Welcome to Best of the Week, mostly written on a gloomy, drizzly Friday in Sisters Beach, Tasmania, and polished off early this morning. Today’s writing soundtrack - The Doors - seems weather appropriate.

Happy Hot Enough For Ya Day. I think we can safely say that’s an event targeting the northern hemisphere.

Sorrell’s stall

There’s been a lot going on this week, not least the beginning of the financial reporting season.

Having watched Sir Martin Sorrell - boss of S4 Capital and founder of WPP - on stage in London earlier this month, I thought I knew what to expect. His prediction was that the holding companies would report a decent set of numbers up to this point, but would flag that the going is getting worse.

The bears ate Sorrell’s share price this week

That turned out to be half true. On Thursday night, S4 Capital released an early update to the market, which is rarely a sign of good news. Revenues have continued to grow, but the London-based company’s costs have blown out, it revealed. That came as a surprise - in his WPP days, Sorrell was a stony hearted controller of costs. Halfway into its financial year, the going has indeed got worse for S4 Capital. The other holding companies seem to be a different story so far, but we’ll come on to that.

Instead of the £160m profits the market had been led to expect for the full year, the number for S4 Capital - which is the parent company of Media Monks - will be nearer £120m. That may not seem so bad in the scheme of things, but it comes against a backdrop of the embarrassing delay in getting the company’s previous quarter’s accounts out on time.

As a result of that debacle, the company’s share price dropped nearly 30% back at the end of April. This week there was no benefit of the doubt, with a fall of a further 45% in a day.

Pretty much all the gains in the value of the company since Sorrell turned it into a vehicle to become another global communications holding company, back in May 2018, have now vanished.

The rise and fall of S4 Capital’s share price | Google Finance

S4 Capital’s market capitalisation fell back to £700m, or around AU$1.2bn. Perhaps most hurtful for Sorrell’s ego, in US dollar terms, that number is US$840m - well below the $1bn unicorn startup status the company boasts about on its own website.

While that leaves investors with the pain of making a paper loss, it also marks an effective end to the company’s current strategy for growth.

Having been abruptly ousted from WPP, Sorrell was in a hurry to take on the bigger holding companies and his route to growth was through “merger”, rather than full acquisition, building a company based only on purely digital advertising and marketing services.

Founders selling agencies into the group would get half in cash and half in shares in S4 Capital. Initially, that worked well - the company has already got up to 9,000 staff across 32 countries, including offices in Sydney and Melbourne. That’s extraordinary growth. And it looked like a great deal for founders while the share price was going up.

The problem for the company now is that no sensible owner would do that sort of deal going forward, knowing there have already been two crashes in the share price. Just like the agency owners sucked into the Photon Group disaster in Australia a decade ago, they might wake up a few weeks later and discovering they’d swapped the family cow for non-magic beans.

The S4 Capital update takes a considered tone. After all, the company is still profitable. A company that makes £120m profit is to be taken seriously - even if that’s less than its current debt of around £150m. As a general rule, banks prefer the former number to be larger than the latter.

The bigger question for S4 Capital is where it goes from here. Sorrell’s route to fast growth was through a piece of financial engineering unlikely to be available to him in the short or medium term. On stage, the 77-year-old Sorrell was still sharp, but he’s also facing the ultimate deadline. The actuarial tables suggest that in another decade, it won’t be him in charge.

For the most part, the second part of Sorrell’s prediction didn’t come true in the updates from his rivals this week. None of them (yet) signalled that the storm clouds ahead will hit their profits.

Publicis: Good half but ‘ongoing uncertainties’

Publicis Group reported a big jump, highlighting its Australian media business as one reason. That will mark a satisfying exit from Zenith for Nickie Scriven who resigned a couple of weeks ago, amidst speculation of a move to Dentsu.

Publicis is on a calendar financial year. It reported net revenue for the first half of €5.873bn (roughly AU$8.7bn), up by 19.1% year on year. EBITDA profit for the half was €1.287 (AU$1.9bn), up 22.3%.

At the most there was only a hint of dark clouds ahead. As CEO Arthur Sadoun’s commentary put it: “We are ready to face the ongoing uncertainties caused by the macro-economic context.”

Omnicom: Prepared for ‘economic headwinds’

Omnicom’s results were flatter. It reported revenue for the last quarter of US$3.567bn, almost exactly the same number as in 2021.

Omnicom’s profit was down slightly from US$589.6m to US$562.4m.

