WPP CEO Sir Martin Sorrell on the State of Advertising

November 17, 2017

From the WPP Stream in Ojai, California Cheddar's CEO Jon Steinberg speaks with WPP CEO Sir Martin Sorrell about the future of advertising.

The ad exec says clients want platforms like Snap and Pinterest to succeed. With the duopoly of Google and Facebook dominating the industry, with 75 percent of digital advertising and 30 percent of the entire ad market, his clients want control to be more distributed.

While Sorrell has seen Google as a "frenemy" in the past, he says he now sees the technology giant as a "flexible friend," because it's become more responsive to concerns. One of the reasons for Google's shift, Sorrell says, is the rise of companies like Amazon which provide an existential threat to the search and advertising model.

There's also been a lot of talk about how the rise of artificial intelligence may impact the American workforce. Sorrell says technology could be a net destroyer of jobs, and he expects that to become an increasingly critical political issue.

Last month, WPP cut its growth forecast for the third time this year. In the latest quarterly, revenue grew 0.8 percent to $4.78 billion. Sorrell says, "It's been very tough," and he's looking to see how things pan out next year. On the future of advertising, Sorrell says investment in innovation and branding is critically important.

FULL TRANSCRIPT

FEMALE_1: Our very own CEO, John Steinberg is live from WPP stream in Ohio, California with WPP CEO, Sir Martin Sorrel. John, how's it going?

Jon Steinberg: It's great. Um, it's a spectacular event here. Martin just got off the stage with [OVERLAPPING].

Martin Sorrell: Spectacular?

Jon Steinberg: Yes, spectacular. David Marcus of Facebook Messenger, Tim Kendall from Pinterest, but let's get down [OVERLAPPING].

Martin Sorrell: And Shantanu as well from Adobe.

Jon Steinberg: Shantanu from Adobe. But Martin, let's get into it. Um, let's talk about Google and Facebook, which is, I feel like at the streams I've been to, there's been an ebb in a flow in terms of the talk of du- duopoly. And we are at peak duopoly discussion this year, I think.

Martin Sorrell: Um, yes-ish. I mean, I think the pressure is that Google and Facebook are both feeling, the regulatory issues, the fake news, fraud, internet, measurement, the three Vs, key three three Vs; viewability, value, and validation. I think they are, uh, bringing a bit more realistic attitude to be fair. Particularly, with Google and maybe Facebook a little bit less so. But I think Facebook is making an effort as well. Certainly, we're seeing on the regulatory front, them having to make, uh, make efforts. You know, Facebook now hiring, what is it? 10,000 people?

Jon Steinberg: Yes.

Martin Sorrell: Uh, so the human factor comes in. They haven't admitted that there are media companies, either of them, as yet, but, uh, this sort of certainly moving that [APPLAUSE] way and it's not just algorithms that decide what happens to content but there will be judgment and humans in- involved too.

Jon Steinberg: Do you- do you think Facebook listens to anybody? I mean, it would seem to me that of all the people that they should listen to have a p- have a- have a conversation with ears open, you would be one of the people, given the amount of media spin. Do you think they, they listen to anybody about anything?

Martin Sorrell: I- I think I- you know, little bit of an unkind question. Uh, I think they do. Uh, I think frankly that, that Google will probably be more responsive and more flexible. I referred to- we used to refer to them as Frenemies. We still do, but more fle- flexible friends now. And I think Google has become more flexible in its response. Maybe partly to do with the regulatory issues we're talking about. You know, Russian interference in the elections, um, referenda etc cetera. But also because of the rise of Amazon. I- I think the existential threat, er, to, to Google, for example, is going to come from an Amazon on search and advertising.

Jon Steinberg: Did you see Malone's comments yesterday?

Martin Sorrell: No, I did not see that.

Jon Steinberg: John Malone, actually, he- he- you kind of said it before him. He said that, um, Amazon is a death star with every industry on earth in its sights.

Martin Sorrell: [LAUGHTER] That's an extreme statement but I don't with every industry but certainly a large number. I mean, what I'm sure Jeff and his colleagues are looking for, uh, for high-margin industries where, with low private label penetration, those are the two characteristics, and they're looking to shorten the supply chains and provide you and I as consumers with, er, with cheaper, cheaper products and cheaper services. So pricing convenience is very important. But there are political dimensions to this. I mean, for example, I was in India recently and I was thinking about, if you think about the number of people in India who depend on the retail supply chain or on selling things through the retail distribution, and then whether it's Flipkart or Amazon, and Alibaba they come along and if they destroy. And I'm a believer that technology is a net destroyer of jobs.

