Yesterday I heard Sir Martin Sorrell, CEO of WPP Group, speak about the Changing Nature of PR and Communications. I attended as a guest of the organizer Frocomm. Given Sir Martin’s experience and seminal role in the communications industry today, I thought it was well worth going along. His very big-picture thinking was in evidence, alongside manifest ability to change his thinking on issues. What I’ve captured below is a pretty fair reflection of what he said, in his own words. I’ve added some notes and thoughts, as quite a lot of what he covered relates to issues I’ve been thinking about and developing.
The WPP group has 100,000 employees, revenues of US$12 billion with annual growth of 5-6%, and market capitalization of US$17 billion, which places it as the largest communications group, ahead of Omnicom. Australia provides total revenue of US$ 600 million, making it fourth in size of WPP’s country operations, so it is disproportionately important to WPP.
WPP has three major objectives:
Currently 37% of our revenue is in US and 37% in Europe. Our objective is for Asia to grow from 25% to 33% of our revenue. Half the world’s population is in this region, and by 2013 it will be two thirds. China and India will once again account for 40% of global GDP. Goldman Sachs’ original BRIC (Brazil, Russia, India, China) document is seminal and drives our strategy and thinking.
Grow non-traditional advertising
If you wanted to upset me, you’d say we’re an advertising conglomerate. We’re not a conglomerate, we’re focused, and conglomerates are discounted by the market. 46% of our revenue is in advertising, the rest is in other disciplines, including PR, communications, direct interactive, Internet. We want revenue other than advertising to account for two-thirds of our revenue.
TV Commercial pricing is increasing at a rate faster than inflation, and clients dislike that intensely. So they are using TV less, and using alternatives to TV. We are at the beginning of the growth of video, which is stimulating PR.
Accountability and measurability
We don’t think decisions to spend on marketing will be made at board level or below if they don’t have the data to support them. There is limited pricing power in consumer markets, so corporaions are emphasizing topline growth, as well as limiting costs. Clients will not move without statistical justification. Tracking data will be critical. The Internet is making advertising and marketing far more measurable.
[NOTE: See our view on measurability as a driver in our Future of Media Strategic Framework.]
In five years WPP will be represented more strongly in Asia, Latin America, Africa, and the Middle East. Its revenues will come more from non-traditional advertising, more in the Internet and more in measuring.
More important role for media planning and buying
The heart of our business is the differentiation business. The Big Idea, as proposed by David Ogilvy, is the idea that differentiates products and services.
At the same time there is growing consolidation of media planning and buyIng. 25-33% of global media buying is through WPP. That consolidation has given an opportunity to leverage media space. We will buy 25-30% of the advertising available from ITV or News Corp, giving us both tremendous pricing power, and the ability to do cross-media planning.
Ten years ago media buyers didn’t get respect or rewards. New technology has buttressed their role – the medium is determining the message. TV no longer the sole medium for the Big Idea.
Application of technology to our business.
This is epitomized in our recent acquisition of 24/7 Real Media. This mimicked the mooted acquisition by Google of DoubleClick and by Microsoft of aQuantive. These three acquisitions are about application of technology to our business. This is a prime driver of PR. PR is growing at 10% annually.
[NOTE: Interesting that Sir Martin acknowledges that their acquisition of 24/7 Real Media was mimicking Google and Microsoft. The tech companies’ acquisitions are fundamentally important, as noted in our review of top developments in media, however while WPP’s acquisition was smaller, it shows how the competitive landscape has completely opened out to encompass technology, advertising, and marketing.]
Ours is a cyclical business. The issue now is not the credit crunch. Unpleasantness and nasty medicine will be doled out in 2009 by whoever enters the White House. The political cycle causes the economic cycle.
At this stage of the cycle PR is very vibrant. It is the rise of new technologies, including social networking. Social networks are used to recommend things to each other. Social media is anarchic. I think everyone should read Andrew Keen’s book The Cult of the Amateur. 16-24 year olds put tremendous validity in what they see on the web. Social networking has underlined the value of editorial advertising. People believe things much more readily if they read editorial than read advertising.
[NOTE: See earlier thoughts on the balance of power shifting from advertising to PR]
The rise of social networks is also a worrying phenomenon. A recent headline in AdAge said that GM is cutting its ad budgets by 28%. It may be spending some of the rest on some other marketing activities, though it is also likely to be reducing total spending. PR is a cheaper option for clients. Clients are befuddled by the fragmentation of the media. It is much more difficult to justify spending, thus the focus on measurability. Clients are cutting budgets and reallocating. PR is benefiting from this.
Last year I talked about Americanization as the driver. Today it’s very different. The biggest companies will not come from the West. Gazprom will have a US$1 trillion market capitalization in three years. China Mobile is the fifth most valuable brand in world, given its 330 million subscribers, growing at now 6 milllion a month, up from 5 million. Tata will soon produce a $2500 car. Lenovo, Sinopec, and many others are the manifestation of globalisation in the real sense of the word. There will be some very big corporations from developing countries.
Two: Significant overcapacity in industry.
Differentiating products for intangible reasons, emotional and other, is becoming mroe and more important. The future shortage is in people, in the absolute number of consumers. China’s population will decline. The battleground will be in strategic and structural change inside organisations.
[NOTE: See my analysis on long-term population and economic trends, exactly to this point]
Three. The Web.
