.6%
Directories
27.8%
4.1%
Radio Newspapers
11.3% 13.7%
Radio
8.9%
Local TV
(ex. Cable) National TV
Local TV
9.1% National TV (ex. Cable)
(ex. Cable) 9.4%
(ex. Cable) 9.1% Direct Mail Magazines
Direct Mail Magazines
9.0% 12.1% 9.3%
10.3% 10.9%
Notes: All revenues exclude Political and Olympic spending.

Source: MAGNA Global, J.P. Morgan estimates.
Since each medium is measured by a different metric, cost is determined from a

number of criteria such as creative formats, reach or coverage of advertising,
frequency of delivery, and time slot selected. However, to level the playing field and
compare the cost of each medium, marketers use the metric of cost per thousand, or
CPM.
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Figure 33: CPMs Across Major Advertising Media, 2017-18

CPMs
Medium Age 18-34 Age 25-54 Description
Network TV (30-second ad unit)
Early AM $74.58 $31.47 Broadcast programs nationally through a group of afiliated
Daytime 26.56 18.81 stations. Usually the same programs are simultaneously
Early News 72.90 31.12 broadcast within a region. Prime Time: Mon-Sat 8-11pm
Primetime 83.69 53.03 and Sun 7-11pm.
Late Evening 67.49 47.24
Syndication
Daytime 24.48 15.67 Syndication is the distribution of programs
Early Fringe 48.90 25.05 by non-network stations and vary by air
Prime Access 117.60 51.57 time, date, and market.
Late Fringe 51.98 27.21
Cable TV (30-second ad unit)

Daytime 17.50 10.51 Cable is more targeted than broadcast TV
Late Evening/Early Morning 35.83 21.95 due to more interest-specific programming
Primetime 59.18 28.93
Radio (30-second ad unit)

Network 16.30 9.70 Reach specific target audiences locally through nationally
affiliated stations.
Spot (100 Markets) 26.45 15.78 Purchase radio time by selected market and station.
Reach is determined by the number and size of markets.
Magazines (4-color page)

Targeted Buy 49.10 24.25 Targeted medium that reaches a selected audience over a
relatively extended life.
Newspapers (Mag. Size, white page)

National Buy 91.60 43.30 Timely mass medium that is considered an "action
medium" where readers seek sales, classifieds, and
coupons. Local circulations reach approx. 60% of
households in a market.
Out-of-Home (30-Sheet Poster)
Billboards/Posters 15.10 9.22 Outdoor media properties that require a specific location
or event. Examples include billboards, posters, blimps,
transit advertising, etc.
Source: Media Dynamics; J.P. Morgan estimates.
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Television offers advertisers Television allows for cost-effective reach of advertising to mass audiences,
mass reach especially since 97% of U.S. households have at least one television (according to
Nielsen). As a result, TV is suited to marketers selling products that are widely
distributed, such as consumer packaged goods, autos, and retail goods, because the
CPM is relatively low. Broadcast and cable TV are expected to capture
approximately 16% and 15% of total major media spending in 2018, respectively.
TV’s CPMs vary by daypart. Broadcast TV CPMs are determined by demand and
limited supply, in which an increase in demand is augmented by a decrease in supply,
thereby leading to higher CPMs. Cable is a bit different. Historically, as demand for
cable increased, supply did as well, effectively muting some of the growth in cable
CPMs; this dynamic, though, is starting to break as cable ratings decline and the total
number of networks decreases.
Content is an important driver of a network’s ability to attract advertisers and raise

CPMs as top shows can often earn many times the revenue for a 30-second spot that
a lower rated show can command. Content is critical on the cable side as well: the
leading cable networks have distinguished themselves as those with the best-rated
shows, and this leads to some pricing power in cable upfront negotiations. Over the
years cable networks have invested in higher quality content, including original
programming and sports, which has helped to narrow the CPM gap vs. network TV.
Still, the pricing premium for broadcast has remained, reflecting in our view network
television’s superior value as a short-term reach vehicle.
Advertisers have three opportunities to purchase TV advertising time: (1) upfront, (2)
scatter, and (3) remnant. Advertisers work through media buyers to negotiate
placement and rates for their ads.
Figure 34: Cost of 30-Second Spots vs. Average Viewership - Select Shows
$700
$650 - SNF
$600
Cost of 30-Sec Spot (in thousands)
$518 - TNF
$500 $442 - Empire
$400
$283 - Big Bang Theory

$300 $238 - This Is Us
$175 - Timeless
$207 - The Voice
$200 $215 - HTGAM
$219 - Grey's Anatomy

$209 - Modern Family
$100 $167 - Designated Surv.
$177 - Scandal
$165 - Lethal Weap.
$0
0 5,000 10,000 15,000 20,000 25,000
L+SD Viewers (in thousands)
Source: Variety; Nielsen; TVbytheNumbers J.P. Morgan estimates.
From May through July every year, broadcast networks sell 75-85% of their ad space
2017/2018 was another positive for a 12-month period beginning in September (cable networks sell about 50-55% of
upfront
their ad space upfront). In exchange for early commitments, advertisers get ratings
guarantees and options to cancel their commitments during certain windows
throughout the year. The media buyers negotiate these deals on behalf of the
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advertiser during this upfront process. In years of very strong demand for advertising
space, the upfront selling season can be as short as a few days. In more “normal”
times, the process lasts several weeks to over a month.
The 2014-15 TV broadcast season marked the first post-recession TV upfront decline
for both cable and broadcast. Networks did not sell as much of their inventory as in
previous years (CBS, for example, sold around 74%, down from a typical ~80%),
potentially due to advertisers wanting to wait to buy spots closer to air time or
shifting part of their budgets to digital. This, in turn, sparked a discussion around
how much of advertisers’ more cautious approach to the upfront was temporary
(perhaps due to macroeconomic factors) and how much was due to more secular
effects from either viewership trends or the ongoing digital shift of advertising spend.
These concerns were amplified following the 2015-2016 upfront, with volumes again
light relative to history (CBS, we estimate, sold around ~69% of inventory) and CPM
growth slowing to low to mid single digits. To the surprise of many industry
watchers, the TV ad market showed exceptional resilience in the back of half of
2015, which continued into the first half of 2016 leading to the upfront. As seen in
Table 15 below, 2016-2017 was the first positive upfront in two years and was
followed by another positive result for the 2017-2018 upfront. We attribute the
strong gains in the upfront to three factors: 1) a shift from scatter into the upfront; 2)
less inventory either due to ratings shortfalls or some networks cutting ad loads; and
3) an increase in budgets, partly helped by some money shifting back from digital.
Even with the positive upfront, the scatter market has remained strong into 2018,
with pricing upward of 40% above upfront prices, across dayparts. TV in our view
continues to benefit from some marketers hitting the pause button on digital as well
as a decline in linear ratings, which is creating a scarcity of inventory.
Table 15: Primetime TV Upfront Spending

$m and Y/Y % Change
Primetime TV Upfront Spending
Season Broadcast Cable Total Season Broadcast Cable Total
2006-2007 $9,140 $7,070 $16,210
2007-2008 $9,280 $7,250 $16,530 2007-2008 1.5% 2.5% 2.0%
2008-2009 $9,160 $7,600 $16,760 2008-2009 -1.3% 4.8% 1.4%
2009-2010 $7,745 $6,920 $14,665 2009-2010 -15.4% -8.9% -12.5%
2010-2011 $8,630 $7,950 $16,580 2010-2011 11.4% 14.9% 13.1%
2011-2012 $9,220 $8,690 $17,910 2011-2012 6.8% 9.3% 8.0%
2012-2013 $9,390 $9,275 $18,665 2012-2013 1.8% 6.7% 4.2%
2013-2014 $9,085 $10,110 $19,195 2013-2014 -3.2% 9.0% 2.8%
2014-2015 $8,680 $9,675 $18,355 2014-2015 -4.5% -4.3% -4.4%
2015-2016 $8,360 $9,450 $17,810 2015-2016 -3.7% -2.3% -3.0%
2016-2017 $8,750 $9,875 $18,625 2016-2017 4.7% 4.5% 4.6%
2017-2018 $9,105 $10,625 $19,730 2017-2018 4.1% 7.6% 5.9%
Source: Media Dynamics and J.P. Morgan estimates.
Table 16: Select Upfront Commentary from CYQ2’17 Earnings Calls

Company Upfront Perfomance
AMCX HSD price increases at AMC, strong volume increases at BBC, IFC, Sundance
CBS HSD price increases overall w/ morning and late night up DD, volume increases, standard deals on C7 with some C35
CMCSA HSD price increases, volume up ~8% or ~$400m excluding Olympics/Super Bowl
DIS HSD price increases overall w/ late night and kids up LDD, 20% increase in digital sales
TWX HSD price increases, MSD volume increase, DD increase in audience-based and VOD offerings
VIAB HSD price increases, volume up
Source: Company CYQ2'17 earnings calls; Bloomberg.
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Figure 35: Upfront Media Cancellation Schedule

Period % Cancellable Cancellation Dates
1Q (Dec) 0% -
2Q (Mar) 25% Oct 15 - Nov 1
3Q (June) 50% Jan 1 - Feb 1
4Q (Sept) 50% April 1 - May 1
Source: J.P. Morgan estimates; MediaCom
Scatter
The scatter market is the sale of ad space that was not sold in the upfront market. It is
sold on a shorter term basis. Supply and demand dynamics determine pricing, which
is typically higher in the scatter market as it provides for short-term buying decisions,
but ratings are not guaranteed. Scatter pricing is referred to in percentage premiums
or discounts versus upfront pricing.
In the first broadcast quarter (fourth calendar quarter), demand typically equals
supply for advertising inventory on network TV, causing CPMs to be roughly in line
with upfront pricing. In the second broadcast quarter (first calendar quarter), demand
drops off a bit as advertisers do not spend much at the beginning of the year, post-
holiday season. Supply is decent as a percentage of inventory sold in the upfront for
this quarter and is not particularly high, and scatter market pricing may remain stable.
In the third and fourth broadcast quarters (second and third calendar quarters),
demand increases and supply decreases (sellout rates in the upfront for these quarters
is typically higher than it is in the first half of the season, around 90%, which limits
supply and hence tightens up the market). This causes scatter market pricing to
typically sell at a premium to the upfront. This pattern is beneficial to the networks as
it raises scatter market pricing going into the upfront negotiation period.
While this is a typical cycle, in reality scatter market dynamics often vary (especially
in recent seasons, as described below) as other factors affect supply and demand such
as audience deficiency units (ADUs). If ratings are particularly poor and fall short of
guarantees, networks will eat into inventory (read: decrease supply) in order to offer
advertisers the free air time owed to them, known as a “make-good.” This can tighten
the market and, in turn, raise prices.
Coming out of the softer upfront in 2015/2016, scatter for the season was robust;
pricing was up around 20%, and several management teams described the
environment as the best in years or ever. The strong market contributed to a better
upfront in 2016/2017, though subsequent scatter remained positive, with pricing over
upfront up over 20%. Following the 2017/2018 upfront, scatter has again remained
strong, with some networks reporting scatter pricing upward of 40% above the
upfront.
We note that a continued decline in available inventory against relatively steady

demand is likely helping tighten the scatter market. Weak ratings at some networks
have led several into “make good” situations, forcing them to take some inventory
out of the market to give to advertisers in order to make up for previous shortfalls in
ratings versus the guarantees given in the upfront. This has naturally led to some
tightening in the market. In addition, some media companies are potentially reducing
the ad load on some of their networks, which has also helped reduce supply and
tighten the market.
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Remnant
The unsold inventory after the upfront and scatter markets is sold as remnant.
Advertisers purchasing remnant usually do not have specific marketing goals and are
just looking for discounted space. In a strong market, this remnant space is generally
limited to the early hours of the morning. Purchases are made on short notice,
typically occurring one to seven days in advance.
Remnant advertising increased in the challenging ad environment of 2009 but

declined rapidly in the recovery as the scatter market strengthened. We estimate
remnant now accounts for about 10% of cable network advertising and upward of
5-10% on broadcast TV.
Measurement
Advertising on TV is largely sold on C3/C7 ratings, which are provided by Nielsen.
C3 stands for commercial viewership plus three days of time-shifted viewing (C7 is
commercial viewership plus seven days of time-shifted viewing), meaning any
commercial watched within three days of being aired is counted in the ratings.
Advertisers purchase spots based on ratings (guaranteed in upfront purchases), so
fluctuations in ratings will impact total advertising revenue to media companies.
Given the significant shift in viewership over the past few years to digital platforms
and beyond the three-day window, however, there has been an increasing focus by
both media companies and advertisers/agencies for accurate cross-platform and
extended time period measurement, which is important for both advertising dollar
allocation decisions as well as media monetization across platforms. Nielsen’s Total
Audience Measurement (TAM) product is the current leader in providing this
measurement, in our opinion, although media companies and agencies/advertisers are
also using additional third-party analytics and media companies’ own internal
viewership data to support cross-platform ad buys.
We believe Nielsen’s Total Audience Measurement, which focuses on bridging the

gap between linear and digital viewership, has gained traction over the past year with
Digital Ad Ratings (DAR) now used by all top 25 U.S. advertisers. DAR is a key
measurement metric that allows advertisers, agencies, and media companies to
compare commercial viewership across television and digital. In Q2’18, Nielsen
plans to further enhance the metric by implementing its own viewability and fraud
capabilities into DAR. At the company’s November 2017 Investor Day, Nielsen also
announced that the company reached a consensus with the industry to evolve the
C3/C7 standards, which will now allow Nielsen to measure dynamic ads that have
been changed or inserted in a program within the three-day or seven-day window
with DAR, and buyers/sellers will be able to choose to either add them to the C3/C7
metric or keep them separate. This capability is important as it gives media
companies greater flexibility in monetizing their television inventory by expanding
television ratings to include addressable/digital advertising.
Meanwhile, we still believe it will take time for the entire industry to adopt uniform
measurement since all media companies will need to install Nielsen’s software
development kits (SDKs) on every platform. Without all networks and MVPDs using
Nielsen’s TAM, the metric’s usefulness is greatly diminished from an industry-wide
perspective, in our opinion. We believe some of the reluctance appears to be
associated with the complexity of technology implementation and time required to
tag content. Furthermore, while we view Nielsen as the industry leader, many media
companies are likely evaluating alternative solutions or trying a hybrid approach,
leading to differences of opinion internally on the amount and rate of investment in
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any one measurement system. On the distributor side, there is likely still a large
percentage of MVPDs that have not signed on to participate, suggesting a notable
portion of viewership is still missing, likely due to a lack of urgency paired with
required investment or a desire to also develop their own measurement and analytics
solutions.
We believe TAM will be used by certain advertisers and media companies in

discussions in this year’s upfronts, although it is still not likely to be universally
adopted. Near term, we expect it to be used as a key planning tool. Over time, TAM
is likely to become more beneficial to media companies by allowing them to
recapture revenues from currently under-monetized content on digital platforms, and
agencies/advertisers would have a more complete picture of cross-platform
viewership trends. However, given some headwinds to industry-wide adoption, we
do not necessarily see better cross-platform measurement as a notable near-term
benefit to the industry.
TV Outlook for 2018

US TV ad revenues decreased -7.7% to $61.8 billion in 2017 according to Magna.
Excluding the roughly $3.6 billion in political and Olympic ad revenues in 2016,
spending on TV was down -3.1% (national -2.2% and local -4.9%). 2018 will see a
positive impact from the return of these biennial events in addition to the World Cup,
though on an underlying basis we expect continued modest declines of around 1-2%,
with national outpacing local. We expect the decrease to be led by continued declines
in linear ratings, only partly offset by higher inventory pricing. A wild card for 2018
will be viewership for the NFL, which was lower for a second straight year last
season.
Digital
Advertising capabilities on the internet and over mobile devices continue to rapidly
expand and evolve. Magna has estimated that digital overtook television as the
largest ad spend medium in 2016, and the gap between the channels is expected to
widen as online growth maintains its outperformance. Within the Internet category,
JPM estimates mobile is now the largest platform, at around 60% of all US internet
spending. Video and social networking—where mobile has seen the strongest
growth—are the two key areas drawing major brand advertisers online, which is
helping ad spending to catch up with consumer usage.
Facebook, Google, and everyone else. A key story for digital advertising is the
continued dominance of Facebook and Google. Based on our conversations with
media buyers, we believe between 80% and 90% of incremental digital ad spend is
going to platforms owned by the two companies. While there are numerous reasons
to explain what appears to be an emerging duopoly in this space (superior products,
more time spent, better engagement, etc.), in our view the crucial competitive
advantage comes down to the platforms’ greater scale, data, and targeting abilities.
Advertisers looking to reach any audience can find them on these platforms, and at
granularity that usually doesn’t exist at other web publishers. Furthermore,
campaigns can be more effectively measured, ensuring marketers that they are
receiving a satisfactory ROI.
For traditional publishers, the dominance of Facebook and Google has created strain
on business models and has led to some consolidation of web platforms in order to
create the scale necessary to compete (e.g., Time/Meredith, Group Nine Media).
Publishers have also responded by emphasizing the need to have advertising placed
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against quality content, and in some cases online newspapers have pointed to the
problem of “fake news” on social media. It’s not clear though that “quality content”
will be enough to get marketers to shift away from Facebook or Google; to the extent
that digital marketing is about buying targeted audiences at scale, these platforms
will likely continue to capture an outsize share of digital growth.
Table 17: Net US Digital Revenue by Platform

Net US Digital Ad Revs ($b) Percentage of Incremental Growth
Platform 2016 2017 2018 2019 Platform 2017 2018 2019
Google 29.4 35.0 40.1 45.7 Google 49% 47% 48%
Facebook 12.4 17.4 21.6 25.6 Facebook 44% 39% 34%
Microsoft 3.3 3.6 3.8 4.0 Microsoft 2% 2% 2%
Oath 3.5 3.6 3.7 3.8 Oath 1% 1% 1%
Amazon 1.1 1.7 2.4 3.2 Amazon 5% 7% 7%
Twitter 1.4 1.2 1.2 1.2 Twitter -1% 0% 0%
Yelp 0.6 0.7 0.8 1.0 Yelp 1% 1% 1%
Snapchat 0.3 0.6 1.2 2.0 Snapchat 3% 5% 7%
IAC 0.5 0.5 0.4 0.4 IAC 0% 0% 0%
Other 19.0 18.8 18.6 18.6 Other -2% -1% 0%
Total 71.6 83.0 93.8 105.4 Total 100% 100% 100%
Source: Emarketer; J.P. Morgan estimates.
Viewability, fraud, measurement, and brand safety remain concerns for

marketers looking to increase digital spend. Each of these present major
challenges for both marketers and content owners and in our view will need to be
worked out for digital to continue to attract incremental spend, especially from
television. We further believe these issues have been partly responsible for the shift
of some dollars back to traditional media, mainly from lower quality digital
inventory (e.g., P&G shifted $200m away from digital media in 2017).
Brand safety was a notable concern for marketers last year, highlighted by advertiser
boycotts of YouTube in March and November. In response to these concerns, Google
and other tech companies made changes to their platforms, including human review
of videos, and we believe most advertisers eventually returned. Still, as highlighted
by Unilever’s comments in February warning tech companies over brand safety, we
think this remains an ongoing issue.
Regarding the other advertiser concerns (viewability, fraud, measurement), we

believe some progress was made last year. In Jan 2017, Marc Pritchard, Chief Brand
Officer at Procter & Gamble, spoke at the IAB Annual Leadership Meeting (IAB is
the Interactive Advertising Bureau). In his talk, Pritchard gave a candid assessment
of the current state of online advertising, and issued an ultimatum to publishers,
agencies, and other participants in the media buying process that they would have to
accept P&G’s standards in order to see its ad dollars going forward. The full speech
is available here. Pritchard recommended several measures to reform the industry,
including a common viewability standard, third-party measurement, prevention of ad
fraud, and more transparent agency relationships. In a follow-up speech in
September, Pritchard stated the industry had made 60% progress toward his goals
(80% on transparency, 60% on viewability, and 50% on fraud).
TV and Digital blend—examining the virtual MVPD advertising model

Virtual MVPDs grew significantly in 2017, supported by the launches of Hulu Live
and YouTube TV and continued ramp-up at DirecTV NOW. In total, J.P. Morgan
estimates 2.7m net subscriber adds for the year, with growth set to accelerate. Given
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the limited gross margins of virtual MVPDs and cost escalators built in programming
contracts, we believe the sustainability of current retail prices depends largely on
developing a viable advertising model. Based on conversations with industry
contacts, we’d describe the platforms as a work in progress, with development so far
challenged by technical and operating hurdles. As a base line, we think the goal for
virtual distributors is to achieve advertising revenue per sub at least in line with
legacy cable and satellite providers (we estimate at $9/month) and likely higher given
the potential for more targeted advertising.
The services are provided the same 2 minutes per hour that are normally allocated to
legacy distributors. In the case where a platform includes Cloud DVR, the vMVPD
could potentially insert fresh advertisements into recorded content, subject to
restrictions. Finally, the virtual service is likely to have some video-on-demand
inventory.
Platforms with legacy owners, such as Sling or DTV NOW, can lean on existing
linear operations in order to directly sell the 2 minute allocation. DISH and DirecTV
are also established players in dynamic ad insertion, having operated scaled
businesses, which replace advertisements in subscriber DVRs. We believe this
expertise provides an incumbent advantage, at least relative to cable or telecom
operators, which might enter the space. Hulu Live and YouTube TV, meanwhile, are
likely to leverage infrastructure built up to support existing video-on-demand
services. Below we review some of the challenges in building up a viable ad model
for virtual MVPDs:
 Even as a whole, vMVPDs lack scale. We estimate total virtual MVPD subs
reached 4.9 million by the end of 2017. While not insignificant, we think the
platforms in aggregate lack the scale to attract serious advertiser demand. This is
even more so an individual basis, with the largest platform, Sling, at an estimated
2.2 million subs. We believe the disparate services will need to cooperate with
each other and with agencies in order to offer a scaled platform that will draw
marketer interest.
 Is OTT attractive to television, digital buyers, or neither? The hybrid nature
of OTT (is it digital or TV?) makes it unclear who the natural buyer of the
advertising inventory is. We believe legacy television marketers are hesitant to
acquire OTT spots given the lack of scale and unease of switching away from a
product that is established and measurable. Meanwhile, incumbent digital buyers
are also likely turned off by the lack of scale in OTT as well as the inferior data
targeting relative to large digital platforms (i.e., Facebook or Google). Digital
advertisers may also be frustrated by constraints that are specific to OTT. For
instance, retargeting, which is useful in a display or six-second video ad
environment, can create a negative experience for TV viewers that a virtual
MVPD may want to avoid.
 The political challenge: whose responsibility is it to sell this inventory?
Networks, agencies, and distributors often have different teams assigned to sell
television and digital inventory. These teams are also likely serviced by separate
back-end infrastructures. Advertisers we think prefer to deal with a single point
of contact, but it’s unclear in many cases who is supposed to take the leading role
in serving them. While this seems like it should be an insignificant problem, we
think internal politics remain a real roadblock in getting advertisers to shift
dollars from incumbent allocations.
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 The technical challenge: a lot of little fires. Technology remains a key

challenge in reaching addressable advertising nirvana (right ad, right place, right
time) in the legacy and OTT environment. Distributors need to allocate
advertisements across a permutation of platforms and devices. Optimizing
performance across these systems is not easy, and one industry contact described
the need to constantly put out a lot of little fires, which inevitably delays dynamic
ad insertion and requires replacement with a generic backup ad.
 The data challenge: there are no browser cookies on a connected TV. Unlike
TV advertising where buyers purchase specific demos, digital advertising is
largely based on behavioral data points. Connected TV portals, however, lack the
browser cookies or search histories upon which many customer profiles are built.
Virtual MVPDs will need to build up their own models, potentially built around
viewing history paired with geographic or demo based data.
 It’s unclear who should sell video-on-demand inventory. For video-on-
demand, we believe there is no standard for whether inventory should be sold by
the network, distributor, or even platform (e.g., Roku). The lack of uniformity we
think creates challenges in aggregating data necessary for targeted advertising as
well as for advertisers looking to deal with a single point of contact.
Figure 36: U.S. Internet Advertising Share by Format, 2017
Social Media
20% Internet display
22%
Podcast
0%
Internet Radio
2%
Internet
Video/Rich
Media
17%
Paid Search
33% Internet
Classified
6%
Source: Zenith, December 2017.
Agencies continue to build their Agencies continue to aggressively bolster and acquire capabilities in digital
digital media capabilities marketing as advertisers look to shift spend into this more measurable channel (print
has been the main loser in this shift). The holding companies provide a full suite of
creative and media services, akin to traditional media. Services offered include
strategy, research, planning, analytics, website development and maintenance, and
technology enablement.
Digital media buying has been a key focus of investment into areas such as
programmatic real-time display buying over exchanges through dedicated trading
desks. Along with behavioral targeting (the use of user data) and real-time bidding,
an agency can follow a target audience and serve ads to that person regardless of
what website they visit. The agencies like to call this “buying audiences” rather than
buying media properties, and these cost-effective aggregators of audience have often
contributed to price erosion of single-website properties. We see the continued
evolution of data, social media, video, and mobile as the key drivers to agency
growth.
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Figure 37: Internet Ad Spending by Quarter, 1996-Q217

$ in millions
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Source: Interactive Advertising Bureau (IAB), PricewaterhouseCoopers, J.P. Morgan.
Digital Outlook for 2018

J.P. Morgan’s Internet team expects online ad spend to increase 11% in 2018, with
growth led by mobile and video. Desktop is forecast to continue its decline, with
decreases in search and banner more than offsetting an increase in video.
Table 18: JPM Internet Team Advertising Forecasts

