Small media services companies opposed to the planned takeover of Ogilvy Africa by Scangroup have changed tack, opting to merge their operations in response to the looming shift in market realities.
The move is intended to help the small players build muscles to confront the behemoth that is expected to emerge from the Scangroup-Ogilvy merger in the Sh31 billion media services market.
Industry insiders say Scangroup’s bid for Ogilvy, if successful, will shift the dynamics of the media services market bringing into play new realities that existing players will have to absorb to remain in business.
“In the next three years there is a possibility that if small players don’t re-invent themselves the market will be left to one big player who will reap massive profits riding on economies of scale,” Alvas Onguru, the managing director at Fireworks, a media services company. “We are positioning our self as alternative players for clients who will not be happy with the status quo.”
Fireworks is part of a group of smaller players, who have decided not to wait for the new market realities to emerge but have embarked on their own merger plans, setting the stage for a wave of consolidation in the industry with far reaching implications on competition and pricing of media services.
Some industry insiders reckon that widespread consolidation could mean that buyers of media services will have to deal with only a few providers, raising the prospect of an oligopoly or even the emergence of cartel-like behaviour in the marketplace with serious pricing implications.
A significant drop in the number of service providers also means that consumers of media services might be forced to share providers with their rivals at the risk of leakages and theft of ideas.
The presence of only a small number of players, for instance, means that Kenya Commercial Bank will share a service provider with rivals such as Equity and National Banks, and telecoms service providers such as Safaricom, Zain and Orange will buy media services from the same source for lack of alternatives.
Managers of the small media services companies however reckon that only consolidation of their operations through mergers could help them survive the new market realities that will emerge should the regulator allow the Scangroup-Ogilvy tie.
On Tuesday, Fireworks and Corporate Talk told the Business Daily that they have joined forces to create a new entity with a pool of resources and skills to provide clients with a more comprehensive service offering.
A similar match-up between ZK Advertising and an unnamed player were also said to be ongoing even as the Tanzanian firm reportedly shops for a buyer for its regional business.
Industry sources said a number of small media firms are looking for strategic partnerships with the deep pocketed international players with the money to finance planned expansions into new markets and shield them against the expected attacks from the big players.
The push for regional footprints largely mirrors the strategy that Ogilvy and Scangroup have adopted to establish a presence in a number of African countries offering a one-stop shop for multi-national clients who prefer to deal with single agencies.
The emergence of Nairobi as a regional services hub has convinced many players that strong companies will always be frontrunners in pitching for business from firms with multi-national footprint.
Mr Onguru said the merger with Corporate Talk not only spreads the two companies’ footprint but also should also enable them to offer personalised services to clients who maybe uncomfortable with the big players.
The changing shape of the industry is being seen as opening a window for investors to establish new firms and go for clients with preference for small agencies that exclusively handle their work.
The proposed Scangroup-Ogilvy deal was however not subjected to shareholder discussions during the company’s Annual General Meeting at the Bomas of Kenya yesterday because the matter is pending before the regulators.
That leaves the possibility that should the regulators agree to the buyout deal, Scangroup will call an extra-ordinary general meeting to seek shareholder approval.
Earlier this month, six agencies filed a petition with the commissioner of monopolies opposing the deal between the market leader and the second largest player arguing that it will establish a dominant entity with the potential to dominate the media buying market in the region to the detriment of other players in an industry where there is low differentiation.
They are also seeing risk in the pricing of media units purchased, saying the presence of a big player in the market exposes media buyers to the risk of price manipulation.
“Discounts are calculated using the gross rate card as the base. A big player will have the ability to manipulate discounts on media units purchased to its advantage, since it will contribute to 71 per cent of media owners’ income from advertising and media agencies,” said a petition filed by the six.
Synovate, a consumer market research firm, says the single largest portion of the media buying business – 43 per cent of total sales -- remains outside the agencies and is done through direct sales.
It is in the remaining 57 per cent portion of the market shared by the agencies that Ogilvy and Scangroup control a combined 71 per cent leaving 29 per cent to be shared among the remaining….. small players.
Corporate Talk says the merger with Fireworks should add impetus to its expansion into seven African countries as it races to catch up with the market leaders.
The company intends to open offices in Tanzania, Malawi, Zambia, Congo DR, Uganda and Madagascar with its headquarters in Nairobi.
Merger of Corporate Talk and Fireworks also gives the group the ability to offer both public relations and adverting services for their clients under one roof.
Lenny Nga’ng’a, a director at Saracen OMD backed the Corporate Talk, Fireworks deal, saying the smaller players will have to forge partnerships and also raise awareness among clients of the available alternatives to remain relevant in the market.
“Firms currently dealing exclusively in media buying and advertising should partner with their counterparts in creative to offer clients a one stop shop for media services,” he said. “There is increasing demand from clients to have creative, media buying and advertising services together pressing the case for mergers of small players.”
ZK public relations, which was among the companies that petitioned the Commissioner of Monopolies, said it was awaiting a decision from the group’s board scheduled for next week to decide on its future.
“The board will hold their quarterly meeting early next week and it is from this that we might know what strategy the group wants us to adopt,” said Michael Onyango, PR Director at ZK Advertising.
ZK group offers both public relations and advertising services and has operations in 17 African countries including, Burkina Faso, Congo –Brazaille, Congo DRC, Dubai, Gabon , Malawi , Niger , Nigeria, Madagascar, Rwanda, Sierra Leone , South Africa, Tanzania, Tchad , Uganda and Zambia.
Kenya’s biggest media buying and creative firm Scangroup opened swap negotiations that will see it gain a significant stake in Ogilvy East Africa.
Smaller players reckon that the deal, which effectively merges two of the biggest players in Kenya’s advertising scene, gives the resulting entity the muscle to dominate the market.
Last year, Scangroup accounted for 61 per cent of all advertising booked through agencies while Ogilvy held on to 10 per cent stake.
Opponents of the deal including Saracen OMD, Nuturn Bates and ZK Advertising, said their plan is to petition regulatory authorities to scrutinize the deal for its possible impact on competition in the media services market.