In the first boom we lost a lot of our staff to start-ups. When the companies failed, many came back to work for us. At the re-entry interviews, they didn’t say they were grateful to have a job. They said to a man and woman that if they could go back to work in a more unstructured and flexible work environment they’d go in a heartbeat.
Four. Lack of cooperation.
The thing that really causes trouble in WPP and our clients, is the lack of cooperation between people. There seems to be an intuitive inability of people to work together. Goldman Sachs has grown as a single brand. We are a multi-branded organization. The greatest debilitator it is the inability of geographically segregated people to work together. If we could all work together in the same direction we could achieve amazing things. It is the critical issue.
[NOTE: This is the heart of what will drive or hamper large organizations moving forward, something central to my work and interests. See for example insights into spanning silos in major organizations]
Tesco, WalMart, and other major retailers account for an enormous proportion of retail sales. Walmart accounts for 30% of the US distribution of Johnson & Johnson and Procter & Gamble. Tesco now has 50% of its operations internationally, but far less of its profitability. This will build enormous pricing pressure on suppliers.
[NOTE: See analysis on impact of pricing pressures]
SIx. Corporate Social Responsibility.
From a PR perspective this is critically important. 18 months ago I wouldn’t have said this. Three things have happened to change the environment: 1 The massive Buffett donation to the Gates Foundation; 2 Branson agreeing to donate up to US$3 billion; 3 News Corp picking up on carbon neautrality. So today no chairman or CEO will jettison corporate social responsibility. If you’re going to build any brand long-term, you wouldn’t do anything that upset people. This is not altruism, you do the right thing, it’s good business. Even Chinese consumers believe that products and companies and brands that embrace the environment are better. Tom Friedman is now writing a book about China as an environmental leader.
Seven. Global structure.
Our clients are moving to more coordinated global structures. Clients will appoint country managers, as we have at WPP. If they drive strategy globally they lose country focus, local sensibilities, local relationships. As you centralize power in companies, you lose country focus. The pendulum will swing back. WPP spends 3%+ of revenue on regional management. This is superfluous, doesn’t make much of a contribution.
It boils down to two key issues:
How we penetrate growing economies. Advertising grows at 2-3 times the economic growth rate in developing economies. For example GDP in Russia is growing at 15%, while WPP revenues are growing by 35%.
We launched the Mobile Alliance today, pooling resources across WPP companies to do mobile marketing well. I can’t understand why the telcos aren’t embracing this. If they don’t, Google will. Last year in strategy session had Eric Schmidt and Chad Hurley the week before YouTube was acquired. Google is highly overvalued relative to the advertising sector. The top communications groups have total market capitalization of US$50 billion, while Google is capitalized at four times that with less than half the revenues. I call Google a frenemy. It is a short-term friend and a long-term enemy. With the approval of the DoubleClick acquistion the long-term is getting closer. We are Google’s biggest client. We buy 5% of Google’s advertising. Google is experimenting with radio, TV, print inventory, I think they’re consciously or unconsciously trying to disintermediate agencies. Similarly Microsoft is our 10th largest client. Today your client is your competitor or supplier.
What keeps me awake at night?
The technology issue. We have made several more acquisitions after 24/7 Real Media. Business will naturally gravitate to 20% of total advertising revenue going online, from its current level of 7-8%. By this time 33% of conumer exposure to advertising will be on the Internet. We’ll add 100 million revenue in China. We have 27% market share in Russia and Brazil.
Eisner said he worried about the PhD’s about some garage in Silicon Valley. Modify that – I’m worried about them, but I’m more worried about PhD’s in garages in Bangalore and Shanghai.
Audience question on MySpace valuations
It’s a bit like the fashion business. Social networks are put together by people who don’t want to be monetized. On momentum charts it is very clear that Google and MySpace are losing traction.What is the impact on networks when people come in with commercial motives? A lot of people are doing them for social reasons, to build communication. Information is no longer power. Everyone has the information at their fingertips. In Asia people access Internet by mobile, not PC. PCs are the dinosaur.
Ballmer said 25% of Microsoft’s revenue will be advertising, partly by controlling Facebook’s advertising revenue. There are already signs of volatility in social networks, and we will see tremendous volatility. These are fashion brands.
I’m sick of sitting in front of 13 year olds on panels, who are all basing their models on advertising. They can’t all be successful. We will see a significant weeding out, and it will be a painful process. I ask them one question: how much revenue are you generating? Currently 7-8% of ads are online. A lot of things will fail – it’s a VC world. You have to pay to play. There’s no way we can convert WPP to a digital organization unless we are prepared to play. We have got some skills and knowledge that our competitors don’t.
[NOTE: See commentary on innovation coming from outside major media organizations]
We invest 60% of our revenues in our people, as do our competitors. It doesn’t rest easy in ad agencies. Jack Welch would say we’re fluffy. He had a go at me last year when I said sponsorship is intuitive, Jack said that’s fluff.
Audience question on online anti-brand campaigns
Anti-brand campaigns went on before, they just weren’t as virulent. Companies have to deal on the basis that everything that happens, every email that is written, may become public. There is almost no opacity. This is a much more democractic and interesting world. Anti-consumer activists didin’t have the means to express themselves, now they can do so. Companies must be much more aware. Online visibility is a very positive business builder. People don’t realize that’s life. There’s nothing you can hide any more. Nixon would be extremely uncomfortable in this environment.