Read the full transcript of Sir Martin's exclusive video conference at the 2007 shots Forum.

Sir Martin Sorrell, CEO, WPP
Speech at Shots Forum 22/03/07
via live video link from London's High Court


CHANGE NEED NOT BE UGLY

If change need not be ugly, I think change is very difficult, and I'd like to define, if I can, in light of what you said just before I came on air, what the changes are. And I could go through the six challenges that we see for clients, but really they all boil down to two. And for any client or any media-owner or indeed any agency, I think there are two key things that we need focus on.

One is, (and you touched on it in the opening), is the geographical bit, and I think that's fairly easy to deal with, or certainly conceptually or intellectually. You just look at the world, you see the way the population shifts are going, the fact that 2014 two thirds of the world's population is going to be in Asia, that there are probably 1.5 billion people in China, not 1.3 as some people tell us, so there's an extra 200 million sculling around there, which is 3 and a half UKs, two thirds of a US and equivalent to an Indonesia. There's 1.1 billion in India, and these are markets that … there are 460 … if you think that these statistics are just about human beings and numbers of people, just think about the 468 million mobile subscribers in China, which is growing by 5 million a month. Just think about the 300 million subscribers on China Mobile alone and Millward Brown, one of our research companies which publishes its branding valuation survey each year now through the FT is coming out again shortly, but last year it positioned China Mobile, or valued China Mobile, as the fourth most valuable brand in the world. If you think about those statistics, or if you think about Corus being taken over by Tartar - Corus which was British Steel - so who would have thought that British Steel would have been taken over by an Indian company? (and by the way the under-bidder were the Brazilians), we see that the Ambanis at Reliance might be thinking of taking a stake in Carro 4. I mean that all these changes, this shift in value and wealth from the west to the east or back to the east from whence it came 200 years ago, I mean it's easy for us to get our mind around that. And change there is certainly not ugly, and it's certainly easy to get your mind around as long as you've got good Brazillians, good Russians, good Indians, good Chinese running the operations that you have in those markets, you can do (and I'll be immodest here), you can do what WPP's doing or has done and build a 50% share of the Indian market, a 15% share of China, market leadership in Brazil and Russia, and be well positioned to deal with let's call it the neo-bricks such as Indonesia with 200 million people, Pakistan with 160, and Vietnam with 80. So that thing I think you can get your mind around. I'm not saying it's easy but it doesn't cause the stresses and strains that the other thing that's happening does.

And the other thing that's happening is well known because I think you've probably focused on it this morning, I know you've had presentations from Good Technology and Malcolm Poynton I'm sure will talk about it if he hasn't already, but the other big issue is the technology opportunity. And I call it opportunity because if you don't do something about it, it becomes a threat or an issue. And the technology thing is very, I think, extremely difficult to deal with. I wouldn't call it ugly but it's very, very difficult, and the more established you are, the worse it is or the more difficult it is to deal with. The companies that start with no legacy systems, with no history, that start with a clean sheet of paper, are clearly advantaged in dealing with the issue of technology.

And I just remember that I was at a conference in Deer Valley a couple of weeks ago organised by J P Morgan, and Charlie Rose the American interviewer was doing a number of interviews and there were a number of panels, and one of the interviewees was Rupert Murdoch, and Rupert referred to… he didn't talk about OhmyNews in the context of the newspaper industry, (which is the Korean online newspaper which is a citizens' newspaper which has broken most of the major stories in pink Korea in the last year or so), but he mentioned a German online newspaper which had started recently and which had 8 million dollars of revenue in advertising already started by I think a couple of ex-journalists, and he basically said; "how can I compete as a newspaper owner when I've got printing plants that cost 400 million dollars, I've got collective bargaining agreements that go back to the seventies?".

