Independent Digital Agencies - Game Over

As smaller independent digital agencies get gobbled up by larger networks, what does this mean for the industry and how are the independent agencies coping?

29 Jun, 2015 by admin

As smaller independent digital agencies get gobbled up by larger networks what does this mean for the industry and how are the independent agencies coping?

 

By ALIEFYA VAHANVATY

 

The industry is rife with speculation about the impending buyout of Foxymoron. Although Foxymoron a seven-year-old agency, did not tell us much about the deal, it admitted to have been actively looking to get acquired.

 

Komli Media too, having distinguished itself from other digital agencies by insisting it is an ‘ad-tech’ company, has in the past five months or so been in intense talks with at least three e-commerce firms, including Snapdeal and Paytm for an acquisition. Its tech capabilities in the digital advertising space haven’t charmed either of the firms, and while Komli didn’t let us in on details, media reports claimed the talks fizzled out because of differences in valuation.

 

The past two decades, have seen the rise of several digital agencies offering specialized marketing services to brands and this new branch of marketing is completely different from what mainline agencies offered thus far. By the end of the decade, as social media became increasingly popular, the scope of digital marketing widened considerably. Brands started gravitating towards creating strong online footprints and today in 2015, digital marketing has become a central piece of brand marketing strategy.

 

“Digital has been around for at least a decade now but media agencies especially in India largely ignored it. So independent digital agencies cropped up and they started to cater to clients and met a market requirement. Digital, became mainstream for certain industries, BFSI, for example,” explains Amar Deep Singh, Co-founder and CEO of Interactive Avenues, IPG Mediabrands. Digital, he says, was a sales channel and its budgets would come from sales budgets and not from marketing budgets! “Some of them (the industries) began doing tons of business through digital and their budgets grew as much as their offline budgets. That gave digital agencies an opportunity to size their business,” he adds.

 

“It’s not about giving up; but about joining hands and scaling up”

 

The playing field so far

It’s only in the past 18 months or so that digital has clearly beaten Outdoor and Radio to become the number three medium and may even overtake Print and challenge TV in a few years. And finally, the traditional agencies are waking up to the fact and debating whether to build this expertise in-house or look at inorganic growth by acquiring some of the independent agencies. And in the last few years, the Indian digital industry has seen a number of ‘desi’ digital agencies being acquired by foreign biggies. For example, in April 2012, Publicis Groupe acquired Mumbai-based digital agency Indigo Consulting to make it operate as a unit within the Leo Burnett Group in India. The acquisition run was followed by WPP-owned JWT Singapore acquiring a majority stake in Hungama Digital Services.

 

This has largely been as a result of the tectonic shift in the Indian online landscape in the past couple of years. There are 234 million internet users in India now according to a June 2014 report by IAMAI (Internet And Mobile Association of India) that makes it one of the top three internet markets internationally.

 

Moreover, India is one of the top markets for mobile phones worldwide. With millions of mobile subscribers and rapidly increasing mobile internet, India provides a great opportunity for marketers. The size of digital advertising in the overall advertising pie increased from Rs 1750 crore in 2011-12 to Rs 2260 crore in 2012-13. According to estimates by Group M Digital Advertising spends will account for Rs 4,661 crore of the Rs 48,977 crores estimated ad spend for 2015.

 

Today, industry experts believe that the digital advertising industry has come into its own. Young digital agencies are now being acquired by larger advertising companies as a part of client and talent acquisition. For many of the independent digital agencies, in the meanwhile, this is an opportunity for investors to exit. “All of these agencies are chasing everything and they are struggling to reach a scale. They are all profitable at some level but to really scale a viable business, to work across three or four cities, to be able to hire more talent to move up the ecosystem is a struggle beyond a point. And then the attraction of tagging into a network that is paying a few multiples of their earnings is always attractive to an entrepreneur,” says Digital & Marketing Advisor, Ashok Lalla.

