AT&T Inc. Seals Huge Advertising Deal With Omnicom Group Inc.

By Markets Fool.com

AT&T (NYSE: T) recently centralized its creative, digital, and media accounts under a single account with advertising and PR giant Omnicom (NYSE: OMC). The decision represents a major victory for Omnicom and a big loss for its rival,WPP (NASDAQ: WPPGY).

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Omnicom's BBDO previously handled creative accounts for the AT&T brand, while WPP's Grey and MEC respectively handled the DirecTV and media accounts.But with advertising now becoming a more significant part of AT&T's business, the telco invited both companies to make a pitch for the integrated creative and media business.

After two months of review, AT&T moved the DirecTV account to BBDO and the media account to Omnicom's new media agency, Hearts & Science. Let's take a look at how this deal could help both AT&T and Omnicom.

Image source: AT&T.

What the deal means for AT&T

Lori Lee, senior VP and global marketing officer at AT&T, said in a prepared statement reported by FireceWireless that a "single integrated team allows usto move quickly, innovate at scale and take a data-driven, holistic approach to reaching consumers and businesses." Lee noted that those capabilities would be important as it launches "new streaming video entertainment choices that are built for mobile."

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Streamlining those operations would complement the integration of AT&T's wireless service and DirecTV. AT&T currently offers unlimited wireless plans for DirecTV customers, and "data free" websites and videos to counter similar services like T-Mobile's Binge On and Verizon's Go90.

AT&T will also launch three streaming video services later this year -- DirecTV Now, an app for content from its satellite TV business; DirecTV Mobile, an app for premium video content; and DirecTV Preview, an ad-supported service with free videos from a wide variety of sources. AT&T will reportedly rely less on broadcast TV ads and more on digital ads, which isn't surprising since manycord-cutters are pivoting toward OTT [over-the-top] and mobile platforms.

Centralizing ad operations for the wireless, mobile, pay TV, and media accounts under Omnicom would enable AT&T to gather analytics from a single system and make focused marketing pushes to strengthen its core wireless and pay TV businesses.

What the deal means for Omnicom

AT&T spends more on advertising than any othertelco in the U.S., and its total U.S. ad spending is only topped by consumer staples giant Procter & Gamble. Ad Age reports that AT&T spent $3.3 billion on ads in2014, which represented nearly 3% of its operating expenses. Ad Age hasn't released AT&T's estimated ad spend for 2015 yet, but it's likely much higher following the acquisition of DirecTV last July.

Omnicom won't handle all of AT&T's advertising business -- multicultural creative will be handled by multiple agencies, and Cricket's creative work will still be handled by Argonaut. However, Cricket's media buying, which was previously handled by MEC, will be moved to Hearts & Science. But Omnicom will oversee enough of the business that we can safely assume that it will handle a few billion dollars of AT&T's ad buys within the next year.

This victory could get Omnicom's revenue growth -- which missed estimates over the past three quarters -- back on track. Sales rose just 1.8% annually to$3.88 billion last quarter, missing estimates by $30 million. Advertising revenue, which accounted for 53% of its top line, rose 7.7% annually and outperformed its smaller CRM, PR, and specialty businesses.

Prior to the AT&T announcement, analysts expected Omnicom's revenue and earnings to respectively rise just 2% and 8% for the full year. Those estimates could now be too conservative as AT&T ramps up its ad spend in the second half of the year. It could also convince other major customers with fragmented ad accounts to centralize those operations with Omnicom -- which would be bad news for rivals like WPP.

The key takeaways

AT&T's decision to consolidate its ad accounts with Omnicom is a win-win deal for both companies. AT&T streamlines its ad campaigns for new DirecTV branded initiatives, and Omnicom's revenue and reputation get a nice boost. The clear loser here is WPP, but the massive group -- which serves adsfor all 30 Dow companies, 77 of the NASDAQ 100, and 352 for the Fortune Global 500 -- should shrug off that loss fairly easily.

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Leo Sun owns shares of AT and T. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Omnicom Group, Procter and Gamble, and T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.