Or, I can give you another example, Alan Rusbridger, an unlikely person you'd think to be talking to the editorial stars at the Guardian about unifying their editorial platforms, about changing collective bargaining agreements that went back many years, and trying to restructure old media into new. And just talking a little bit about the difficulty of change by sort of category - we start with clients. It's sort of remarkable to me that we know, or we think we know, that about 20% of the consumers' time is spent online. If that is so, (which I think it broadly is, and that's 20% of their time in terms of media habits/media consumption), if that is so you would think that budgets would move very quickly to 20% of total spend on the Internet, but the fact is that that's not the case. The UK, (mainly because I think the BBC gets £3 billion a year on January 1st from the licence payer and therefore has a massive amount of money to invest on its digital platforms and new technology approaches, mainly for that reason), the UK now this year according to our aptly named forecaster at GroupM, Adam Smith, the UK's proportion of spend on the Internet will be about 18%, having been 14% last year and against a worldwide average of 6 to 7%. And then you go to France and Italy and Spain and the UK and you see spending of 2 or 3 or 4%, so we haven't seen the penetration amongst clients. The other good example I think is in the US where we know that 70 to 80% of all car purchases and truck purchases are affected or initiated on the Web, so you would expect car budgets to be, I don't know 25, 30, 35, 40, 50%. They're nowhere near that. So I think when you look at clients, there is understandably an inbuilt reluctance to change budgets quickly. I'm 62. Most people who run clients or media owners or agencies are mature, maybe mature but not senile, but they're certainly mature, and their attitude I think is understandably "we don't want to change things too quickly". It might be because we have to focus on quarterly results, it may be that when you've spent 25 years of your life getting to the top of a company to run it for 5 or 10 years that you naturally resist change, you naturally say "I'm gonna spend the last 5 years of my career travelling around the world or travelling around the company, and the last thing I want is change". Change is painful, change is difficult. And I think that's part of it too. So, I think with clients, and we see it by the way with Hispanic marketing, with Afro-American marketing, you go to the US, both those segments of the population account for about 15% and yet we never see 15% of spend targeted at those ethnic groups, and particularly when they're growing faster usually in terms of population and their wealth accumulation and their income accumulation rates or increase rates are greater than the other 70% or whatever it is of the population. So this is a natural resistance to change and it's very difficult to get over. That's for clients.

For media owners, and one of the questions I think I was asked in the brief was, talk a little bit about what the impact is on different media types, I think it is the most difficult. For media owners this whole technological change issue is the most difficult because they have committed themselves to a technological route that can be disintermediated by these technologies in a way that clients and agencies don't necessarily face the same problem. And if you look at media owners and I think the worst affected are clearly the newspapers or let's call them the paper-based media - so newspapers, magazines, periodicals - there was some Deutsche Bank analyst data on classified advertising, the compression on classified advertising for example in the UK is very severe, we're seeing fall-offs of 10, 15, 20, 25%. I mean these are colossal fall-offs with the exception of property which has been moving. And by the way this is before a disintermediator such as craigslist, (I'm sure you all, most of you know what it is, but basically criaigslist is classified advertising for free), this is before craigslist really gets to work on the UK classified market. So, I think, paper-based media. That doesn't mean it's impossible, that doesn't mean you can't do worldwide news, it doesn't mean you can't do the German example that Rupert Murdoch mentioned, only it's very tough for newspaper. I think secondly, radio. I've always felt that radio would be stronger. I thought Nicholas Negroponte's comment several years ago - 10, 15 years ago - that we'd have more ear time than eye time was very powerful, but it has not proven to be. Maybe radio's become too fragmented and the sort of thing we see Mel Cammasan trying to do with Sirius in the United States is an example of the consolidational take place. So I'd put radio second. I'd put TV third. Maybe cable and satellite are not gonna be as affected. There are definitional issues in all these things, by the way. What constitutes a newspaper now? What constitutes a radio station? Does my gnome box that I use at home with Sky, is that audio? Is it radio? I think it's radio, but it takes the TV audio feed through a box. So there are some definition issues there but I think radio is second, TV is third affected. Cable and satellite - obviously there are opportunities, IPTV there are of course still opportunities, broadband television delivered by the mobile phone networks - there are opportunities. The least affected so far seems to be cinema and outdoor, but cinema may get affected post the digitisation surge that we've seen as people spend less time in cinemas and take VOD or whatever it happens to be at home. And then finally maybe outdoor, because of the improvement in technology, is least affected. While all that's going on obviously Internet, mobile, IPTV, video, iPods, all these things, PVRs are going to become more and more important. So I think the media gets most affected.

