New technology is driving media convergence and a demand for accountability in advertising, says Martin Sorrell

What a difference a few years make. The slump of 2001 and 2002 now seems, thankfully, a long time ago. The advertising markets stabilized in 2003, before a welcome return to growth in 2004. This revival was driven by some significant global events.

We enjoyed a dramatic recovery with a very positive confluence of events, a maxi-quadrennial. The Olympics in Athens, presidential elections in the US and the European football championships all drove up the communications-services business. Growth continued to surge in 2005 and the outlook for 2006 – a mini-quadrennial – is excellent. We have the Turin-based Winter Olympics, the football World Cup in Germany and the Congressional mid-term elections in the US, for all of which advertising and communications spending estimates are about $1.5 billion.

Then 2007 will be the year of preparation for the next maxi-quadrennial in 2008 – the blockbuster Olympics in Beijing, the American presidential election (which could involve an engrossing face-off between Hillary Clinton and Condoleezza Rice) and the European football championships again. The 2008 Olympics will be extraordinary. No self-respecting global company trying to expand in China will fail to use Beijing as a platform. Nor will any self-respecting Chinese-based firm wishing to expand inside or outside China.

The global advertising and communications services business has, therefore, very good medium-term prospects.

A world of overcapacity

In the developed western economies, we see overcapacity in many other sectors of industry and a shortage of human capital as population growth rates slow down. Overcapacity is the single biggest issue facing many companies. The established consumer goods industries face similar problems to those suffered by the car and truck industry, where companies can make 80 million units a year but consumers want to buy only 60 million. In the 19th and 20th centuries, the problem was making and delivering goods. In the 21st century, given overcapacity, it will be differentiating and selling your brands.

It will be critical, therefore, to differentiate products and services through intangible and tangible means, and to differentiate companies by recruiting, motivating and retaining the best talent. In a noisy, mixed-up world, companies must stand out through the quality of their people. Making sure your people buy into your strategy is key; living the brand is critical.

All this creates a demand for truly effective advertising and internal and external communications services. But there will also be increased scrutiny on the effectiveness of that advertising and communication. Clients demand ever more accountability, ever more measurability and a broader range of services globally.

A changing industry

However, although companies will need marketing services, business seems tougher than ever. Technological changes, increasing global competition and a changing media industry are raising the demands on our business.

For advertising agencies, the big challenges are coming from the fragmentation of television into multiple channels and the arrival of the internet as a multimedia channel in its own right. The internet must surely be the most socialist – or even communist – influence we have ever had. It is providing information at pretty much zero cost, and starting to carry entertainment media across borders. A lot of the early hype about the Web has turned out, belatedly, to carry some truth. Once, owning a newspaper printing press or a licence to broadcast was enough to attract audiences and advertisers, and to make money.
The internet has created a democratic communications world where people can more easily choose which communications they want to receive, and which to publish themselves. Today, most people in the developed economies have sufficient technology at home to construct a website that could be viewed by tens of millions around the world. They can take photos of news events on their mobiles. They can bypass advertising with personal video recorders or iPods.
No wonder the owners of traditional media – television networks, national newspapers and magazines – see these things as threats. They should, however, embrace new technologies and work out better pricing models. For example, the cost of network television slots has risen faster than inflation, to the disquiet of advertisers. Imagine what would happen in the car industry if the price of steel rose by 10% against general inflation of 3%. Manufacturers would use less steel or find a substitute. That is happening in advertising. Radio, outdoor, cinema and or fishy internet advertising are becoming more acceptable substitutes. Network television, however, will remain important, provided it continues to invest in the quality of new creative content that will attract large numbers of people. Of course, in future it will be received over the mobile internet or via a mobile phone as well as through cable, satellite and traditional terrestrial broadcast. Media fragmentation has increased as old media become more sophisticated and the new media proliferate.

A convergent, integrating industry

As there has been fragmentation of media, so there has been diversification by communications agencies. Big groups such as Omnicom, IPG, Publicis and WPP can now offer clients integrated services from across their range of communication services businesses, not just advertising.
Where we used to talk about the advertising business, we are now talking about advertising and marketing services. Marketing services include market research (for information and insight) and consultancy in branding and identity; public relations and public affairs; and specialist services such as healthcare communications, direct marketing, interactive communications and the internet. We expect marketing services to move from about half of our business to two-thirds in the next five to 10 years. That is because of the growth in new technologies and as a response to the increasing cost of network television.

The industry is trying to do two things. The first is enabling our clients to coordinate as seamlessly as possible the services we provide for them in our different businesses, which requires scale as well as ability to develop synergies. The second is providing our employees with opportunities that go beyond any particular function or location, and a chance to develop their careers cross-functionally. To deliver integrated services, we need more integrated people.

A globalizing industry

As well as changing how we do business, we are changing where we do business. WPP has 40% of its business in America, 40% in Europe and 20% in by far the most exciting parts of the world – Asia, Latin America, Africa and the Middle East and Eastern Europe. The world is becoming increasingly two-paced functionally and geographically, with growth in the developing world far outpacing that in the established economies. In the next five to 10 years, the distribution of our business will change to one-third, one-third and one-third.

The consolidation in the communications business has had to keep pace with the consolidation among clients. At Davos last year, we heard about Procter & Gamble’s merger with Gillette. In retail we have seen concentration not only by acquisition, but also by growth in market share.

Tesco accounts for 12% of all retail sales in Britain and 30% of the British grocery market, and is now growing internationally. Wal-Mart accounts for 8% of retail sales in America. Many of our clients have 30% of their American sales going through Wal-Mart. We have seen consolidation in media owners and legislation in most countries favouring mergers. To meet the size and spread of the needs of these giants, communications businesses need similar global scale.

Consequently, like many other industries, our business is polarizing between the very big – the super-agencies such as WPP – at one end and the small, exclusive boutiques at the other. This has made the middle of the road a difficult place to be, with traffic approaching from both directions. Those mid-scale agencies, excluded from the super-agency pitches because they lack the global scale or breadth of services, feel uncomfortable, and so are now trying, themselves, to merge and integrate.

An increasingly accountable industry

Many sectors are under increasing pressure from shareholders and regulators to become more accountable and responsible. In the marketing services industry this trend is moving even faster, driven by technology and our clients.

Technology has spawned direct, interactive communications and the internet. It has improved the effectiveness of cable and satellite television, newspapers, periodicals and radio. Internet protocol television – where programming is delivered over broadband – will bring more fragmentation. Crucially, many of these new media are more measurable and more targeted. The internet will give advertisers just the sort of accountability they seek as well as more ability to target consumers directly.

We need to ensure that what we do is more measurable. The direct, interactive areas of communications are the more accountable. This trend is growing because that is what our clients want. They are constantly examining advertising and marketing services investment: how much money should they spend and where should they spend it? Does it make sense to shift their media investment away from network television to cable, satellite, radio, outdoor, cinema, public relations, direct, interactive or internet? That has made media planning and buying – what we call media investment management – a rapidly-growing area. The growth of new technologies places a premium on the work we are doing in this area.

Analysis of media investment is, therefore, becoming increasingly important: measurability and accountability are essential. How much they should spend and through which media are the critical questions for our clients. That remains the Holy Grail of our business: knowing which half of advertising is wasted as well as showing just how much value is created by the other half.

CV Martin Sorrell

Sir Martin Sorrell is chief executive and architect of WPP, one of the world’s largest communications services groups. It includes JWT, Ogilvy & Mather, Y&R, MindShare, Millward Brown, Hill & Knowlton, Burson-Marsteller and Cohn & Wolfe, among others.