Why CMOs Need a Digital Marketing Hub

OMMA Data and Targeting ConferenceLos Angeles, California

Refer to pages 16-19 for Important Disclosures, including Analyst’s Certification.

For Important Disclosures on the stocks discussed in this report, please go to

http://research-us.bmocm.com/Company_Disclosure_Public.asp

July 25 2012

Dan Salmon

Equity Research Analyst

BMO Capital Markets

(212) 885-4029

dan.salmon@bmo.com

2

Intro: Two Hats to Equity Research

1. Industry analysis• At BMO, we make no distinction between “traditional/offline” and

“emerging/digital” advertising

• Other firms: one “media” analyst, one “internet” analyst

2. Public company analysis• Advise institutional investors on stock investing in the advertising

and marketing industry

3

Companies Under Coverage

Agencies

Internet MarketingData & Direct Marketing

4

Why CMOs Need a Digital Marketing Hub

First we need some context…

5

Marketing Spending = ~$1 Trillion Globally

• Paid media = ~87% of marketing spend• Advertising (53%)• Marketing Services (34%)

• Agency Fees and Marketing BPO (8%)• Data & Intelligence (4%)• Software & Technology (1%)

• IP marketing = ~25% of marketing spend• Not just “Internet” like Search, Display

• Mobile• In-store/Point-of-Sale• IPTV• Digital-out-of-Home• Streaming Audio

Source: GroupM, DMA/Winterberry Group/Acxiom/Teradata, IDC, Advertising Age

Global Marketing Forecasts Summary

Absolute 2009 2010 2011E 2012E 2020E

Advertising 439.5 468.0 491.1 522.2 661.2

Marketing services 279.9 300.1 315.5 329.8 468.4

Total paid impressions 719.4 768.2 806.6 851.9 1,129.6

Ad Agency / Marketing BPO Fees 58.5 62.3 67.6 71.0 109.4

Data/ Intelligence 47.0 46.8 48.2 49.6 53.0

Software/ Technology 9.0 10.3 11.2 12.1 20.3

TOTAL Marketing 834.0 887.5 933.6 984.6 1,312.4

'12-'20

Growth 2009 2010 2011E 2012E CAGR

Advertising -6.6% 6.5% 4.9% 6.3% 3.1%

Marketing services -5.8% 7.2% 5.1% 4.5% 4.5%

Total impression -6.3% 6.8% 5.0% 5.6% 3.7%

Ad Agency/ Marketing BPO fees -15.3% 6.4% 8.6% 5.0% 5.6%

Data/ Intelligence -11.6% -0.6% 3.1% 2.8% 0.9%

Software/ Technology nm 13.5% 9.0% 8.0% 6.7%

TOTAL Marketing 6.4% 5.2% 5.5% 3.7%

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And Don’t Forget Trade Promotion….

Source: GroupM, DMA/Winterberry Group/Acxiom/Teradata, IDC, Advertising Age and DemandTec

• ….and there are also brand’s in-house costs as well (e.g. CMO and staff’s salaries)

U.S. marketing spending ex. trade promotion

Advertising47%

Marketing Services

34%

Agency/ Mkt BPO fees

12%

Data-Intelligence

5%

Software/ Tech2%

U.S. marketing spending including trade promotion

Advertising32%

Marketing Services

23%

Data-Intelligence4%

Agency/ Mkt BPO fees

8%

Trade promotion32%

Software/ Tech1%

7

Industry Drivers: Data Is Vital to All of Them

• Changes in communications infrastructure and consumer behavior:• Penetration of IP Networks and Capacity Expansion• IP Device Adoption and Narrowing Adoption Curves• Multi-Channel Marketing and More Holistic Consumer View

• Secular Themes:• Social• Mobile• Local• Loyalty• Software-as-a-Service (SaaS)