$ in millions 2010A* 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E
By Platform
Desktop
Desktop Search 11,666 14,757 16,915 18,490 18,940 20,486 17,753 16,155 14,863 13,748 12,992
Y/Y growth 26.5% 14.6% 9.3% 2.4% 8.2% -13.3% -9.0% -8.0% -7.5% -5.5%
Desktop Banner 8,229 9,235 9,699 10,024 10,145 9,689 8,702 7,832 7,127 6,521 6,000
Y/Y growth 12.2% 5.0% 3.3% 1.2% -4.5% -10.2% -10.0% -9.0% -8.5% -8.0%
Desktop Video 1,406 1,809 2,304 2,819 3,338 4,169 4,931 5,671 6,408 7,049 7,684
Y/Y growth 29% 27% 22% 18% 25% 18% 15% 13% 10% 9%
Desktop Other 4,088 4,348 4,308 4,175 4,666 4,365 4,511 4,421 4,332 4,202 4,076
Y/Y growth 6.3% -0.9% -3.1% 11.7% -6.4% 3.3% -2.0% -2.0% -3.0% -3.0%
Total Desktop 25,390 30,149 33,226 35,508 37,088 38,708 35,897 34,079 32,730 31,521 30,751
Y/Y growth 18.7% 10.2% 6.9% 4.4% 4.4% -7.3% -5.1% -4.0% -3.7% -2.4%
% of total Online Advertising 97.5% 95.0% 90.9% 83.0% 75.0% 65.0% 49.5% 40.2% 33.5% 28.2% 24.5%
Mobile
Mobile Search 5,934 9,171 17,213 24,098 29,640 34,975 40,222
Y/Y growth NA 54.5% 87.7% 40.0% 23.0% 18.0% 15.0%
Mobile Banner 9,379 13,880 18,044 22,555 27,066 31,396
Y/Y growth NA 48.0% 30.0% 25.0% 20.0% 16.0%
Mobile Video 1,667 4,193 6,709 10,399 15,079 19,904
Y/Y growth NA 151.5% 60.0% 55.0% 45.0% 32.0%
Mobile Other 371 625 1,337 1,938 2,520 2,998 3,448
Y/Y growth NA 68.6% 113.8% 45.0% 30.0% 19.0% 15.0%
Total Mobile 651 1,587 3,346 7,273 12,363 20,843 36,623 50,789 65,114 80,119 94,971
Y/Y growth 143.7% 110.9% 117.3% 70.0% 68.6% 75.7% 38.7% 28.2% 23.0% 18.5%
% of total Online Advertising 2.5% 5.0% 9.2% 17.0% 25.0% 35.0% 50.5% 59.8% 66.5% 71.8% 75.5%
Total Online Advertising $26,041 $31,736 $36,572 $42,781 $49,451 $59,551 $72,520 $84,868 $97,845 $111,640 $125,722
%Y/Y growth 14.9% 22% 15.2% 17.0% 15.6% 20.4% 21.8% 17.0% 15.3% 14.1% 12.6%
By Format
Search 11,666 14,757 16,915 18,490 24,874 29,656 34,966 40,253 44,503 48,723 53,214
Y/Y growth NA 26% 15% 9% 35% 19% 18% 15% 11% 9% 9%
Banner 19,068 22,582 25,876 29,682 33,587 37,396
Y/Y growth NA 18% 15% 15% 13% 11%
Video 5,836 9,125 12,380 16,808 22,128 27,588
Y/Y growth NA 56% 36% 36% 32% 25%
Others (classified, lead gen, Audio…) 4,088 4,348 4,308 4,175 5,037 4,990 5,847 6,359 6,852 7,201 7,524
Y/Y growth NA 6% -1% -3% 21% -1% 17% 9% 8% 5% 4%
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Radio
While this medium lacks the visual capabilities and effects associated with other
media, radio appeals to the imagination, which highlights the importance of ad
frequency to generate the desired response. Radio cost-effectively targets geographic
markets, typically on a local basis. Advertisers also like radio’s low media and
production costs compared to television.
Radio advertising is similar to TV in that advertisers can make network, national

spot, and local spot buys. The majority of advertising on radio is local (about 90%),
with roughly 10% on network, satellite, and national spot radio. Like television,
radio advertisements are also placed by daypart, with the largest audiences tuning in
during the early morning and late afternoon drive times. Radio advertising is heavily
influenced by radio ratings (such as those provided by Nielsen Radio) as advertisers
target listeners based on these ratings and as radio stations set rates according to
daypart and program popularity.
Radio is one of the fastest ways to get a message out to a consumer at a local level.
The lead time to get an advertisement on radio is short since there are limited
production requirements, making it a medium that reacts quickly when the
advertising market changes. Sales are usually made one to four weeks in advance for
this medium (although they can be accomplished in as few as two days), providing a
little less visibility than TV.
Radio is often used by smaller advertisers looking for good value and the benefits of
radio—quick turnaround and low production costs. This renders local radio relatively
better off than national as large national advertisers look more to TV for their
branding.
Radio Outlook for 2018

Growth in traditional radio was down -2.4% in 2017, according to Magna, with
declines in the larger local market more than offsetting a slight gain for national.
Digital revenues for radio station owners continued to be a bright spot, with ad spend
up +10%, bringing the total decline to just under -1%. In general, radio faces
increasing competition for listeners from streaming services and commercial-free
satellite radio. At the same time, we believe marketers continue to shift spend to
digital channels, given the similar targeting benefit of that medium. While we expect
advertisers will take advantage of radio’s expanding digital offerings and live events,
we believe this will only partially mitigate what is likely to be a low- to mid-single-
digit decline in core network and spot advertising. Overall, we look for radio to be
down -2% to -4%.
Newspapers
Newspapers allow advertisers to penetrate local markets using text- and graphics-
based advertising. Print newspaper advertising formats include the following:
 Graphics (Run-of-Press, or ROP). Graphics/ROP ads are favored by retail

companies, wireless carriers, political campaigns, etc. Ads come in different
formats (e.g., half page, full page), in black and white or, increasingly, in color.
 Classifieds. Ads for automobiles, help wanted, real estate, or other items for sale.
 Promotions. Promotions, such as coupons and preprinted inserts (FSIs), are
produced by newspapers or third-party marketing companies.
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Newspaper companies report advertising revenues in terms of retail (or local),

national, and classified ads, which make up about 60%, 20%, and 20% of industry
daily print advertising revenues, respectively.
 Retail. Retail advertising is placed by regional and national retail chains such as
department stores, grocery stores, drugstores, and restaurants that sell in the local
markets. Newspapers remain one of the few advertising vehicles to reach a large
local audience.
 National. National advertising is generally a small category for most newspapers;
this is advertising placed by large advertisers at the national level—i.e., branding
campaigns that are not targeted toward local audiences.
 Classifieds. Classified ads are small text ads placed primarily at the local level
and include four subcategories: auto, real estate, employment, and other, which
includes miscellaneous items for sale and event announcements. The health of
these sub-segments depends a great deal on the health of the related industries.
Much of newspaper advertising’s appeal reflects the ability to tailor ads to local
markets as the majority of newspapers cater to local populations (with the exception
of more national papers such as The Wall Street Journal, The New York Times, and
USA Today). Ad sales are typically made two to four weeks in advance of
publication, although regular advertisers such as department stores and auto dealers
often negotiate packages for up to a full year’s worth of advertising. Classified sales
have a shorter lead time, at about one to two weeks.
Newspapers have suffered as media has fragmented, and the outlook has continued to
remain volatile as print advertising revenues continue to fall faster than publishers
can cut costs and boost digital advertising sales. As circulation has declined, ad
dollars have followed, affected by growing media and audience fragmentation,
advertisers shifting ad dollars to other media, such as the Internet and cable, lower
readership (especially among younger demographics), and the virtual disappearance
of evening newspapers after the evolution of evening news on television. Print
advertising has also experienced a rate of decline that has held steady in the high-
single-digit range over the past several years. In 2017, newspaper advertising spend
accounted for approximately 8% of total U.S. advertising expenditures, down from
about 28% in 2007, according to Zenith.
Paid models continue to bolster increases in circulation revenue

We continue to see some growth in this area as more newspapers are charging for
online access to their content. The New York Times rolled out its paywall in March
2011, marking the first major move toward online subscriptions for a general interest
newspaper (Wall Street Journal has charged for access since 1997), and numerous
other papers have followed suit, including Gannett’s community papers and other
large market papers. We view these moves positively as they highlight the value of
newspaper content and represent an opportunity for revenue growth in spite of still
weak ad trends. Over time, we expect circulation revenue will become a larger
portion of newspaper revenues (as of 2017, it is ~60% of revenue at NYT but a much
lower portion at other companies) and may help offset softer ad trends.
Digital continues to be more meaningful growth driver of newspaper revenues

In order to capitalize on the significant growth opportunities in digital, many
publishers have developed partnerships or have formed syndicates focused on
capturing more ad revenues in a cost-efficient manner. Digital spending has fared a
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bit better in 2010 and 2011, increasing 11% and 7%, respectively. Industry-wide
growth has moderated in subsequent years, to about 0.5% in 2015 and 1% in 2016.
Furthermore, as more investment is plowed into digital we believe that print
advertising will account for a much smaller part of the newspaper business in the
future. On a national basis, digital advertising revenue has reached 20% of total
newspaper ad revenues in 2016, according to SNL Kagan. Additionally, we highlight
that digital advertising now accounts for 43% and 28% of NYT’s and GCI’s
newspaper ad revenue, respectively.
Some of the premium newspaper brands saw a decline in online advertising revenues
in recent years, partly due to the glut of Web ad inventory and increased use of
programmatic automated ad-buying systems that has put downward pressure on
prices. Programmatic advertising systems use sophisticated algorithms to buy and
sell digital ads in real time based on information about website visitors rather than
the site they are visiting. Spending is expected to continue to increase in coming
years as advertisers shift more of their budgets through automated systems. In an
effort to combat the abundance of ad inventory, companies like NYT are creating
new advertising formats, including native advertising—articles and videos created
for advertisers that run alongside editorial content. Spending on native advertising in
the U.S. is expected to increase to roughly $28b in 2019, according to research firm
eMarketer.
Publishers have also been able to partner with some of the large internet portals and
within apps such as Facebook’s NewsFeed and Apple News, while other publishers
in recent years have looked to acquire online businesses, particularly within digital
marketing and advertising to bolster their digital efforts to diversify their businesses.
Newspaper Outlook for 2018

We expect newspaper industry advertising to be down in the mid single digits in
2018 as advertisers continue to shift spending away from newspapers toward other
media and readership trends remain under pressure. We would expect publishers with
a successful digital subscription strategy to continue to capitalize on the
unprecedented elevated news cycle, though unfortunately this is a trend very difficult
to forecast. Separately, we believe that newspaper publishers that were able to benefit
from lower operating costs due to cost-cutting initiatives and some revenue
contribution from acquired businesses in 2017 may not see this benefit in 2018 and
therefore believe that it does not fully address the ongoing organic declines in print
advertising. Overall, we expect declines in print advertising in the high-single-digit
to double-digit range and expect newspaper advertising share to move from 8% in
2017 to 7% in 2018 given further downsizing of print publications coupled with
increased penetration of digital ad formats. We believe digital advertising growth
will likely continue to be positive, up low single digits in 2018, although we continue
to be wary of digital advertising still not being big enough to offset print declines
among the publishing community.
Magazines
Magazines are a targeted medium that reaches a selected audience and can deliver
lengthy, complex messages over an extended shelf life. Consumer and specialty
magazines provide notably good reach to well-defined target groups, although it may
be difficult to reach a broad geographic area. Advertising sales are typically made
two to three months in advance of publication, which explains why this medium
often lags changes in the ad market.
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Over the past few years, there has been pressure on magazine advertising given (1)
more competition for ad dollars from electronic media such as cable TV and the
Internet, (2) concerns over return on investment as well as circulation accuracy, (3)
heavy rate discounting, and (4) intense competition among print titles. In addition,
the digital revenues that are generated by magazine publishers continue to be largely
offset by the double-digit y/y declines of traditional page ad sales. Overall, magazine
circulation has been challenged due to (1) persistent retailer consolidation (the Wal-
Mart effect and traffic moving to dollar stores and warehouse clubs), (2) retailers
often replacing magazine racks with other products at checkout counters, and (3) the
demise of sweepstakes promotions. Circulation troubles often reduce pricing
flexibility at many titles.
Magazine Outlook for 2018

We expect magazines to continue to also face secular headwinds as advertising shifts
online, although we expect the medium to continue to invest in digital. SNL Kagan
estimates that ad revenue for U.S. print consumer magazines will decline -4.6% y/y
in 2018 to $7.5b, marking the seventh consecutive annual decline in consumer
magazine print advertising revenue. Additionally, SNL projects that print magazine
advertising revenue will fall at a -4.5% CAGR to $5.2b in 2026. We expect growth to
remain lackluster and total print ad revenues to decline in the high single digits to
low double digits in 2018 and expect the medium to continue to receive robust
contribution from digital, although this still only represents ~30% of total magazine
advertising, according to SNL Kagan.
Outdoor
Outdoor is reaching a general audience and benefiting from digital growth,
although progress is lumpy
Outdoor is a mass medium that reaches a general audience with a concise message in
a selected geographic region. Outdoor advertising includes billboards, street furniture
(e.g., bus shelters, park benches), transit advertising, and alternative outdoor areas
such as stadiums and arenas, airborne vehicles, marine vessels, beaches, ski resorts,
golf courses, bicycle rack panels, gas pump panels, rest areas, ad panels on top of
taxi cabs, etc. Billboard advertising comprises the bulk of outdoor advertising
available in the US, capturing ~60% of total revenue. Billboard advertising has
typically been sold for long-term periods (six to 12 months), although with
conversions to digital, the time frame can be much more targeted (e.g., temperature
threshold) and short term, and the landlord oftentimes does not own the billboard
structure on the plot of land or sell the advertising on the billboard. Meanwhile, most
street furniture and transit advertising deals are locked up under multiyear contracts
that vary by city with outdoor advertising companies responsible for selling
advertising across the assets.
Longer term, we see the Outdoor space as one of the more attractive subsectors
within Media as the medium is maintaining and even slightly growing market share
as companies upgrade their static assets to digital with increased analytics and
targeting capabilities that are attractive to advertisers. Currently undergoing
significant change, we see the rising adoption of digital billboards, transit, and other
public screens to fundamentally change the overall industry over time. Technology is
advancing, and data-driven dynamic campaigns create new opportunities for
advertisers to reach consumers at the right time and place, making Outdoor an
increasingly important part of digital advertising budgets. In addition, the subsector’s
key growth drivers of 1) increasing urbanization, 2) rising passenger numbers across
the globe, and 3) increasing fragmentation of the Media landscape (with Print losing
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audience) are very much intact. Long term, we believe the real opportunity lies in
Outdoor taking ad budgets not only from competitors’ advertising channels that are
impacted by changes in consumption patterns such as print but also from budgets
allocated to digital, thus providing future margin upside.
Outdoor share clearly differs widely across different geographies

The outdoor share in overall media differs widely across different markets and is
especially high in Asia—particularly Japan and China. We have seen JCDecaux win
numerous contracts in Tokyo to currently own 99% of the bus shelter advertising
space in the country. We believe the company’s relatively high exposure to two of
the three leading markets for digital advertising (China and UK) positions it to
benefit from increasing demand for digital out-of-home (OOH). Meanwhile, in the
U.S., outdoor share of overall ad budgets has remained relatively constant over the
past few years (with declining print ad budgets shifting toward digital) at ~5%.
However, we believe the increasing convergence of outdoor and digital advertising,
in addition to new programmatic trading optionality, offers potential for the ad share
to increase over time. M&A is also likely to gain in importance in the sector.
Figure 38: Share of outdoor advertising in total ad budgets

14% 13%
12% 12%
11% 11% 11%11% 12% 11%
12%
10%
8% 7% 7% 7% 6% 6% 6% 6%
5% 5% 5% 5% 5%
6% 5% 5% 5% 4% 4% 4%
4%
2%
0%
World North America Latin America China Japan Western Europe France UK Germany
2010 2016 2018E
Figure 39: Share of digital within Digital is the game changer for the outdoor industry
Outdoor (Western markets, U.S. The application of digital technology, such as video and wireless interaction, is
example)
expected to drive growth over time, although trends have been somewhat lumpy
%
given the volatility in advertiser allocations as viewership across media continues to
70%
60%
fragment and advertisers search for the highest ROI platforms with the least brand
50% risk. Several initiatives are underway to transform the outdoor industry. Technology
40% is allowing the industry to become more interactive and increase user engagement,
30%
20% better capitalizing on its ubiquitous attribute. The traditional static poster is being
10% replaced by those with interactive TV, website, gaming consoles, etc. Many exhibits
0%
are also now employing more socially engaging formats. The proliferation of
smartphones is another opportunity for outdoor to customize messaging and leverage
social media.
Source: eMarketer.
Digital deployment continues to be robust. The Outdoor Advertising Association of
America (OAAA) estimates that there are now roughly 7,300 digital billboards and
3,750 digital transit faces in the U.S. The pace of deployment is expected to remain
healthy in coming years, with several hundred new boards being added annually and
both Outfront (OUT) and Lamar (LAMR) looking to continue converting a steady in
2018. Although Magna Global expects digital to grow at a double-digit clip, the
research house expects flat to slightly positive growth in traditional out-of-home,
bringing total industry growth to a ~2.5% CAGR over the next four years.
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Better measurement and analytics should help the industry

Measurement of outdoor advertising has notably improved after years of lacking
meaningful quantification. There are several methods for measuring out-of-home
media effectiveness in comparison to other media, with Geopath the industry
standard in the U.S. In 2016, the Traffic Audit Bureau (TAB) for Media
Measurement rebranded as Geopath after becoming the currency for Outdoor in
2012, replacing Daily Effective Circulation (DEC), after five years of development
by TAB, the outdoor industry’s measurement agency. The scheme was initially fully
implemented for traditional outdoor (billboards, bus shelters, phone kiosks, etc.), and
in 2014 TAB integrated ratings for transit and digital formats as well, where digital
formats have spot ratings for each ad rather than the structure itself.
Geopath generates standard audience measurement for the industry with

demographic-specific impressions, ratings points, and reach and frequency measures.
It also uses data sources such as connected cars, weather data, population growth
factors, and the locations and trips of hundreds of millions of anonymous mobile
devices to respond to seasonal, daily, and hourly variation as well as provide post-
campaign delivery information. This is a notable shift in the organization’s focus
from measuring solely inventory to measuring and analyzing audience location and
how consumers engage with advertising, providing deeper consumer insights and a
better understanding of the impact and effectiveness of out-of-home advertising,
which should be beneficial to advertisers.
We expect these better measurement, data, and analytics capabilities to further help
the out-of-home industry as it should help increase accountability and transparency,
and the ratings allow advertisers to more easily compare outdoor to other traditional
media as they provide counts of demographic audiences actually noticing the
advertising on OOH displays. Furthermore, Outdoor yields low CPMs versus other
local media and is cost effective as advertisements can be viewed 24 hours a day,
year-round. Advertisers generally like this great reach, increasingly better
measurement, and outdoor advertising’s un-skippable nature compared to other
media such as television.
Outdoor Outlook for 2018

Total outdoor advertising grew 2% in 2017 with traditional out-of-home growing 1%
and digital growing 12%. This growth was slightly softer than the past few years
(total outdoor grew 4% in 2016 with traditional growth of 1.5% and digital growth of
14%; total outdoor grew 6% in 2015 with traditional growth of 3.5% and digital
growth of 16%). We expect a slight acceleration of growth this year as the medium
benefits from a healthy ad environment with likely better advertising allocations to
the medium this year. In the U.S., we expect 2018 traditional out-of-home to grow a
modest 0.5% y/y and digital to grow 13% for combined total growth of ~2.5%. On a
global base, Zenith expects total outdoor advertising to grow by ~3% in 2018 and
~2.5% in 2019 and share of global ad spend to remain stable at ~7%.
Cinema
Cinema advertising refers primarily to the ads that run before an in-theatre movie
starts. Advertisers generally like this form of advertising because it captures a
consumer’s undivided attention in a highly engaging premium video format, and we
believe the value has increased in an environment with ongoing fragmenting
viewership with some consumers also becoming accustomed to ad-free content.
Studies by Arbitron have noted that young consumers aged 12-34 found cinema ads
more acceptable than ads on TV or other mediums and further demonstrated greater
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recall, implying that cinema advertising is an effective way to reach an audience.

Meanwhile, trends in cinema advertising have been somewhat volatile over the past
couple years. National CineMedia, the largest player, had -5% y/y ad revenue in
2017E (domestic industry box office decline -2.7% y/y) following flat ad revenue in
2016 (domestic industry box office growth +2% y/y), 13% growth in 2015 (domestic
industry box office growth +7%), and -15% decline in 2014 (domestic industry box
office decline -5%), demonstrating the significant impact of the overall film slate on
this advertising medium, especially as cinema’s share of ad dollars remains quite
small at ~0.5%.
Core categories in recent years have included auto, beverage, entertainment, and
telecom, and newer entrants include financial services, food, and CPG. Cinema ad
dollars compete mostly with TV, which serves as a benchmark reference for pricing.
The cinema ad market is essentially split between two companies, National
CineMedia (NCMI) and Screenvision (owned by private equity firm Shamrock
Capital), which enter into long-term exclusive contracts with the movie theater
chains to run ads before the movie previews begin. National CineMedia has the edge
in market share with over 20-year contracts with the top three chains: Regal
Entertainment, AMC, and Cinemark, as well as shorter contracts with many others.
Cinema has historically been more volatile as a more sensitive medium to any
advertiser budget pullbacks, and we believe exhibitor’s ongoing conversions to
recliners/reserved seating may lead to consumers getting to the theaters later,
presenting a headwind to ad spend. We also note that NCMI and Screenvision
attempted to merge in 2014; however, the deal was blocked by the DoJ.
Cinema Outlook for 2018

We estimate cinema advertising declined -4% in 2017. The medium has historically
been very volatile given cinema’s very small advertising share and somewhat
sentiment-driven nature tied to the box office outlook (cinema advertising revenue
was -7% in 2014, +13% in 2015, flat in 2016). It is therefore very difficult to make
predictions about annual cinema advertising growth. Longer term, we expect flat to
low-single-digit y/y advertising growth as the medium is a very engaging, high-
quality premium video format offering, and studios are increasingly investing in big
franchise and blockbuster film slates that drive audiences to theaters. Meanwhile, we
believe these positive attributes will be partially offset by ongoing headwinds from
exhibitors’ conversions to reserved seating, which may lead to consumers getting to
theaters later and therefore viewing fewer pre-show ads. We estimate 2018 domestic
cinema advertising growth of +2% y/y.
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The Advertising and Marketing Services

Company
In this section we look at the typical agency holding company, examining the split
between advertising and marketing services, the components of each, and providing
some insight into how each of these businesses works.
Composition of revenues at an Advertising and marketing services companies are typically composed of
advertising and marketing approximately half traditional advertising and half marketing services. In past years,
services company
the big holding companies moved aggressively into developing their marketing
services offering as they sought both diversification and the higher growth rates these
businesses often provided.
Revenues in traditional advertising are broken out between creative advertising

(about 30% of the total) and media planning and buying (about 10-25% of the total).
Marketing services comprises customer relationship management (CRM), about 35%
of total revenues on average; public relations (PR), some 5-10% on average; and
specialty/other communications, about 10-15% on average.
Figure 40: Advertising and Marketing Services Company Revenue Breakout
Traditional advertising Traditional advertising involves three distinct activities: creating advertisements,
planning ad campaigns and strategies, and buying ad space in media outlets. Creative
advertising is the actual conception and production of advertisements. Media
planning is the research and evaluation of advertising placement strategies. Media
buying is the negotiation with the media for placement of advertisements. The
evolving interactive landscape also adds nuances that include non-paid media such as
social campaigns/profiles and app and website development that still require
meaningful marketing resources to execute (revenues to the agencies).
The advertising and marketing services holding companies have multiple creative
agency networks. The idea behind this diversification is to 1) avoid client conflict
and 2) provide a more diverse creative offering. With only one agency network, the
holding company may be limited to just one client in each industry as there is still
sensitivity in most industries that prompts companies to forbid the advertising agency
to work with a competitor. Many advertisers don’t mind, however, if a competitor is
represented at another agency within the same holding company. Furthermore,
having many agencies boosts the chances of winning more business that is up for
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review as the creative reputation or flavor may differ from one agency to another.
For a public company, there is also less volatility in a holding company that has more
than one agency network because if one agency falls out of favor for a while, the
others can still help contribute to growth.
Media planning is often coupled with media buying, but the two need not work
together. Ad companies can run their media planning and buying operations as
separate entities. In addition, many large advertisers have their own media planning
divisions and therefore use advertising companies only for creative and media buying
work. Media planning usually involves close interaction with the creative teams as
well to produce a well thought out, comprehensive ad campaign.
Many years ago, agency networks each housed their own creative and media
planning and buying divisions. As the holding company structure evolved and grew,
the media buying functions were extracted from within the agency networks and
combined into one large media buying unit. The reason behind this move was the
idea that scale really matters in the media buying business. More dollars under the
media buyer’s control give it more leverage in negotiating pricing or placement of a
client’s advertisement. The holding companies have, in many cases, reconfigured
their structures such that a powerful media buying arm is positioned to draw media
buying business, often performing the service on behalf of the holding company’s
own traditional creative agencies, which promotes their specialization and
streamlines the entire process.
Advertisers often prefer to keep all functions within the same advertising company as
this can enable increased communication and coordination of ad campaigns. In
practice, though, the three activities are quite distinct, and some advertisers prefer to
use different agencies and even different holding companies for their creative and
media planning and buying work. Some advertisers may maintain accounts with
different agencies or advertising companies because of client conflict issues or
simply because they have good relationships with different creative and planning and
buying companies.
The top 10 global advertising agencies are listed in the figure below.
Figure 41: Top 10 Worldwide Advertising Agencies by Revenue, 2016

$ in millions
Worldwide Revenue
Rank Agency Network 2016 % Change
1 Dentsu $2,381 19.8%
2 BBDO Worldwide (OMC) 1,896 6.2%
3 DDB Worldwide (OMC) 1,699 22.9%
4 TBWA Worldwide (OMC) 1,407 3.9%
5 McCann (IPG) 1,402 1.4%
6 Hakuhodo 1,266 14.5%
7 J. Walter Thompson Co. (WPP) 1,259 19.0%
8 Y&R (WPP) 1,187 -4.1%
9 Ogilvy (WPP) 1,020 -1.7%
10 Publicis Worldwide (PUB) 817 -14.5%
Note: 2016 latest available.
Source: Advertising Age.
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Creative Advertising
Creative agencies design and produce advertisements to be placed in media outlets.
The creative work itself involves the conceptualization, production, and presentation
of an advertisement. The ad concept involves an understanding of the product or
service offered, the marketplace and competition for the product or service, and the
target market before developing a campaign theme and producing ad copy or
recorded material to support this theme. This work may be supported by media
planning.
Depending on the medium selected, the lead times required to prepare creative
campaigns will vary. Print advertisements range from a few days for a daily
newspaper to two to three months for consumer magazines, while TV ads can require
several months of planning and preparation. Digital execution can be much faster. In
some cases, creative agencies are also performing more direct and interactive work,
sometimes in partnership with sister agencies. For example, direct marketing agency
OgilvyOne is related to Ogilvy & Mather Worldwide at WPP, while Rapp is a direct
marketing wing of DDB at Omnicom. Other agencies perform more full-service
work themselves, such as IPG’s FCB (after merging direct agency Draft with
traditional FCB).
Media Planning
Media planning is often the first step in developing an advertisement, involving the
evaluation of potential media and determining which will be the most effective and
cost-efficient way to deliver the client’s message. Indeed, over the last few years we
have seen more focus on the central role of media planning given the increased
freagmentation of audiences across new media. More advertisers have consolidated
their media planning and/or media buying accounts with one regional agency, which
can then better manage brand image and placement.
Media planning involves significant research into target consumer behavior and into
pricing of different media at different times, with the goal of delivering an
advertisement with the greatest coverage and reach. Three metrics are used in
assessing delivery of the selected media:
 Reach. Reach is the percentage of the target population that is exposed to the
message at least once.
 Frequency. Frequency represents the average number of times the target is
exposed to the message.
 Gross rating point. Applied more to TV, the gross rating point is the percentage
of the target that saw the ad (= reach x frequency).
To sell a product successfully, media planners research the product’s merits and
utilize population demographics to segment the target market. Researchers also
analyze competing products and competing product advertisements, as well as the
general economic environment, in order to best position the product in the
marketplace. The goal is to create a brand image and establish a process of
communicating this image.
Media planners also work with their clients to evaluate options for the placement of
the advertisement, including:
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 which media to use—for example, TV, online, mobile, radio, print, outdoor;
 what genre to focus on—for example, which TV network or type of program to
place ads in depending on the product or service advertised;
 what level of advertising to use—for instance, how to break out spending among
local, national, and international audiences and how to integrate a campaign
across media; and
 what timing to consider in running ads—for instance, when during the day, or
even during the program, to run the ad in order to reach the largest possible
audience.
Media Buying
Media buying consists of national and local broadcast purchasing where buyers
negotiate programming and pricing packages on behalf of their clients. Buyers then
monitor the programs and follow up with a comparison of completed campaign
results against the original advertising plan.
Media buying has become increasingly important in its own right. As the choices of
media available to advertisers expand and the cost of media continues to fluctuate,
media buying specialists have emerged and attracted business away from the
traditional agencies. Advertisers realize that the skills required for media planning
and buying are very different from those needed for a creative marketing campaign.
As these media specialists have grown, they have gained the scale necessary to
demand the most coveted advertising space and the best prices from the media
owners. This, in turn, enhances their ability to attract new customers.
Whereas media planners work with the advertiser who wants to place an ad, media
buyers work with the medium that will host the ad. Media buying is essentially the
task of negotiating ad placements with the various forms of media, including the
price of the ad (which can be driven lower by a larger, more powerful buyer), the
location of the ad (for example, during which TV show), timing (more specifically,
what time during the TV program, such as during which quarter of a football game),
and, for multimedia or multi-region campaigns, combinations of placement and
timing to bring optimal price efficiency to the client. Much is negotiable, and the size
and clout of the media buyer can have a significant effect on the pricing and
placement of an advertisement.
Agencies serve as the pass-through vehicle for advertising budgets and generally take
a small cut (around 2%) of the total. We note advertisers have been consolidating
their media buying businesses to fewer agencies in an effort to better coordinate and
gain economies of scale in their buys. Media buying accounts have also made up the
bulk of account moves recently, in part driven by changes in allocation decisions,
which perhaps led to a revaluation of agency relationships. In general, we believe
pricing pressure is increasing in the media buying business as consolidated accounts
have more bargaining power and media buyers may be willing to come down a bit on
price to secure a prestigious and lucrative new account. Prominent media buyers and
their parents are listed below.
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Figure 42: Top 10 Worldwide Media Agencies by Revenue, 2016