 

Size, scale and beyond

From early 2014 there has been a spike in networks acquiring well-known digital agencies in the country. The noted ones were Social Wavelength acquisition by JWT, 22 Feet acquisition by DDB Mudra, and Law & Kenneth acquisition by Publicis. In January this year, WATConsult got acquired by the Indian unit of Japanese advertising group Dentsu for a valuation of anywhere between Rs 180 crore and Rs 200 crore, according to industry sources.

 

With digital growing in the country, acquisitions like these are good for the market as more and more  network agencies realize that they need more firepower in terms of specialist digital and social media agencies, says Shamsuddin Jasani, Managing Director, Isobar India. “Also, the scale of operations has increased so much that clients require large teams to manage their accounts and this may or may not be possible by a single agency alone. So it’s not necessarily a gap which is being filled or a specialty being acquired, sometimes it’s also that the scale of business is such that more than one agency is required to meet the business requirements,” he adds. “The larger networks have consumer insight, they can invest in competitive research, they can build big ideas that are media agnostic. The smaller agencies are not able to do these varied things,” explains Lalla.

 

Santosh Padhi, Co-founder, Taproot India (a full-service agency under the Dentsu umbrella) furthers this thought. “Digital is the future of the industry. Five or even two years down the line, it will be the primary medium. And, if it is the future, then I would definitely like to ready for the future and invest in that future. And so if I were a large network and looking to expand my scope, a digital agency would be the obvious choice. And this is what we are seeing today - a clear indication of future readiness of the marketplace,” he says.

 

Acquired advantage

Getting acquired by networks has its own pros and cons. Networks bring the combined knowledge and skill set which an independent agency can’t manage but independent decision making and investing in products, are some of the areas that are compromised post-acquisition. “After the acquisition by ZenithOptimedia Group, we have been able to expand our offerings into other areas of digital marketing given the higher level of investments we have been able to do in the business. Our processes have become much more streamlined with further investment in technology. Furthermore, backed by Performics’s strong global expertise and the might of ZenithOptimedia Group client roster and brand name, we have been able to accelerate our client acquisition agenda multi-fold,” says Tanmay Mohanty, MD, Resultrix and Performics, India.

 

In an increasingly connected world, large brands require agencies that can reach every corner of the world, harness the power of new digital technologies, create multiplatform content, leverage mobile advertising and optimize media-buying algorithms.

 

Sanjay Mehta, Co-founder and Joint-CEO, Social Wavelength, cites his own instance. “Access to connections, people and knowledge has been a key benefit of the acquisition for us. We had always seen this potential but with our limited reach and resources this was difficult for us, but now with the JWT partnership and being part of the larger network, we have this access. Our services and capabilities have a global reach today and we have begun working with international clients. Advantage two, is that within India, JWT group has some of the biggest and best brands as clients and we have gradually started going with JWT for pitches. With Social Wavelength, the JWT offering is more complete and more wholesome. It benefits JWT, the clients and obviously us as well, since it opens up opportunities, which would have been tough to come across as an independent agency,” he says.

 

That said, being part of a joint family comes with its set of rules and structures – the young must listen to the elders! Talking of the structures and practices that come with being part of a larger firm, Rajiv Dingra, CEO, WATConsult, says, “Yes, there is a reporting structure and there is a plan of where our spending should go and where are we planning to earn our revenue from. The accounting and finance has to be completely transparent. Luckily, we are an agency that knows how to do well which is the main reason we got acquired in the first place. Network agencies interfere only when things go wrong. And if things are going wrong, you are certainly better off being part of a larger network than being independent.”

 

There are reasons for smaller agencies to withdraw from these deals too. The ones that are built on a fundamentally strong foundation do not want to easily give up on their culture and vision. These agencies are equally careful about diving into the right kind of deal. “A larger group especially ones that are more firmly entrenched in this market will look for any additional acquisition that will give them an additional skill set, that will give them additional scale and will be green in terms of overall EBITDA. While we may tick all of those boxes, the other side of it, is that, they may not necessarily let us retain our identity. It’s one thing to sell out, but it’s another thing to be absorbed,” states Roopak Saluja, Founder and CEO, The 120 Media Collective.