Jon Steinberg: Yes.

Martin Sorrell: Now, there are others much cleverer than me who say it's [OVERLAPPING] addition of, ah, obs. But if they do destroy jobs, for example in India, it will become a very hot political issue as to what happens to these retail supply chains. And unless employment is provided, you know, the biggest issue in India is going to be the employment of a 100 million or so young people in the coming years. It's going to be a critical issue. It becomes a critical political issue.

Jon Steinberg: Let's move on to advertising.

Martin Sorrell: Yeah.

Jon Steinberg: What is going on in advertising. I mean it, it seems unbelievably bleak across the board right now. You read the articles yesterday about BuzzFeed and Vice. We have Murdoch saying that he is at not-at-scale to compete.

Martin Sorrell: Yeah.

Jon Steinberg: Um, you know, you were- you're now- you've now forecast that you're going to be zero for the year as opposed to [OVERLAPPING] zero-to-one.

Martin Sorrell: I- I- no, for this year. Yes we do. [OVERLAPPING] We talked about around a flat for this year.

Jon Steinberg: Yes.

Martin Sorrell: As we look at- next year, we'll see, we'll see how things span out as we go through the budget [OVERLAPPING] .

Jon Steinberg: But down, down in North America this quarter, 4.9%?

Martin Sorrell: Yeah. I mean, it's been very tough. I mean, there are three potential explanations. One is Google and Facebook, which I- I don't think is true.

Jon Steinberg: Okay.

Martin Sorrell: Because I think, you know, Google is our largest me- media destination and investing about five, five and a half billion. Facebook will be over three- two billion this year so they'll be potentially even our second largest destination. The Murdoch Nexus of FOX and News Corp and Star and Sky will be around around the same number. So, I don't think it's that. Consultants, are there eating our lunch, I don't think so. I think consultants do go into our clients and offer, you know, if you're a CEO.

Jon Steinberg: Yeah.

Martin Sorrell: They- they said you're spending too much or will bring down the costs pay as a percentage of the savings and we'll help you save. And you're not going to resist that.

Jon Steinberg: Yes.

Martin Sorrell: That's a very seductive offer. But going head-to-head to us, with us on digital interactive, I don't think, I think we hold our own if not do better. Actually, if we look at the stats for this year, we're probably about two-to-one, three-to-one in terms of win-loss ratios. And even some of the biggest assignments we're really actually doing very, very well. The third issue is, you know, what are activists and what does that [OVERLAPPING] doing in terms of the pressure on cost? Er, investment in innovation and branding is critically important. And looking back to the Amazon issue, the Mallone comments etc cetera. In order to withstand that pressure, what do you have to do? You have to innovate and you have to brand. We know that the companies that innovate and brand grow that top line prices. And the real issue for packaged goods companies and beyond is what happens to your volumes when you cut your investment in innovation [OVERLAPPING] and marketing? And that the- the evidence is, volumes fall off and that's when the trouble starts.

Jon Steinberg: I think there's two scenarios. One scenario is, that it's the end of advertising, which I don't agree with. It's something is to dramatically change and that is why the advertising is going down. The other one which I tend to believe is, there's a massive mistake going on. There's a massive under investment in advertising going on, because the factors that you said and a fear around Amazon and Dollar Shave Club and therefore we need to completely regain [OVERLAPPING].

Martin Sorrell: But don't forget, you know, whe- whether, you know, we just won the- the Dollar Shave Club in- in- in Europe in the UK.

Jon Steinberg: Part of the incumbent st- [OVERLAPPING].

Jon Steinberg: And no, what's happened is- is that spending has been redirected. I mean digital is 40% of our business. People forget that. It's, uh, eight billion dollars out of 20 billion dollars of revenue. So we've already morphed. It went back to 2000 it was virtually close to zero. Same thing for the fast growth markets. In- in those years they were 10% of our business. They're now 30%. So, the geographical and technological changes that have made a spectacular impact on our business, but we've adjusted. And people forget about the adjustment. I mean, I read, um, Brockers report this morning saying because of, uh, Deutsche Telekom, we're sort of fragmenting their- their media in Germany, which we re-won. We with income and we won again. It has made no difference to our, difference to our revenue pattern in Germany. If any, if anything it's probably enhanced it. It's a misreading of what's going on because 40% of our business is digital. Google and Facebook are our biggest media digital partners. [OVERLAPPING]

Jon Steinberg: Yes.