$ in millions
Worldwide Revenue
Rank AGENCY [PARENT] 2016 % Change
1 Mindshare Worldwide (WPP) $1,297 10.3%
2 OMD Worldwide (OMC) 1,293 7.5%
3 MediaCom (WPP) 1,290 8.8%
4 Carat (Dentsu) 1,259 15.1%
5 MEC (WPP) 1,006 3.1%
6 Havas Media Group (Havas) 936 5.5%
7 Starcom (PUB) 928 -38.3%
8 Zenith (PUB) 874 -18.8%
9 PHD (OMC) 572 6.8%
10 UM (IPG) 520 3.9%
Note: 2016 latest available.
Source: Advertising Age.
Marketing Services
The profile of the leading advertising and marketing services companies has changed
meaningfully over the last two decades. The most significant change is the
investment in marketing services businesses, or “non-traditional advertising,”
transforming these companies into more diversified marketing communications
companies. “Diversified marketing services” generally encompasses CRM, PR, and
specialty/other communications. CRM (customer relationship management) offerings
include direct, interactive, and database marketing, market research, and promotional
marketing. Specialty/other communications refers to tailored services such as
healthcare, multicultural, entertainment, and sports and event marketing.
While targeted marketing For the last two decades, advertisers have been looking for more specialized and
remains a longer term trend, targeted ways to deliver their marketing messages. An advertising organization’s
mass reach remains highly
valued in an increasingly ability to deliver a wide variety of marketing services will likely help attract more
fragmented media world business and boost its overall profitability, since overall sales and marketing costs
fall and services can often be bundled together at higher rates, leading to improved
margins. In addition, this shift in business mix gives advertising organizations a more
diversified revenue base, providing some downward protection in a sluggish
economy and upward pressure on growth rates in a robust environment. Providing
many services to one client also can help solidify the agency/advertiser relationship.
We note that while the longer term trend of targeted marketing still stands, due to the
scarcity of mass reach as consumption is increasingly fragmented, mass media is
also very much in favor and valued as evidenced by high CPMs paid for marquee
events.
Longer term, we believe the growth of these businesses should outpace traditional
marketing as (1) advertisers move more of their incremental spending into targeted,
measurable, and often cheaper forms of marketing, and (2) advertising and marketing
services companies continue to expand relationships with their clients, since much of
the incremental business being picked up is in the marketing services area. Indeed,
the holding companies are working hard to better integrate their advertising and
marketing services businesses. Thus, we would expect marketing services in
aggregate to grow at a premium to traditional advertising in a healthy economic
environment.
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Customer Relationship Management

CRM services broadly refer to offerings that help an enterprise create, develop,
manage, and enhance a customer relationship. For example, to provide customers
with products they need or may want, a company might build a customer database
that tracks historical purchases so the sales force can understand the types of
purchases made and, in turn, make more relevant product recommendations. Service
offerings include direct and interactive marketing, market research, and promotional
marketing.
Direct Marketing
Data-based and interactive marketing have been strong areas of growth, while
traditional areas such as direct mail and telemarketing remain core to specific
targeting.
Leading direct marketing firms include Omnicom’s Rapp; WPP’s Wunderman and
OgilvyOne; Interpublic’s MRM//McCann (formerly MRM Worldwide); Publicis’
DigitasLBi; and Havas’ Havas Worldwide (formerly Euro RSCG 4D). Niche players
include Harte-Hanks.
 Market Research. The increasing importance that companies place on customer

data to gain insight into consumer behavior has driven demand for quality market
research. Worldwide market research spending stands at roughly $45 billion
globally, according to GroupM, as advertisers seek consumer insights they can
now better leverage through targeted digital media. Market research includes ad
hoc (customized) research as well as syndicated research. Customized research
has not regained meaningful traction since the downturn as advertisers still
hesitate to commission individual studies, and hence margins have remained
weak in this part of the business. Syndicated research, involving ongoing panels
of participants, typically is a more steady and profitable business. Market
research companies pass through data collection costs to their customers as a cost
of goods sold. As data collection costs are coming down due to Internet data
gathering as well as outsourcing of this function to lower cost labor markets,
gross revenues on market research are coming down; however, net revenues (the
base from which operating costs are drawn) are largely unaffected.
WPP stands out as the only ad holding company that possesses meaningful
market research businesses (Kantar). Other pure-play market research firms are
Nielsen, GfK, and Ipsos.
 Promotional Marketing. In-store marketing involves advertisers trying to reach
consumers at their most vulnerable position, point of sale. The purpose is to move
product, ideally at the expense of a competitor. Promotional marketing attempts
to appeal directly to consumers by offering price discounts, free samples, and in-
store advertising of products to heighten consumers’ awareness and purchase of a
company’s products. Advertisers use these vehicles to drive sales while also
creating brand awareness to ultimately capture market share. Advertisers can also
measure the success of a campaign in multiple ways, such as the number of
registrations of new clients and the number of leads generated through coupon
and premium distribution or redemption. Pressures to the retail sector, in
particular from online competition, have recently led to slower organic growth for
these businesses, and even prompted OMC to make some divestitures in the field
marketing space in 2017.
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Promotional companies include Omnicom’s Integer and Interpublic’s Jack

Morton.
Public Relations
Public relations (PR) is the communication of a company’s or organization’s
message or image to the public. The internet is both a boost and a pressure to PR.
Social media has put corporates more on the defensive, encouraging them to be more
proactive in managing their brand dialogue with consumers. At the same time, with
the ease and prevalence of the internet, there is less incentive for more formal
activity and announcements, which can hurt agency fees. However, we see the
overall increased activity of social marketing (Facebook pages, Twitter feeds,
YouTube campaigns) as additive to the holding company business.
Organic growth for public relations slowed across holding companies in 2017 as
agencies saw the impact of a general pullback in client project spend. At OMC,
organic growth for PR was +0.3% (vs. 2.8% in 2016), and at WPP net sales growth
for PR was 0.2% (vs. 2.4% in 2016). IPG does not break out PR separately, though
growth for its CMG division was flat in 2017, decelerating from 3.6% the prior year,
a performance management attributed partly to its public relations agencies.
Leading PR firms include Interpublic’s Weber Shandwick and Golin (formerly

Golin/Harris); Omnicom’s Fleishman-Hillard, Porter Novelli, and Ketchum; WPP
Group’s Hill & Knowlton, Burson-Marsteller, and Ogilvy Public Relations; Publicis’
MSLGROUP (formed as merger between Publicis Consultants and Manning,
Selvage & Lee); and Havas’ Euro RSCG Worldwide PR (formerly Euro RSCG
Magnet).
Specialty/Other Communications
Specialty and other communications are a grouping of focused marketing efforts
targeting specific industries, demographic groups, or media. Some of the work
involves traditional advertising, but in a specialized industry or targeted to a specific
demographic group, and some of the companies active in these areas are, in fact,
owned or operated by advertising agencies. General subgroups include health care,
interactive, multicultural, entertainment, and sports and event marketing.
 Health Care Marketing. The accelerated rate of Food and Drug Administration
(FDA) approval for prescription products in the 1990s and early part of the
decade, combined with the shortening life cycle of these drugs, has created a
highly competitive environment in the pharmaceutical industry. Faced with
intensified competition and a limited time in which to promote their products due
to patent expirations, pharmaceutical companies have stepped up their marketing
spending and turned to pharmaceutical services firms to supplement their internal
marketing departments. These outside providers offer services such as medical
detailing (i.e., describing the specifics of new drugs to doctors and pharmacists so
that they are better educated on the pros and cons), educational services, direct
mail programs, and managed care consultancy.
In addition, the Food, Drug, and Cosmetic Act of 1997 (which loosened the
regulations on direct-to-consumer [DTC] marketing by requiring drug companies
to meet obligations to inform consumers by referring to four sources of additional
information—i.e., a doctor, a toll-free number, a magazine or newspaper ad, and
a website) prompted a proliferation of DTC advertisements. DTC ads help
generate brand awareness and loyalty when new drugs are launched, and brand
stickiness when prescription drugs lose their patent but go over-the-counter
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(OTC). From 1996 to 2006, DTC spending grew ~20% annually, reaching
$5.4 billion in 2006. Over the last few years, however, spending has trailed off
somewhat. Several industry factors are credited with the reduced spending lately,
including fewer blockbuster drug launches while existing patents continue to roll
off as well as increased scrutiny by Congress over drug safety and advertising
practices that has seen a higher time lag between FDA approval and DTC
campaign launches. The rollout of ObamaCare helped drive a rebound in
healthcare-related spend, which returned to strength in 2013.
Leading providers of pharmaceutical services include Omnicom Health Group;
Interpublic’s McCann Health; Publicis’ Publicis Healthcare Communications
Group; WPP’s Ogilvy CommonHealth Worldwide; and Havas’ Havas Life
Medicom.
 Multicultural Marketing. Advertising targeted to specific ethnic populations is
affected by the language used and cultural interpretation. Advertising agencies
have recognized the importance of multicultural marketing by operating agencies
that cater to African-, Asian-, and Hispanic-Americans. Hispanic marketing, in
particular, is seen as a very high-growth area given burgeoning Hispanic
populations in many parts of the U.S. and a new recognition of the targetability of
this consumer group by advertisers. Each of the top-tier holding companies has
an agency that ranked among the top 10 multicultural agencies for at least one of
the ethnic groups.
 Digital/Interactive Marketing. While many interactive capabilities have been
incorporated into full-service agencies, some still operate as stand-alone entities
in order to leverage expertise across a holding company or allow for a greater
range of clients. By virtue of the vast landscape of interactive marketing, most
agencies (both full-service and stand-alone) fulfill a variety of roles. These
companies generally help clients design and operate websites, manage databases,
perform market research and segmentation analyses, plan the best mix of
interactive vehicles to use, produce creative online advertising/social campaigns,
provide interactive CRM services such as e-mail marketing, and, in some cases,
buy online advertising inventory and run sponsored search.
 Entertainment Marketing. Entertainment marketing ranges from music
licensing and movie product placements to TV sponsorships. Ad holding
company efforts to place products on hit TV shows and movies and develop
product-based storylines are expected to increase as advertising and
entertainment overlap. Across all holding companies, existing relationships with
Hollywood are anticipated to support these entertainment marketing initiatives.
Some agencies have formalized these relationships by creating divisions that
blend programming with advertising.
 Sports and Event Marketing. Event marketing advertising expenditures have
experienced good growth as advertisers seek alternative ways to break through
the fragmented media landscape. However, events are often the first to be cut in
difficult times, as happened in the recession, creating greater volatility for an
agency. Contributing to recent growth has been the increased popularity of sports
and other entertainment events. Also, media has played a significant role in
increasing the popularity of some athletes, causing marketers to get them under
contract and create a brand affiliation. As the athlete becomes more successful,
the hope is that the brand will benefit from the association.
Many agencies have consolidated their sports marketing businesses under one
umbrella. For example, Interpublic has grouped most of its sports and
entertainment marketing businesses under Octagon to go along with another of its
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large agencies, Jack Morton. Omnicom owns a leading experiential marketing

company, GMR Marketing, as well as The Marketing Arm. Likewise, WPP
Group offers sports marketing services through PRISM
Advertising and Marketing Services

Company Growth Drivers
Advertising and marketing services companies have three main drivers of revenue
growth. These are industry growth, net new business wins, and acquisitions. These
companies report an estimate for organic growth (industry growth and net new
business wins) separately, distinguishing it from total reported growth, which
includes growth from acquisitions. Foreign exchange also affects total reported
growth. Investors tend to focus primarily on organic growth as the key figure in a
company’s revenue performance.
Industry Growth
Industry growth is the starting point for ad agency growth. A healthy business
climate typically leads to healthy advertising spend as we outlined in the section on
ad spending in relation to GDP growth. We are currently in a healthy ad market as
advertisers continue to rely on advertising to drive revenue growth and go after
market share. We believe ad spending will increase +4.0% in the U.S. and 4.2%
globally in 2018.
Net New Business (Market Share Gains)

The second leg of growth is new business wins. In general, the larger advertising and
marketing services firms have netted more wins than losses of accounts over the last
several years. This has been driven by the fact that holding companies in general own
the top creative agencies and offer a full range of marketing services on a global
level. Consolidation of business has also led to significant ad dollars moving to the
larger advertising and marketing services holding companies. New business wins or
market share gains generally contribute one to two percentage points of growth on
average at the larger advertising and marketing services companies. Net new
business is generally reported in terms of billings, not revenues, even though it is
widely acknowledged that this reported figure is rather loosely defined. New
business activity has picked up quite a bit from the lows of the recession, when
advertisers were distracted by other concerns during the downturn. 2015 in particular
saw a “tsunami” of account moves. Over the past few months, the pace of new
account reviews has picked up, with several large media reviews launching. For more
on billings, please see Appendix 1.
Acquisitions
Major M&A was relatively quiet in 2017. This followed a modest resurgence in
activity between 2012 and 2016, which included Dentsu’s $5b acquisition of Aegis,
Dentsu’s $979m investment (68.3% stake) in Merkle, Publicis’ $3.7b acquisition of
Sapient, and the failed Omnicom-Publicis merger. Outside of these mega deals, the
holding companies continually make many smaller acquisitions targeted to specific
disciplines and geographies, notably digital and emerging markets. Based on our
conversations with holding company management teams, we believe there is a little
desire for large-scale acquisitions (i.e., purchasing each other). More recently,
domestic agencies IPG and OMC have taken to divesting some non-strategic assets,
which has negatively impacted total growth.
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Figure 43: Major Mergers and Acquisitions ($, ₤, and € in millions)

Trans. Transaction Value as a Multiple of:
Year Target Acquirer Primary Category Value Sales EBITDA EBIT
2016 Merkle Dentsu Data marketing $1,433.4 20.0x
2015 Grupo ABC Omnicom Group Advertising & marketing services $270.0 - - -
2015 Creative Counsel Group Publicis Advertising & marketing services ~R1,500 2.5x
2015 Essence WPP Group Digital Media Agency £70.0 1.0x - -
2015 Comscore (~15-20% stake) WPP Group Market Research $300.0 4.5x 20.0x -
2015 FullSix Havas Digital Agency $75.0 1.0x - -
1
2014 Sapient Publicis Digital Marketing $3,700.0 2.7x 14.1x -
2014 AppNexus (~16% stake) WPP Group Digital Technology na - - -
2014 IBOPE WPP Group Market Research $300.0 1.5x -
2014 Rentrak (17% stake) WPP Group Market Research na - - -
2013 Globant (20% stake) WPP Group Digital Marketing $80.0 1.0x -
2012 LBi Publicis Digital Marketing € 437.0 - 11.0x -
2012 Aegis Dentsu Advertising & marketing services $4,920.0 - 12.0x -
2012 AKQA WPP Group Digital Marketing $540.0 2.3x 12.8x -
2012 Doner (minority) MDC Partners Advertising & marketing services $17.5 - - -
2012 TargetCast MDC Partners Media Buying & Planning $17.5 - - -
2012 RJ Palmer MDC Partners Advertising & marketing services $25.0 - - -
2011 Vice (minority stake) WPP Group Digital Media $35.0 - - -
2011 Rosetta Publicis Digital Advertising $575.0 2.6x 12.0x -
2011 Clemenger BBDO (step up to majority) Omnicom Group Advertising & marketing services $150.0 2.0x - -
2011 Aspen Marketing Services Epsilon (Alliance Data Systems) Marketing and Data Services $345.0 1.4x 8.6x -
2011 Greystripe ValueClick Mobile ad network $70.0 1.9x 18.7x -
2011 Commarco GmbH (incl. Sholz & Friends) WPP Group Advertising & marketing services $195.0 1.0x - -
2010 iCrossing Hearst Digital Advertising $325.0 1.4x - -
2010 Innovation Interactive (incl. 360i) Dentsu Digital Marketing $200.0 2.5x - -
2009 Razorfish (Microsoft) Publicis Digital Marketing $530.0 1.4x 13.9x -
2009 Nitro Sapient Advertising $53.0 1.2x 9.4x -
2008 TNS WPP Group Marker Research £1,432.0 - 8.6x -
2008 Naked Communications Photon Group Media Strategy $318.0 8.0x 10.8x 50.0x
2007 Quigo AOL (Time Warner) Online ad network $350.0 - - -
2007 BlueLithium Yahoo! Online ad network $300.0 - - -
2007 Interactive Marketing Works TradeDoubler Search engine marketing (SEM) $112.0 - - -
2007 TACODA AOL (Time Warner) Online ad network $275.0 7.3x - -
2007 Lintas India (51%) Interpublic Group Advertising $50.0 - - -
2007 Bluestreak.com Aegis Online ad serving $12.5 - - -
2007 Business Interactif Publicis Groupe Digital Marketing $182.8 - - -
2007 aQuantive Microsoft Digital Marketing $6,000.0 9.7x 40.1x 54.1x
2007 24/7 Real Media WPP Group Digital Marketing $649.0 2.2x 31.0x 54.1x
2007 Alliance Data Systems Blackstone Group (Private equity) Marketing and Data Services $7,800.0 3.4x 12.4x 14.2x
2007 Clemmow Hornby Inge (49.9%) WPP Group Advertising $59.0 3.3x - -
2007 Right Media (80% ) Yahoo! Online ad exchange $680.0 12.1x - -
2007 Catalina Marketing Hellman & Friedman (Private equity) Marketing Services $1,696.0 3.0x 9.9x 14.3x
2007 Hitwise Experian Digital Market Research $240.0 4.3x - -
2007 DoubleClick (Hellman & Friedman) Google Online ad serving $3,100.0 10.3x 30.0x -
2007 AgenciaClick Aegis Digital Marketing £20.0 - - -
2007 AKQA (majority stake) General Atlantic (Private equity) Digital Marketing $250.0 2.5x - -
2006 Digitas Publicis Groupe Digital Marketing $1,295.0 2.7x 16.2x -
2006 ADVO Valassis Marketing Services $1,232.5 0.8x 12.3x 22.5x
2006 Accipiter aQuantive Online ad serving $30.3 - - -
2006 Abacus (DoubleClick) Alliance Data Systems Digital Marketing $435.0 - 10.0x -
2006 Franchise Gator aQuantive Digital Marketing $21.5 2.8x - -
(2) € 8,600.0
2006 VNU (Private equity consortium) Market Research 2.0x 11.9x 15.7x
2006 Medical Broadcasting Company Digitas Healthcare Interactive Advertising $30.4 1.3x - -
2005 The Communications Group (70% stake) WPP Group Advertising $70.0 1.0x - 6.0x
2005 SOPACT, Metrobus, JC Decaux Ned. (Publicis) JC Decaux Advertising € 110.0 - - -
2005 Fastclick Valueclick Digital Marketing $214.0 3.7x 27.1x 28.8x
2005 Digital Impact Acxiom Marketing Services $120.0 2.5x - -
2005 Molecular Aegis Marketing Services $31.5 - - -
2005 Zyman Group (61% stake) MDC Advertising $75.7 1.8x - -
2005 Grey Global Group WPP Group Advertising $1,310.0 0.9x 8.7x 10.3x
2004 Cooper & Hayes Omnicom Group Advertising $25.0 - - -
2004 Bounty (Havas) LDC Marketing Services £20.0 - - -
2004 Modem Media Digitas Digital Marketing $200.0 3.1x 11.0x -
2004 Consodata Acxiom Database Marketing € 30.0 0.6x - -
2004 Claritas Europe (VNU) Acxiom Database Marketing $33.5 0.4x - -
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Trans. Transaction Value as a Multiple of:

Year Target Acquirer Primary Category Value Sales EBITDA EBIT
2004 SBI Razorfish aQuantive Digital Marketing $160.0 1.7x - -
2004 Advertising.com AOL Digital Marketing $435.0 1.9x - -
2003 Isis Research Aegis Market Research (Health Care) £23.8 - - -
2003 Cordiant WPP Group Advertising £198.0 0.4x 5.4x -
2003 FD International Advent International Public Relations £26.0 0.8x - -
2003 Scholz & Friends (77.3% stake) Electra European Fund LP and Scholz mgmt Advertising £15.8 0.4x - -
2003 Agency.com (Seneca) Omnicom Group Internet Advertising $196.8 - - -
2003 NFO Taylor Nelson Sofr es Market Research $425.0 0.9x - -
2003 NCH Marketing Services Valassis Marketing Services $49.4 0.7x 4.5x 6.4x
2003 Chime Communications (49% of HHCL) WPP Group Public Relations $19.3 - - -
2002 Organic (Seneca) Omnicom Group Internet Advertising $106.2 - - -
2002 BCom3 Group Inc Publicis Groupe Advertising $3,133.7 1.6x 12.2x 28.1x
2002 Maxxcom MDC Corp Advertising $16.2 0.0x 0.7x 1.4x
2002 @plan.inc Nielsen NetRatings Online Market Research $18.5 - - -
2002 Scottish Radio (Score Outdoor) Clear Channel UK Ltd Outdoor advertising (billboards) $83.8 3.4x - 94.8x
2002 UPSHOT Equity Marketing Inc Promotion and Event Marketing $10.3 - - -
2002 Art Marketing Syndykat (82.9%) Agora SA Advertising $45.4 - - -
2002 PR Force NV* Incepta Group PLC Public Relations $19.7 4.4x - -
2002 Flack Outdoor Advertising Inc NextMedia Group Inc Outdoor advertising $24.9 - - -
2002 DoubleClick Japan Inc (25.6%) Trans Cosmos Inc Internet Advertising $16.3 0.6x - -
2001 Tempus WPP Group Media Buying $674.8 2.8x 20.0x 25.7x
2001 True North Communications Interpublic Group Advertising $2,250.1 1.4x 8.5x 11.0x
2001 55% of Media Planning Group Havas Media Buying $470.5 4.6x - -
2001 NPD (custom marketing division) Ipsos Marketing Research $120.0 1.7x - 12.0x
2000 ACNielsen VNU Marketing Research $2,339.5 1.5x 14.5x 15.1x
2000 Deutsch Interpublic Group Advertising $250.0 1.7x - -
2000 Leagus Delaney Envoy Advertising $86.0 1.9x 19.3x -
2000 Lighthouse Global Network Cordiant Marketing Services $542.0 3.4x 14.6x -
2000 Saatchi & Saatchi Publicis Groupe Advertising $1,900.0 2.5x 18.7x -
2000 Young & Rubicam WPP Group Advertising $4,714.0 2.4x 13.7x 18.1x
2000 Caribiner (Communications Group) Interpublic Group Specialized Communications $90.0 0.4x - -
2000 Competitive Media Reporting (VNU) Taylor Nelson Sofr es Marketing Research $88.0 1.6x - 11.7x
2000 Snyder Communications Havas Advertising & Direct Marketing $2,237.5 3.2x 17.1x 21.4x
2000 Fallon McElligott Publicis Advertising $120.0 1.5x - -
2000 Frankel Publicis Direct Marketing $170.0 1.8x - -
1999 M/A/R/C Inc. Omnicom Group Direct Marketing $122.4 1.3x 12.8x 28.0x
1999 Rainey Kelly Campbell Roalfe Young & Rubicam Advertising $40.5 - - -
1999 Mullen Advertising (75%) Interpublic Group Advertising $45.0 1.6x - -
1999 KnowledgeBase Marketing Young & Rubicam Direct Marketing $175.0 5.2x 23.4x -
1998 Abbott Mead Vickers (72.3%) Omnicom Group Advertising $447.1 3.0x 14.7x 18.1x
1998 CKS Group USWeb Corp. Interactive Ad./Marketing $312.6 2.0x 13.9x 16.8x
1998 International Public Relations Interpublic Group Public Relations $226.5 1.0x - -
1998 Jack Morton Interpublic Group Specialized Communications $100.0 1.4x - -
1998 Arnold Communications Snyder Communications Integrated Marketing $120.0 1.2x - 9.2x
1998 Hill, Holliday Interpublic Group Advertising $100.0 1.4x - -
1998 Carmichael Lynch Interpublic Group Advertising $40.0 1.3x - -
1998 GGT Omnicom Group Advertising $300.0 1.0x - 10.0x
1997 Bozell, Jacobs, Kenyon & Eckhardt True North Advertising $440.0 0.9x - 10.0x
1997 SiteSpecific CKS Group Interactive Ad./Marketing $6.5 3.6x - -
1997 Fleishman Hillard Omnicom Group Public Relations $85.0 0.8x - -
1996 64% of Modem Media True North Interactive Ad./Marketing $33.0 3.4x 13.6x 15.5x
1996 DiMark Harte-Hanks Direct Marketing $44.5 0.6x - -
1996 Ketchum Communications Omnicom Group Public Relations $65.0 0.5x - -
1995 DIMAC Heritage Media Direct Marketing $251.8 2.2x - -
1995 Ross Roy Communications Omnicom Group Direct Marketing $57.9 0.9x 5.3x 5.9x
1994 Western International Media Interpublic Group Media Buying $50.0 0.6x - -
1994 Ammirati & Puris Interpublic Group Advertising $55.0 0.8x - -
1993 TBWA Advertising Omnicom Group Advertising $65.0 0.7x - -
1991 Scali McCabe Sloves Interpublic Group Advertising $55.5 0.8x - -
1989 Ogilvy Group WPP Group Advertising $793.0 0.9x 9.1x -
1987 JWT Group WPP Group Advertising $555.3 0.9x 17.1x -
1986 Ted Bates Worldwide Saatchi & Saatchi Advertising $391.0 1.2x - -
1986 Doyle Dane Bernbach/Needham Harper/BBDO Omnicom Group Advertising $480.2 0.7x - -
1986 Backer & Spielvogel Saatchi & Saatchi Advertising $47.2 0.8x - -
1986 Dancer-Fitzgerald-Sample Saatchi & Saatchi Advertising $70.8 0.6x - -
Mean 2.2x 14.6x 139.4x
Median 1.6x 12.8x 15.5x
(1) Sapient EBITDA multiple includes synergies; (2) Consortium includes AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co., and
Thomas H. Lee Partners. Source: Various media; J.P. Morgan.
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Industry Trends
Scale advantages and margin improvement through
consolidation at the holding level
Advertising agencies continue to integrate their entire capabilities into one potential
platform to improve clients’ access to data and pitch for new businesses at the
holding company level. This enables the collaboration of cross-border companies and
drives scale advantages (particularly in media buying). The larger agencies benefit
from:
 Increased ability to outcompete independents and in-house agencies through

enhanced creative capabilities, significant data advantages, and economies of
scale in media buying.
 Substantial margin improvement potential from lower real estate costs,
economies of scale in media buying, and improved back office efficiency gains.
We highlight the different approaches among the key players in the agency space
below.
WPP: “Horizontality”
“Horizontality” has long been one of WPP’s strategic aims. The creation of
GroupM in 2003 houses its media buying assets (Maxus, MediaCom, Mindshare,
etc.), which was originally separate from its creative agencies. Since 2015, the
company moved “horizontality” to its top priority, and since then we have seen two
horizontals built over time: 1) the company coordinates activities across different
geographies with over a third of new assignments in 2015 produced by collaboration
of at least two of WPP’s companies and 2) a regional-level management appointment
to ensure country-specific performance and a focus on local business wins. The client
specific-strategies for 45 of WPP’s largest clients’ account for over one-third of
group revenues with the aim of ensuring that it is able to offer its full breadth of
services seamlessly.
Figure 44: WPP’s organizational “horizontality” matrix
Source: Company data.
WPP also launched its [m]platform to further drive data exchange between
agencies. Launched globally by GroupM in November 2016, the [m]platform
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represents an extension of the horizontality theme into the data itself. Through the
integration of information across all channels, advertisers can access all digital media
assets under one platform. The unification of all of WPP’s cross-platform data such
as display, mobile, video, offline CRM, apps, and programmatic provides media
planners with detailed consumer data such as demographic trends, technology usage,
behavioral insights, and purchase history. We see the value-add from the [m]platform
for advertisers in the access to a wide array of data sources that enable effective
communication and customer targeting, which can further drive incentive to increase
media buying.
Publicis: “Power of One” and Publicis.Sapient

