Mint concludes a special three-part, first-person account by WPP Group Plc. CEO Sir Martin Sorrell on what will drive the world of advertising and marketing services in 2007 and beyond.
On Friday, Sir Martin wrote about globalization and Americanization. Saturday, he focused on China and India. Today, he writes about technology and the impact it is having and will continue to have on advertising. Edited excerpts from his account, dubbed The Advertising and Marketing Services Industry: China and the Internet:
Web 2.0 and the future
Since the dotcom implosion of 2000 it had become fashionable to dismiss the Web. However, WPP’s smarter clients and those who missed out on opportunities in the 1990s have taken advantage of depressed values and a contrarian position.
Web activity, broadly defined, currently accounts for more than $2 billion (Rs8,060 crore) of WPP’s revenues, or around 20%. It is growing rapidly. There seem to be three reasons why. First, there is still the threat of disintermediation. A horrible word; perhaps some explanation is needed.
Let’s take an example from our own business. More than $2 billion of WPP’s revenues comes from market research. Traditionally, research has been done on the phone and through the post. The process is long and cumbersome. A questionnaire has to be designed, distributed and filled in by consumers or interviewers. Then data is collected, analysed and conclusions developed. It can all take three to six months. Many CEOs despair that by the time the solution has been identified, the problem has changed. Using the Internet, however, the research process can be transformed and responses obtained almost instantly. WPP’s Lightspeed panel interrogates more than 17 million consumers globally and can deliver answers inside 24 hours.
Second, you continue to be disintermediated by lower-cost business models that are evaluated by investing institutions in new and different ways. Despite the relatively recent vicious compression in valuations and consequent losses, the financiers of new media and technology companies still focus on sales, sales growth and market way share, rather than on operating profits, margins, earnings per share and return of capital employed.
Finally, the Internet and new media companies still steal your people. After the bankruptcies and failures, many young people returned to the more traditional businesses they had left. WPP lost a number of such bright talents and later welcomed some back to the fold. I conducted a number of so-called re-entry interviews, and hoped to see and hear from it; few grovelled. Instead they admitted that given the opportunity again, they would seize a similar one.
With the emergence of the second Internet boom, the so-called Web 2.0, it is clear there is another wave of interest among bright, young people over new technologies and attractive opportunities.
So, is Google friend or foe, frienemy or froe?
On the amicable side, we, for example, are its largest agency customer, spending more than $200 million last year. That tells you a little about the nature of Google’s business. Normally our media market share, according to RECMA, the independent organization that measures scale and capabilities in the media sector, is around 25%. With Google it is around 2%, indicating a long tail and a heavy business-to-business connection. In any event, Google wants to work with us on building relationships with our 50 biggest clients and it is offering incentive programmes for us to buy more. We have also run joint seminars on both sides of the Atlantic, for some of our largest and most important clients, to try to build mutual relationships.
On the less friendly side, CEO Eric Schmidt says Google is targeting the advertising sector. Although after GoogleClick, the short term got shorter and the long term nearer Google has already taken several initiatives. It has run an experiment: wholesale purchasing print media and retailing the space in smaller amounts to clients. It has hired creative people to write ads. It has approached US clients directly to see if it can set up a direct, electronic media buying exchange. It is looking at electronic media planning and buying models, which can be accessed through the Web. It purchased dMarc, a radio Internet-based company for $100 million down and a three-year mother of—all earn outs possibly worth $1.1 billion, although the principals have now left. It has recently signed deals with Clear Channel in radio and Echo Star in TV that make clear its desire to move into traditional media.
Google has also concluded its billion-dollar deal with AOL, and Time-Warner has indicated in internal memos that it plans to cooperate with Google in television, print and other media. The opportunity exists, although it is doubtful if the traditional Time-Warner operating company verticals will be easily persuaded to give up on digital expansion and opportunities to meet their budgets and targets. It also offers, through Google Analytics, a free analytical service. Last year, it made Rupert Murdoch’s purchase of MySpace a stunning success with a $300 million per annum, three-year deal for Internet revenues. This against a purchase price of around $580 million. And then it overcame its lack of success with video by buying YouTube for $1.65 billion, despite little or no revenues and a bunch of copyright law suits, part of which were solved by making three music companies momentarily YouTube share owners and $50 million richer on the morning of the sale. Finally, it gave Warren Hellman and Hellman & Friedman an 800-900% return over two years on DoubleClick, paying over $3 billion or 10 times revenues or 30 times Ebitda. Entry to the first round of the auction was 13-14 times Ebitda, which we could not reach.
It seems that this last transaction will finally awake the dragon. Stand by for a heavy Microsoft response, not only on regulatory fronts, but from transactions, too. Through DoubleClick, Google may control more than 80% of targeted and contextual Internet advertising, along with much valuable client and publisher data. Current rumours surround more consolidation around Yahoo!, Aquantive and others. Already, Yahoo! has paid an infinite Ebitda multiple for Right Media.
Sane strategic moves or irrational exuberance? All in all, Google is opening up the attack on many fronts. Perhaps too many, particularly when you consider the other fronts they are fighting on, such as book publishing. One gets the impression they are throwing a lot of mud against the wall to see if any sticks. Yahoo! has a different approach, working through its agency partners and believing in the power of people, rather than Google’s greater focus and belief in technology.
Technology and the data it provides are becoming more important components to succeed in the new technology-based media. We are already investing through WPP Digital, GroupM, Kantar and our direct and interactive businesses, such as Wunderman, OgilvyOne, G2 and RMG Connect. With sufficient investment, we can reproduce any of the media planning and buying technology developed and have already accessed search revenues effectively. Unlike the media owners, we are not investing in a single technology or making technological bets. We are purveyors of media investment alternatives and, as long as we are not excluded from any single, powerful technology and have the talent to analyze the media alternatives, we will remain relevant and valuable to our clients. Unlike media owners, who unless they cover the media waterfront, are exposed to one technology or another.
In summary, Google is probably a frienemy or froe. Warren Buffett used to say in the 1970s, when he invested directly in IPG and Ogilvy, that agencies represented a royalty on the international growth of US-based multinationals. Perhaps today, parent company investment also represents a royalty on the growth of new media technologies.
With recessionary forces abating in 2003 and secular and quadrennial forces driving the industry to new highs in 2004, 2005 and 2006, the short-term picture for the communications services industry has improved. The next quadrennial cycle of 2005-08 is shaping up to be even stronger. The immediate issues of government overspending, consolidation among clients, media owners, retail and agencies, increasing trade and price promotion, fees, procurement and outsourcing, media fragmentation and super-agencies all bring opportunities as well as threats. This year should show more improvement. In the longer term, the new true globalization and the growth of Asia Pacific, overcapacity and the shortage of human capital, the Web, the demand for internal communications, retail concentration and global corporate citizenship should together underline and assure the importance of our industry and its constituent parts, advertising and marketing services. The latter as a proportion of GDP will burst through the cyclical high established at the peak of the Internet boom in 2000.