Martin Sorrell: Our business has changed to accommodate those changes. And the total spend on advertising, not in the traditional sense but in the overall sense has changed. You know, the- the signals that Murdoch, Rupert and local and I guess and James are giving off in relation to the future of Fox and the future of News Corp, embody that because they're saying there would be big changes in the content industry. There are big, big changes around linear TV and over the top television. And in order to capitalize on that and to benefit from that, they are going to need greater scale.

Jon Steinberg: And as part of that scale, do we need to see vertical scale in addition to horizontal scale? Does every media company need distribution ownership? An- and what is your thoughts in that context at AT&T Time Warner?

Martin Sorrell: Well, I'm puzzled by the- the- the reaction to AT&T Time Warner because in, the regulators reaction, because it seems to me that this would would not be an anti-competitive merger. But we'll see how that pans out in terms of any lawsuits and appeals that go through. I think the biggest problem on AT&T Time Warner is the delay that it causes.

Jon Steinberg: Yes.

Martin Sorrell: On the assumption that the deal goes through in some way, shape or form. The problem for the management, just like with Sky in the UK. And I think the two situations acro- I think was unfair what the government did with Sky in the UK. I think, you know, they should have, I think probably it was such a political hot potato.

Jon Steinberg: Yes.

Martin Sorrell: That the government didn't want to hear. It's a sort of political hot potato as well. AT&T Time Warner but the same thing is if you're trying to run a business in rapidly changing environments, it's very, very difficult. The irony in relation to the first part of our conversation is regulation has not caught up with the changes that Google [OVERLAPPING] and Facebook and Amazon have brought about. Whereas, it has caught up and gone beyond in the case of a AT&T and a Time Warner or a Sky and a Fox.

Jon Steinberg: That's very interesting. And in what way do you think it should catch up?

Martin Sorrell: Well, I think regulatory, the regulators should be acknowledge these changes and the impact on the competitive landscape far more rapidly than they're doing. Because they haven't caught up on the news side of it.

Jon Steinberg: Yes.

Martin Sorrell: And they haven't yet and they haven't adjusted on the old side of it. And the competitive situation facing the decision for the government on Sky in the UK is very different in 2017 to what it was in 2011. It's a complete sea change and yet the regulatory attitude hasn't really shifted. And I think it has to because otherwise the incumbents are in a tougher position and the- the the the people who are new to it are actually getting advantage. [OVERLAPPING].

Jon Steinberg: Everybody making these radical changes, are there radical changes that you want to make to your business? If the philosophy today. [OVERLAPPING]

Martin Sorrell: We have to. We have no choice. [OVERLAPPING].

Jon Steinberg: The philosophy to date has been and you've used the term allowing our children to eat one another I love that expression.

Martin Sorrell: Well, the kind of mobilisation, we've had to, we had to, we have to grow our business, [OVERLAPPING] traditional business digitally. We've had to get our digital assets like a Wunderman or ViaMail or an AKQA or a Mirrum or OggleV1 and grow them faster. And then we've had this experimentation phases, you know, with our investment in vice or Refinery29 or Imagined or whatever it happens to be. We try to to try and we called it called it cannibalisation. That if you don't eat your children somebody else will, so you have to change your model. But the real change that we have to make is act as a company, a united company. As one company. The days when we, it was a market share battle and we had. [OVERLAPPING].

Jon Steinberg: Yes.

Martin Sorrell: Compete and cooperate.

Jon Steinberg: Yes.

Martin Sorrell: Have gone. Clients want us to provide the best people to solve their problems. The- that's one thing.

Jon Steinberg: Is that a sea change from where you were a year ago? Or two years ago?

Martin Sorrell: I would say compared to two or three years ago.

Jon Steinberg: Okay.

Martin Sorrell: And- and our people have to get used to the fact that they are part of a bigger [OVERLAPPING].

Jon Steinberg: Will people, so that's, I want to dig in on that point. Will- will a person working at WPP today, it's a bit like when people used to say in the United States, they'd say soldier where are you from, I'm from Virginia. Now, I'm from the United States. Are we soon going to have clients say, WPP is who?

Martin Sorrell: Yes.

Jon Steinberg: Services maybe.

Martin Sorrell: Yes.

Jon Steinberg: And that's different right.

Martin Sorrell: Very different. It's an integrated operation with 200,000 people in 112 countries hopefully acting as one as opposed to multiple units. The day of, you know, disintegration, the days of collaboration, for example, I- I- I went through Michael Bloomberg's new building in London, er, which is a spectacular Norman Foster building. But the basic premise of that building is about collaboration. And there's a central sta- circular staircase.