The introduction of the “Power of One” in December 2015 marked the initial
transformation of Publicis’ historical structure through breaking agency silos to drive
a more client-centric organization. The new structure of the business comprises four
solution hubs (Communications, Media, Sapient, and Healthcare) and integrates
several services. Within the recent formation of Publicis.Sapient, the company
consolidated its digital offerings (Razorfish, SapientNitro, DigitasLBi, and Sapient
Consulting) into one operating division to leverage its diverse offerings and drive
further cross-selling (detailed report here).
Figure 45: Publicis’ new operating structure
Publicis.Sapient Publicis Communications

Razorfish, DigitasLBi, SapientNitro, Publicis Worldwide, LeoBurnett,
Sapient Consulting Saatchi & Saatchi, BBH, Prodigious
Publicis Health
Publicis Media DigitasHealth LifeBrands, Publicis
Starcom Mediavest Group, LifeBrands, Saatchi & Saatchi Wellness,
ZenithOptimedia, Vivaki, Performics Publicis Health Media, Touchpoint
Solutions
Publicis ONE
Re:Sources
Source: Company data, J.P. Morgan.
IPG: Open Architecture

For over 10 years, IPG has organized its services around an approach known as
“open architecture.” The underlying principle is to provide clients access to talent
from various disciplines (creative, media, digital, experiential, etc.) across the
holding company organization. For clients, open architecture means getting the best
of IPG without having to worry about which silos the resources are located in. In
general, Interpublic’s principle is not to create specialized teams or agencies to
service specific clients, though it will do this for large accounts where it is requested.
It also believes the integrated offering is a differentiator versus potential entrants into
marketing services (i.e., consultants) as it is more difficult to compete with holding
companies across an array of services.
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From a human resources perspective, open architecture allows IPG to maintain

separate agency networks and cultures and still meet client needs. It also allows
employees to work on a variety of accounts and not have their careers tethered to
specific clients.
OMC
Omnicom does not have a specific theme or name for its internal processes, though
we believe it operates a client-centric approach similar to IPG. OMC maintains
separate agencies and brands but offers clients resources from across the holding
company to form “virtual client networks” tailored to meet specific needs.
Over the past few years, Omnicom has formalized some these structures, creating the
Omnicom Health Group, the Omnicom Public Relationship Group, and a third group
comprised of independent national agencies. The organizations provide for sharing of
best practices and expertise, create career opportunity and mobility, and allow the
company to market to clients with wider offerings.
Digital remains a key growth driver, though the market for

some services has begun to mature
In our view, the channel shift toward digital has been a substantial benefit for the
holding companies as it increases the complexity of traditional advertising and
marketing services offered by agencies while opening up opportunities for new
revenue streams. The graphic below shows just a snapshot of the range of digital
services provided by an agency.
Figure 46: Snapshot of advertising agency services in digital media
Digital Media Mobile

 Traditional or programmatic  Mobile web development
media buying / selling  Mobile and tablet applications
 Audience Buying  Mobile media, e.g. coupons,
 Search engine optimization locations
Social Media / Content Data and Analytics

 Social media campaigns  Real-time data analysis
 Social media analysis and  Tracking and targeting
monitoring  Integration of multiple data
 Content (native advertising) sources
Technology Digital Platforms

 Analytics  Web marketing platforms
 Website development  Data management platforms
 Content management
Source: J.P. Morgan research, WPP.
 Offshore digital production
 eCommerce
Source: J.P. Morgan.
In addition to a greater scope of services, digital advertising has provided the

following benefits for agencies:
 Advertisers tend to in-house fewer services for a digital campaign relative to

a traditional one. This is driven by the increasing complexity of media plans as
dollars fragment away from one or two major networks to include multiple
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platforms and formats, such as website development, search, video, mobile, etc.
Additionally, agencies tend to outsource a larger portion of work on a traditional
campaign (e.g., for a broadcast campaign, the production, talent, and directors are
often outsourced) and therefore keep more of the budget at the agency level for
digital.
 Digital ads typically carry lower CPMs. This frees up marketing dollars, which
flow to the agencies and pay for production costs, which are higher in digital. We
note CPMs are not universally lower across digital, and high-quality inventory,
particularly video, can see pricing over traditional.
 Digital increases the demand for creative work. As opposed to traditional TV
campaigns, which might feature one advertisement aired repeatedly, digital
requires a campaign to be broken down into several more formats (social,
desktop, search, etc.), each of which carries its own unique challenges. For
instance, a traditional 30-second TV ad may need to be re-cut for Facebook,
where audience capture has to occur in the first three seconds, often without
sound. Video advertising is also expected to become increasingly interactive,
which will drive the need for creative to be tailored to specific audiences. For
instance, an online automobile ad viewed by someone who has been browsing
NASCAR fan websites may emphasize the car’s speed; but for a viewer
searching the web for infant clothing, that same advertisement has to be re-
purposed to emphasize the car’s safety.
 We believe agency pricing for digital tends to be higher. Several industry
executives we’ve spoken with have said that margins are similar for traditional
and digital (as advertisers are usually billed on a cost-plus basis, regardless of
media); however, we have also heard that the higher returns, typically greater
complexity of campaigns, and the fact that digital is a growth area of investment
for advertisers lead to less pressure on price, and therefore margins tend to be
slightly higher for agencies.
 Increased data capture offers greater insights. Agencies are also actively
capturing and leveraging significant amounts of data that internet advertising
campaigns produce in an effort to enhance creative and media strategy and
achieve better audience targeting. Clients also need help to simplify the vast
quantities of data collected into simple, meaningful results.
While online ad spend continues to outpace legacy media, we believe the market for
digital services has begun to mature in certain areas. In response, we’ve seen
marketers (in particular larger brands) begin to in-house some services that have
become more commoditized (e.g., website design, social media management).
This increased complexity Larger agencies are likely to win business from independent agencies
increases the workload and
scope of work that ad agencies Given the difficulty of competing with the larger agencies’ holistic proposition and
offer, and therefore, we believe, greater economies of scale, we believe smaller independent agencies are likely to
will increase the agencies’ share continue losing business. These advantages will be even more prevalent in the digital
of ad dollars world, where the media buying arm and the creatives will increasingly work together
as the business moves to being increasingly programmatically traded, i.e., the
tailoring of an advert based on specific user data, such as a digital auto advert being
tailored to the demographic of the user. Such collaboration would make it nearly
impossible for a pure creative or media agency to compete.
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Growth rates for digital advertising remain high

Digital advertising continues to grow strongly with its global share rising to 37% in
2017. In most developed markets, digital as a percentage of overall budgets has
reached ~50%.
Figure 47: Worldwide digital share of Ad Spend Figure 48: Digital share of Ad Spend by geography
50% 70%
44% 60% 57%
45%
40%42% 60%
40% 37%
35% 34% 50% 40%
30% 34% 35%
30% 26%
40%
25% 23% 30%
20% 17% 20%
16% 20%
15% 14%
10% 9% 12% 10%
6% 7%
5% 4% 4% 0%
0% UK Germany US Western China
2017E
2018E
2019E
2020E
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Europe

Below, we provide further details on each of the agencies and their activities in digital.
Figure 49: Revenue share of digital Publicis: digital share of >50%, but growth rates have been slowing
divisions and analog
In 2006, management first publicly stated its intention to become “leaders of this
Razorfish
6%
digital, interactive and mobile world” and to generate 25% of revenues from digital
by 2010. It has implemented this strategic aim by carrying out an aggressive M&A
Publicis.
Sapient
strategy (major acquisitions illustrated in Figure 50) as well as organic growth. At
24% the end of 2017, digital contributed 58% of group revenue.
Analogue
46%
As we show below, Publicis’s digital operations comprise a portfolio of different

assets. The acquisition of Digitas in 2006 marks the first big digital step. In 2009,
2011, and 2012, three important acquisitions followed: the digital marketing agency
Digital, 54%
Other
Digital
Razorfish (which joined Vivaki, along with Digitas, SMV, and ZenithOptimedia);
24% the digital advertising network Rosetta (which was added as an independent agency
Source: Publicis. to Publicis Worldwide, Leo Burnett, Saatchi & Saatchi, etc.); and one of the last
global independent digital agencies, LBI (eventually merged with Digitas to form
DigitasLBi network). The latest initiative has been the creation of Publicis.Saipient
(formed in Jan 2017), which is now a key part of the group with the majority of
digital business now included in this division. This hub includes all digital agencies
such as Sapient Consulting, DigitasLBi, and SapientRazorfish and all the associated
entities providing clients with everything the digital communications value chain has
to offer from consulting to commerce (including creation, data, and production
platforms).
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Figure 50: Publicis’s major milestones in digital
Source: Company reports.
More recent acquisitions include Vertiba (March 2016), a US-based consulting

partner specializing in delivery of cloud solutions for data-driven marketing, sales,
and customer service through salesforce.com.
Figure 51: Digital integration with acquired date in brackets
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WPP: A digital share of 42%

WPP has pursued a strategy of organic growth in its key digital focused agencies as
well as selective acquisitions (particularly in buying equity stakes). Its key agencies
include Wunderman, Ogilvy & Mather, and J. Walter Thompson. WPP also has a
dedicated digital vertical, WPP Digital, which contains various digital-focused
agencies such as POSSIBLE and Rockfish as well as Data & Technology companies
such as HOGARTH, Light Reaction, and XAXIS. WPP Digital also contains the
equity stakes in various companies, including a 20% stake in Globant APPNexus and
VICE media. WPP’s revenues are 42% digital as of 2017 (+2.5% YoY). We profile
WPP’s key digital agencies below.
AKQA
Although not as large as some of the other WPP agencies, and while not purely
digital, AKQA has won many industry awards for its digital brand experience and
multi-channel marketing campaigns. It was also rated as a leader in Gartner’s recent
Global Digital agency report. It has a dedicated data sciences team that can help
clients derive new revenue channels from existing data. Our industry contacts state
that it is particularly known for its development of e-commerce channels for
automotive companies, having developed Audi’s industry-leading customization
platform in North America as well as a virtual reality configuration platform for
Nissan.
Globant
Globant (covered by Tien-tsin Huang with OW rating) is a pure-play provider of
SMAC (social media, mobility, analytics, and cloud) solutions and services and
identifies one of its key strengths as being at the forefront of digital technology and
services. Its revenues are predominantly North American (81% in 2016), but the
majority of its work force is based in Latin America (84%). Unlike, the traditional IT
services or consultancy firms discussed above, which offer a full range of services,
Globant does not offer business consulting, legacy application maintenance, or
outsourcing services to its clients. The company grew by 27% in 2016.
The company focuses on developing innovative applications or solutions for its

clients in emerging technology areas. For example, the company helped develop an
online experience for Walt Disney Resorts and mobile apps for LinkedIn. The
company engages with clients on various projects, typically in ideation and
development phase, and builds an innovative solution using its unique delivery
model. The company deploys a cross-functional team, called “Agile Pods,”
consisting of employees in technical, product management, and user experience areas
to develop solutions for its clients.
Unlike traditional IT services firms that are organized by industry verticals, Globant
is structured along emerging technologies, with each technology group referred to as
a “Studio.” The company has 12 studios: 1) Consumer Experience, 2) Digital
Content, 3) UX Design, 4) Mobile, 5) Cloud Computing, 6) Wearables and Internet
of Things, 7) Enterprise, 8) Cognitive Computing, 9) Big Data, 10) Quality
Engineering, 11) Gaming, and 12) Continuous Evolution.
Each of the individual studios has a mix of permanent members that are responsible
for developing technology competencies in that area and employees that rotate across
studios and enable flow of ideas and knowledge across the organization. While the
company does not disclose its revenue mix by Studios, we believe Consumer
Experience, Mobility, and Quality Engineering are among the largest studios.
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We believe the Studio-based model allows Globant to offer innovative solutions in

emerging technology areas, allowing it to borrow best practices and ideas from one
vertical and implement at other industry vertical clients. For example, the team
developing online channels for retail banking consumers might benefit from
borrowing omnichannel features offered to retail consumers. By comparison, the
vertical-based model could create silos within an organization and restrict knowledge
sharing across different units.
J. Walter Thompson – Mirium

Mirium is a sub-agency in J. Walter Thompson, launched in early 2015, dedicated to
digital marketing, with >40 offices distributed across North America, Europe, and
APAC and employing c2,200 staff. It consolidates 11 separate digital agencies that
were part of its parent network
Mirium has three offering platforms: business transformation, experience

development, and commerce activation. Industry contacts cite customer experience
and user experience as key strengths given its ability to integrate technology with its
strong creative resources.
Ogilvy & Mather – Ogilvy One

Recently cited as a digital marketing leader by Gartner, Ogilvy One is a traditional
creative agency that has successfully transformed almost wholly into a digital
marketing leader. It has achieved this through organic investment as well as
significant acquisitions such as Bottle Rocket, a mobile app developer, and Verticurl,
a marketing automation supplier. It has a true global presence in over 40 countries,
which has helped it to attract global clients such as Nestle.
Possible
Possible is a specialist digital creative agency with strengths in content management,
contentment marketing, digital commerce, and mobile design. It has gained notoriety
from its development of the Jet Blue app, with more than 5.5 million downloads so
far. The app has won numerous industry awards including “Top 10 Travel Apps”
from Smarter Travel, Mobile of the Day from FWA, IAB MIXX Award, and was a
Mobi Awards Finalist. This was due to its native booking, quick check-in, boarding
pass retrieval, trip management, the ability to scan passports and credit cards, and the
chance to learn more about the in-flight experiences that made it an industry leading
app.
Salmon
Salmon is a global commerce service provider that defines and delivers market-
changing commerce strategies and solutions. Salmon specializes in strategy (both
B2B and B2C), multi-channel solution optimization, commerce system integration,
e-commerce operations management, program management, and user experience
optimization.
VML
VML has three core practices: Strategy & Intelligence, Marketing & Advertising,
and Platform & Experiences. VML has more than 2,500 employees with principal
offices in 28 locations across six continents.
 Strategy & Intelligence: VML bases this division around advisory services and
helps CMOs as they transform customer engagement, enterprise IT, and channel
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design. It also has specialties in brand planning, consumer research, channel

insights, and analytics & optimization.
 Marketing & Advertising: VML focuses on omnichannel, integrated campaigns
with its own content and media services. It also offers social strategy, public
relations, and loyalty.
 Platforms & Experiences: VML offers both digital and real-world environments
of brand perceptions and offers services design, content platforms, technology
development, commerce, product development, and mobility services.
Wunderman
Wunderman is the largest of WPP’s digital agencies and aims to combine creativity
and data that delivers results for brands. It focuses on Direct, digital, promotion, and
relationship marketing and also has specialties in e-commerce and digital
transformation (although more from deriving digital strategy through customer data
than technical implementation). Wunderman has won multiple creative awards
including a Cannes Lion Grand Prix, and in 2015 industry analysts named
Wunderman a leader in marketing database operations as well as a strong performer
in customer engagement strategy. We estimate Data makes up c20% of Wundermans
revenues, which it leverages across its other services. Headquartered in New York,
the agency brings together 7,000 creatives, data scientists, strategists, and
technologists in 175 offices in 60 markets.
Wunderman operates in three main categories: data, analytics, and insights;

communications and experiences; and technology-enabled marketing.
 Data, Analytics, and Insights: contains specialties as diverse as target audience

assessment to omnichannel management.
 Communications and experience: offers services including direct/digital
communications, e-commerce, CRM platforms, and website builds. It also offers
content, social, and mobile services.
 Technology-enabled marketing: In this division, Wunderman offers database
builds, platform/stack assessment, and database management platforms.
[m]platform
Launched globally by GroupM, the parent of WPP’s media agencies, in November
2016, [m]platform represents an extension of the “horizontality” strategy into the
data itself.
Interpublic's digital operations

IPG does not provide a breakout of digital vs. non-digital revenue. The holding
company emphasizes an “open architecture” approach, meaning it sources the best
ideas and resources from across its agencies to serve client needs. In this way, its
digital offering is embedded throughout the organization, though it does have
digitally-focused agencies, which we describe below.
IPG has been less active than other holding companies in acquiring digital
technology. Management has stated a philosophy in the past of “If you can rent it,
why buy it,” preferring instead to allocate excess cash to shareholders. IPG does not
believe this strategy puts it at any disadvantage, and the company still maintains its
own proprietary data stack, which is called AMP (Audience Measurement Platform).
Management has also commented that a rent rather than buy approach removes it
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from possible conflicts of interest that other holding companies face when pitching
services to clients.
In 2017 IPG saw a slowdown in project-based work at some of its digital specialist
agencies, including R/GA and Huge, which had been strong contributors to organic
growth in years prior. Management stated that work had not moved to competitors
but instead had been put on hold as clients generally pulled back on project spend.
Specialty digital agencies include:
R/GA
R/GA was historically a digital-focused agency and was named “Digital Agency of
the Decade” by AdWeek (2000-2010). It has since branched out to become a full-
service agency and was named AdAge’s Agency of the Year in 2015. In 2017 the
firm was named Digital Innovation Agency of the Year by Campaign. The agency
has also expanded into business lines traditionally dominated by consultants,
including business transformation, and also operates R/GA Ventures, which provides
capital and advice to start-ups. R/GA has over 2,000 employees with offices in the
North America, South America, Europe, and Asia. Recent client wins include
Johnnie Walker, Nikon, PWC, and Samsung.
Huge
Similar to R/GA, Huge was historically a digital-focused agency but has recently
branched out to a wider offering. IPG first acquired a majority stake in 2008, and
since then Huge has grown from 80 employees to over 1,000; headquartered in
Brooklyn, the agency has offices in six countries. In 2015, The Drum named Huge
the fastest growing digital agency in the UK (within its size group). CEO Aaron
Shapiro also stated the agency grew 31% in 2016. In September 2017 Huge logged a
notable client win with McDonald’s for digital design and user experience, beating
out Fjord, a unit of Accenture, in the final round.
MRM//McCann
A unit of McCann Worldgroup, MRM is a global digital marketing and customer
experience agency, with over 30 offices across the world. Clients include Fitbit,
General Motors, Microsoft, and Ikea.
MullenLowe Profero
Part of the MullenLowe group, Profero is a digital marketing agency acquired by IPG
in 2014. The firm offers a range of services including online media, advertising, web
development, search engine marketing, social media, and online PR.
Cadreon
Cadreon is a programmatic ad-tech unit that is part of Mediabrands, the media
buying arm of IPG.
Omnicom’s digital operations

Similar to IPG, OMC’s digital services are embedded across its offerings, including
at its core agency networks, DDB, BBDO, and TBWA. OMC does not separately
break out digital sales.
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Annalect
Annalect is a leading data and analytics agency that was started by Omnicom in
2010. It specializes in creating anonymized data profiles that can have up to 40k
points of information that are crucial to providing insights to both the media buying
and creative arms at OMC, helping them better serve clients. Annalect also offers
services directly to outside clients, providing tools and technology as well as
consulting services. Both P&G and AT&T have indicated that Annalect capabilities
were a factor in shifting their accounts to Omnicom.
Proximity Worldwide
Aligned with BBDO, Proximity specializes in digital marketing, directing marketing
and CRM, and data and analytics. The agency has 67 offices in over 50 countries,
with a staff of over 2,000. Clients include HP, Emirates, Bayer, ExxonMobil, P&G,
and VW.
Tribal Worldwide
Part of DDB, Tribal was historically a digitally-focused agency but has since
branched out to a wider offering. The agency offers marketing services across
mobile, social, and video as well as direct marketing and website development.
Organic
Organic is a digital creative agency that emphasizes use of data and predictive
analytics to tailor solutions for clients. Clients include Kotex, Quaker Oats, Kohler,
and AT&T.
Critical Mass
A digital experience design agency, Critical Mass offers a wide range of services,
including brand launch, design, digital campaign management, social media, mobile,
marketing science, and e-commerce.
Accuen
Accuen is Omnicom’s “center of excellence” for programmatic media. Growth at the
unit contributed 96bps, 91bps, and 57bps to total OMC organic growth in 2014,
2015, and 2016, respectively. As clients have shifted from a principal to agent model,
this has dragged on organic growth, without an impact to operating profit dollars; as
a result, Accuen’s contribution in 2017 was -3bps.
Steady rise in digital weighting of Dentsu’s overseas business

Dentsu Aegis Network (DAN) is taking aggressive measures to expand digital
business, such as via acquisitions, based on its ambition to become a 100% digital
economy business by 2020. The digital weighting (within overall gross profit) of
overseas business rose to 58% in 2017 from 41% in 2013, just after the Aegis
acquisition. Meanwhile, this weighting is still only 22% for domestic business (43%
for the group as a whole). DAN’s leading global network brands in the digital arena
include iProspect (digital performance marketing agency), Isobar (digital agency),
Merkle (data marketing company), and Vizeum (media agency specialized in digital
media). In particular, DAN acquired capabilities in high-quality data, analytics, and
CRM via the 2016 acquisition of the data marketing company Merkle, whose people-
based data platform M1, launched in 2017, appears to have contributed to the strong
progress in acquiring new business during 2H FY2017.
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Sluggish growth in online advertising’s share of Japan’s total ad market reflects a

dependence on traditional media in Japan and advertisers’ tardiness in shifting to
digital. Against this backdrop, a number of dedicated online ad agencies have seen
rapid growth in recent years that could threaten Dentsu’s market share over the
medium to long term. Dentsu has meanwhile been strengthening its resources in the
online space, including establishing Dentsu Digital (July 2016) and Rakuten Data
Marketing (July 2017; JV with Rakuten), and we will continue to monitor
developments this year as it works to make up for a slightly late start.
Figure 52: Dentsu’s Digital Business Contribution Ratio by Region

70.0% Overseas digital ratio Total digital ratio Japan digital ratio
60.0% FY end change
50.0% 57.9%
41.0%
40.0%
43.2%
30.0%
20.0%
22.2%
10.0%
0.0%
2013 2014 2015 2016 2017

Note: FY2013, FY2014 ends in March. FY ends in December from 2015.
iProspect
Operates in 40 countries around the world, with its home base in the UK. Digital
performance marketing agency supporting the maximization of clients’ online
marketing ROI. Received more than 200 awards around the world in 2016 and was
selected as the leading global digital performance agency.
isobar
Digital agency operating in more than 45 countries around the world, with its home
base in the UK. Delivers product and service design and brand commerce solutions
via creative leveraging of digital media. Received more than 250 awards in 2016,
including Campaign Asia’s best agency award.
Merkle
Acquired in 2016. Data-driven CRM and performance marketing agency with an
original technology platform. Since its foundation it has established a competitive
advantage by seeking to strengthen data-driven marketing, and it delivers services to
increase engagement between corporate customers and consumers.
Vizeum
Media agency operating in more than 40 countries, with its home base in the UK.
Specialized in digital media, with prowess in communication planning. Has superior
understanding of consumer behavior and how it changes, via leveraging of data,
media, and technology.
Amnet
Operates trading desks in 42 countries around the world that organically link online
ads with various forms of data to make ads more accurately targeted and more timely.
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360i
Champions fusion of search engine marketing (SEM) with social marketing, highly
praised within the industry as a next-generation digital agency
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Lines Between Marketing and Consulting Budgets Blur

The opportunity from targeting IT budgets is significant
As consumers have become increasingly “digital,” incumbent companies have faced
substantial disruptions as new competitors have challenged their existing business
models. Companies are seeking advice on consumer behavior, digital strategy, and
for help with implementing technology to adapt to the changing business
environment. This has expedited the process of changing the advertising agencies
from “just” being media or creative agencies into diversified marketing, strategic,
and technological partners. It has also, however, been the driving force behind
IT/consultancy firms moving into the marketing services area. We highlighted before
the opportunity for ad agencies to target additional CIO- and CTO-managed IT
services budgets, which is projected by Publicis to be worth nearly more than a
trillion dollars (see below).
Figure 53: Digital is driving a three-way industry convergence, offering a >$1 trillion industry
Source: J.P. Morgan research, Publicis.
Limited impact from IT services companies entering core agency businesses

