WeWork has been lauded by many as one of the huge success stories of the 21st century. Before they came along, renting office space was run-of-the-mill, boring. You paid money, you got a room and installed some desks, some chairs, a printer. You moved in. That was it.
WeWork, however, wants you to believe that you aren’t simply paying for space. Of course, you get a beautiful new office, but you are also paying to be a part of something new, part of a community of like-minded people. Indeed, part of WeWork’s mission is that it is “a place you join as an individual, ‘me’, but where you become part of a greater ‘we’.” WeWork positions itself amongst those big disruptors of this century – Netflix, Uber, even Facebook, and an IPO was a natural next step for this real estate/tech behemoth.
Dreaming of a huge $47 billion valuation, the cash-hungry We Company, WeWork’s parent company, aimed to sell enough shares to raise $4 billion and had, according to the New York Times, ‘lined up a $6 billion bank loan that was contingent on the IPO’. By the end of September, though, those heady days were over. WeWork discovered that investors were sceptical about their huge valuation, large amounts of debt and corporate governance issues. They pulled the IPO, Founder-CEO Adam Neumann was forced to step down, are looking at redundancies and are reconsidering their expansion strategy into China.
So how did WeWork value itself so high? What was it doing right? A lot of it came down to brilliant brand-building and marketing. As touched on earlier in this piece and explored by Mark Ritson in this article, WeWork didn’t position itself as a real estate or office rental firm. It wanted to be seen as a tech firm, or, as Ritson says, there was a “vague, socially-constructed idea that this is another big disruptive tech firm with another massive IPO.” 21st century tech firms have of course seen phenomenal success over the past two decades, and many have an aura of community and purpose to humanise the vast profit they turn over. WeWork, with its mission to ‘Create a world where people work to make a life, not just a living” embodies that tech ethos, and as such pushes its community app. This wasn’t just a forward-thinking branding decision: if it worked, it was a sage financial decision, with tech companies raking in revenues far higher than those of more traditional businesses.
From the outside, this approach seemed to be working for WeWork: in the first half of 2019, for example, it earned $1.5 billion in revenue. However, the gloss loses its sheen a little when you discover that in the same period it lost almost $900m. And the sheen disappears completely in the context of information that it was looking to raise between $3 billion and $4 billion in debt to tide it over.
And that’s the key to this story: the losses and associated debt. While investors don’t necessarily insist that start-ups are profitable before they go public, it helps to be able to show a path to profitability. We Company’s revenue and operating losses are moving in tandem, rather than showing an increasing gap. They may find some cold comfort in the fact that they aren’t alone in this plight: ‘fellow’ disruptors Netflix and Uber, to name just two, show no sign of becoming profitable in the near or even mid-future. Netflix must continue its huge investment ($15 billion this year) into original content in order to survive stiff forthcoming competition in the shape of Disney, Amazon and Apple. To finance that, Netflix is estimated to have a debt of around $12 billion – and with a net income of just a twelfth of that, it seems unlikely that it will ever be able to pay that off.
Is WeWork’s failed IPO the first sign of a difficult, uncertain future for the big disruptive organisations of the last 10 years? Perhaps the tech disruptors of the future will bring the focus back to business strategy and creating revenue streams. Brand positioning and purpose are of course crucial to a business’ success, but they must be founded in a robust business and financial strategy to guarantee success.
Disclosure: ECI Media Management’s UK office is a tenant of WeWork in London
TV has long reigned supreme in the advertising world, but in recent years it has started struggling to hold onto its throne. Consumers are turning away from live TV – Britons, for example, watch five hours of video content a day, but only three of those are live TV. They are being lured away by the on-demand streaming services such as Netflix and its competitors. Part of the allure of the streaming services is their lack of ads: tolerance for irrelevant, interruptive ads has decreased dramatically, which TV has historically been unable to respond to due to its lack of addressability. This is one of the factors that has made Google and Facebook so successful – their ad services offer greater targeting and buying flexibility, an attractive proposition for brands seeking to reach their audiences with highly engaging, relevant advertising.
But TV is fighting back. In 2014, Sky launched AdSmart, its addressable TV advertising service. It tailors ad breaks based on the viewer’s profile and location: this enables advertisers to better target their campaigns and improves the effectiveness of TV advertising. Furthermore, due to an ad only playing when the specified audience is watching, it ensures advertisers’ money is spent efficiently. This is a crucial modernisation of the TV format which means that it can better compete with its digital rivals. Critically, it can be used across both linear and on-demand TV, and to target niche or region-specific audiences – particularly relevant for smaller or regional brands.