Jon Steinberg: Yeah.

Martin Sorrell: Everybody, there are no offices. There are standing room conference rooms, you know, people standing up to stop meetings going on too long. It's all about collaboration and integration. Now, Bloomberg is fortunate because he has one brand.

Jon Steinberg: Yes.

Martin Sorrell: Right? Sorry to mention Bloomberg on Cheddar.

Jon Steinberg: No, no, I- I like it there.

Martin Sorrell: But, but it's one brand. WPP has increasingly to become one brand.

Jon Steinberg: Are you going to have to move out of the townhouse and be in a bigger building where you're in the center of it all?

Martin Sorrell: We have some hidden bigger buildings. No, [OVERLAPPING] In Shanghai, in Madrid, in Milan, there- there are WPP campuses.

Jon Steinberg: But- but the hallway that you ran out of farm street at a de-centralized holding company, you were built like Warren Buffett, you know, out in Omaha.

Martin Sorrell: [LAUGHTER].

Jon Steinberg: Are you going to have to rethink it where you're in a giant building and Martin is sitting in the center of a desk?

Martin Sorrell: Er, I don't know whether it will go that far but if you go to Shanghai.

Jon Steinberg: Okay.

Martin Sorrell: To WPP in Shanghai, if you go to our new campus in Madrid, it will be the same. In Milan, it will be the same. So in many parts of the world, you know, we're housing three and a half thousand, two and a half thousand, 2,000 people in Amsterdam. We're doing the same. We're going there next week to see the the plans for that. So we are integrating our offer into a far more effective way. I mean, clearly sometimes, because of conflict. You know, McKinsey and Goldman Sachs can handle conflict in one brand.

Jon Steinberg: Yes.

Martin Sorrell: It's a very difficult for us to [OVERLAPPING].

Jon Steinberg: Last topic. I really nailed Snapchat with you nine months ago where, you know, you said you were going to do 200. I said they were going to come close to a billion.

Martin Sorrell: I said 200. So we were going from 200 to 400 which we probably will do. [OVERLAPPING] But we will be 400. [OVERLAPPING].

Jon Steinberg: And I said no way they do a billion. And you said. And I was right.

Martin Sorrell: But we haven't got to the end of the year yet. [OVERLAPPING]

Jon Steinberg: The estimates are now, ah.

Martin Sorrell: About 850- nine hu- 850, 900. Yeah.

Jon Steinberg: 850? What's going on over there?

Martin Sorrell: We're just trying to prove that you're such a smarty pants.

Jon Steinberg: On this one topic, you know, wha- wha- what happened there?

Martin Sorrell: Well, they've doubled up. If you go you've got to give him some credit.

Jon Steinberg: And I think it's spectacular.

Martin Sorrell: I would like to double our revenues from 20 billion to 40 billion.

Jon Steinberg: I think it's a spectacular achievement but it- it's dramatically short of what everybody thought.

Martin Sorrell: Coming back to where we started the conversation. Clients want Snap to succeed. They want Pinterest to succeed.

Jon Steinberg: No doubt.

Martin Sorrell: They want the altern- Oath to succeed. They want at Nexus to succeed. And the reason is the duopoly, a Google placement just to remind you of the statistics is 75% of digital advertising, which in turn is 30% in the industry. And so we're talking about 21-22% of the total.

Jon Steinberg: All right. Always insightful.

Martin Sorrell: I don't know about insightful but anyway.

Jon Steinberg: No, no. [OVERLAPPING].

Martin Sorrell: Trying out.

Jon Steinberg: I do these interview people email me for weeks. So, Sir Martin Sorrell. Thank you. [OVERLAPPING].

Martin Sorrell: They haven't got anything better to do than?

Jon Steinberg: You know people like your long interview.

Martin Sorrell: The best, the best thing was, was a friend from Pinterest. Tim Kendall and his 5 a.m.

Jon Steinberg: Ice bath.

Martin Sorrell: Ice bath. Do you think we should do that?

Jon Steinberg: I was listening to it and I thought he might [OVERLAPPING] .

Martin Sorrell: It shrinks your body.

Jon Steinberg: I kind of wanted. Well, he said, he said, there is weight loss. I could use a little midsection loss, I think that I'll do it.

Martin Sorrell: [LAUGHTER].

Jon Steinberg: All right. Sir Martin Sorrell, thank you as always for joining us.

Martin Sorrell: Thank you.

Jon Steinberg: Back to you guys at the stock exchange.