Our deep dive into the analysis of growing opportunistic digital services identified
the role of IT/Consultants in traditional marketing services and the potential
competitive threat it poses to Advertising Agencies, pushing the price of acquisitions
up and limiting access to new talent. We see the lines between the separate tech and
marketing/advertising industries continuing to blur further as digital, data, and
platforms merge, and we see the CMO, the CIO, and the CTO having to work
increasingly together. This process moves in both directions, with the likes of
Deloitte, Accenture, and Adobe moving into the marketing space.
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Programmatic Explained
Perhaps no area of agency work gets more focus from investors than media buying,
where agencies execute media purchases and negotiate pricing packages on behalf of
clients. Despite the increased attention, this business remains a relatively smaller
portion of revenue behind traditional creative and marketing services. We estimate
media buying comprises roughly 25% of revenue at Publicis and WPP, 15-20% at
Omnicom, and 10-15% at IPG. Still, we acknowledge that generally margins within
media buying tend to be slightly higher than in creative, given lower staffing needs
and ability to scale. We believe the increased focus from investors on media buying
reflects fears that this portion of agency business is susceptible to disintermediation,
as opposed to creative services where there is more recognition that the bespoke
nature of the work requires that it remain at the agencies.
Media buying is changing rapidly, particularly as dollars move to digital (estimated

to now make up ~35% of total global ad spend), and more importantly as digital ads
are bought and sold on a programmatic basis. According to eMarketer, programmatic
digital display ad spending will reach close to $40 billion in 2018, up ~20% from
2017, and comprise over 80% of total digital display ad spending (excluding search).
Strong growth, albeit at decelerating rates, is expected to continue for the next few
years. For agencies, programmatic remains a relatively small portion of overall
revenues, but this is expected to continue to grow as both digital increases as a total
percent of ad spend and programmatic increases as a percent of digital.
Figure 54: US Programmatic Digital Display Ad Spending, 2015-2019E

$ billions, %
$50 $45.7 90%

$45 80%
$39.1
$40 70%
$35 $32.6
60%
$30 $25.5 50%
$25
$17.5 40%
$20
$15 30%
$10 20%
$5 10%
$0 0%
2015 2016 2017E 2018E 2019E
Programmatic digital display ad spending % chg % of total digital display ad spending
Source: eMarketer, Oct. 2017.
We believe that fears of disintermediation from either in-sourcing, ad-tech firms, or

the so-called “Walled Gardens” such as Facebook or Google are unfounded. Before
addressing those concerns, it is necessary first, though, to understand how
programmatic works and the agency role in the process.
Programmatic Buying Explained

WPP’s Xaxis has defined programmatic buying as “an automated method of buying
digital advertising driven by data and technology.” It is important to note the
definition does not include real-time as inventory can be bought and sold in advance.
The differentiating factor of programmatic is not that inventory is purchased on an
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instant basis but that the purchases are made on an automated basis as opposed to the
traditional method of directly contacting a publisher’s sales force to buy ad space.
With programmatic, media buyers often refer to buying audiences as opposed to

buying media. The goal is generally to use data to put the right ad in front of the right
person at the right time. Data utilized include browsing history (cookies), historical
purchase data, contextual data (time of day, geography, browser used, device used),
as well as the publisher and advertiser’s own primary data. So, for example, if data
determines that a female, using an Apple product (more upscale), who has recently
browsed websites for handbags and even left unpurchased but filled carts at the
Coach online store is now reading an article on NYTimes.com, then it would be in
the interest of Coach to deliver an ad programmatically to that site at that moment
offering a promotion.
A key advantage of programmatic is that ad campaigns can be adjusted in near real

time, with brands continuously checking to see how many clicks an ad is getting or
how long viewers are watching a video before scrolling away. This is in contrast to a
traditional campaign where data has to be collected and adjusted over a period of
time. Adjustments can take a creative form, such as altering an ad to be more
attention grabbing without sound, or tactical, as in fine-tuning targeting criteria.
On the next page we illustrate how a real-time programmatic buy actually works. We
note a simple search on the web for this topic will produce a slew of diagrams trying
to explain this, with some enormously complicated. We see these complex charts as
misleading and note that all programmatic impressions have five key steps that we
map out.
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Figure 55: 5 Steps in a Programmatic Impression
MediaOwner.com
Major Players
Step 1: MediaOwner.com’s webpage loads. The site’s CMS
DoubleClick (Google), AppNexus,
sends a request to a publisher ad server to load a display ad. 1. Publisher Ad Server OpenX, AdJuggler, FreeWheel
The publisher ad server makes a request to both direct sold
ads and ad exchanges.
Step 2: Upon notification from the Publisher Ad Server, the PubMatic, INDEX Exchange, OpenX,
Ad Exchange conducts an auction for the display ad. 2. Ad Exchange YuMe, Smaato, Google, FB, Aol,
Requests are sent to bidders representing advertisers. YHOO, AppNexus, Rubicon Project
Step 3: The bidder, a demand-side platform (DSP) or ad The Trade Desk, MediaMath, Turn,
network, receives bid request and looks for campaigns on its 3. Bidder Rocket Fuel, Criteo, Google, FB, Aol,
platform. It then sends the Ad Exchange a bid on behalf of YHOO, AppNexus, Rubicon Project
advertiser. Exchange then collects bids and chooses a winner.
Step 4: Winning bidder now needs to supply creative display DoubleClick, Atlas (Facebook),
ad to the exchange. Bidder makes request to Advertiser Ad 4. Advertiser Ad Server Mediaplex, PointRoll, Media Mind,
Server to provide ad. Flashtalking, Spongecell, Vindico
Step 5: To comply with privacy standards, Advertiser Ad

Server makes request to Opt-Out provider to deliver an opt- 5. Opt-Out Ghostery, Evidon, TRUSTe
out button, which is overlaid at right corner of display ad.
Advertiser
Source: Jounce Media. Note: CMS = content management system.
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Presumably, the entire exchange above happens instantaneously without any

interference to the web browsing experience. While the “ad-tech stack” illustrated
here includes the five key steps in all programmatic impressions, the process can be
significantly more complex and include detours for media arbitrage, targeting data,
and measurement tracking. It is also important to note that for some impressions,
each point in the stack can be controlled by a single company, such as occurs when
an ad is purchased within the sphere of Google, Facebook, or AOL.
Within this process, the agencies primarily operate in the sphere of buy-side
technology, or steps 3 and 4. An agency’s role is to stay on top of technology
advancements within the tech stack and, on behalf of clients, choose and contract
with vendors at the bidder and advertiser ad server level, using scale to structure
preferred rates. Ideally, an agency should also be involved in the planning, execution,
and measurement of a programmatic exchange. We say ideally as the lines between
agency and ad-tech provider are sometimes blurred, with the latter occasionally
handling execution and management. In addition to steps 3 and 4, agencies are
present along the stack through wholesale ownership or stakes in ad-tech firms,
which they can use to influence the process.
Is disintermediation possible? We do not believe the agency role is at risk, and we

examine the threat from two directions:
 In-housing. The threat most frequently cited against the agency role is that
advertisers will bring the programmatic process in-house, the thesis being that
many companies already manage online search this way. For the stack above, this
would mean that brands contract directly with Bidders and Advertiser Ad
Servers. While we have heard of marketers handling some parts of programmatic
themselves, we still believe full in-housing is rare and limited to companies with
already outstanding technical resources and talent. There are three main reasons
why we do not see this threat as substantial: 1) by in-housing, advertisers forgo
the benefits of agencies using their scale to negotiate preferred rates; 2)
advertisers lack the scale in data relative to agencies, which can make for a less
effective buy; and 3) so far, with few exceptions, advertisers have proved unable
to manage this process fully in-house. Our own checks with industry contacts
have confirmed what agencies have said publicly, that several brands have tried
to pull a portion of programmatic in-house, only to see it fail, and return to
agencies with greater appreciation for their role. A common problem that comes
up is that software is not set up correctly, which ends up costing advertisers
money; whereas previously an agency would have happily taken this cost for a
client, advertisers are now stuck with losses. We also believe that advertisers
have significant staffing challenges as top talent prefers to work on programmatic
across an array of platforms and brands, which an agency can offer.
 The Google/Facebook factor. Given the increased flow of dollars to platforms
run by GOOGL and FB, some have argued that the agency role will come under
threat as brands seek to directly contract with the platforms and only allow
agencies to manage programmatic on the greater web. We do not believe this is
presently occurring (WPP, for instance, in 2017 spent ~$7 billion with Google
and FB) and that such thinking ignores the importance of the agency role in the
media planning process. As agnostic entities, agencies can take a broad market
view across all types of media, using their data and knowledge to best allocate a
campaign, including how many ad dollars to allocate to Facebook or Google. We
do not believe that advertisers by and large want to manage this process, and by
sticking with agencies it at least ensures parity with competitors. Agencies are
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also increasingly highlighting the conflict of interest inherent in a business model

where the media owner is also the ad tech platform controller.
Programmatic matures. While growth rates for programmatic remain high, the
business is maturing, prompting a closer examination by advertisers of how their ad
dollars are being spent. Some advertisers are concerned with the lack of
transparency, especially when an agency may have stakes in certain digital media
companies, suggesting a possible conflict of interest (i.e., are agencies buying space
on their own properties even if not in the best interest of the advertiser?). We believe
that increased scrutiny will result in greater transparency over time, consolidation
along the tech-stack, and a squeeze out of smaller players whose value is deemed
low. We expect some pricing pressure, but given the still rapid growth rates and
rising penetration of digital, programmatic should remain a driver of agency growth.
We believe agencies will also look to protect margins by cutting vendors out of the
process, moving capabilities and knowledge in-house.
Agency programmatic strategies diverge. The agency holding companies all tend
to approach programmatic differently, with key factors including the level of
transaction risk (agent or principal) and the level of centralization within the agency.
Transaction risk comes from an agency programmatic arm buying inventory on a
principal basis and then selling the ad back to a client (usually of the in-house media
buying firm), therefore taking pricing risk, albeit for a short period of time. In some
ways, this is not unlike a brokerage firm risking its own capital as it makes a market
in stocks or bonds.
Among agencies, WPP’s Xaxis is notable for taking the principal approach (in
addition to the pure agent role). Xaxis will generally structure its programmatic
agreements based on a guaranteed effective CPM outcome to the client. Under this
arrangement, WPP takes on the full risk of executing the campaign to the agreed
upon eCPM outcome, and likewise it does not detail the various costs incurred of
media or the tech stack components. For Xaxis, there are two key advantages: 1)
executed correctly, taking principal inventory can be more lucrative than acting in a
pure agent role; and 2) by purchasing in advance, Xaxis in theory is able to provide
better inventory to its clients than competitors can.
The key drawback to taking principal inventory is that many clients are simply
uncomfortable with the arrangement, a concern we have heard directly from CMOs.
Many advertisers continue to prefer agencies operate as an agent, executing
programmatic buys on exchanges on behalf of clients.
Ultimately, we believe which model prevails will depend on how much advertisers
value the best inventory vs. how much they value transparency. Given the ubiquity of
inventory on the Internet, we would have previously argued against the principal
model as it would seem possible for an advertiser to acquire the inventory they want
without having to purchase directly from their agency (i.e., an advertiser can always
buy ad space on CNN.com if the space on MSNBC.com has already been purchased).
However, as digital video emerges as a high-quality medium, with relatively high
demand and scarcer supply, the advantages of Xaxis’ model may become more
important.
On the issue of centralization, here too programmatic strategies have begun to

diverge. On one end of the spectrum, we believe WPP has been the most aggressive
at housing anything programmatic related at Xaxis. At IPG, programmatic buying
technology is centralized at Cadreon, though dedicated employees are also integrated
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into the media agencies and client teams. Cadreon offers clients multiple pricing and
service models and commits to but does not guarantee key performance indicators
(KPI). At OMC, programmatic can be executed through Accuen, a digital trading
platform, but also through media buying arms OMD and PHD. In general, Accuen
offers clients guaranteed delivery execution based on an agreed KPI for an all-in
price; costs in this instance are not itemized. Clients can obtain greater transparency
on costs at OMD and PHD, but buys are executed on a best-efforts basis.
A notable accounting impact is seen from buying media as principal rather than
as an agent. Since there is pricing risk to the trading desk, the media buy must be
grossed up so that the full cost is reported as an expense and the full price allocated
to the client at execution is reported as revenue (the desk owns the inventory it is
selling the client). This differs from traditional media buying where only the net
margin on the media buy is reported as revenue to the holding company. WPP
therefore reports “net sales” as well as revenues, which it argues removes any
flattering impact of this difference in accounting. We note, however, that if an
agency does not take transaction risk, then for media buying net sales and revenue
would be equivalent (WPP also cites the difference between net sales and revenue in
its data investment management division where revenue includes pass-through costs,
principally for data collection).
Client Conflict Barriers Breaking Down

A continuing trend in the industry is the loosening of client conflict policies, which
has left advertisers with a greater choice of ad agencies relative to several years ago.
For instance, automakers historically had some of the strictest policies around client
conflicts. Today, though, it is not uncommon to see several different car companies
under one holding company umbrella, such as with OMC, which won VW’s global
media account in 2016 despite an existing comprehensive relationship with Nissan.
The fact that Ford is reevaluating its agency relationship suggests to us that it too is
willing to consider moving its account to another holding company. This looser
environment has skewed the supply/demand dynamic, putting agencies in the
compromised position of having to accommodate advertisers’ requests much more so
than in the past for fear of losing business. The result has been an uptick in account
reviews/client movements, agencies doing more for less, and pressure to both organic
growth and profitability.
Account Consolidation
With greater agency consolidation over the last 20 years, account movement has also
shifted into fewer agency partners. Coming out of the last recession, we saw a burst
of account review activity, much of it focused on consolidating agency rosters with
an eye toward cost savings. More and more advertisers have moved their business to
the larger advertising and marketing service holding companies. This move has been
the result of advertisers looking to create a more consistent brand image on a global
level and gain potential cost savings from either improved operating efficiencies or
bundled pricing. Consolidation on the media buying side of the business has also
furthered this trend. In addition, the larger advertising and marketing services
companies have facilitated this move through the rapid buildup of diversified
marketing services and a global presence so they can offer one-stop shopping to their
clients.
Walgreens, Verizon, and AT&T are recent examples of advertisers that consolidated
the vast majority of their marketing into one or two holding companies. We believe
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that clients will continue to consolidate accounts at fewer advertising and marketing
service companies for three reasons: pricing leverage, elimination of redundant costs,
and brand harmony, benefiting the larger ad holding companies.
Agency and Client Mergers and Acquisitions

Account consolidation is partly a function of M&A activity among advertisers,
which have sought to streamline operations by narrowing their advertising to fewer
agencies, as well as among the agencies themselves, which have sought to broaden
the scale and scope of their operations, thereby attracting larger accounts.
M&A Activity Among Clients

M&A activity has historically contributed to consolidation activity among agencies,
or at least consolidation of accounts. Subsequent to merging, corporations generally
streamline operations, including evaluating their agency relationships. While most
companies still leave the decision of choosing an agency to individual brand
managers, it has become common to reevaluate these relationships from a corporate
level after a major acquisition. This effort often begins with the process of a
corporate re-branding of the newly combined entity, and an agency has to be chosen
for that high-profile job. During the process, agency relationships are often evaluated
across the board, which, in many cases, leads to major account consolidations by
dropping multiple agencies and giving all of the business to one company.
M&A Activity Among Ad Agencies

Advertising and marketing services companies have traditionally grown through
acquisitions of smaller firms, as well as through larger-scale mergers. Such agency
consolidation has enabled the top advertising and marketing services companies to
broaden their skill sets and reach meaningfully as well as create greater scale. With
additional agency networks, these holding companies can avoid client conflict issues
in many more cases and compete for additional business. The scale attained through
these acquisitions often enables an agency to assume more business from a current
client, facilitating an account consolidation.
Consolidation in Media Planning and Buying

The media buying industry has undergone significant consolidation during the past
five years or so. In this area of the advertising business, size really does matter. The
more dollars a media buying company has within its network, the more leverage that
company will have in negotiating pricing and placement of advertising dollars for its
clients. Decades ago, there were three major TV networks and 25 leading media
buying entities. The balance of power was with the sellers of advertising space.
Today, that pendulum has swung, with only a handful of top media buyers (the top
10 buyers manage over 50% of the global market) and a multitude of sellers, as cable
and other national networks have evolved. The media buyers appear to have a
stronger position in the industry today than ever before. Most holding companies
have formed umbrella organizations for their media buying and planning businesses
in order to achieve some back-office efficiencies as well as to position themselves
with greater scale.
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Compensation Structure
The Commission-Based System Gave Way to Fixed-Fee Rates
The advertising industry today has largely moved away from commission-based
compensation and toward fee-based pay. Traditionally, advertising organizations
were paid at a set percentage of an advertising budget for the creative work on an
account. The percentage was originally around 15% back in the early 1980s, but it
has been declining as the price of media has escalated, and today it averages closer to
10-12%. The issues with commission-based compensation include the following:
 Commissions create the incentive to recommend expensive media to increase

agency revenues.
 Commissions did not appropriately align the work with the fee paid (i.e., an
agency could develop a campaign, and if the client decided not to air it, the
agency in theory would not be paid).
 The agency’s pay was not aligned with the success of the campaign.
Today, nearly all advertising clients have a fixed-fee relationship, though a client’s
scale of media spend will still naturally correlate to agency revenue given the greater
scope of work.
Fixed-Fee Structure Reduces Media Spend Volatility

Fee-based revenues tend to be figured on a “cost-plus” basis and thus should be less
cyclical than compensation schemes tied directly to advertising’s ebbs and flows,
resulting in more predictable agency performance. In this model, a client agrees to
pay total costs plus a profit margin and requires agencies to be held more accountable
for their spending estimates and actual outlays. Cost plus fee-based revenues tend to
be recognized earlier in the work process, when the service is rendered, whereas
commission-based revenues are recognized when the advertising appears on a
specific medium, which is after the agency makes sizable expenditures. As long as an
advertising company’s management is diligent regarding receivables, fee-based
revenues should be collected earlier than commissions, translating into enhanced
cash flow dynamics. The fixed-fee basis also enables the agency to plan its own
budgets better, hence giving the holding company a better grasp of its businesses’
performance. This system may limit the agency’s upside, however, in an inflationary
environment, when a commission system might otherwise produce a greater windfall.
We note that the fixed-fee method seems to favor the agencies in light of the trend of
media fragmentation. As dollars move from traditional, expensive media to multiple,
lower cost media, the agencies should garner a larger portion of the overall marketing
budget. However, pricing pressure is ongoing as it is easy to push back on margin in
this fee structure, which has remained a headwind for agency revenues.
Incentive-Based Compensation Often Talked About but Not Much Used

Incentive-based compensation is a component of a fee-based system. This method
has emerged as clients seek more accountability for how advertising spending
improves performance, which is measured by both objective and subjective metrics,
including sales, market share, and the quality of creative work. We believe that more
than one-third of advertisers use some level of incentive-based compensation for a
fraction of their work. Most agencies, however, aren’t willing to take on the risk of
this system, particularly given the difficulty in evaluating the “success” of a
campaign. Furthermore, difficulties in aligning the right criteria on which to base
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incentive compensation have also somewhat limited its use, and we therefore
question how significant incentive compensation will actually become as a percent of
total.
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Financial Outlook
2018 marks the ninth year of the advertising recovery, which has seen healthy
organic revenue growth for most of the agencies since 2010 in the low to mid single
digits, driven by the US and UK and emerging market strength. Growth notably
accelerated for the industry (more the US-based agencies) in 2014 and 2015 before
slowing in 2016 and 2017. Outlooks provided by the holding companies point to a
modest acceleration in aggregate, though with somewhat uneven performance. IPG
and OMC have both guided to 2-3% organic growth, while WPP’s guidance is for
flat y/y organic growth. PUB meanwhile is looking for further acceleration in organic
growth off of +0.8% in 2017. Dentsu’s guidance for Dentsu Aegis Network is higher
than its peers, at 3-5% y/y. IPG and OMC will likely see a negative impact to
revenue from previously disposed businesses in Q1, though on a full year basis this
could be made up through acquisitions. Based on current exchange rates, we expect a
more substantial FX tailwind for domestic agencies 2018. On margins, IPG has
guided to another 20bps of improvement, WPP has guided to flat margins, and PUB
to improvement over the next few years, while OMC is not committing to a target for
2018. In terms of buybacks, we look for both IPG and OMC to roughly keep pace
with 2017, repurchasing $300m and $600m, respectively. We expect WPP to buy
back 2% of its share capital and continue with its 50% payout target, giving a
dividend yield of 3.7%. We project 22% EPS growth for IPG, with slightly better
operating income growth of 6% boosted by a lower effective tax rate. At OMC we
look for operating income growth of 4% and EPS growth of 11%, also helped by a
lower tax rate. At WPP, management reduced long-term guidance to 5-10% EPS
(versus 10-15% guided for before), largely driven by M&A and buybacks. We expect
PUB to remain cautious given its current restructuring program.
Below, we take a look at the various components that drive revenue and EPS
performance.
Revenues
As discussed in more detail in the preceding “Growth Drivers” section, three main
variables affect revenue growth: industry growth, market share gains, and
acquisitions. A fourth element to reported performance is foreign exchange
movements, which can swing revenue growth and sometimes affect profitability.
As we discussed in the “Macro View” section, we are expecting healthy core

spending levels this year. Emerging markets have seen some choppiness but should
continue to outpace the developed markets as ad spending in many of these markets
makes up a relatively small proportion of their GDP compared to the US, suggesting
higher than average ad spending growth going forward. Meanwhile, the US and
Western Europe should see healthy core growth, boosted by the return of cyclical
events. We project the global ad spend will grow 4.2% in 2018 with 4.0% growth in
the US.
Market Share Gains

As discussed earlier in the report, account movement does have an influence on top-
line trends. At the end of 2017, WPP sat at the top of our new business tables, helped
by significant account wins with PSA Group, Sanofi, LVMH, and Walgreens. The
company is likely to see a modest boost to organic revenue growth as a result, though
at £13b in net sales, we are mindful it does take a sizeable amount of incremental
business to meaningfully boost the top line.
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Domestic agencies OMC and IPG, meanwhile, will start 2018 with less of a tailwind
than in years prior, which we estimate will contribute to softer Q1 organic revenue
for both companies. At IPG, the agency still needs to lap some 2017 account losses,
including with Sprint and MillerCoors. On its Q4 earnings call, management did
state it sees a ~20bps tailwind to growth in 2018 from new business, with the impact
coming after the first quarter. For OMC, we estimate the company will be impacted
in the early part of the year from prior-year losses at media shop OMD (Walgreens,
Lowe’s, PSA, Bel Groupe) and some creative losses at smaller networks such as
GSD&M.
Acquisitions
Aside from the major deals in recent years (Dentsu-Merkle, Denstu-Aegis, the
terminated Omnicom-Publicis, and subsequent Publicis-Sapient), smaller tuck-in
acquisition activity has been steady since the recession across the holding companies
as cash continues to build on balance sheets and the competitive drive toward greater
emerging market and digital exposure continues. Companies have spoken of actively
seeking M&A opportunities, again mostly centered on digital and emerging markets.
WPP is the most aggressive of the agencies with a specific target of £300-400mn of
bolt-on M&A per year. PUB continues to expect further bolt-on acquisitions but
remains very specific that large-scale acquisitions are unlikely at this stage. OMC has
stated that it expects dispositions to negatively impact revenue by 4.0-4.5% in Q1,
then return to plus or minus 1% for the remainder of the year.
Operating Margins
Approximately 60% of costs at the typical advertising and marketing services
company are salaries; this high variable cost component helped protect earnings
somewhat during the downturn as companies managed their staffing levels and
reduced incentive compensation to meet business demand. Management teams have
also been hard at work on fixed costs such as back office operations and rent
expense, and while many of the bigger strides were made in the downturn,
efficiencies are still being gained to drive stronger margin expansion.
Historically, the agencies have not been big margin stories given their more variable
cost structure vs. media owners. The ad market recovery, however, provided the
opportunity to drive greater operating leverage on a more efficient cost base out of
the downturn. At this point in the cycle we would expect less impact from margin
expansion, and only IPG and PUB have definitively stated they expect margin
growth ahead. IPG is guiding to 20bps of margin expansion in 2018 following a
40bps increase last year. OMC has not committed to a target for 2018 following a
45bps improvement in 2017, which was partly helped by the sale of lower margin
businesses. WPP is cautiously targeting flat margins in 2018 and has a long-term net
sales margin target of c20% (vs. 2016 at 17.3%). PUB is targeting a further increase
to margins in 2018, though it has not quantified this (JPMe +110bps to 16.6%).
Lastly, Dentsu is guiding at 15.7% in 2018 (vs. 2017 at 18.7%) due to an increase in
domestic and overseas investment.
Longer term, we believe that margins will modestly increase in a healthy ad market
given higher incremental margins on growth. We also expect that as the integrated
agencies assume a greater proportion of marketers’ budgets, margins should naturally
improve as the companies can leverage more marketing dollars across their expertise
on that account. In addition, the longer an agency maintains an account, the more
profitable that relationship usually becomes as it moves beyond the initial costs and
is able to better manage the account (e.g., taking advantage of higher utilization
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rates). We believe some of the best individual agencies have in the past achieved
targets as high as 20-25%, implying that there is still quite a bit of room for margin
expansion at the advertising and marketing services companies. Lastly, we believe
the digital areas often have higher levels of sustained profitability once past their
original ramp-up on an account, so as these businesses assume a larger portion of the
agency revenues, we should see a benefit to profitability.
Interest Expense
The favorable credit markets have allowed the agencies to refinance their debt at
significantly lower levels and motivated some to take on incremental debt to lock in
attractive rates. Most of the group has a steady interest expense outlook with no
major refinancings set for 2018.
Tax Rates
Both IPG and OMC will benefit from corporate tax reform in 2018, which will
provide a tailwind to EPS growth. For IPG we model a 28.0% effective rate
compared to 36.1% in 2017, and for OMC we model a 28.5% rate relative to 31.3%
in 2017. WPP saw a headline tax rate of 22.0% in 2017 versus 21% in 2016. We
expect the tax rate to increase given a higher share of high tax regions in the
portfolio. We forecast PUB’s tax rate to remain stable at 26.0%. We expect the tax
rate for Dentsu will increase to 35.0% (normal level) in 2018 from 24.4% in 2017.
Share Buybacks and Dividends

Given minimal capital expenditures, we expect all of these companies to produce
healthy free cash flow this year. We also look for continued returns of cash to
shareholders: we look for OMC to repurchase $600m in addition to dividend yield of
3.25%. We expect IPG to maintain a healthy buyback (JPMe $300m) along with a
very healthy 3.5% dividend. We expect WPP to continue its 50% payout target,
similar to 2016 (4.8% dividend yield), on top of a 2% buyback (c£400m). We
forecast PUB to increase its payout ratio slightly to 50% (vs. 42% before), resulting
in a dividend yield of 3.4%. For Dentsu we expect it to achieve a payout ratio of
23.6% in 2018 and a dividend yield of 1.6%.
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Valuation
Advertising and marketing services companies are valued on both a P/E basis and
other metrics such as enterprise value to EBITDA (EV/EBITDA), especially when
comparing U.S. companies to European companies, given differences in items such
as interest expense and convertible bonds and related tax effects. In this section, we
provide an overview of historical trading patterns; we provide specific valuation and
stock recommendations in the company-specific sections that follow.
Figure 56: 10-Year Historical Share Price Performance, Indexed

