Why the marketing space is vital to enterprise software players

Julie Langley, partner at Results International, publishes her first M&A opinion column

This is a contributed piece by Julie Langley, partner at Results International

The enterprise software players should really have little interest in the world of marketing services, or so you might imagine. After all, their business is selling software, which is high gross margin and highly scalable. They have always shied away from selling services, which can only be scaled by adding more people. As such, any services they have offered have generally been seen as a necessary evil to ensure software sales. However, as technology starts to replace services in the marketing function an ever-greater proportion of the marketing budget becomes accessible to companies such as SAP, Oracle and Salesforce and they have this firmly in their sights.


Why has the threat from enterprise players been ignored?

Despite the software vendors devoting significant M&A spend to the marketing sector in recent years (through acquisitions of marketing technology), the incumbents such as WPP, Omnicom, IPG and Dentsu, don’t yet seem to view these players as a particular threat. They are, understandably, more concerned with their most immediate challenges - the impact of Google, Facebook and Amazon on their business model, the impact of fraud and lack of transparency on advertiser spending.

Meanwhile, remaining concerns have largely been focused on the high profile incursions into the marketing sphere by the management consultancies. This is not without merit – the consultancies’ revenues in the sector are growing, and they are often bidding against the large media holding companies for the same acquisition targets. They also appear to generate higher revenues per head in marketing services than most of the large media holding companies.

It would be very short-sighted to underestimate the software players’ interest in the sector though. Over the past decade, every major function in the enterprise has become dominated by one or two platforms – think SAP and Oracle in finance or Workday in HR. Marketing is the last remaining function within large enterprises where numerous disparate platforms – including Excel - are the norm. Given the large enterprise software vendors are now experiencing low single digit growth in their core markets, turning their attention to the marketing function makes perfect sense. The annual global spend on marketing and advertising services is estimated to be over $1 trillion. 


How has the long-term strategy played out?

You can discern the beginnings of a strategy to break into the sector over a decade ago when the enterprise businesses began investing in CRM capabilities, content management software and ecommerce platforms. However, the focus on the core marketing function started in earnest in 2012, when SAP, Oracle and Salesforce started acquiring software to manage core marketing activities such as email, social media and digital asset management. Their M&A activity into the sector has continued at pace ever since. 

So what was behind this acceleration? Advertising and marketing were not previously in the sights of the software companies because most spend was on services. Now technology, which is coming to automate element of these services, is changing that picture. 

Nowhere is this more obvious than in media-buying. Just a few years ago, we would have said that the large software companies would have no interest in media-buying per se – it is a commission based, services business, which is as far removed from their software DNA as you can get. But the advent of automated media-buying has transformed that landscape. Recent acquisitions demonstrate media-buying is firmly on their roadmaps, for example SAP acquired marketing attribution company Abakus, while Oracle bought Datalogix and Moat which enable improved ad targeting and measurement.  

SAP’s approach is particularly interesting though. It launched SAP Exchange Media (SAP XM) last year, and although this received surprisingly little coverage in the sector trade press its potential impact on the marketing services industry is enormous. SAP’s stated aim in bringing this product to market is, in their words, “to shorten the traditional media buying process by bridging direct relationships between advertisers and publishers”.

Firms with a heritage in business management software, such as Oracle and SAP, come at the media-buying market with a unique advantage over the current incumbents; almost every large advertiser globally uses their accounting software. Nearly every dollar a large advertiser spends – both online and offline - runs through a SAP or Oracle accounting system, as does every dollar of each product sold. If these players were able to use the possibilities of AI and big data to match up that data, the potential value to brands is huge. In fact, the accurate attribution of marketing spend across both online and offline channels represents the holy grail for marketers. 


What other advantages do software players offer to marketing?

The software players offer two further advantages, trust and transparency. They already manage the advertisers’ first party data, and have done so securely for decades. Furthermore, SAP and Oracle’s software has the potential to provide visibility of the customer journey across virtually every brand touch point. This covers the ecommerce platform, customer service, advertising, in-store – if that data could then be fed back real-time into the manufacturing plant and the supply chain, it would provide huge operational and financial benefits for its large clients. In other words, the large software companies are coming at the media and marketing space from a unique position.

Moving into this space offers the software firms the means to reenergise slowing growth, so they literally cannot afford not to take advantage of the opportunity. This suggests further M&A on the part of these players is all but inevitable and they may yet prove to be the most disruptive new entrant to the advertising industry.