Sky’s ‘AdSmart: Five Years and Forward’ study, published in August, found that addressable TV can increase ad engagement by 35% and cut channel switching by 48%; what’s more, viewers of addressable TV ads are 10% more likely to spontaneously recall an ad compared to linear TV advertising. This has clear benefits for advertisers – especially as TV doesn’t suffer from the brand safety issues that have plagued the likes of YouTube over the years. By mid-September 2019, AdSmart has delivered 17,000 campaigns for more than 1,800 advertisers.
Three years after it launched AdSmart in 2014, Sky began its pan-European roll-out into Germany, Italy and Austria. Significantly, in 2019 two important UK players and competitors of Sky’s – Virgin Media and Channel 4 – confirmed that they would be joining the AdSmart platform. Virgin Media went live on the platform in early July; Sky Media will act as ad sales agents while Virgin Media will use both AdSmart and tech developed by its parent company Liberty Global. Virgin Media will also be trialling AdSmart on Virgin Media One in Ireland towards the end of 2019. This month, Sky announced that Channel 4 would be joining the platform in a deal that includes Channel 4’s own channels as well as broadcasters for which it handles advertising sales, including UKTV and BT Sport.
AdSmart’s roll-out across Europe as well as its partnerships with key players in the UK gives international advertisers the ability to target and reach consumers in key western advertising markets, and the uptake of addressable TV will surely only grow over time.
AdSmart is a great tool for clients who are new to TV advertising or who have a niche/hyper-targeted audience or regional demographics they want to deliver a message to at potentially a fraction of the cost of traditional TV campaigns. It allows TV to have an addressable function, driving impactful messages to the correct consumer 100% of the time. It is a union of the brand building ability of TV with the precise targeting capabilities of digital.
However, this is not a silver bullet. The extra cost of addressable ads often outweighs the targeting gain, meaning that every contact in the target group is more expensive – and you’re not benefitting from the overspill of traditional TV activity, reaching unintended consumers, as AdSmart treats the TV screen as a solely digital platform. Additionally, AdSmart activity is not independently reported through industry bodies such as Barb: reported outputs come from NBCU’s CFlight, an internal tool developed by NBCU. Finally, AdSmart ads cannot be dropped into live programming – spots during major events such as live sports must be purchased in the traditional way.
Addressable TV is an exciting development and gives TV a more level playing field when competing with digital, but it’s not right for all brands all the time, particularly those who seek mass reach.
AdSmart is just one of the media developments impacting on inflation that we examine in our Inflation Report Update, released this week. You can read it here.
For so long, advertising’s ‘big six’ – WPP, Omnicom, Publicis, Dentsu, Interpublic and Havas – had things pretty easy. Clients relied on them for creativity, innovation, new technology, the lowest prices and so much more, and they only had one another as serious competition for the big accounts. Complacency became a real risk: growth was driven largely by acquisition, and they relied on scale and global reach being a barrier to entry for any ‘upstarts’.
Recently, however, things have become much more challenging. It started with the ongoing accusation that the big six were not transparent in their business practices, as explored in the ANA’s explosive K2 report in 2016. This concern prompted many clients to seriously consider, or even actively start, bringing their media buying activities in house, thus cutting out the middleman, saving money and eliminating transparency concerns. In-housing has gathered pace with the rise of digital advertising, with many major brands bringing functions such as creative, content creation and even programmatic buying in-house. And then of course, there’s the threat of the management consultancies, who, as E.J. Schultz writes in Ad Age, are ‘wooing chief marketing officers with their vast array of strategic and data analytics solutions to big business problems that traditional advertising can no longer solve’. In 2018, the marketing services units of Accenture, PwC, IBM and Deloitte muscled into Ad Age’s ranking of the 10 largest agency companies in the world, making the big six sit up and take notice once and for all.
Most recently, the threat has come from a resurgent independent advertising industry. In a recent Campaign article, Iain Jacob wrote about how the industry appears to be ‘returning to a more natural state of creativity that has always defined the best advertising practitioners’ – he suggests that creativity has been stifled by the big six and the landscape had fallen flat. Now, start-ups in every sector of the industry, from content and digital creative to data and performance, backed by private investors, venture-capital funds and private equity, are flourishing. They are being fuelled by clients who are promoting diversity and supporting a ‘fundamentally different ecosystem to procure the creativity they need to thrive’.