250
200
150
100
50
0
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
S&P Big 4
Source: Bloomberg; J.P. Morgan. Note: Big 4 are OMC, IPG, PUB, WPP.
Omnicom
Historically, OMC shares traded at a ~20% premium to the S&P prior to this past
recession. Beginning mid 2007, this historical premium quickly became a discount
(the first time since early 2003), which has fluctuated in the recovery, at times
returning to premium valuations. Shares are currently trading at a -27% discount on a
2018E P/E basis. Given OMC’s double-digit EPS growth profile since the recession,
high FCF, and focus on returns to shareholders, we think the stock warrants a
multiple more in line with the market.
Interpublic
For most of 2017, IPG maintained a discount valuation to OMC, though at 13.9x it
now trades at a 7% premium, which we attribute to relatively better Q4 performance.
Versus the market, IPG trades at a -22% discount compared to an in-line valuation on
average over the prior five years. To the extent it appears there is upside to IPG’s
organic growth margin estimates, we believe there is room for modest multiple
expansion in 2018.
WPP
WPP shares trade primarily on the London Stock Exchange, though the company
also has ADRs listed on the NASDAQ exchange that trade under the symbol
WPPGY. WPP trades at a 2018E P/E of 10.1x, at a significant discount of -19% to
PUB and a -29% discount to MSCI Europe (vs. average of 9% premium since 2004).
Given WPP’s guidance for 5-10% EPS growth in the next few years, over-cautious
guidance of flat margin and organic growth for 2018, and potential tailwinds to
organic growth from significant account wins from 2017($1.8bn net positive
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business; the highest among the Top 4), we think the stock warrants a premium to the
market comparable to its historical levels. We believe WPP can deliver at least a
+7% 2018-20E EPS CAGR through contributions from value-enhancing M&A and
c2-3% per annum from share buybacks.
Publicis
Publicis stock trades primarily on the Euronext exchange (where it trades as PUB; it
is more commonly quoted on Reuters as PUBP.PA and on Bloomberg as PUB FP).
Publicis removed its ADRs from the New York Stock Exchange in 2007 and listed
over the counter (OTC) as PUBGY. Publicis trades at a 2018E PE of 12.7x, with the
market giving PUB a substantial discount to MSCI Europe (-9% vs. historically
trading at a +16% premium). We believe there is significant upside given 1) the cost
restructuring strategy and synergies (from Sapient, recent ERP switchover, and
shared services between agencies) that may further drive margins as the market
remains too cautious on potential cost savings and 2) the opportunity to benefit from
the rising number of account reviews in Mediapalooza 2.0.
Dentsu
Dentsu does not look highly undervalued compared with rivals based on FY2018E
(P/E of 16x based on adjusted EPS, EV/EBITDA of 8.1x) due to expansion of
domestic and overseas investment. If organic growth in overseas business recovers
more strongly than at rivals in FY2018, however, we think the stock will gradually
price in an FY2019 profit recovery scenario, accompanied by substantial upside
owing to narrowing of the valuation gap with rivals. Over the past year or so the
stock’s valuation has consistently fallen in tandem with the overall sector, and the
gaps between sector companies are now slight, but we now expect that sector stocks
will once more trend based on their growth momentum.
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Company Profiles
The advertising and marketing services industry today is highly consolidated, with
revenues largely concentrated in the top five holding companies: WPP, Omnicom,
Publicis, Interpublic, and Dentsu. A second group of companies, which includes
Havas, Hakuhodo DY, and MDC Partners, is behind in terms of revenues. On the
following pages, we provide snapshots of the leading global advertising and
marketing services companies.
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WPP Group
Based in London, WPP Group is currently the largest advertising company in the
world, with 2017 net sales of £13bn (and revenues of £15.6bn). The company
employs approximately 205,000 people (including associates and investments).
WPP’s major global ad agencies are J. Walter Thompson, Ogilvy & Mather, Y&R,
and Grey. WPP is also the largest media buyer in the world with four top-flight
media buying and planning concerns, Mindshare, MEC, MediaCom, and Maxus,
which it has grouped together as GroupM (among other media agencies such as
Essence and Xaxis). On the marketing services side, WPP is unique among its peers
in having its Data Investment Management division, which includes leading market
research firm Kantar. WPP’s Public Relations/Public Affairs group includes Hill &
Knowlton, and its Branding & Identity, Healthcare, & Specialist Communications
group includes direct and digital marketing companies such as Wunderman and
Brand Union. WPP’s CEO, Sir Martin Sorrell, is among the more outspoken of the
top advertising and marketing services companies’ executives, and he has built WPP
through a bold acquisition strategy since 1987. The company has been praised by
investors for the transparency of its financial statements and the robustness of its
earnings profile (a 14% EPS CAGR since 1993). We rate WPP Overweight.
Investment Thesis
 WPP is simplifying structure to better meet clients’ needs. Regardless of the
causes of the slowdown, WPP’s response is to accelerate its strategy of
simplification with the consolidation of agency brands, the full integration of its
offering, capabilities, and shared scale, data, technology and services. This should
make WPP faster, better, cheaper and better able to address clients’ needs and
should drive efficiencies to support margins or market share.
 Brands are becoming more important, new opportunities for growth. In our
view, there is a strong case for the increased importance of brands and new
opportunities for growth from performance-based marketing, digital
transformation, and SMEs, and network effects around scale, data, technology
can strengthen the agency model.
 Our longer term forecasts assume organic growth of 1.7% (and >3% over
previous five years) and only 20 basis points of (cumulative) margin
improvement to 17.5%. We hold net debt/EBITDA at 1.5-2.0x for further into our
forecast period with the benefit of M&A and buybacks driving EBIT and
earnings upgrades longer term.
 Valuation looks attractive. WPP trades at a -29% discount to MSCI Europe on
2018E P/E of 10.1x vs. a c9% premium on average since 2004, and we believe it
deserves to re-rate at least to its historical levels.
Outlook
WPP has guided for flat 2018 net sales organic revenue growth and margins. We
note that WPP tends to guide quite cautiously, particularly at the beginning of the
year, and we see potential upside to our current 2018 organic revenue growth
forecast of +2.0% y/y. This should ensure tight cost control and margin expansion
should stronger growth materialize. While budgeting for flat, WPP’s dual focus for
2018 is to grow revenues and enhance margins. WPP has a long-term net sales
margin target of close to c20% (vs. 20167 17.3%) and EPS growth target of 5-10%
p.a. WPP also targets a share buyback program of 2-3% per annum.
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Valuation
The shares are trading on 2018E P/E of 10.1x and EqFCF yield of 9%, too
inexpensive, in our view, for a company that has delivered 20+ years of consistent
double-digit earnings growth.
Risks to Rating and Price Target

 A worse than expected economic and advertising environment could weigh on
WPP’s results.
 Costs may increase faster than expected, implying lower than expected operating
margins.
 Value-destroying acquisitions.
 Substantial numbers of contracts lost.
 Increased competition from Consultancy/IT firms causing market share loss.
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Figure 57: Net Sales by Geography, 2017A Figure 58: Net Sales by Segment, 2017A
Data
Investment
AP, LA, AME, Management,
CEE, 31% North 18%
America, 37% Public
Advertising, Relations &
Media Public Affairs,
Investment 8%
Management,
47% Brand
Consulting,
Health &
Wellness and
Western Cont. Specialist
Europe, 20% UK, 13% Comm., 28%
Source: Company reports. Source: Company reports.
Figure 59: Major subsidiaries
Advertising Media Buying Data Investment Management PR Branding & ID Healthcare and Specialist Comms
JWT Group M: Kantar Group Hill & Knowlton Landor
Ogilvy & Mather Mindshare Ogilvy PR Brand Union
Y&R MEC Burson-Marsteller Fitch
Grey MediaCom Cohn & Wolfe
Maxus Specialist PR
Figure 60: Key Management Figure 61: Key Clients

Executive Position Ford Nestle
Sir Martin Sorrell CEO Unilever GSK
P&G BP
Roberto Quarta Chairman
IBM Allianz
Paul Richardson Finance Director Dell General Mills
John Seifert Chairman & CEO Ogilvy & Mather J&J Pfizer
Tamara Ingram CEO J. Walter Thompson Colgate HSBC
David Sable CEO Y&R Source: Company and media reports.
Jim Heekin Chairman & CEO Grey
Kelly Clark CEO Group M
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Figure 62: Organic Revenue Growth, Q114-FY18E Figure 63: Headline Operating Margins, 2014-18E
4.9%
4.4%
4.3% 17.4%
3.8% 3.3%
3.0% 3.3% 3.3% 3.2% 2.8% 3.1% 17.3% 17.3%
2.5%
2.1% 2.1% 2.2%
0.8% 16.9%
0.0%
16.7%
-1.1% -0.9%
-1.3%
-1.7%
2018E
Q114
Q214
Q314
Q414
2014
Q115
Q215
Q315
Q415
2015
Q116
Q216
Q316
Q416
2016
Q117
Q217
Q317
Q417
2017
2014 2015 2016 2017 2018E
Source: Company reports and J.P. Morgan estimates. Note: Headline operating earnings exclude amortization of intangibles, goodwill impairment, and
other non-cash write-downs , margin as % of net sales
Source: Company reports and J.P. Morgan estimates.
Figure 64: Acquisitions 2000-2017 Figure 65: Reported Net New Business Wins
£ in millions $ in millions
2000 281 2000 $4,500

2001 730 2001 2,500
2002 277 2002 3,600
2003 345 2003 3,600
2004 209 2004 6,800
2005 508 2005 5,200
2006 216 2006 6,411
2007 675 2007 2,370
2008 1029 2008 392
2009 118 2009 45
2010 200 2010 4,642
2011 470 2011 1,761
2012 567 2012 679
2013 201 2013 2,477
2014 489 2014 3,712
2015 693 2015 1,674
2016 697 2016 -2479
2017 285 2017 1,819
Note: Includes earnout payments. Source: Company reports.
2000 does not include Y&R (£3.0bn in stock)
2005 includes 50% of Grey (other 50% was £340m stock)
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Figure 66: Balance sheet and cash flow position, 2018E Figure 67: Expected Earn-Out Payments
Avg. Net debt/EBITDA 2.1x £ in millions
Interest Cover 12.5x
Eq. FCF* £1,413m 2017 181
FCF to firm* £1,593m 2018 128
Dividend 59p 2019 144
Source: J.P. Morgan estimates. * JPM definition. ** Company definition. 2020 58
2021+ 103
Total 614
Figure 68: WPP Group—Income Statement

£ in millions, except per share data
2014 2015 2016 2017 2018E 2019E 2020E
Net Sales 10,065 10,524 12,398 13,140 12,997 13,407 13,951
Reported growth -0.1% 4.6% 17.8% 6.0% -1.1% 3.1% 4.1%
FX -6.4% -1.2% 10.4% 4.6% -3.6% -0.2% 0.0%
M&A 3.0% 2.5% 4.3% 2.3% 2.5% 2.4% 2.4%
Organic Growth 3.3% 3.3% 3.1% -0.9% 0.0% 1.0% 1.7%
Adjusted PBIT (Headline) 1,681 1,774 2,160 2,267 2,242 2,326 2,435
PBIT Margin on net sales 16.7% 16.9% 17.4% 17.3% 17.3% 17.4% 17.5%
Change in margin +0.3% +0.2% +0.6% -0.2% +0.0% +0.1% +0.1%
Associates within headline PBIT 69 69 65 113 113 118 124

Adjusted Operating profit 1,612 1,705 2,095 2,154 2,130 2,208 2,311
Depreciation 228 325 380 389 399 409

EBITDA 1,910 2,002 2,420 2,534 2,632 2,725 2,844
Finance costs -168 -152 -174 -175 -179 -181 -182
Adjusted PBT 1,513 1,622 1,986 2,092 2,063 2,146 2,253
Tax -303 -308 -417 -460 -474 -493 -508

Tax rate +20.0% 19% 21% 22.0% 23.0% 23.0% 22.6%
PAT 1,210 1,314 1,569 1,632 1,588 1,652 1,745

Minorities -75 -85 -102 -96 -93 -97 -102
Net Income 1,135 1,229 1,467 1,536 1,495 1,555 1,643
Yr end shares 1,326 1,329 1,332 1,333 1,333 1,333 1,333

ESOP / Treasury -32 -38 -54 -71 -93 -115 -136
Avg basic 1,294 1,291 1,278 1,261 1,245 1,226 1,205
Options/ issuable shares 43 22 18 15 15 15 15
Avg diluted Shares in issue 1,337 1,313 1,296 1,276 1,259 1,241 1,220
-1.6% -1.3% -1.5% -1.7%
Adjusted EPS (p) 85 94 113 120 119 125 135
Growth 10% 21% 6% -1% 6% 7%
Interim 12 16 20 23 22 24 25
Final 27 29 37 37 37 39 42
DPS (p) 38 45 57 60 59 63 67
Payout ratio 45% 48% 50% 50% 50% 50% 50%
Source: Company reports, J.P. Morgan estimates.
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Omnicom Group
Based in New York, Omnicom Group is the second largest advertising company in
the world, with 2017 revenues of $15 billion. Omnicom was incorporated in 1986
and employs 77,300 people worldwide. The company is divided into three main
advertising agency networks (BBDO Worldwide, DDB Worldwide, and TBWA
Worldwide), which comprise a full range of traditional advertising as well as
marketing services businesses; Omnicom has a stable of over 200 smaller
independent agencies in its Diversified Agency Services (DAS) division as well.
Over the years, Omnicom has shifted many marketing services agencies from its
DAS division into these three main networks, essentially creating three mini holding
companies. Omnicom’s Media Group now consists of three full-service media
companies, with OMD Worldwide, PHD, and Hearts & Science, as well as several
media specialist companies, including data and analytics provider Annalect.
Omnicom has historically stood out among its peers for a more “build” vs. “buy”
approach toward growth with generally disciplined, small-scale acquisitions adding
to organic growth. Its ROE and ROIC metrics likewise lead the group, along with
consistent double-digit EPS growth historically. We rate Omnicom Overweight.
Investment Thesis
 We view Omnicom as “best in class” in the group. Omnicom maintains a
broad business mix with three top creative networks, a strong media buying
segment, and stand-out data and analytics business. In addition, the company has
demonstrated excellent cost management through business cycles, in our view,
including the past recession where compression was far better than peers and
Omnicom successfully returned to pre-recession profitability by 2012, on plan
with guidance.
 More modest organic growth and margin expansion expected next year,
partly offset by FX tailwinds. Omnicom has targeted 2.0-3.0% organic revenue
growth in 2018 against easier comps (+3.0% in 2017 vs. +3.5% in 2016). FX is
forecast to be a tailwind, and we estimate a 2.0% benefit to revenue. Past
divestitures will also drag on revenue growth, mainly in Q1, and for the full year
we model a -1.0% impact. OMC has not committed to a margin target for 2018,
after 45bps of improvement last year. We expect Omnicom’s historically robust
share repurchases to continue, reflecting ongoing strong FCF.
Outlook
For 2018, management has initially targeted a 2.0-3.0% organic revenue increase.
We expect growth to be back-end loaded, partly due to the easier comps but also as
OMC cycles past some client losses. At Q4 earnings, the company guided FX to be a
2.0% tailwind for the full year compared to a 0.3% benefit in 2017. We also forecast
a -1.0% impact from divestitures, driven by the prior sale of some CRM businesses
which should hit in Q1. Management has not committed to a target for margin
expansion, and for now we’re modelling a modest 10bps benefit. We expect
buybacks to be slightly ahead of last year—we forecast $600m this year—which
combined with tax reform (rate goes to 28.5% from 31.3%) should lead to EPS
growth of 11.3%, by our estimate. Cash on hand remains near an all-time high, and
net leverage is modest at 0.5x. Shares are currently trading at 7.8x our 2018E
EBITDA and 7.5x on 2019E, and 13.0x our 2018E EPS and 12.2x on 2019E.
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Valuation
Our $90 December 2018 price target reflects a forward multiple of ~15.0x on our
2019 EPS. Our valuation is a discount to the broader market (17.8x), which we view
as conservative given OMC’s historical double-digit EPS growth profile and high
FCF generation that is mostly returned to shareholders through buybacks and
dividends.

 Ad spending tracks GDP closely, so a pullback in the U.S. and global economy
can hurt Omnicom’s top and bottom lines.
 New business trends are unpredictable. If new business trends grow negative,
top-line growth may come under pressure.
 The lagging European economy and any meaningful US dollar strength could
weigh on earnings growth.
 While we are not overly concerned about transparency issues in the industry,
ongoing news on this front may weigh on shares.
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Figure 69: Revenues by Geography, 2017 Figure 70: Revenues by Segment, 2017
Africa & Middle

Latin America East Specialty 6%
3% 2%
Asia Pacific
11%
CRM 32%
Advertising
Euro & Other 53%
Europe U.S.
16% 54%
U.K.
9% Canada PR 9%
3%

Global Advertising Networks Other Advertising Agencies Media Planning and Buying Marketing Services Interactive
BBDO Goodby Silverstein OMD Rapp (Direct Marketing, Digital) Organic
DDB GSD&M PHD Integer (Promotion and event) Proximity
TBWA Martin | Williams Hearts & Science Fleishman-Hillard (PR) Critical Mass

Executive Position Client
John Wren President, CEO McDonald's VW
Pepsi P&G
Philip Angelastro EVP, CFO
Nissan FCA
Chuck Brymer CEO of DDB AT&T SC Johnson
Troy Ruhanen CEO of TBWA
Andrew Robertson CEO of BBDO
Figure 74: Organic revenue growth, 1Q16-4Q18E Figure 75: Operating margins, 2008-2018E
5.0% 14.0%
4.4% 13.6%
4.5% 13.5%
3.8% 13.5%
4.0% 3.6%
3.4% 3.5% 13.0%
3.5% 3.2% 3.2% 3.2% 13.0% 12.8% 12.7%
12.6% 12.7% 12.7%
3.0% 2.8%
2.5% 12.5%
2.5%
12.1%
2.0% 1.6% 12.0% 11.7% 11.6%
1.5%
0.9% 11.5%
1.0%
0.5%
11.0%
0.0%
10.5%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.
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Figure 76: Acquisition-Related Expenditures Figure 77: Balance sheet and cash flow position, 2017
$ in millions $ in millions, except per share data
2004 378 Total debt/EBITDA 2.1x
2005 327 Interest coverage 10.4x
2006 311 Credit Ratings BBB+ (S&P0)
2007 378 Baa1 (Moody’s)
2008 492 FCF 1,675
2009 158 FCF/share 7.16
2010 184 Dividend 2.40
2011 443 Source: J.P. Morgan estimates.
2012 197
2013 112
2014 228
2015 152
2016 492
2017 361
Figure 78: Expected Potential Earn-Out Payments

$ in millions
2018 $ 93
2019-2020 47
2021-2022 76
After 2022 0
Total 216
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Figure 79: Omnicom Group — Income Statement

$ in millions
Q1, 17 Q2, 17 Q3, 17 Q4, 17 Q1, 18E Q2, 18E Q3, 18E Q4, 18E 2015 2016 2017E 2018E 2019E
United States Revenue $2,011.7 $2,060.9 $1,992.4 $2,131.9 $1,901.0 $2,102.1 $2,052.2 $2,185.3 $8,526.7 $8,627.8 $8,196.9 $8,240.6 $8,487.8
Organic % change 0.8% 0.2% 2.4% -1.1% 0.5% 2.0% 3.0% 2.5% 4.6% 1.9% 0.5% 2.0% 3.0%
Acquisition % change -0.6% -6.1% -8.0% -7.0% -6.0% 0.0% 0.0% 0.0% -0.5% -0.7% -5.5% -1.5% 0.0%
Total % change 0.2% -5.9% -5.6% -8.1% -5.5% 2.0% 3.0% 2.5% 4.2% 1.2% -5.0% 0.5% 3.0%
International Revenue 1,575.7 1,729.2 1,727.1 2,044.7 1,693.9 1,884.8 1,861.0 2,126.5 6,607.7 6,789.1 7,076.7 7,566.1 7,867.8
Organic % change 9.2% 7.7% 3.3% 4.8% 1.5% 3.0% 3.5% 4.0% 6.1% 5.6% 6.2% 3.1% 3.0%
Acquisition % change -0.9% -2.3% -2.9% -3.8% -2.0% 0.0% 0.0% 0.0% 0.7% 1.4% -2.5% -0.4% 1.0%
F/X % change -2.7% -3.4% 2.3% 5.3% 8.0% 6.0% 4.3% 0.0% -14.1% -4.3% 0.6% 4.3% 0.0%
Total % change 5.6% 2.1% 2.8% 6.3% 7.5% 9.0% 7.7% 4.0% -7.4% 2.7% 4.2% 6.9% 4.0%
Total Revenues 3,587.4 3,790.1 3,719.5 4,176.6 3,594.9 3,986.9 3,913.1 4,311.7 15,134.4 15,416.9 15,273.6 15,806.7 16,355.6
Total organic % change 4.4% 3.5% 2.8% 1.6% 0.9% 2.5% 3.2% 3.2% 5.3% 3.5% 3.0% 2.5% 3.0%
Total acquisition % change -0.7% -4.4% -5.7% -5.5% -4.2% 0.0% 0.0% 0.0% 0.1% 0.3% -4.2% -1.0% 0.5%
F/X % change -1.2% -1.5% 1.0% 2.4% 3.5% 2.7% 2.0% 0.0% -6.6% -1.9% 0.3% 2.0% 0.0%
Total % change 2.5% -2.4% -1.9% -1.5% 0.2% 5.2% 5.2% 3.2% -1.2% 1.9% -0.9% 3.5% 3.5%
Salary and service costs 2,694.2 2,736.1 2,770.5 3,048.9 2,699.9 2,878.2 2,914.7 3,147.5 11,248.8 11,453.2 11,249.7 11,640.3 12,044.5
% of revenue 75.1% 72.2% 74.5% 73.0% 75.1% 72.2% 74.5% 73.0% 74.3% 74.3% 73.7% 73.6% 73.6%
Occupancy and other costs 302.0 297.0 316.7 316.3 302.5 312.2 327.3 320.1 1,242.7 1,218.0 1,232.0 1,262.1 1,301.8
% of revenue 8.4% 7.8% 8.5% 7.6% 8.4% 7.8% 8.4% 7.4% 8.2% 7.9% 8.1% 8.0% 8.0%
SG&A 108.6 120.4 99.5 121.5 108.8 126.7 104.7 125.4 431.6 443.9 450.0 465.6 481.8
% of revenue 3.0% 3.2% 2.7% 2.9% 3.0% 3.2% 2.7% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9%
Depreciation and amortization 72.7 71.1 68.6 69.8 72.9 74.8 72.2 72.1 291.2 292.9 282.2 291.9 297.7
% of revenue 2.0% 1.9% 1.8% 1.7% 2.0% 1.9% 1.8% 1.7% 1.9% 1.9% 1.8% 1.8% 1.8%
Amortiation of intangtibles 30.4 28.5 27.9 27.0 30.5 30.0 29.4 27.9 109.3 115.3 113.8 117.7 117.7
Depreciation 42.3 42.6 40.7 42.8 42.4 44.8 42.8 44.2 181.8 177.6 168.4 174.2 180.0
Operating income 409.9 565.5 464.2 620.1 410.9 595.1 494.2 646.6 1,920.1 2,008.9 2,059.7 2,146.9 2,229.9
% of revenue 11.4% 14.9% 12.5% 14.8% 11.4% 14.9% 12.6% 15.0% 12.7% 13.0% 13.5% 13.6% 13.6%
% change 4.5% 0.7% 2.4% 3.0% 0.3% 5.2% 6.5% 4.3% -87.5% 4.6% 2.5% 4.2% 3.9%
Net interest expense (income) 39.6 45.3 46.4 43.6 43.0 45.8 45.8 45.8 141.5 167.1 174.9 180.3 187.0
Income before taxes 370.3 520.2 417.8 576.5 367.9 549.3 448.5 600.9 1,778.6 1,841.8 1,884.8 1,966.6 2,042.9
Income tax provision 108.0 166.7 132.0 183.2 104.9 156.6 127.8 171.3 583.6 600.3 589.9 560.5 582.2
Tax rate 29.2% 32.0% 31.6% 31.8% 28.5% 28.5% 28.5% 28.5% 32.8% 32.6% 31.3% 28.5% 28.5%
Income after taxes 262.3 353.5 285.8 393.3 263.1 392.8 320.7 429.6 1,195.0 1,241.5 1,294.9 1,406.1 1,460.6
Equity in affiliates/minority interests (20.5) (24.9) (22.2) (32.6) (21.3) (27.2) (24.1) (35.6) (101.1) (92.8) (100.2) (108.2) (110.5)
Net income 241.8 328.6 263.6 360.7 241.8 365.5 296.6 394.1 1,093.9 1,148.7 1,194.7 1,298.0 1,350.2
Addbacks (0.5) (0.5) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (12.5) (6.3) (1.6) (1.0) (0.5)
Adjusted net income 241.3 328.1 263.3 360.4 241.6 365.3 296.3 393.8 1,081.4 1,142.4 1,193.1 1,297.0 1,349.7
Avg. shares outstanding 236.5 234.0 232.7 232.3 230.8 228.3 227.3 227.0 245.5 239.2 233.9 228.4 223.0
Diluted EPS, recurring $1.02 $1.40 $1.13 $1.55 $1.05 $1.60 $1.30 $1.73 $4.41 $4.78 $5.10 $5.68 $6.05
% change 13.4% 3.4% 6.9% 5.8% 2.6% 14.1% 15.2% 11.8% 4.1% 8.4% 6.8% 11.3% 6.6%
EBITDA 482.6 636.6 532.8 689.8 483.8 669.9 566.4 718.7 2,211.2 2,301.8 2,341.8 2,438.7 2,527.5
% of revenue 13.5% 16.8% 14.3% 16.5% 13.5% 16.8% 14.5% 16.7% 14.6% 14.9% 15.3% 15.4% 15.5%
% change 3.5% 0.3% 1.3% 2.3% 0.2% 5.2% 6.3% 4.2% -1.6% 4.1% 1.7% 4.1% 3.6%
EBITA 440.3 594.0 492.1 647.1 441.4 625.0 523.6 674.5 2,029.4 2,124.1 2,173.5 2,264.5 2,347.5
% of revenue 12.3% 15.7% 13.2% 15.5% 12.3% 15.7% 13.4% 15.6% 13.4% 13.8% 14.2% 14.3% 14.4%
% change 4.7% 0.6% 2.1% 2.5% 0.3% 5.2% 6.4% 4.2% -1.5% 4.7% 2.3% 4.2% 3.7%
Source: Company reports, J.P. Morgan estimates.
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Interpublic Group
Based in New York, Interpublic Group of Companies is the fourth-largest advertising
group in the world with 2017 revenues of $7.8 billion. The company comprises three
fully integrated advertising/marketing communications divisions, McCann
Worldgroup, FCB (formerly Draftcfb), and MullenLowe Group; media specialists
including UM and Initiative, which operate under the company’s IPG Mediabrands
unit; leading specialist and marketing services agencies, including PR firm Weber
Shandwick and experiential marketing firm Jack Morton; plus a collection of stand-
alone domestic agencies such as Hill-Holliday and The Martin Agency. Interpublic
was founded in 1930 as McCann Erickson (it has operated under the name
Interpublic since 1961) and currently employs 50,200. Over the past 10 years,
Interpublic has effectively managed a turnaround of the company after a period of
poor financial performance, accounting issues, and management turnover. Current
management has successfully brought the company back to peer-level organic
revenue performance, much improved profitability, and, in our view, the strongest
balance sheet in the group. We rate Interpublic Overweight.
Investment Thesis
 2018 outlook encouraging. Following 17% organic growth between 2014 and
2016, IPG posted a more modest 1.8% increase in 2017. The slowdown in our
view was driven by a pullback in client spending (mainly in the CPG space) in
addition to some project-based work in digital and PR being put on hold. The
initial outlook for 2018 is more optimistic, and the company is currently guiding
to 2-3% organic growth; we model 2.5%. We expect performance to be more
weighted toward Q2/Q3, partly driven by easier comps but also as the company
cycles past lingering client losses from last year. On the margin side,
management has guided to 20bps of improvement. Along with a boost from
corporate tax reform and continued share repurchases, we look for EPS growth of
22% to $1.73.
 IPG will continue to make progress on closing margin gap with peers. IPG
grew its operating margins by 37bps to 12.4% last year, relative to a 45bps
improvement to 13.5% at domestic peer OMC. We note Omnicom’s margin was
partly boosted by the sale of some lower margin businesses early in 2017.
Operating leverage at IPG last year was driven by the Office & General lines, a
trend we expect to continue. We forecast Interpublic will resume closing the gap
versus peers in 2018, albeit at more modest rate relative to past years.
Outlook
Management has provided 2018 guidance for organic revenue growth of 2-3%, and
we additionally model an FX tailwind of 1.5% for the full year. The company is also
looking for 20bps of margin improvement, and we model operating income growth
of 5.7%. Tax rate is currently expected to be approximately 28%, down from 36% in
2017. Based on this guidance, and our assumption that IPG repurchases ~$300m of
stock this year, we look for 2018 EPS growth of +22%. Shares have outperformed
YTD, reflective in our view of the company’s better Q4 results and upbeat tone on
the post-earnings call. Even so, IPG shares are trading at 13.9x our 2018E EPS and
12.7x 2019E, an over 20% discount to the market despite trading in line on average
over the prior five-year period. As IPG delivers growth as projected in 2018,
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showing some acceleration from last year’s levels, we believe the stock’s multiple
may also expand toward its historical levels.
Valuation
Our $27 December 2018 price target reflects a forward P/E of 14.5x applied to our
2019 EPS estimates. We view this as conservative relative to the S&P at ~18.0x,
given IPG’s superior earnings growth outlook, strong balance sheet (now with a fully
investment grade credit rating), and FCF generation.