Now let me just spend a few minutes before opening up on the third group, which is the agencies. I think, we're having a tough time in the mature markets, and by that I mean the US, the UK, France, Germany, Italy, Spain. I was in Scandinavia, I was in Stockholm a couple of nights ago and it struck me that Sweden has adapted, with companies like Shiftsted and like Metro, (the free newspaper), they have adapted very much more rapidly than other markets. And that might be because they're smaller and therefore people haven't focused on them and certainly penetration of the Internet was strong, but for agencies in those mature markets, (not in China, not in India where CCTV in Shanghai Media Group and the Indian newspapers are growing 15, 20, 30% a year, and radio in Shanghai, growing at that rate), but even in those mature markets I think it's very tough. I think it's going to get tougher, and I think the attitudes still have to change in a major way. Let me just sort of lay it out what I think is happening with increasing severity and with increasing pressure. And the best way I can explain it is if you think about the classic advertising agencies, the traditional advertising agencies that have planning departments and creative departments and production departments that are naturally orientated around historic technology, taking it to its extreme, know how to produce a 60 second TV ad or 30 second or whatever it is - and you've got a structure that's built around the demand for those ads, traditional ads. And then either inside that traditional agency or adjacent to it, or in the same group, (all of those conditions apply to WPP), you've got the people, the planning departments, the creative departments, the production departments that are thinking about the new technologies. Now the demand for the first group is declining, or if it's not declining it's flat, that's probably more accurate to say it's flat, or if it's increasing, it's increasing in very small amount. Yet the people that populate those traditional agencies are not changing what they do and how they do it to accommodate that change in demand. And let me put it very crudely - if you're earning as a creative director or a planning director or an account director, let's say it's $500,000, and half of that is base compensation and half of that is incentive compensation, the people running that agency and the people that are employed in those departments are not prepared to see their compensation shift to accommodate the change in demand. They're not ordinarily prepared to shift their skills fast enough to the new technology. So they're saying; increase the investment in the traditional department even though the demand is not increasing significantly. And at the same time, in the other side in the new technology agency, well let's say the creative director or the planning director is paid $100,000 or $200,000 and the incentive compensation's another $100,000 or another $200,000, and the demand for those people is increasing because the demand for the product is increasing at a significant rate. Wherever the Internet advertising is it's 6 to 7 % of the worldwide market, 5 or 10 years ago it was zero, and our view is - you want my view? It's 20% of our business now, it's gonna be a third of our business in fairly short order.

The people in those new technology agencies, the demand for their services is growing, the demand for talent is growing, and they will demand a higher price for their talent, quite rightly. And by the way this is nothing new because you've touched on media planning and buying, and GroupM which is now the market leader buys 40/50 billion dollars of media a year, that didn't exist 7, 8, 9, 10 years ago, that was embedded in traditional agencies, and the process in my view, is exactly the same. Now there has to be a shift, and it has to be a very rapid shift amongst the agencies to embrace new media. You can do it in a number of ways. If you have enlightened management running your traditional agency they will do it. If you don't, of if you don't believe people naturally move fast enough, you have to create a thing like WPP Digital which is a separate vertical, and that separate vertical drives your traditional businesses to move faster. Because I think the sad truth is - and this applies to all the segments I mentioned; clients, media owners and agencies - we just don't move fast enough.

And the only time that we really move fast is when the platform's burning or when the ground is cut from under our feet. And you can see an interesting thing, (and I'll finish here), happening at the moment, and that is, (and I think this will be the case), that the traditional agencies, whether I call it our own JWT, Ogilvy, Y&R, Grey, Red Cell, or whether I say BBDO, TDWA, or McCann or Saatchi or Publicis or whatever it is, are going to increasingly find themselves in competition from new media and digital agencies that haven't gone through the traditional processes, that start, you know, you can see it a bit already; there are digital agencies that are on client lists for pitches, and that in my view is going to increase. So what you're going to see is some of us believe, (and I think this will happen and there will be a fusion between old and new, just like TV), we won't make the distinction between old and new media - it'll all be media. But what you're gonna see is agencies that were born and bred and developed on the digital side of the business, that naturally move quicker, that are naturally more aggressive, that are naturally attacking rather than defending territory, are going to become, let's call them, full-service agencies. And they will be a new breed, and they will compete on a level playing field with the traditional agencies, and that's how the fusion I think will take place. So the definition of creativity is gonna shift dramatically to a definition that embraces technology as its base - in other words you're creative not because you've come up with a big idea or a great idea in traditional technological senses, but you're creative because you employ the new technologies, the Internet, mobile, whatever it happens to be, in an innovative way. And the media piece will align with both, and you'll even get the media piece fusing, the media buying and buying piece, fusing with that new creativity.

