Sir Martin Sorrell faces WPPs challenges

The threat of recession, emerging economies, green issues, the prospects for traditional and new media, the burgeoning of smaller ad networks and how to meet client demands are among the challenges facing WPP, as founder and chief executive Sir Martin Sorrell tells Stuart Smith

Q: You say there will be no recession, but the world economy will experience difficulties in 2009. Just how bad is that downturn going to be?

A: I don’t think there will be a recession, as classically defined, not even in the US. But I do think there will be a slowdown, primarily driven by two factors. We’ve got a president who’s been overspending. He’s been spending on the public sector like a drunken sailor. George Bush will keep the economy going to help John McCain [the Republican candidate] as much as he can. When was the last time we had a recession in a presidential election year? So, regardless of who gets in, because of the mid-term congressional elections in 2010 and the need to stay popular, anything unpleasant that needs to get done will get done early, in 2009. I think business in general and our business in particular is increasingly driven by events and political cycles.

Second, after Beijing, there’s an opportunity for the Chinese economy to pause. It will be negatively affected, no doubt about it. I don’t believe in the decoupling argument. I think we are less coupled, and the appropriate metaphor these days is that if America sneezes, we all catch a cold and not pneumonia. China still depends on the strength of the US economy and it’s been growing at a prodigious and unsustainable rate.

Then, in 2010, you have the congressional elections – which will stimulate expenditure – and the World Cup in South Africa. Don’t underestimate the World Cup’s importance in putting the African continent more squarely on the economic map. In China you’ll have the World Expo in Shanghai, probably the biggest World Fair since the one in America in 1964. Finally, there will be the Asian Games in Gwangju.

Q: You aim to derive one third of your revenues from emerging economies. If I was a private investor and put one third of my portfolio in those markets, I would probably be regarded as pretty reckless. Why do you think you can get away with it?

A: Why reckless? I think you would be highly intelligent. It’s high risk, high reward. Why would you want to battle away in economies that are growing at 2-3%, when you can invest in an economy, like China’s, that has grown consistently in double-digit figures over the last 20 years? On the basis that we are averagely intelligent at WPP, which I don’t think we are, we should push at an open door.

Top line growth drives shareholder returns and it stands to reason that you do better if you are in the faster growth markets. The growth opportunities, in the traditional and the new [media] are in South East Asia, Latin America, the Middle East, Africa and Eastern Europe. We are now the leader in the four key emerging markets – Brazil, Russia, India and China [BRIC]. In the traditional markets, you have to shift from traditional media to new media. WPP had $12.3bn (£6.18bn) revenue last year, and we certainly became the largest marketing services group in the world, surpassing Omnicom in the last quarter. Of this, $3.5bn is traditional brand advertising. Subdivide it again and about $1.5bn comes from Asia/Latin America, the Middle East and Africa. That leaves $2bn in the slower part of the portfolio. That $2bn is reflective of what you see in NBC, CBS and the Murdoch empire. The pressure in our industry is in the traditional media. The opportunity is in the new media. And in the old media, as well as the new, in the emerging markets. So buying Polish television stations, or Russian outdoor sites, is a rather intelligent thing to do.

Q: Five years ago, when I interviewed you, you said the jury was out on whether China or India was the more interesting opportunity. You contrasted the strength of China’s industrial infrastructure and population resources with India’s political openness, its Anglophile culture and the integrity of its legal system. Have your opinions changed, or hardened?

A: India or China is a nonsense question because it’s got to be both. Both economies are growing at about 10%. I’d probably make the same observations about their differences today.

But the big thing compared with five years ago is that economic take-off is no longer in its infancy. Eight of the top 30 companies by market capitalisation in the world come out of China. One of the things you notice is that when China and India look at the West, they no longer see the kind of excellence that would daunt them.

Q: Let’s move to a related topic, the green theme. If all these countries are growing so fast, and they come to have the same consumerist expectations that we ourselves have acquired, surely that is not sustainable?

A: Consumers, governments and non-government organisations will favour those companies that take a more constructive approach to issues such as the environment, food availability, obesity and water shortages – water is the oil of the 21st century, as someone said. You can point to three signal events that have changed the attitude of the business community. Warren Buffett and Bill Gates getting together, the Murdochs teaming up with Al Gore and Sir Richard Branson and his $3bn (£1.5bn) environment profit pledge. Those three events have had a massive PR impact on corporate thinking, and no chairman or ceo interested in long-term brand building is going to duck these issues any more.

How is sustainability going to affect consumer behaviour? Let’s look at the obsolescence issue, as a for instance. What Apple is doing with the iPod – creating $400 (£200) players that are designed to be tossed on the scrapheap after a year – is something that consumers will not accept in the future. They will be looking for longevity.
Our view, which is counter to what you expect our industry to argue, is that conspicuous consumption is not productive, and should be discouraged. As Vietnam, Pakistan and Indonesia accelerate into affluence, as the demands of 1.5 billion Chinese become greater in terms of materialistic fulfilment, the issue of structured obsolescence is going to come more and more sharply into relief. That means it’s incumbent on us, and our clients, to rethink how we go to market.

Q: What do you consider your competitive set these days?

A: First, there’s the traditional competitive set. In order of strength, they are Omnicom, in the traditional advertising space, particularly in the US. Omnicom is in the old space. Publicis second, closely followed by Havas and the putative combination with Aegis, which I believe will happen in the middle of the year. Obviously IPG is still a bit in limbo land.