In the manner of turning a large ship, the reaction of the big six has been somewhat slow, but is now gaining momentum. Each has been pursuing radically different strategies, compared both to their past strategies and to one another. WPP, for example, has – as we explored in more detail in this blog – focused on streamlining its structure, consolidating its workforce and investing in more data and technology alongside creativity. For them, it’s a question of simplifying their offering so it’s easier for clients to navigate. Jacob points out that WPP has taken a different approach to data to Publicis Groupe: the latter acquired data marketing business Epsilon, therefore cementing its status as a data ‘controller’, while WPP has sold its stake in Kantar to focus on being a smart data user or ‘processor’ to drive value for clients. Jacob makes it clear that his money is with WPP in this instance. In second quarter reports, Omnicom’s John Wren stressed the group’s commitment to creatives and creativity as the key driver of their recent growth: ‘Omnicom was founded by creatives. It is not something that can be acquired or sold’.
This year’s second quarter reports for the six holding companies were generally positive. WPP’s key sales measure – organic growth less pass-through costs – fell by 1.4%: not immediately promising, but a marked improvement on the 3% fall forecast by analysts, and also an improvement on a fall of 2.8% in the first quarter. Interpublic also enjoyed good news in July: a second quarter net revenue increase of 9.1% and organic net revenue increase of 3.0%. American conglomerate Omnicom reported a fall in revenue of 3.6%, but an increase of net income of 1.8%, thanks to organic growth in advertising and healthcare. Things weren’t so optimistic at Publicis: the French company reported lower-than-expected revenue for Q2 2019, with just 0.1% organic growth, compared to analysts’ expectations of 0.7%. That resulted in a slump in share value of 8.5% – their lowest level since 2012.
In the short term, and considering the financial positions of the major players, the focus on creativity and client deliverables rather than acquisition of data companies seem to be playing well. In the context of the rise of in-housing by clients, is data acquisition the right thing to do? Only time will tell.
It’s fair to say that Netflix is one of the huge tech success stories of the 21stcentury. Having started as a DVD sales and rental business, it expanded its business in 2010 with the introduction of streaming media, whilst initially retaining the DVD side of the business. It now has more than 148 million subscribers in over 190 countries. Its earnings to date have reflected its meteoric rise: in Q1 of 2019, for example, the company reported $4.52bn revenue, compared to the $4.5bn anticipated by Wall Street.
So far, so good. However, Netflix has undoubtedly benefited from first-mover advantage, and that may be coming to an end. Many media companies such as Disney, Apple, Amazon, Sky and traditional broadcasters are launching their own streaming services with established and new content; Disney has already removed all its original movies from Netflix, as well as those it owns the rights to, including Marvel and Star Wars. In the aforementioned Q1 report, Netflix stated that it didn’t expect this new competition to negatively affect its subscriber growth; however, that seems inevitable, and Netflix has already taken steps to mitigate the risk.
The obvious solution to increased competition has been for Netflix to make substantial financial investment into the creation of its own original content, which can’t be withdrawn by a competitor. However, that’s a huge investment and, as CNN points out, ‘the continuous influx of revenue still falls several steps short of what the company is spending each quarter [on original content]’. The cost has to be covered somehow – but how?
In an IAB panel back in April, execs from YouTube, JPMorgan and two agencies concluded that running ads were an inevitability for Netflix – echoing Sir Martin Sorrell in 2015 when he said that Netflix would inevitably have to build digital ads into its marketing strategy. Hulu has done this successfully with a two-tier subscription option – a more expensive ad-free choice, and a cheaper ad-supported service. Analysts believe that Hulu makes more money per subscriber from its subscription plus ads combination than it does from its more expensive ad-free option. Given Netflix’s scale – it is the third most-watched TV ‘channel’ in the UK, for example – it is an extremely attractive proposition for advertisers – and that makes it attractive for investors and Wall Street. However, Netflix subscribers are vocal in their opposition to this suggestion, and a 2018 trial was not a success: 57% of a control group said they would cancel their subscription. It’s worth noting though that Hulu added more subscribers than Netflix in Q1 the US (3.8m versus 1.74m), even with ads.
What are the alternatives? Netflix could of course increase its subscription prices; even after bumping them up in the last quarter of 2017, it increased its subscriber count by 50% more than Wall Street predictions. There is probably an upper limit to this option though. Another would be to look at the other side of the balance sheet: cut investment in original content and focus on the shows that are sure to be smash hits, which aren’t necessarily original. In 2018, just two of the top ten most watched Netflix shows were Netflix originals.
Netflix is comfortably winning the streaming game at the moment, but it needs to re-examine its model in light of the rise of competitors. A digital ad platform is one option, but there is a risk that that move would lead to the loss of many of its subscribers – which competitors would welcome with open arms. There are other options – increasing subscription prices and cutting costs elsewhere – and Netflix will have to look at all of them in depth in the coming months.