 Ad spending tracks GDP closely, so if US trends begin to worsen again, it would
hurt Interpublic’s top line.
 Depressed spending by FMCG companies may last longer than expected, leading
to further negative earnings revisions ahead.
 Recent new business trends have improved, but if they deteriorate again, our
revenue outlook for 2018 may be too optimistic.
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Figure 80: Revenues by Geography, 2017 Figure 81: Revenues by Discipline, 2017
Other
Asia/Pacific 6%
12%
Latin America Marketing

4% Services
45%
Continental
Europe Advertising &
9% U.S. Media
60%
55%
UK
9%

Global Advertising Networks Other Advertising Agencies Media Planning and Buying Marketing Services Interactive
McCann Worldgroup Deutsch Universal McCann (UM) Golin R/GA
FCB Hill Holliday Initiative Jack Morton (experiential marketing) MRM/McCann
MullenLowe Group The Martin Agency Weber Shandwick Huge

Michael Roth Chairman, CEO GM Verizon
Frank Mergenthaler EVP, CFO Sprint Unilever
Harris Diamond CEO, McCann Worldgroup Microsoft Coca-Cola
Carter Murray CEO, FCB Johnson & Johnson Mastercard
Source: Company reports. Source: Company reports
Figure 85: Organic revenue growth, 1Q15-4Q18E Figure 86: Operating margins, 2008-2018E
8.0% 14.0%
12.5%
7.0% 6.7% 12.0% 12.4%
12.0% 11.5%
10.5%
6.0% 5.3% 9.8% 9.8%
10.0% 9.3%
5.0% 8.5% 8.4%
4.3%
3.7% 8.0%
4.0% 3.3%
2.7% 2.8% 5.7%
3.0% 2.6% 2.5% 6.0%
2.1%
2.0%
4.0%
1.0% 0.4% 0.5%
2.0%
0.0%
0.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E
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Figure 87: Acquisitions

$ in millions
2001 $ 311
2002 277
2003 225
2004 175
2005 92
2006 31
2007 151
2008 106
2009 72
2010 62
2011 63
2012 146
2013 62
2014 68
2015 29
2016 52
2017 31
Figure 88: Balance sheet and cash flow position, 2017 Figure 89: Expected Potential Earn-Out Payments
$ in millions, except per share data $ in millions
Total Debt/EBITDA 1.12x 2018 $ 79
Interest coverage 17.99x 2019 54
Covenants 2020 79
Interest Coverage over 5x
2021 35
Leverage under 3.5x
2022 11
EBITDA $1,225
Thereafter 10
FCF $1,338
Total 268
FCF/share $3.37
Dividend $0.721 Source: Company reports.
Note: IPG increased its quarterly dividend to $0.21/share (from $0.18) beginning 1Q18.
Source: Company reports; J.P. Morgan.
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Figure 90: Interpublic Group—Income Statement

$ in millions, except per share data
Q1, 17 Q2, 17 Q3, 17 Q4, 17 Q1, 18E Q2, 18E Q3, 18E Q4, 18E 2016 2017 2018E 2019E
U.S. Revenue $1,111.8 $1,160.5 $1,156.0 $1,286.0 $1,129.6 $1,190.7 $1,188.4 $1,316.9 $4,684.8 $4,714.3 $4,825.5 $4,996.8
Organic Change 2.9% 0.7% 1.3% 3.7% 1.9% 2.5% 2.7% 2.3% 4.4% 2.2% 2.4% 2.8%
Acquisition Change -1.0% -1.4% -2.1% -1.5% -0.3% 0.1% 0.1% 0.1% 0.3% -1.5% 0.0% 0.8%
Total U.S. Change 1.9% -0.7% -0.8% 2.2% 1.6% 2.6% 2.8% 2.4% 4.7% 0.6% 2.4% 3.6%
International Revenue 642.1 724.4 746.6 1,055.0 691.5 773.7 795.9 1,110.9 3,161.8 3,168.1 3,372.0 3,506.9
Organic Change 2.2% 0.0% -0.7% 2.9% 2.5% 2.7% 3.0% 2.7% 5.8% 1.2% 2.7% 3.0%
Acquisition Change -1.0% -0.4% -1.6% -0.8% -0.3% 0.1% 0.1% 0.1% 0.0% -0.9% 0.0% 1.0%
F/X Change -2.6% -2.8% 1.0% 2.8% 5.5% 4.0% 3.5% 2.5% -5.1% -0.1% 3.7% 0.0%
Total International Change -1.3% -3.3% -1.3% 4.9% 7.7% 6.8% 6.6% 5.3% 0.7% 0.2% 6.4% 4.0%
Total Revenues 1,753.9 1,884.9 1,902.6 2,341.0 1,821.1 1,964.3 1,984.2 2,427.8 7,846.6 7,882.4 8,197.5 8,503.7
Total Organic Revenue Change 2.7% 0.4% 0.5% 3.3% 2.1% 2.6% 2.8% 2.5% 5.0% 1.8% 2.5% 2.9%
Total Acquisition Revenue Change -1.0% -1.0% -1.9% -1.2% -0.3% 0.1% 0.1% 0.1% 0.2% -1.3% 0.0% 0.9%
Total F/X Revenue Change -1.0% -1.1% 0.4% 1.2% 2.0% 1.5% 1.4% 1.1% -2.1% 0.0% 1.5% 0.0%
Total Revenue Change 0.7% -1.7% -1.0% 3.4% 3.8% 4.2% 4.3% 3.7% 3.1% 0.5% 4.0% 3.7%
Salaries and related costs 1,275.4 1,239.3 1,227.6 1,325.8 1,326.1 1,291.5 1,280.3 1,374.9 5,036.0 5,068.1 5,272.9 5,469.8
% of revenue 72.7% 65.7% 64.5% 56.6% 72.8% 65.7% 64.5% 56.6% 64.2% 64.3% 64.3% 64.3%
% change 0.5% 0.8% -0.1% 1.3% 4.0% 4.2% 4.3% 3.7% 3.7% 0.6% 4.0% 3.7%
Office and general expenses 448.8 439.1 455.9 496.9 464.4 452.7 469.5 509.3 1,870.5 1,840.7 1,895.8 1,949.6
% of revenue 25.6% 23.3% 24.0% 21.2% 25.5% 23.0% 23.7% 21.0% 23.8% 23.4% 23.1% 22.9%
% change -0.3% -5.4% -6.2% 5.7% 3.5% 3.1% 3.0% 2.5% -0.7% -1.6% 3.0% 2.8%
Operating income 29.7 206.5 219.1 518.3 30.6 220.1 234.5 543.6 940.1 973.6 1,028.7 1,084.2
Operating margin 1.7% 11.0% 11.5% 22.1% 1.7% 11.2% 11.8% 22.4% 12.0% 12.4% 12.5% 12.7%
% change 29.1% -8.1% 5.7% 6.8% 3.0% 6.6% 7.0% 4.9% 7.8% 3.6% 5.7% 5.4%
Interest expense (20.9) (25.7) (21.0) (23.2) (22.5) (22.5) (22.5) (22.5) (90.6) (90.8) (90.0) (90.0)
Other income, net 5.2 4.7 4.1 5.4 4.5 4.5 4.5 4.5 18.0 19.4 18.0 18.0
Investment impairment 0.8 (2.3) (1.2) 1.5 0.0 0.0 0.0 0.0 4.1 (1.2) 0.0 0.0
Income before taxes 14.8 183.2 201.0 502.0 12.6 202.1 216.5 525.6 871.6 901.0 956.7 1,012.2
Income tax provision (2.1) 75.4 75.4 176.6 3.5 56.6 60.6 147.2 291.0 325.3 267.9 283.4
Tax rate -14.2% 41.2% 37.5% 35.2% 28.0% 28.0% 28.0% 28.0% 33.4% 36.1% 28.0% 28.0%
Income of consolidated companies 16.9 107.8 125.6 325.4 9.1 145.5 155.8 378.4 580.6 575.7 688.9 728.8
Income applicable to minority interests 3.4 0.1 (2.6) (16.9) 3.4 0.1 (3.6) (18.5) (24.0) (16.0) (18.6) (23.0)
Equity in affiliates 1.2 (0.1) (1.0) 0.8 1.2 (0.1) (1.0) 0.5 0.3 0.9 0.6 0.5
Net income 21.5 107.8 122.0 309.3 13.7 145.5 151.2 360.4 556.9 560.6 670.9 706.3
Net Margin 1.2% 5.7% 6.4% 13.2% 0.8% 7.4% 7.6% 14.8% 7.1% 7.1% 8.2% 8.3%
Net income (adjusted) 21.5 107.8 122.0 309.3 13.7 145.5 151.2 360.4 556.9 560.6 670.9 706.3
Add-backs for diluted EPS - - - - - - - - - - - -
Avg. shares outstanding 399.3 400.3 397.2 393.2 390.5 389.4 387.8 386.2 407.3 397.5 388.5 376.0
Diluted EPS $0.05 $0.27 $0.31 $0.79 $0.04 $0.37 $0.39 $0.93 $1.37 $1.41 $1.73 $1.88
% change 1272.7% -17.9% 6.5% 5.0% -35.0% 38.8% 27.0% 18.6% 13.2% 3.1% 22.4% 8.8%
EBITDA 100.4 264.1 275.1 573.1 103.9 279.5 292.1 600.4 1,185.9 1,212.7 1,275.9 1,339.8
% of revenue 5.7% 14.0% 14.5% 24.5% 5.7% 14.2% 14.7% 24.7% 15.1% 15.4% 15.6% 15.8%
% change 19.4% -6.1% 3.4% 3.4% 3.5% 5.8% 6.2% 4.8% 7.9% 2.3% 5.2% 5.0%
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Publicis Groupe
Publicis is the third-largest advertising and marketing services company in the world,
with 2017 revenues of €9.7 billion. Publicis has grown rapidly through acquisitions,
having bought Saatchi & Saatchi and Fallon in 2000, Bcom3 (which brought in Leo
Burnett and Starcom MediaVest) in 2002, Digitas in 2007, Razorfish in 2009,
Rosetta in 2011, and Sapient in 2014. Publicis owns two exceptionally strong media
buying operations, ZenithOptimedia and Starcom MediaVest (recently rebranded in
the restructuring as Starcom and Zenith). Its marketing services businesses are
grouped as Specialized Agencies and Marketing Services (SAMS) and include health
care marketing, PR, and sports marketing. The company employs c77,000
professionals worldwide. We rate Publicis Overweight.
Publicis is based in Paris, where the stock trades on Euronext as PUB (quoted on
Reuters as PUBP.PA and on Bloomberg as PUB FP); its ADRs were delisted from
NYSE in 2007 and now trade OTC as PUBGY.
Investment Thesis
 Publicis is currently trading at a -9% discount to MSCI. The company saw a
strong margin performance in 2017, reaching 15.5%, up 40bps at constant
restructuring charges (down 10bps when taking FX into account), despite the
absence of revenue growth (particularly in H117). Going into 2018, PUB
indicated further margin expansion in the next few years (after guiding for a 17.3-
19.3% margin in 2018 previously), and we see potential for further margin
surprises. We believe the company will continue to benefit from its current
restructuring efforts and further synergies (Sapient synergies, benefits from the
recent ERP switchover, and shared services between agencies) with benefits
feeding through this year in addition to (some) revenue growth also dropping
through (see our recent detailed note on Publicis here). We continue to see a
strong H118 but expect momentum from net new business to slightly slow in
H218 due to the loss of Sanofi in Q317. We see Publicis slightly more exposed to
the current accounts under review in Mediapalooza 2.0 and forecast organic
revenue growth of +1.8%/+1.9% in 2018/2019, which already includes the
assumed headwinds from the Richemont, Sprint, and Sanofi account losses. We
see the current valuation of 12.7x/12.2x 2018E/19E P/E, a c9% discount to MSCI
Europe, as an attractive entry point for a solid top-line turnaround story where
there are low expectations and which also offers an attractive 2018E/19E
9.6%/10.1% Eq FCF (pre bolt-on M&A). We rate PUB OW with a Dec 2018
price target of €78.90, implying 38% potential upside.
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Figure 91: Quarterly organic growth for Publicis

3.3% 3.2% 2.9%
2.8% 2.7%
2.0% 2.1%
1.4% 1.5% 1.2% 1.8%
1.0% 0.9% 0.8%
0.7% 0.7% 0.8%
0.5% 0.2%
-1.2%
-2.4%
2018E
Q114
Q214
Q314
Q414
2014
Q115
Q215
Q315
Q415
2015
Q116
Q216
Q316
Q416
2016
Q117
Q217
Q317
Q417
2017
Source: Company data, J.P. Morgan Research.
 Strong balance sheet and shareholder returns. Publicis’s balance sheet

remains strong, in our view, with 2018E net debt/EBITDA of 0.2x. We believe
this leaves scope for further shareholder returns or value-enhancing acquisitions.
Outlook
As we expected, 2017 was a year with difficult trading conditions and impact from
FMCG clients; however, with a pickup in ad spend in H118 and management
commentary on “very reassuring signs of current trading conditions” in February, we
see the following:
 Top-line acceleration of +100bps: Management did not guide for organic

revenue growth; however, with the visibility from account wins/losses in 2017,
we expect +1.8% organic growth in 2018. We expect an update at the upcoming
Capital Markets Day.
 Management reiterated its 2018 margin guidance for further expansion and
higher investments to be “critical” (JPMe +110bps to 16.6%) driven by strong
execution on the cost side, Sapient synergies, benefits from the ERP switchover,
and increased shared services between agencies.
Valuation
We see the current valuation of 12.8x/11.8x 2018E/19E P/E, a c9% discount to
MSCI Europe, as an attractive entry point for a solid top-line turnaround story where
there are low expectations and that also offers an attractive 2018E 9.6% Eq FCF (pre
bolt-on M&A). Our price target is derived using a DCF valuation and stands at
€78.90, using a WACC of 8.0% and unchanged terminal growth of 2.0%.

 Worse than expected economic and advertising environment following Brexit.
 Disruption to underlying business as a result of management distraction from
structural changes.
 Significant loss of media/creative accounts.
 Costs may increase faster than expected: Publicis expects margin to improve
substantially in the mid to long term. Higher than expected costs may adversely
impact these targets.
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 Difficulties in integrating Sapient with lower than expected cost synergies and
underlying growth performance.
 Increased competition from IT/Consultancy firms.
 Value-destroying acquisitions.
Figure 92: Revenues by Geography, 2017 Figure 93: Revenues by Segment, 2016
AP, LA &
ROW, 8% MEA, 17% Analogue & Digital Media = 25%
Specialised Analog Media,Digital Media,

Agencies and 12% 13%
Marketing
serv ices, 13%
Europe, 26%
Digital, 52%
North
America, 49%
Adv ertising, 23%

Advertising Agencies Media Agencies Digital Agencies Technology Specialized Agencies
Publicis Wolrdwide Zenith Optimeida Razorfish* Vivaki Publicishealthcare
Saatchi & Saatchi Starcom Mediavest Rosetta MSL group
Leo Burnett Group DigitasLBi Medias & Regies Europe
BBH Nurun Prodigious
Sapient*
Source: Company reports. * Razorfish and SaipientNitro have recently merged into one entity.

Maurice Lévy Chairman of supervisory board Procter & Gamble Samsung
Arthur Sadoun CEO Renault Bank of America
Jean-Michel Étienne CFO Fiat Chrysler Nestlé
Steve King CEO, Publicis Media Citigroup MillerCoors
Alan J. Herrick CEO, Publicis.Sapient Kraft AstraZenica
Rishad Tobaccowala Chief Strategist Verizon Carrefour
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Figure 97: Quarterly organic revenue growth, Q114-2018E Figure 98: Operating margins, 2008-2018E
3.3% 3.2% 2.9% 16.7%
2.8% 2.7% 16.5% 16.6%
2.1% 16.4%
2.0% 16.1%
1.4% 1.5% 1.2% 1.8% 16.0%
1.0% 0.9% 0.7% 0.7% 0.8% 15.8%
0.8% 15.6% 15.5%
0.5% 0.2% 15.5%
15.0%
-1.2%
-2.4%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2018E
Q114
Q214
Q314
Q414
2014
Q115
Q215
Q315
Q415
2015
Q116
Q216
Q316
Q416
2016
Q117
Q217
Q317
Q417
2017
Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates. 2014 was 14.9% excl. merger related
costs. Lower margin from 2015 reflects the consolidation of Sapient.
Figure 99: Acquisitions Figure 100: Reported Net New Business Wins
€ in millions $ in millions
2002 75 2000 $1,400
2003 200 2001 2,000
2004 124 2002 2,000
2005 (164) 2003 4,000
2006 58 2004 4,400
2007 996 2005 9,800
2008 172 2006 3,700
2009 287 (inc Razorfish) 2007 5,000
2010 169 2008 5,000
2011 698 (inc Rosetta) 2009 6,000
2012 529 2010 5,900
2013 775 (inc LBi) 2011 7,900
2014 559 2012 3,500
2015 3,265 (inc Sapient) 2013 4,500
2016 240 2014 (678)
Note: Net of disposals. Includes earn-outs/buy- 2015 (2,518)
outs. ’09/’10/’11/’12/’13/’14 from company 2016 (1,074)
presentation, cash flow 2017 -364
2002 does not incl. Bcom3 (€3,432m stock) Source: Company reports and J.P. Morgan estimates. Note: No longer reported post 2013.
Figure 101: Balance sheet and cash flow position, 2017

Average 2016 Net debt/EBITDA 0.6x
Interest Cover 11.9x
Eq. FCF* €1,356m
FCF to firm* €1,394m
Dividend €2.00
Source: J.P. Morgan estimates. * JPM definition. ** Company definition.
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Figure 102: Publicis Groupe — Income Statement

€ in millions, except per share data
2013 2014 2015 2016 2017 2018E 2019E 2020E
Total revenues 6,953 7,255 9,601 9,733 9,690 9,390 9,577 9,771
y/y change (%) 5.2% 4.3% 32.3% 1.4% -0.4% -3.1% 2.0% 2.0%
y/y organic 2.6% 2.0% 1.5% 0.7% 0.8% 1.8% 1.9% 2.0%
Personal expenses -4,330 -4,506 -5,988 (6,059) (5,977) (5,749) (5,824) (6,068)
y/y change (%) 6.2% 4.1% 32.9% 1.2% -1.4% -3.8% 1.3% 4.2%
Other operating expenses (1,358) (1,435) (1,952) (1,992) (2,047) (1,925) (1,915) (1,788)
y/y change (%) 1.0% 5.7% 36.0% 2.0% 4.9% -3.4% -6.4% -7.1%
Underlying EBITDA 1,282 1,324 1,661 1,682 1,666 1,716 1,838 1,915
y/y change (%) 6.3% 3.3% 25.5% 1.3% -1.0% 3.0% 7.1% 4.2%
as a % of sales 18.2% 18.1% 17.3% 17.3% 17.2% 18.3% 19.2% 19.6%
D&A (ex intang. from acq.) (120) (125) (174) (166) (161) (160) (158) (156)
y/y change (%) -4.8% 4.2% 39.2% -4.6% -3.0% -0.8% -1.0% -1.1%
Underlying Operating Income 1,145 1,189 1,487 1,516 1,505 1,556 1,680 1,759
as a % of sales 16.5% 16.4% 15.5% 15.6% 15.5% 16.6% 17.5% 18.0%
Non current income/(expenses) 17 10 0 12.0 -1 -1 -1 -1
Underlying EBIT 1,162 1,199 1,487 1,516 1,505 1,556 1,680 1,759
as a % of sales 16.7% 16.5% 15.5% 15.6% 15.5% 16.6% 17.5% 18.0%
Interests (26) (29) (89) (182) (127) (127) (130) (114)
Underlying PBT 1,136 1,170 1,398 1,334 1,378 1,429 1,550 1,645
Underlying Taxes (332) (331) (416) (415) (358) (372) (403) (428)
Tax rate (%) -29.2% -28.3% -29.8% -31.1% -26.0% -26.0% -26.0% -26.0%
Associates 5 4 8 -5 -5 -5 -6 -6
y/y change (%) -80.0% -20.0% 100.0% -162.5% 0.0% 4.3% 9.7% 7.0%
Minority interest (17) (14) (10) (7) (10) (10) (11) (12)
y/y change (%) -37.0% -17.6% -28.6% -30.0% 42.9% 4.7% 9.7% 7.0%
Other 0 0 0 0 0 0 0 0
Underlying Net Income to equity
holders 792 829 992 1,015 1,005 1,042 1,130 1,199
y/y change (%) 9.5% 4.7% 19.7% 2.3% -1.0% 3.7% 8.4% 6.1%
Headline diluted EPS 3.54 3.64 4.39 4.46 4.36 4.50 4.86 5.13
y/y change (%) 9.7% 2.8% 20.6% 1.6% -2.3% 3.3% 7.9% 5.7%
DPS 1.10 1.20 1.60 1.85 2.00 2.25 2.43 2.57
y/y change % 22.2% 9.1% 33.2% 16% 8% 12% 8% 6%
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Dentsu
Dentsu is Japan’s largest ad agency and ranks fifth in the world by consolidated gross
profit. It started in 1901 as Japan Advertising. In 1907 it merged with Japan
Telegraphic Communication, resulting in two businesses, communication and
advertising. The company took its current name in 1955. The stock was listed on the
first section of the Tokyo Stock Exchange in November 2001, the company’s 100th
anniversary. It acquired Aegis in March 2013.
Dentsu Aegis Network holds many leading global network brands in the digital arena,
including iProspect (digital performance marketing agency), Isobar (digital agency),
etc. The company acquired Merkle in August 2016. Merkle has more than 650 client
companies (at the time of acquisition) and ranks 9th in the world for AdAge’s
rankings of CRM and direct marketing networks (ranked # 6 in the US). Merkle’s
new service MerkleONE (M1) platform enables long-term transactions with clients,
and we focus on its potential as a recurring service. We look for momentum to
improve in Dentsu Aegis Network’s new business acquisition as a result of
bolstering its position in the increasingly important field of data marketing, and M1
being utilized as DAN’s platform going forward.
Separately, Dentsu is known for its strength in sports marketing. It entered the
sporting event business in the 1980s and currently possesses an overwhelming
presence in Japan’s sports marketing segment that leverages sturdy, long-standing
ties with sports associations in Japan and abroad. Dentsu exclusively handles sales of
broadcasting rights to the Olympics, FIFA World Cup Soccer, the World
Championships in Athletics, other events hosted by the International Association of
Athletics Federations (IAAF), and other events.
In terms of the domestic business, Dentsu is placing top priority on legal compliance
(e.g., reducing working hours) and is looking to create a structure that maintains
quality by investing in tools for project screening and infrastructure. Dentsu Labor
Conditions Reform headquarters was established in November 2016. Several work-
style reform disciplinary measures were announced during 2017. Management plans
to complete these reforms during FY2018 and intends to return to normal operations
in FY2019.
Investment Thesis
We remain positive on Dentsu based on the following reasons: (1) we expect the US
operation to drive the recovery in overseas organic growth on a major contribution
from new business acquisition by the Merkle M1 platform launched last year; (2) we
think parent guidance for flat top-line growth looks overly conservative in view of
recent ad market conditions and impending contributions from major sporting events.
Although the stock does not look highly undervalued compared with rivals based on
FY2018, due to expansion of domestic and overseas investment, if organic growth in
overseas business recovers more strongly than at rivals in FY2018, we think that the
stock will gradually price in an FY2019 profit recovery scenario, accompanied by
substantial upside owing to narrowing of the valuation gap with rivals.
Outlook
While management doesn’t disclose a target for the overall organic growth rate, it
discloses an organic growth target of 3-5% YoY for the international business. The
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US operation has been gradually rebounding from a 2Q FY2017 bottom, and we

expect it to drive the recovery in overseas organic growth. We expect profits to
decline in FY2018 as Dentsu increases domestic and overseas investment by more
than we anticipated, but we also think guidance is overly conservative and see
substantial scope for an overshoot, especially in the Japan business despite ongoing
spending on labor environment reforms. Dentsu plans to maintain the dividend of
¥90 per share in FY2018, for shareholder payout.
Valuation
Our Dec 2018 price target of ¥5,800 is based on DCF. We assume WACC of 5.9%
(market risk premium: 5.5%) and terminal growth rate of 0%. Our price target time
frame is through December 2018. Our price target equates to an EV/EBITDA of 8.1x
and P/E of 16x based on our FY2018 adjusted EPS estimates, and an EV/EBITDA of
7.3x and P/E of 13x based on our FY2019 adjusted EPS estimates.