• All of them are infused with data

8

Industry Constraints: Learning How To Work With Data

• Incumbents Defense of Legacy Business Models

• Marketers’ Organizational Inertia

• Fragmentation and Lack of Standardization

• Intellectual Property Litigation

• Privacy Regulation Always Waiting in the Wings• 2033: When Digital Natives Will Be The Majority of US Congress

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CMO Desk of the Future: The Digital Marketing Hub

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The Digital Marketing Hub: Plug-and-Play Modules

• Database Marketing/CRM• Enterprise Marketing Management (EMM) Software

Software Era: Pre 1995

Web 1.0 Era: 1995-2005

• Email Service Providers (ESP)• Ad Serving• Ad Operations• Ad Networks (Affiliate Marketing, Online Lead Generation)• Search Engine Optimization (SEO)• Search Engine Marketing (SEM)• Marketing Analytics (Web, Social, Third Party)

Web 2.0 Era: 2005-Present

• Ad Exchanges• Demand-Side Platforms (DSP) and Agency Trading Desks (ATD)• Sell-Side Platforms (SSP) and Private Exchanges• Data Management Platforms (DMP)• Creative Optimization

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Why CMOs Need a Digital Marketing Hub

What are the new data-driven realities of

advertising and marketing?

12

Data Changes Old Truisms: The Law of “Time Spent?”

• Does % of time spent with media vs. % of ad spend even matter anymore?

0%

5%

10%

15%

20%

25%

30%

35%

40%

TV Radio Newspapers Magazines Internet

Time Spent With Media Share of Advertising Spending

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Data Changes Old Truisms: Consider Search…

• In an IP world, isn’t it all about intent?

1.8%

28.2%

0%

5%

10%

15%

20%

25%

30%

Time Spent With Google Search

Google Search Share of Online Advertising

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… And The Rise of Transaction Data

• Moving further down the funnel and leveraging transaction data

Top of Funnel: “Interest”

Middle of Funnel: “Intent”

Tip of Funnel: “Transactions”

15

The Rise of Earned and Owned Media

Paid vs. Owned vs. Earned

Source: BMO Capital Markets.

Owned Mediae.g. branded

website, mobile app, digital

display inside Walmart store

Earned Mediae.g. word-of-mouth, public

relations, sharing “Likes”

Paid MediaAdvertising

(e.g. 30-second TV spot, online banner ad) + Marketing

Services (e.g. direct mail,

sponsorships)

Social Networks = Word-of-Mouth at Scale

Also: Word-of-Mouth in Data form

Earned = Consumers Generate Impressions

• Established: Word-of-Mouth and Public Relations

• New: Free Social Brand Pages

Owned = Brand Owns Impressions

• Established: YourBrand.com

• Today: Mobile Apps

16

Is Paid Media (aka Advertising) Pricing in Secular Decline?

~$850B of Paid media budgets· growing inline with global GDP

= Old: Paid media impressions · "analog dollars to digital dimes"

New: Free earned/owned media impressions ·

+

Ad Pricing in Long-

Term Secular Decline

Growing ~4% per year (hopefully…)

Growing faster than 4% per year

Growing MUCH faster than 4% per year

+

=

17

Is Paid Media (aka Advertising) Pricing in Secular Decline?

• Real world evidence from the Buyside

1. Proctor & Gamble• $1 billion of marketing savings by 2015• But the same number of impressions/share of voice

2. General Motors• Cut $10 million of Facebook Paid media/advertising spending• Maintained all Brand Pages on Facebook• Reportedly asked for 20% cuts at TV Upfront

• Real world evidence from the Sellside

1. Google Cost-per-Click Down ~15% This Year

2. Yahoo! Seeing Pricing Softness Despite Higher Sell-Through

3. Facebook eCPM up only 1% in 1Q12

18

Why CMOs Need a Digital Marketing Hub

Which companies are poised to succeed?

19

Managers of Brand’s 1st Party Data & 3rd Party Data Chefs

The Bigger Revolution is in 1st Party Data• Brands harnessing their own assets• Who is helping them with this?