In the new space, we have Google, Microsoft and Yahoo!. Google now owns DoubleClick, which makes it a direct competitor. At the same time we buy $150m (£75m) of stuff from Google, and with Dell as a client it will be even more. Microsoft is our seventh largest client but also owns aQuantive, a competitor. If Yahoo! does a deal with Microsoft, that will bring more balance to the market. A duopoly is better than a monopoly.
Comscore statistics over the past few weeks have proved that even Google is vulnerable. Still, look at its power: $160-170bn (£80-85bn) market capitalisation. WPP’s is only $15bn (£7.5bn), even though we’re the biggest in our industry by market capitalisation. So we’re an 11th of their market capitalisation and our revenues will be $13.5bn (£6.78bn) this year. Which means we earn half their revenues. Or look at it another way. If you add ourselves, Omnicom, IPG and Publicis together, that gives a total market capitalisation of $40-45bn (£20-22.5bn), so about a quarter of what Google would be, and yet our revenues would together be about $33bn (£16.6bn), so about 50% bigger. Yet, we’re a quarter of Google’s market capitalisation. So the market is saying a little bit about the prospects for Google versus ourselves here.

It stands to reason you can’t compete head on with these people. You’ve got to do it a different way. That’s why the 24/7 acquisition WPP made was so important and so different. The reason we win out is because we do have a better offer in the faster markets and superior technology. Wunderman is a $900m-plus (£450m) business, OgilvyOne, an $850m (£425m) business, G2 is about $350m (£175m), RMG Connect clocks in at about $200m (£100m). These are all global businesses. No one else has a global business in this area. Then we have the add-on digital agency companies like Aqua Online. And the third leg is the application of technology through a company like 24/7, which I admit was expensive.

The big issue is: how do we employ that technology in a creative way? We need a different kind of person, someone who understands that “the medium now determines the message”.

Full service agencies missed out as a result of the media planning/buying revolution. Digital is another version of the media story, and we’ll make the same mistake if we are not careful. We need to accelerate the process of going digital. I want media to be one third of our business too, just as much as I want emerging markets to be one third. Digital is underspent, just as China and India are underspent.

Public relations is the other thing to look out for. Why is PR growing so fast? It’s the internet.

Q: Do you see the trend towards smaller creative boutiques, such as Wieden & Kennedy, or micro networks, such as Bartle Bogle Hegarty, as a threat to the output of the main networks?

A: There’s nothing new in this challenge. It was the same in the seventies; it’s back to the future. In fact, the statistics are against what you are suggesting. The concentration of business in the top five agencies has actually been growing, with media being the big driver.

Let’s not get too bogged down in a UK-centric view of the marketing services world. The UK is admittedly 15% of our business, but only about 6% of the world’s business. Our boutique agencies are unlikely to make a substantial impact on, say, China. China will create its own set of national agencies. Our biggest competition in China is not Omnicom or Publicis, it’s Jason Jiang’s company, Focus Media, which started in flat-screen advertising in office elevators.

There will always be Crispins [Crispin Porter & Bogusky]. The BBH model is very difficult. I know, because CHI is exactly the same model, unashamedly so. But as BBH goes into a second generation it becomes more and more difficult for them. Those creative agencies you are referring to would be a Fallon, maybe historically a Wieden, a BBH, a Nitro, a Crispin. But there has to be some strategic reason for acquiring them. It can’t be purely financial. We’ve all found that out.

The real change in the agency environment is this. Five years ago, Omnicom and Publicis would have said: we never do anything of a team nature between our operating units. They will operate independently and autonomously and we’ll never interfere with them. Now you get the Bank of America phenomenon, a virtual agency as you call it. It was some scramble for Omnicom, but they did it and it was a very good win for them. You see the same with Publicis and Samsung. Clients aren’t interested in our operating brands. We are, the marketing press is, our people are, quite rightly: but clients just want solutions to their problems and they don’t care where they come from. We’re trying to develop a 1000-plus agency specifically for the Dell business we’ve just won. My view is that increasingly there will be agencies within agencies and, instead of running businesses and running round the world managing salaries and properties, we should do what we are really there to do, which is look after our clients’ interests.

Q: Is the industry as talented as it used to be?

A: A number of clients think the quality of people running their businesses is not as good as it used to be. I don’t agree with that, but I do think one of the sicknesses of the industry is that, when we need people, we don’t recruit them from top universities like Goldman and McKinsey. If we need people, we steal them from someone else. Whatever you may think of JWT in the sixties, people at good universities chose it as a career. It’s not like that any more.

Q: Isn’t that partly clients’ fault for squeezing so much money out of the business over the years?

A: Clearly the industry does not pay as well as investment banking and management consultancy. On the other hand, there are lessons to be learned from them. Both have recently sold themselves on the idea that a better work/life balance is achievable. It’s possible for our business to create a structure that offers these compensations.
The other issue is the quality of talent. McKinsey people say: “It is a fact that”, whereas in the agency business they say: “We think that”. People in our business are more qualitative, more intuitive, probably more fun. Yet management consultants do have systems, and they are capable of brilliant presentations.

Q: Do you suffer from founder’s disease?

A: Yes. Every founder suffers from founder’s disease. It’s the old Bill Shankley thing: “Football’s not a matter of life or death, it’s much more important than that.” I think Vincent Bolloré [president of and principal shareholder in Havas] would share the same motivation. Maurice Levy? It’s a job. He was the chief information officer in Marcel Bleustein Blanchet’s empire. John Wren [president and ceo of Omnicom] the same: it’s a job. I have a very small shareholding in WPP, but emotionally the thing is there. Whoever does my job in the future may do a much better job. But it will never be the same because they will never treat the business as their own. In my case the emotional connection is so strong that if we win or lose a piece of business, I take it personally. It’s very much part of me. So, if that’s founder’s disease, I’ve got it.