Upside Scenario
 Faster than expected recovery in domestic business.
 Greater than expected growth acceleration overseas.
 Greater than expected improvement in profitability of domestic business.
 Expansion of shareholder returns.
Downside Scenario
 Greater than expected contraction of advertising budgets by big advertisers.
 Greater than expected improvement in profitability of domestic business.
 Greater than expected share deterioration in domestic market due to work-style
reform.
Figure 103: Gross Profits by Geography, 2017 Figure 104: Non-consolidated Revenues by Segment, 2017
Creative
12%
Americas
24% Marketing TV
Japan Promotion 42%
41% 14%
EMEA
21%
Others
25%
APAC Internet
14% 7%
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Advertising Agencies Digital Agencies Media Agencies Technology Trading Desk
Mcgarrybowen CCI DentsuX ISID Amnet
Carat Isobar Dentsu Tec
MKTG iProspect Amplifi
Vizeum Merkle
Dentsu Digital
360i
Figure 106: Key Management Figure 107: Key Clients (Non-Consolidated)

Executive Position Japan Overseas
Toshihiro Yamamoto President & CEO Santory General Motors
Shoichi Nakamoto Senior Executive Vice President & CFO KDDI Microsoft
Yoshio Takada Executive Vice President Kao AB InBev (from this year)
CEO of Dentsu USA & P&G P&G
Tim Andree
Executive Vice President NTT Mondelez
CEO of Dentsu Aegis Network & Kirin Coca-cola
Jerry Buhlmann
Executive Officer of Dentsu Inc. Asahi Toyota
Nick Priday CFO of Dentsu Aegis Network Coca-cola Shiseido
Source: Company reports. Honda Adidas Reebok
Figure 108: Organic revenue growth, 2015-2017 Figure 109: Operating margin, 2014-20E
12.0% 10.6% 9.5%
30.0%
IFRS OP Adj. OP Adj. OP (International) Adj. OP (domestic)
8.0% 6.2% 6.5%
5.1% 25.0%
4.2% 3.9% 3.9%
4.0% 2.7% 2.8%
20.0%
0.0% 15.0%
-4.0% -2.1% 10.0%
-4.8%
-8.0% 5.0%
Mar-Q
Jun-Q
Sep-Q
Dec-Q
Mar-Q
Jun-Q
Sep-Q
Dec-Q
Mar-Q
Jun-Q
Sep-Q
Dec-Q
0.0%
2014 2015 2016 2017 2018E 2019E 2020E
2015 2016 2017
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Figure 110: Acquisitions Figure 111: Balance sheet and cash flow position, 2017
¥ in millions Net debt/ EBITDA* 0.8x
2002 ¥1,218 FCF ¥113.8b
2003 2,317 Dividend ¥90
2004 55 Source: Company data, Bloomberg.
2005 2,546
2006 2,591
2007 2,098
2008 15,797
2009 556
2010 14,737
2011 16,235
2012 29,491
2013 319,380
2014 35,528
2015 41,996
2016 170,419
2017 67,299
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Figure 112: Comparables

$, ₤, and € in millions, except per share data
EBITDA EPS EV/EBITDA P/E
Company 3/9 Price EV 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E DIV Yield
Interpublic Group $23.93 $10,761 $1,276 $1,340 $1.73 $1.88 8.4x 8.0x 13.9x 12.7x 3.5%
Omnicom $73.73 $18,975 $2,439 $2,528 $5.68 $6.05 7.8x 7.5x 13.0x 12.2x 3.3%
WPP GBp 1,204.5 £20,747 £2,519 £2,607 GBp 119.0 GBp 125.0 8.2x 8.0x 10.1x 9.6x 4.9%
Publicis € 57.26 € 14,690 € 1,725 € 1,792 € 4.52 € 4.71 8.5x 8.2x 12.7x 12.2x 4.0%
Dentsu JPY 4,635.00 JPY 1,454,922.32 JPY 182,700 JPY 203,300 JPY 372.39 JPY 432.37 8.0x 7.2x 12.4x 10.7x 1.9%
Average 8.0x 7.5x 12.6x 11.1x 3.5%
S&P 500 2,786.6 17.8x 16.2x

MSCI Europe 127.4 14.5x 13.4x
Source: Company reports, Bloomberg, J.P. Morgan estimates as of 3/9/2018. Note: Dentsu market cap in billions . Adjusted EPS(Fully diluted) is used for Dentsu.
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Appendices
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Appendix I: Billings
An advertising account is always reported in terms of billings, not revenues. Billings
represent the advertiser’s total advertising budget for that particular product.
Historically, the industry standard was that 15% of this budget went to the agency
that provided the creative work. The media buyer (the agency that negotiated the
pricing and placement of the advertisement to the media) would be allocated
approximately 4% of the budget for that job. The move to a fee-based compensation
structure has made the translation from billings to agency revenues more complex,
and pressure on fees has pushed down the revenue take on billings over the years.
A shorthand way of determining the annual revenue impact to an agency from a

client’s budget is to take 10-12% of a budget for a creative account and 1-3% of the
budget for media buying services. (As the price of media increased significantly in
the 1990s, the agency’s creative fee moved to 12% from 15% of a typical budget.)
This is an estimate, but it generally provides a good approximation of an agency’s
fees. For example, we estimate that the agency that does the creative work for an
account valued at $100 million would likely generate approximately $10-12 million
in annual revenues from that advertiser. If it was a media account (the agency is
simply responsible for the brokerage of the media business), it would be worth $2-3
million to the agency. If it was both a creative and a media account, it would be
worth about $12-15 million. The rest of the dollars ($85-88 million in this example)
goes to the medium itself (TV, radio, etc.).
Therefore, when a trade magazine writes about new business won or lost, the dollars
being discussed are generally always referred to in terms of billings. The actual
impact to an agency’s revenue line is typically only a fraction of the amount quoted.
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Appendix II: Working Capital Changes

Because advertising agencies serve as the pass-through vehicle for substantial sums
of billings money, cash flows can fluctuate greatly. Specifically, an ad agency’s
accounts receivable, expenditures billable to clients, prepaid expenses, and accounts
payable balances shift from quarter to quarter (and even from week to week and day
to day).
For this reason, we prefer to exclude working capital changes in our net free cash
flow calculation as the quarterly shift in working capital does not necessarily provide
a clear picture of an advertising and marketing services company’s ongoing cash
position.
The following is a summary of the working capital changes quarter by quarter at

Omnicom and Interpublic during the past couple of years, which exemplifies the
positive-negative swings due to receivables and payables. Historically, Interpublic’s
working capital swings were more dramatic, but as it has progressed through its
turnaround, we believe it has done a very good job of improving its capital
management.
Figure 113: Working Capital Changes at Omnicom and Interpublic, 2016-17

$ in millions
Q1,16 Q2,16 Q3,16 Q4,16 Q1,17 Q2,17 Q3,17 Q4,17
OMC -807 -320 343 1107 -551 -578 -199 1676
IPG -690 -128 318 86 -439 24 -198 583
Source: J.P .Morgan estimates, company reports.
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Appendix III: Glossary

Account Consolidation Concentration of advertising budgets at fewer agencies by advertisers. Companies
have trended in recent years toward using fewer agencies for advertising of their
different product lines in an attempt to improve brand cohesion, achieve integration
of advertising and marketing service efforts, and gain greater pricing concessions
over agencies.
Acquisition Growth Growth through revenues of acquired companies. As advertising and marketing
services companies typically acquire smaller companies on a regular basis,
acquisition growth is an important component of overall growth.
Advertising and Marketing A holding company that includes one or more advertising agencies and an assortment
Services Company of marketing services companies. The largest advertising and marketing services
companies serve as parents to as many as 1,500 separate businesses.
Average Frequency In TV and radio ratings, the average number of times the target is exposed to the
message.
Billings An advertiser’s total advertising budget, which is handled by its advertising agency.
Advertisers allot a total dollar amount to advertise their product, and advertising
agencies serve as the pass-through vehicle for these dollars, taking a share of the
billings as agreed with the advertiser and passing the rest on to the media on which
the ad is placed. For creative work, agencies typically take approximately 12% of the
total billings as a fee or commission. For media buying work, agencies typically take
approximately 4% of total billings. Billings is often used as a measurement of an
advertising agency’s size.
Client Conflict Many advertisers have historically maintained client conflict policies that preclude
them from working with an ad agency that also manages the advertising of a
competing product. One of the goals of the holding company structure is to provide
more than one advertising agency such that competing product accounts can be
housed at different agencies within the holding company.
Consumer Packaged Goods Manufactured consumer products, including food and personal care products.
(CPG) Referred to as fast-moving consumer goods (FMCG) in Europe.
Cost-Plus Compensation Fee-based compensation system whereby clients pay advertising agencies the total
costs involved in their work plus a profit margin agreed upon during contract
negotiations. As opposed to commission-based compensation, cost-plus
compensation tends to be recognized earlier in the work process, when the service is
rendered, whereas commission-based compensation is recognized when the
advertising appears on a specific medium, which is after the agency makes sizable
expenditures.
CPM
Short for cost per thousand (“M” being 1,000 in Roman numerals), the cost per 1,000
viewings of an advertisement. CPM = (Media Cost/Impressions) x 1,000. Used as a
standard across advertising media.
Creative Advertising The conception and production of advertisements.
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Customer Relationship Broadly speaking, marketing services that help an enterprise create, develop,
Management (CRM) manage, and enhance a customer relationship. Service offerings include direct
marketing, market research, and promotional marketing.
Direct Marketing Direct communication with a targeted population segment or a specific customer.
Direct marketing involves maintenance of customer databases and the sending of
direct mail or e-mail to targeted population segments (such as a certain age group,
geographic location, or ethnicity) or to previous customers, as well as telemarketing
and response analysis.
Direct-to-Consumer (DTC) The marketing of pharmaceuticals directly to the end user rather than through trade
marketing to health care professionals.
Display Advertising Also known as banner ads, these are graphics placed on websites in prescribed sizes,
just as a print ad appears in a newspaper.
Earn-outs Common form of paying for a business acquisition, in which the agency pays a
portion of the purchase price (often 50%) on the day of the acquisition, with an
agreement to pay the remainder of the purchase price over several years (often five
years), contingent on the acquired company meeting certain performance objectives.
Entertainment Marketing Advertising and marketing of personalities in film, music, and other fields of
entertainment and use of such fields of entertainment as a medium for advertising.
Entertainment marketing includes music licensing, movie product placements, and
sponsorships of products by famous personalities.
Health Care Marketing Targeted marketing by pharmaceutical companies and health care providers to the
medical community as well as to consumers. Service offerings include medical
detailing (describing the specifics of new drugs to doctors and pharmacists),
educational services, direct mail programs, and managed care consultancy.
Incentive-Based Compensation A hybrid of commission and fee-based compensation whereby clients pay their
advertising agencies an agreed-upon fee plus commissions if the advertisements
created improve the client’s product’s performance.
Interactive Development of advertising through interactive media, primarily the Internet, and
Advertising/Marketing marketing through e-mail. Interactive marketing is often offered in conjunction with
other advertising and direct marketing services and includes consulting and strategic
planning work in this medium, also referred to generally as online advertising and
marketing.
Marketing Services As opposed to traditional media advertising, other forms of marketing that include
direct mail, market research, promotions, public relations, and specialized forms such
as health care, multicultural, entertainment, and sports and event marketing.
Market Research Collection and analysis of data in order to determine factors that influence
customers’ purchasing patterns. Market research involves surveys and interviews
from population samples, combined with an understanding of population
demographics and historical consumption of products and services. Market research
can further include projections of consumer purchasing behavior based on these
findings.
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Media Buying Purchasing of advertisement space in the various media (TV, radio, print, etc.).
Media buying involves negotiations between specialized media buyers and the media
outlets.
Media Planning Research and evaluation of advertising placement strategies as a preliminary step in
developing creative advertising.
Net New Business New business won from existing or new clients, netted against business losses from
existing clients.
Organic Growth Growth from existing clients within the advertising agency and from new business
wins as opposed to growth through acquisitions. There are certain variations in the
definition of organic growth—Omnicom, for instance, includes in its organic growth
a calculation of incremental revenue from newly acquired companies while under
Omnicom’s ownership. Most other advertising and marketing services companies
only claim organic growth from businesses that they have acquired and recorded on
their books for one full fiscal year.
Promotional Marketing Incentives offered to potential customers that heighten consumers’ awareness and
encourage the purchase of a product, including price discounts, free samples, and in-
store advertising of products as well as trade promotions to groups such as
wholesalers and retailers.
Public Relations (PR) Communication of a company’s or organization’s message or image to the public.
Reach In TV and radio ratings, the percentage of the target exposed to the message at least
once. The number of different homes/people exposed to at least one program or
commercial across a stated period of time. All homes are counted only once;
maximum reach therefore is 100% of TV or radio households or audience.
Remnant Broadcast advertising space that is not sold in the upfront or scatter markets. It often
consists of inventory at odd hours and is sold in periods as short as a week in
advance.
Scatter Also known as spot sales, consisting of broadcast advertising space sold in the short
term (typically a few weeks to a few months in advance) and usually at higher rates
than in the fixed-rate upfront market.
Specialty/Other Communications General grouping within marketing services of focused marketing efforts targeting
specific industries, demographic groups, or media. Some of the work involves
traditional advertising, but in a specialized industry or targeted to a specific
demographic group. General subgroups include health care, multicultural, interactive,
entertainment, and sports and event marketing.
Sports and Event Marketing Use of sports personalities in advertising and marketing as well as the placement of
advertising at sporting events. Event marketing also includes the planning and
execution of events such as corporate functions, conferences, and sporting events.
TV Rating Percentage of persons or homes that have access to a TV that are tuned to a particular
program. One rating point equals 1% of the total potential household or demographic
audience. Therefore, the rating is the percentage of a population viewing a TV
program during the average minute.
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Upfront Selling of advertising space on network TV prior to the 12-month network season
that begins in September. Advertising space is sold at fixed rates in advance, and
advertisers have a schedule of options to cancel their commitments. The upfront
market takes place from May to July, and networks typically sell about 75% of their
ad space during this period.
VOD Video on Demand—an interactive system through which users can stream or
download individual video programs from a provider such as a broadcast or cable
network, often priced per program. VOD enables more personal consumption of
media and can be advertising free.
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Companies Discussed in This Report (all prices in this report as of market close on 12 March 2018)
Dentsu (4324) (4324.T/¥4730/Overweight), Interpublic Group of Companies (IPG/$23.73/Overweight), Omnicom Group
(OMC/$73.45/Overweight), Publicis Groupe (PUBP.PA/€57.50/Overweight), WPP Group (WPP.L/1195p/Overweight)
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
 Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
securities issued by Interpublic Group of Companies, Omnicom Group, WPP Group, Publicis Groupe, Dentsu (4324).
 Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Interpublic
Group of Companies within the past 12 months.
 Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Dentsu
(4324).
 Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Interpublic Group of
Companies, Omnicom Group, WPP Group, Publicis Groupe, Dentsu (4324).
 Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment
banking clients: Interpublic Group of Companies, Omnicom Group, WPP Group.
 Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Interpublic Group of Companies,
Omnicom Group, WPP Group, Publicis Groupe, Dentsu (4324).
 Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and
the services provided were non-securities-related: Interpublic Group of Companies, Omnicom Group, WPP Group, Publicis Groupe,
Dentsu (4324).
 Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services
from Interpublic Group of Companies, Omnicom Group, WPP Group.
 Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Interpublic Group of Companies, Omnicom Group, WPP Group, Dentsu (4324).
 Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Interpublic Group of Companies, Omnicom Group, WPP Group, Publicis Groupe, Dentsu (4324).
 Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Interpublic
Group of Companies, Omnicom Group, WPP Group, Publicis Groupe, Dentsu (4324).
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and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any
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originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without
limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or
compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and
its affiliates.
 Gartner: All statements in this report attributable to Gartner represent J.P. Morgan's interpretation of data opinion or viewpoints
published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication
speaks as of its original publication date (and not as of the date of this report). The opinions expressed in Gartner publications are not
representations of fact, and are subject to change without notice.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgan–covered companies by visiting https://www.jpmm.com/research/disclosures, calling 1-800-477-
135
(1-212) 622-1896 12 March 2018
0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Interpublic Group of Companies (IPG, IPG US) Price Chart
40
32
OW $26 OW $27 OW $28 OW $27

Date Rating Share Price Price Target
24 ($) ($)
Price($)
19-Nov-15 OW 23.30 26.00
22-Apr-16 OW 23.43 27.00
16
07-Oct-16 OW 22.21 28.00
24-Oct-17 OW 20.63 27.00
8
0
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
15 15 15 15 16 16 16 16 17 17 17 17 18
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jan 29, 2002.
Omnicom Group (OMC, OMC US) Price Chart
136 OW $89
119 OW $84
102
OW $85 OW $90 OW $92 OW $90 Date Rating Share Price Price Target
($) ($)
85
15-Oct-15 OW 71.71 85.00
Price($)
68 14-Dec-15 OW 73.98 84.00
21-Mar-16 OW 81.48 89.00
51
19-Apr-16 OW 84.74 90.00
34 07-Oct-16 OW 83.06 92.00
18-Apr-17 OW 83.50 90.00
17
0
15 15 15 15 16 16 16 16 17 17 17 17 18
136
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(p) (p)
WPP Group (WPP.L, WPP LN) Price Chart
15-Sep-15 OW 1348 1800
3,069 29-Oct-15 OW 1467 1785
OW 1,760p OW 1,880pOW 1,975p OW 2,102p OW 1,900p OW 1,758p 08-Dec-15 OW 1514 1760
2,728
09-Feb-16 OW 1338 1770
OW 1,785p OW 1,835p OW 1,935p OW 2,032p OW 1,969p OW 1,750p
OW 1,620p
2,387 08-Mar-16 OW 1547 1835
29-Apr-16 OW 1628 1880
2,046 OW 1,800p OW 1,770p OW 1,930p OW 2,075pOW 1,997p OW 1,697p OW 1,747p
27-Jun-16 OW 1525 1930
1,705 18-Jul-16 OW 1666 1935
Price(p)
1,364
24-Aug-16 OW 1747 1975
04-Nov-16 OW 1695 2075
1,023
29-Nov-16 OW 1706 2032
682 13-Jan-17 OW 1868 2102
06-Mar-17 OW 1720 1997
341
19-Apr-17 OW 1738 1969
0 18-Jul-17 OW 1553 1900
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 01-Sep-17 OW 1420 1697
15 15 15 15 16 16 16 16 17 17 17 17 18
20-Nov-17 OW 1267 1750
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. 06-Dec-17 OW 1311 1758
08-Jan-18 OW 1329 1747
01-Mar-18 OW 1280 1620

(€) (€)
21-Apr-15 OW 76.81 87.60
15-Sep-15 OW 61.58 92.00
Publicis Groupe (PUBP.PA, PUB FP) Price Chart 05-Nov-15 OW 58.97 79.00
08-Dec-15 OW 59.10 69.00
OW €69 OW €73 OW €75 OW €78 OW €78 OW €79

OW €81.3
09-Feb-16 OW 52.04 68.00
119
12-Feb-16 OW 55.62 69.00
OW €79 OW €69 OW €76
OW €79 OW €79
OW €83 OW €73 OW €77.4 21-Mar-16 OW 61.07 73.00
102
14-Apr-16 OW 63.06 72.00
85 OW €87.6 OW €92 OW €68
OW €72 OW €76 OW €81
OW €82 OW €74OW
OW€79.9
€78.9 08-Jun-16 OW 61.80 76.00
27-Jun-16 OW 60.66 75.00
Price(€) 68
18-Jul-16 OW 63.49 76.00
25-Jul-16 OW 66.24 79.00
51
28-Oct-16 OW 62.42 78.00
34 13-Jan-17 OW 65.60 81.00
06-Feb-17 OW 62.59 79.00
17 09-Feb-17 OW 63.08 78.00
28-Feb-17 OW 63.63 82.00
0
19-Apr-17 OW 63.62 83.00
15 15 15 15 16 16 16 16 17 17 17 17 18 06-Oct-17 OW 60.25 74.00
24-Oct-17 OW 57.40 73.00
Initiated coverage Sep 06, 2002. 29-Nov-17 OW 56.00 79.00
08-Jan-18 OW 55.60 79.90
02-Feb-18 OW 55.44 77.40
08-Feb-18 OW 57.94 81.30
28-Feb-18 OW 62.04 78.90
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Dentsu (4324) (4324.T, 4324 JT) Price Chart
11,331
N Y6,500
10,072
NR
8,813 Date Rating Share Price Price Target
(Y) (Y)
7,554 N Y7,100 OW Y6,900
OW Y5,900 NR OW Y5,500 OW Y5,800
28-Oct-15 N 6750 7100
6,295 09-Jan-16 NR 6250 --
Price(Y)
21-Jan-16 N 5690 6500
5,036
08-Mar-16 OW 5390 6900
3,777
27-Jun-16 OW 4725 5900
2,518 15-Dec-16 NR 5460 --
06-Sep-17 OW 4470 5500
1,259
16-Jan-18 OW 4900 5800
0
15 15 15 15 16 16 16 16 17 17 17 17 18
Initiated coverage Apr 22, 2002.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia and ex-India) and U.K. small- and mid-cap equity research, each stock’s expected
total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it
does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P.
Morgan’s research website, www.jpmorganmarkets.com.
Coverage Universe: Quadrani, Alexia S: 21st Century Fox (FOXA), AMC Networks (AMCX), CBS Corporation (CBS), Discovery
Communications (DISCA), Disney (DIS), Gannett Company (GCI), Interpublic Group of Companies (IPG), LSC Communications
(LKSD), Lamar Advertising Co. (LAMR), Lionsgate Entertainment (LGFa), MSG Networks (MSGN), National CineMedia, Inc.
(NCMI), New York Times Company (NYT), News Corp (NWSA), Omnicom Group (OMC), Outfront Media Inc (OUT), Scripps
Networks Interactive (SNI), SeaWorld Entertainment (SEAS), Sinclair Broadcast Group (SBGI), TEGNA (TGNA), Time Warner
(TWX), Viacom (VIAB)
Kerven, Daniel R: Atresmedia (A3M.MC), ITV (ITV.L), M6 (MMTP.PA), Mediaset (MS.MI), Mediaset España (TL5.MC), Pearson
(PSON.L), ProSiebenSat.1 (PSMGn.DE), RELX NV (RELN.AS), RELX PLC (REL.L), RTL (AUDKt.BR), TF1 (TFFP.PA), Ubisoft
(UBIP.PA), Vivendi (VIV.PA), WPP Group (WPP.L), Wolters Kluwer (WLSNc.AS)
Diebel, Marcus: Auto Trader (AUTOA.L), Axel Springer (SPRGn.DE), Delivery Hero (DHER.DE), Entertainment One (ETO.L),
HelloFresh (HFGG.DE), Informa (INF.L), JCDecaux (JCDX.PA), JUST EAT (JE.L), Ocado (OCDO.L), Publicis Groupe (PUBP.PA),
Purplebricks Group (PURP.L), Rightmove (RMV.L), Rocket Internet SE (RKET.DE), Schibsted (SBSTA.OL), Scout24 (G24n.DE), Sky
PLC (SKYB.L), Ströer (SAXG.DE), Takeaway.com (TKWY.AS), UBM (UBM.L)
Mori, Haruka: ASKUL (2678) (2678.T), Akatsuki (3932) (3932.T), BANDAI NAMCO Holdings (7832) (7832.T), CAPCOM (9697)
(9697.T), CyberAgent (4751) (4751.T), DeNA (2432) (2432.T), Dentsu (4324) (4324.T), Gree (3632) (3632.T), Gurunavi (2440)
(2440.T), Hakuhodo DY Holdings (2433) (2433.T), KONAMI HOLDINGS (9766) (9766.T), Kakaku.com (2371) (2371.T), LINE (3938)
(3938.T), Nexon (3659) (3659.T), Nintendo (7974) (7974.T), Oriental Land (4661) (4661.T), Rakuten (4755) (4755.T), Recruit Holdings
(6098) (6098.T), SQUARE ENIX HOLDINGS (9684) (9684.T), Sega Sammy Holdings (6460) (6460.T), Yahoo Japan (4689) (4689.T)
138
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J.P. Morgan Equity Research Ratings Distribution, as of January 02, 2018

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 45% 43% 12%
IB clients* 53% 50% 35%
JPMS Equity Research Coverage 44% 46% 10%
IB clients* 70% 66% 54%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com. For material information about the proprietary
models used, please see the Summary of Financials in company-specific research reports and the Company Tearsheets, which are
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Global Equity Research

 Comprehensive overview of the advertising industry. In this primer we examine Media

Year Big 4 S&P 500 MXEU

Figure 1: Aggregate Agency Organic Growth

Total North America International

A modest number of other factors continue to weigh as well. We do believe there is

Agency Organic Growth and Margins in 2017

Figure 2: Ad Agency Aggregate Organic Growth Historical by Year

5.0% 4.4% 4.4%

Figure 3: Ad Agency Aggregate Organic Growth Historical by Quarter

Historical Agency Organic Growth Rates

-1.0% -0.1% 0.0%

Figure 8: Agency Operating Margins

OMC IPG WPP PUB

Figure 9: PUB organic growth performance relative to peers

Table 2: FMCG companies under activist pressure

Table 3: Big 4 Agencies Revenue by Vertical

-1% 28% 0% 9.0%

Recent FMCG commentary suggests a sustained focus on cost efficiencies and

Encouragingly, we’ve seen recent commentary from FMCGs emphasizing the

“We’ve maintained our commitment to advertising and trade promotional spend in

Beyond FMCG companies, recent forward commentary on advertising spend has

examining transcripts from calendar year-end calls and conferences regarding

The uptick in holding company organic growth in 2014-2015 coincided with an

Digital Absolute Growth ($m) Digital Y/Y % Growth

Source: Zenith, J.P. Morgan estimates.

e-commerce transformation) or has since become more commoditized. How much of

Other Structural Concerns Are Largely Overdone

Agencies are facing limited competition from non-traditional players

Transparency is less of an issue than headlines imply

We do not believe transparency is an automatic negative for agencies, and it could

Marketers still aren’t going to FB and Google directly

Mediapalooza 2.0 Could Lead to Diverging Performance

review is a near-term risk factor), we think M1 is making it increasingly competitive

Table 4: Top 4 Ad agencies: Volume of net account wins

Table 5: Top 4 Ad agencies - Volume of net account wins

Mediapalooza 2.0 could create a divergence in performance

Table 6: Pending Large Account Reviews

Source: Company reports; J.P. Morgan; media reports.

Solid Global Growth This Year, Expected Up 4.2%

 U.S. We expect ad budgets in 2018 to increase on a reported basis, boosted by

Positives for the Stocks

Mixed organic growth trends expected in 2018, though better in aggregate. We

Risks for the Stocks

 Ad growth depends on economic strength. Below-average economic growth in

Summary Outlook for Individual Stocks

This report is an overview of the advertising and marketing services industry. We

Advertising is a critical revenue stream for most media companies, including

In this section, we provide an overview of the advertising and marketing services

 Zenith. Part of Publicis, Zenith tracks global advertising expenditures in more

 Kantar Media. Formerly TNS Media Intelligence before being acquired by

Figure 17: U.S. Advertising Growth Projections, 2015-18E

Advertising Relative to GDP

New media has altered traditional spend patterns

Agency revenue performance lags media spend

Figure 19: Change in Ad Expenditures vs. Nominal GDP 1970-2018E

Recession Ad Spending %chg GDP %chg

Figure 20: Advertising Spending as % of Nominal GDP, 1970-2018E