CEO John Wren’s accompanying quote was positive enough, while acknowledging the fact that the winds are changing: “As we enter the second half of the year, we are in a strong financial position, and our company is well-prepared to manage through economic headwinds.”

The official disclosure for investors further down in the update was somewhat more negative though:

“Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, rising inflation and supply-chain disruptions could cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and discipline.
“There can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions, reductions in client revenue, changes in client creditworthiness and other developments.”

IPG: A ‘period of macroeconomic and geopolitical uncertainty’

And Interpublic also released numbers for the quarter just gone.

Net revenue for IPG was up 4.7% to US$2.375bn. But costs grew faster, with profit for the quarter down by 9.2% to US$349.1m.

IPG’s CEO Philippe Krakowsky also nodded towards uncertain times: “As we look ahead we are facing a period of macroeconomic and geopolitical uncertainty, and the limited visibility that comes with such an environment.”

Is Snap the canary?

It may well be that the pain for all the holding companies is already in the post. Digital advertising is usually an early indicator when marketers start to cut their spend, and Snap Inc (owner of Snapchat) and Twitter both had bad news for the market at the end of the week.

Snap had its weakest quarter of sales growth since listing, and signalled that in the current quarter, numbers are flat. By 9am this morning Australian time, the company’s share price was down a painful 40% for the day. It;s now at the lowest point i the company’s history.

The key quote about the wider market came from SNAP’s chief financial officer Derek Anderson: “We’re seeing the overall advertising pie grow at a slower rate.”

And even more drastically, we wake up this morning to news that Twitter said that its revenue growth had not just slowed but declined by 1%. Along with the chaos of the on-off Elon Musk takeover offer, Twitter blamed “advertising industry headwinds”.

The real game for digital advertising comes next week when Google and Facebook’s parent companies Alphabet and Meta are both due to report. It could be a tumultuous week.

And there were a couple more data points.

This week, Australia’s largest magazine printer, Ovato, called in the administrators.

And in the UK, marketing industry body IPA released its latest Bellwether Report, which is a well respected chart of marketer sentiment. Marketers are expecting to cut their budgets.

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Facebook pulls the rug on news - again

If there’s one thing that news companies are used to by now, it’s the fact that building any strategy around Facebook is shaky ground.

This week, the platform announced a huge change to its News Feed, which is indeed no longer the News Feed.

It’s a big pivot. The main feed will now be called Home, and it’s gone the full TikTok. News and friends is out, and influencer and creator content is in. Think algorithm-driven entertainment, not personalisation.

Instead, news and friends will be shuffled to a secondary Feeds tab.

The move signals that the company is moving away from its engagement with the news industry. The Wall Street Journal reported this week that staff have been told Facebook will shift engineering and product support away from news, including its seperate News tab.

It also looks like Facebook is also backing away from its short lived newsletters play, Bulletin, which was inspired by the success of services like Substack.

In Australia, that’s likely to mean Facebook will walk away from renewing the big deals it has done with publishers under the threat of the News Media Bargaining Code. That will change the economics of the Australian news industry.

As the WSJ puts it: “Facebook’s shift away from its paid news product was influenced by the stepping up of regulation around the world aiming to require technology platforms such as Facebook to pay for news, according to people familiar with the matter. That reduced Meta Chief Executive Mark Zuckerberg’s enthusiasm for making news a bigger part of Facebook’s offerings, the people said.”

It would seem that Zuck doesn’t like to pay for it.

This move will mean that in the fairly unlikely event that the Labor government had an appetite to designate Facebook under the News Media Bargaining Code, the company will be in a much better position to pull the plug on news in Australia altogether, as it briefly did at the beginning of 2021.

Back to square one.

Unmade Index fades after a strong week

The Unmade Index of ASX-listed media and marketing companies had one of its best weeks in months, with jumps of 3.64% on Monday, 4.72% on Wednesday and 3.15% on Thursday.

Yesterday’s slight fall of 0.27% still sees the index on 685.1 points, well above it’s sub-600 low of a few weeks ago. However, the index is still well below the 1000 points it opened the year with.

Yesterday’s biggest move was HT&E, parent company of ARN, which was up nearly 10%. Meanwhile Seven West Media fell back more than 5%, although its market capitalisation is at least back above $700m.

A roller skating jam named Saturdays

Time to let you get on with your weekend.

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Have a great Saturday.

Toodlepip…

Tim Burrowes

Unmade - media & marketing through an Aussie lens

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