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Is Google Considering Bypassing Advertising Middlemen?

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WPP shares plunged after sales disappointed

When WPP (WPP), the world’s leading advertising agency, reported in August 2017 that its sales for the first half of the year fell and its chief executive Martin Sorrell went on to talk about a slowdown in global ad spending, its stock recorded its biggest one-day decline in over 18 years. Stocks of other ad agencies such as Omnicom Group (OMC), Publicis Groupe SA (PUBGY), and Interpublic Group (IPG) also fell as investors appeared worried about the future of ad and media agencies.

While WPP attributed its woes to weak ad purchasing by consumer packaged goods companies such as Unilever (UL) (UN), there have been fears that advertising agencies such as WPP were being disintermediated, or being bypassed, in the advertising supply chain, especially in digital advertising.

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Programmatic ads viewed as threat to ad agency business

Some have viewed programmatic or automated ad purchasing services, which simplify ad placement and targeting for brands, as a threat to the advertising agency industry.

Alphabet’s (GOOGL) Google is one of the world’s largest digital advertising platforms. The other is Facebook (FB), which also owns WhatsApp and Instagram. In 3Q17, advertising represented 86.7% of Alphabet’s total revenue compared with 98.2% at Facebook. Other advertising platform operators such as Twitter (TWTR), Snap (SNAP), and Baidu (BIDU) also draw the majority of their revenues from advertising sales.

Google says it’s not in favor of agency disintermediation

Some of these advertising platform operators have introduced programmatic ads, which are viewed as fueling disintermediation of advertising agencies. But where does Google stand on this issue of disintermediating ad agencies? Speaking at a Credit Suisse conference recently, Google’s chief business officer, Philipp Schindler, said that the company had no plans of cutting off ad agencies from its advertising business supply chain.

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