Q&A: Martin Sorrell on the Ad Game

The advertising industry has suffered more than most from the prolonged economic downturn. Worldwide advertising fell 7% in 2001, the first decline in two decades; 2002 wasn't much better. WPP Group CEO Martin Sorrell was among the first to predict that conditions weren't likely to improve until 2004. London correspondent Kerry Capell sounded him out on what the future holds.

Q: What's your outlook for the advertising business?

A: This year, we're expecting advertising and marketing services to be flat. But in 2004, U.S. Presidential elections, the consequent strong economy, the Olympic games, political advertising, and the European football championships should ensure that advertising and marketing services will grow by 3% to 4%.

Q: Have companies cut costs too much?

A: Price promotion strategies have become more prevalent in some industries. One example is the auto and truck industry, where marketing is focused on zero-coupon financing and cash givebacks. But if you focus too much on price, you end up selling commodities. If you focus on innovation and product, you earn a price premium and build brands. I cannot remember a time in the last 25 years when clients have been so focused on cost.

Q: Longer term, you're optimistic about the prospects for advertising and marketing services. Why?

A: The underlying long-term trends of globalization or Americanization, overcapacity and the shortage of human capital, the Web, internal communications, and concentration on distribution will underline the importance of our skills and ensure that communication services as a proportion of gross national product will bust through the highs of 2000. The single biggest issue facing our clients is overcapacity, making differentiated products and services critically important.

Q: How has globalization affected the advertising business?

A: The idea that globalization would lead consumers to buy goods and services the same way everywhere now looks to be flawed. Truly global products and services such as soft drinks or computers only account for about 15% of WPP's revenues. What has been going on may not have been globalization but the Americanization of markets. If you wish to build a global brand or business, you have to dominate the American market. In most lines of business, the U.S. market accounts for almost half of the volume, and failure to understand this can be life-threatening. American hegemony is based on the relative homogeneity of its 280 million population compared with, for instance, the 500 million population of the enlarged European Union. There really is no such thing as a Euro-consumer. Of course, China, with its population of 1.3 billion, is clearly a countervailing force, along with the rest of Asia Pacific. Greater China is already WPP's fifth-largest market.

Q: Will the consolidation among advertising agencies continue?

A: Yes. Despite lower levels of general merger-and-acquisition activity, consolidation continues amongst clients. New legislation in the U.S., Britain, Brazil, and other parts of the world is spurring consolidation of media owners, and, as a response, everyone from the ad agencies to retailers are following suit.

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