So, to sum up, I don't think it's ugly. The geographical bit is I think easier. The technological bit is very difficult. It's only difficult because I'm not a geek and I'm sure many people in the audience are not geeks, so how do you figure out where it's all gonna go? Who is gonna out-Google Google? What are the new six Chinese PHDs in some garage in Shanghai gonna come up with? - you know graduates of Shingua or Fudan or Peking University, or MIT or Berkeley, or Stanford - what are they gonna do that is gonna shift the rules of the game yet again? And that, I think that's the closest I get to ugly, because I think that's very, very difficult to figure out. So that's where I want to stop Martin, and maybe there's a few questions.

Q&A

Malcolm Poynton from Ogilvy, London

Given that as you, I think, rightly predict that there is going to be full-service agencies - some from a new breed and some from an old breed - do you think that we will very soon see a merger between a couple of new and old breed agencies to provide the best of the network advantages and the modern agency advantages?

Yeah, well I think you will see it, because we've already seen some agencies, let's call them the new technology agencies, acknowledge they don't have a network, they don't have a geographical capability, and they want to become part of a network. I think you've got to be a little bit careful about that because the nature of the technology, or the technological change to some extent undermines the power of geographical representation. You take your own agency, Ogilvy, which is part of our group, by going to China through HYLZ and Century Harmony we have about 20% of the Internet market in China, and I'm sure that both those agencies became part of our operations in China because they saw operations in China geographically because we're in 12 major cities already and we've got a regional strategy in the 32 provinces of China, but also because they saw international opportunities coming. But I think there will be some of this new breed that will do it on their own, and there will be some who say, "I don't need the umbrella". Now the other thing I think you've got to watch out for is that when you merge the old and the new, whether you do it by acquisition or whether you take two pieces of a parent company like WPP and you put them together, there is a tendency for the old to be subsidised by the new. We saw that with Media, where I really believe that Media subsidised the profitability and operations of a traditional full-service agency. So when you took Media out you suddenly found that not only were these people better when they were liberated, when they declared their UDI, whether it was CIA, Chris Ingram or the Rodos brothers with MPG or Dennis Holt with Western International, or Aegis with the two French brothers, the Grow brothers, the danger is that the old things, that they dominate the new. There has to be equality, there have to be people running that combined business from the new side and not for it to be dominated by the old side. So senior management positions have to be made available to people from the new side. It's a direct analogy between traditional advertising and Direct. As Direct grew and grew more rapidly, the old agencies, the old traditional agencies grabbed Direct. And the senior management positions in those combined businesses generally were people who came from traditional advertising. That cannot be the right solution. And so what you've got to have I think for the concept that you're alluding to, which I think will happen, is that the new - let's call them the new technology executives - have to be in some cases (not in all cases), the governing factor, either regionally or for clients or for functions. Otherwise the new technology people - or the equivalent of the Direct people - the new technology people are gonna say, "I don't wanna be part of it, my skill is being subjugated". And traditional agencies have gotta get out of the habit of in new business presentations or in new business opportunities, or just generally, in putting traditional solutions at the front of the presentation and leaving non-traditional at the back, because nobody's got a monopoly on wisdom any more. And that, you know if you said what's the most uncomfortable thing, the ugliest thing, the toughest thing to get your mind around, I think it's that.



Mark Flowers from McCann Erickson

I'd like to ask you a question about your point of view on the challenges we face around the economics of, let's call it the digital world or more interactive world. I mean coming from a traditional background, and as we sort of evolve away from traditional models, evolve our skills and evolve our creative solutions whether those be downloaded bits of software or widgets on desktops or brands in virtual worlds, whatever it might be, how do we evolve our revenue models and how do we charge clients away from things like commission or fee-based revenue structures?