• Agencies• Database Marketers• New Entrants

Source: From Stretched to Strengthened, Insights from the Global IBM CMO Study, September 2011

% of CMOs Reporting Under Preparedness

47%

50%

54%

55%

56%

56%

56%

57%

59%

63%

65%

68%

71%

0% 10% 20% 30% 40% 50% 60% 70%

Corporate transparency

Regulatory considerations

Global outsourcing

Privacy considerations

Customer collaboration and influence

ROI accountability

Growth market opportunities

Decreasing brand loyalty

Financial constraints

Shifting consumer demographics

Growth of channel and device choices

Social media

Data explosion

Data/Intelligence CAGR only +1%• From “market research”… • ….to “real-time data”• Sea change in 3rd Party Data

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The Rise of the Data Management Platform (DMP)

• New players popularized the term: e.g. BlueKai, Exelate, etc.• Established players re-positioning • e.g. Acxiom the “data management platform”

• Scalable & higher margins• Beginning to test new products with clients

Source: BMO Capital Markets.

High Margin: Build Product/Platform Once, Sell Multiple

Acxiom focus is on the middle three

Strategy/ Creative

1st Party Data Hosting

3rd Party Data Product

Analytics & Insights

Distribution

Low Margin:

Commoditized

Low Margin:

Human Services

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Earned and Owned Media Managers

• Ad Agencies: Capitalizing on the Growth of Earned and Owned Media• Also: new “SaaS” models like Buddy Media for automation

Source: BMO Capital Markets

Paid Media Brand #1 Brand #2

Primetime TV 100 80

% to media/platform owner 90% 90%

% to agency 10% 10%

Mobile Display Ads 0 5

% to media/platform owner na 90%

% to agency na 10%

Social Display Ads 0 5

% to media/platform owner na 90%

% to agency na 10%

Owned Media

Mobile Apps 0 5

% to media/platform owner na 0%

% to agency na 100%

Earned Media

Free Social Presence 0 5

% to media/platform owner na 0%

% to agency na 100%

Total budget to:

Media/Platform owner 90 81

Agency 10 19

TOTAL BUDGET 100 100

9081

1019

0%

20%

40%

60%

80%

100%

Brand #1 (all paid media) Brand #2 (mix of paid, owned,earned)

Media/ Platform owner Agency

22

• >50% of Mediabrands clients’ contracts have some performance-based pricing

• Helped to reach peer-level margins• CPG and tech success; retail a laggard

Agencies: Growth of Performance-Based Pricing• Agency takes lower fee in return for greater share in campaign success• Adds higher risk/reward opportunity for agency models• Trend accelerating as data powers more marketing campaigns

Source: Interpublic analyst day.

• Interpublic Group leading adoption of performance-based pricing

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• SapientNitro• Interactive vending machines for Coca-Cola• Migration of Target.com to proprietary platform (Amazon previously managed)

• Crispin, Porter + Bogusky (MDC Partners)• Rebuilt Domino’s e-commerce platform

Agencies: Merging Commerce + Marketing

Source: Company websites

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• Built on Paid Media, But Also a Vital Earned Media Outlet….

• Consensus view: Google is aimless in Social, no one uses Google+• Reality: Along with Facebook, YouTube is the starting point for all social campaigns

• And they have the ad inventory that brands want:• Brand advertisers are moving online, but banner ads are limited in “story-telling”• Instead, they want online video advertising

Online Video Ad Growth 2010-2016

Google: YouTube = Social + Online Video Inventory

Source: comScoreSource: MAGNAGLOBAL

Internet Usage by Category

0

5

10

15

20

25

30

35

40

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

Social Networking

Search/ Navigation

Retail

Instant Messages

Email

Other content

3.5

8.8

10.2

11.9

6.2

5.0

7.4

43.6%

17.8% 16.8% 16.2%

24.9%

19.6%

2010 2011 2012 2013 2014 2015 2016

Online video spending

% yoy growth

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Google: Dominant Display Ad Technology Stack

• Built on Paid Media, But Also an Enormous Ad Technology Services Provider ….