 

“The kind of conversations we would like to have would be where there was a win-win situation. We’ve always been focussed on wanting to play this game internationally, for example and one of the benefits we would look for in any such relationship would be the ability to scale up internationally. And we would definitely want to maintain control,” he adds.

 

An independent view

Digital as a market has grown tremendously over the last few years and so have the acquisitions – bigger networks acquiring digital agencies at a time when Digital is still evolving, leaving a handful of independent agencies in the market who are surviving simply because of their cutting-edge work. One of them is the 12-year-old Mumbai based IBS which till date has opted to stay as an independent agency. For Sabyasachi Mitter, Founder and MD, IBS, a merger with another agency is out of the question. “Being independent gives us the freedom to do whatever we feel like. Tomorrow if we want to shut down a particular division or start a new division, we don’t need anyone’s sanction. It gives us flexibility and the ability to think on our feet and go where we believe the market is heading. We are able to be ahead of the curve rather than be dictated by it. For us, the hard part is over. Now it’s more about consolidating and building upon what we have done over the last 12 years. Selling out is not an option and figures nowhere in our plans for our future,” he says.

 

For Saluja, it’s not the right time yet. “There are a couple of factors to consider. One, what is the   objective of the entrepreneur behind the company? A lot of players who may have sold out perhaps haven’t really formed, or don’t see themselves having, a point of sustainable differentiation and competitive advantage. Presently, we are well positioned to evolve into an integrated communications player with digital at its core. So we will see this year a situation where we are the primary communications partner for some of the brands that we work with and not necessarily playing a supporting role to an ATL agency,” says Saluja. “Why are we not selling out? Are we close to it? Currently we are definitely not looking at it because we are self-contained in a way as a company that creates, produces, distributes and monetises content. This doesn’t preclude us from having strategic partnerships and alliances and we are in various conversations with various international players to see what can add value and allow us to fulfil our objectives going forward and it doesn’t mean in any shape or form that we lose our independence,” he adds.

 

Integrated solutions or standalone offering?

One of the reasons why networks are acquiring digital agencies in India is also to boost their offerings to clients with a 360-degree approach. Singh of Interactive Avenues, says, “The number of clients that standalone agencies will be able to offer their services to will keep coming down because no client   wants the additional headache of dealing with yet another agency. If they can get digital from their existing media and creative agency, why would they want to look outside? The market for the independent agencies is definitely going to start shrinking if it hasn’t already. We have seen this with clients at IPG Mediabrands. They are happier having integrated solutions rather than go outside.”

 

But if an integrated offering is the card the network agencies are playing, for the  independent agencies left out there, this hardly matters. Mitter of IBS is confident about competing and beating the big fish. “Just because they are a huge global holding company, doesn’t necessarily make them better at the job. Yes, the work that gets done out of the New York or Tokyo offices of these networks is superior but that is a function of the amount of money that clients in India are putting on the table. In the US, a digital film might get a million dollar budget, here you will be lucky to get Rs 5 lakhs! If we were given the same fees, we would employ better production designers; we already have the thought and the creativity. Even with the dismal sums of money involved, we still compete and win against the best. Someone working at IBS today could be working at Razorfish tomorrow. So it’s not about the agency but about how you inspire people who work with you,” Mitter insists.

 

Connecting the dots

Even as the battle lines get drawn, there is a silver lining for the digital landscape in India. “The medium is far from mature so before all the gloom and doom we are going to see a lot more entrepreneurs bringing in a whole new set of offerings - be it technology, infrastructure or even services. The acquisitions and the big money that they bring would in fact drive more people to set up their own businesses with an eye on the big price when the time is right,”  says Mohanty.

 

Lalla sums it up well when he says, “At the end of the day, agencies that bring a holistic, integrated understanding of communication challenges, brand problems, consumer insights and the channels and are able to stay current with the changes that are happening are the ones that will get the largest business wins from clients.”

 

Feedback: aliefya@exchange4media.com

Feedback: Category: Impact Feature Volume No: 12 Issue No: 3

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