Yeah, I think on the traditional side we've already moved heavily, I mean in our business I think we're two thirds fee, so the half of WPP that's traditional advertising - that's creative which is a third and media, (I really should call that traditional, we call it traditional, Publicis tends to call their media business their non-creative side), but in that half of the business two thirds of it is fee-based and there's a lot of incentive compensation. The charm that clients have in relation to the new media is that they appear to be more measurable. And I say "appear" because I mentioned at Millward Brown and Kantar and Research International and Dynamic Logic, we're spending a lot of time trying to figure out how you measure the new media, and you know we're doing that with Neilson in our television audience measurement joint company as well. But the general view is these new media are more easily measurable than the old media. So I think, you know, yesterday there was an article I saw on Google, and pay-per-sale or pay-per-success advertising - that is gonna come, and of course that is why clients find these opportunities interesting because there is a promise, and I underline "promise" 'cause we haven't got there yet; there is a promise of greater measurability. So, I think you're gonna find the model shifts. I think the profitability of the model, that new model based on results, will actually probably be better. We'll certainly have a better alignment with our clients in terms of the parameters or variables that they measure their business on. So, I think to my mind it's all to the good, and I think I agree with the thrust of the question; it will become more incentive-based, it's already become more fee-based, and I think it'll become more measurable as a result. I mean some of the things that you can do with set-top boxes with the new technologies are remarkable in terms of tracking the effectiveness of what we try and do.

Ivan Pollard from Naked

To what degree do you think the actual process of deveioping communications ideas is going to change as a result of the demand for these new technologies?

It's a difficult one, I'm not sure that it's about process, you know it sounds a bit like an answer from that guy Martin Lukes in the FT, it's more about the mind and the mindset. I think it's not about process; it's about thinking, and it's about the way that you respond to an opportunity, or a problem, or a brief. And that's what's got to change. But the only way you're gonna do this is by people really understanding at a very early stage the power of these things that are happening. All I can say… we have a joint venture, a joint company with Dentsu and they send me an analysis every year of what's happening in the Japanese advertising market, and the last one came through and it said "Japanese advertising industry up for the third year in a row", and the headline was Japanese Advertising Up by Half a Percent. I went into the first paragraph - television's down, newspapers are down, magazines are down, and the Internet is up by 25%. And we see that in every one of the developed markets, not past the grey markets of Asia and Latin America, Arabica, the Middle East and Central and Eastern Europe. I think it's not a process change - I mean that's obviously part of it - I think it's a thinking change, and I liken it to what happened with Media; I liken it to what happened with Direct - they were always pale-end Charlie on the presentation, they were always the last five minutes, and because the planners and the creatives in the traditional area spent more time probably than they should have done, it got knocked off or forgotten about or was in the league behind. That has changed, and by the way, Media has played a very important role in this because the UDI that media planning and buying declared, which in our case is 2 billion of revenue out of 11 billion and it's 15 billion of billing, that UDI has driven, has aided the growth of digital media planning and buying and technology and the growth of technology. So, you're from Naked, and Naked's probably a good example of that, and I just think that all those trends are making this new technology piece - again I come back to your word - it's not ugly, it's not about process. It makes us all very uncomfortable because we've not had to deal with this before, and by the way, (and this is where I'll end), the speed is really awesome and it'll get faster. It'll stop at some point in time whether it's at a third or whatever of the market which is where I think it's going to, but the pace of change, you know more's more, can be applied to all sorts of things - it doesn't have to be like the capacity of computers or speed of processing - it applies to technology in a number of different ways. And I just think I don't want WPP or its constituent parts to be disintermediated by new technology if I can avoid it, or if we can avoid it as a group of people. That's the thing that we have to avoid. So we have to out-Google Google. If Google's a short-term friend and a long-term enemy, it's probably in a refinement of the frenemy phrase, either a short-term friend and a long-term enemy, we have to figure out very quickly where we're gonna go. So that's why we do squatt runner, that's why we've got GroupM pouring over what we should be doing about online media planning and buying, and if we don't do that it could make life very ugly.