• DoubleClick serves around half of the web’s non-Facebook display ads• Not a big revenue generator, but a massive advantage in data used for targeting

• June 5th: Google launched the end-to-end DoubleClick Digital Marketing suite

Google Display Ad Technology Stack

Source: BMO Capital Markets.

Advertiser Tools Publisher ToolsMarketplaces

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The Biggest Winners of All? Brands

• Gain efficiencies through earned and owned media

• Agencies, developers and software tools used to create and maintain

Rank Advertiser Rank Advertiser Rank Advertiser1 Procter & Gamble 35 General Mills 68 Campbell Soup 2 AT&T 36 Viacom 69 Citigroup3 General Motors 37 Microsoft 70 Amazon4 Verizon Comm. 38 Merck 71 Subway5 American Express 39 Sony 72 Walgreen 6 Pfizer 40 Nike 73 Hyundai7 Walmart 41 Capital One Financial 74 Discover Financial8 Time Warner 42 Nissan Motor 75 Wendy's/ Arby's 9 Johnson & Johnson 43 Eli Lilly 76 Reckitt Benckiser10 L'Oreal 44 SABMiller 77 Fortune Brands11 Walt Disney 45 Deutsche Telekom 78 Hershey12 JPMorgan Chase 46 Yum Brands 79 Limited Brands13 Ford Motor 47 Lowe's 80 Abbott Laboratories14 Comcast 48 AstraZeneca 81 DirecTV15 Sears Holdings 49 Home Depot 82 SC Johnson16 Toyota 50 Coca-Cola 83 Volkswagen17 Bank of America 51 Progressive 84 Safeway18 Target 52 Kellogg 85 Daimler19 Macy's 53 Estee Lauder 86 Apple20 Sprint Nextel 54 Samsung Electronics 87 Coty21 Unilever 55 LVMH 88 IBM 22 Anheuser-Busch InBev 56 Best Buy 89 Apollo Group23 Berkshire Hathaway 57 State Farm 90 Gap 24 News Corp. 58 Bristol-Myers Squibb 91 Kia Motors 25 J.C. Penney 59 Mars 92 Dish Network 26 McDonald's 60 Wells Fargo 93 Clorox27 Fiat/ Chrysler 61 Time Warner Cable 94 Hewlett-Packard28 U.S. Government 62 Visa 95 CVS Caremark 29 Honda Motor 63 Diageo 96 Dr Pepper Snapple30 Nestle 64 Bayer 97 Burger King 31 Kohl's 65 Allstate 98 Dell32 Kraft Foods 66 Kroger 99 Fry's Electronics33 PepsiCo 67 Novartis 100 Colgate-Palmolive34 GlaxoSmithKline

Top 100 US National Advertisers

Source: Advertising Age, data for 2010

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Why CMOs Need a Digital Marketing Hub

Thank you

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Disclosures

Important Disclosures

Analyst's CertificationI, Daniel Salmon, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Ltd. are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific DisclosuresFor Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx.

Distribution of Ratings (March 31, 2012)Rating BMOCM US BMOCM US BMOCM US BMOCM BMOCM StarmineCategory BMO Rating Universe* IB Clients** IB Clients*** Universe**** IB Clients***** UniverseBuy Outperform 37.2 % 12.1 % 52.1 % 39.2 % 48.3 % 54.6 %Hold Market Perform 60.0 % 7.0 % 47.9 % 57.6 % 51.0 % 40.1 %Sell Underperform 2.4 % 0.0 % 0.0 % 3.2 % 0.7 % 5.3 %

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage within ratings category.*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage of Investment Banking clients.**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as percentage of Investment Banking clients.

29

Disclosures

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Disclosures

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