We work inflation to our benefit, says WPP chief Sir Martin Sorrell

Sir Martin Sorrell is the chief executive officer of the WPP Group, one of the largest companies in the world advertising market.  He built the company himself through a series of controversial and surprising takeovers in the 1980s and 1990s. He spoke with Anumeha Chaturvedi and Somnath Dasgupta.

(Sir Martin is in the business centre at the Oberoi, with an iPAd on his table next to a plate of sandwiches and French fries. Keeps glancing at the iPad, and the first references are to what he is reading on the screen.)

Sorrell: The April Fool's joke - a shotgun wedding Google does hostile bid for WPP.

If they had said WPP bids for Google, people wouldn't have treated it as a joke, right?
That's a good way of putting it. I think you can write - that was too realistic to be an April fool...That would have been regarded as being just par for the course.

After the downturn, what differentiates you from your competition today, and has the downturn made you rethink your structure?
(Looks at iPad) The next April Fool is your invitation to prepare for the Royal Wedding...(laughs)...

Our strategy differentiates us... I would say our position in new markets, which is, if you take India as an example or China, or Brazil, or Russia. You know, in India we have a very big market share, in China we have about 15%, in Brazil we have 25%, in Russia we have 25%. And there is always a lot of from our competition about what they are doing, but when you actually look at the numbers, which we can give you, there doesn't seem to be much of a change. The Next 11 or may be w should call it Next 10 if we should exclude Iran. So I think first thing is new markets, the second thing is new media. As with new markets, it's about 30% of our revenues. Our revenues last year were about US$15 billion. And in both cases- new markets and new media - its about 30%. That doesn't mean by the way that one's complacent about it. In both cases, our businesses are twice as big as the competition, and again the gap is not showing a lot of sign of changing.

And the third area is consumer insight, which is about 25% of our business, which is market research. And you know we are very big in market research business here in India. So actually India as a point of differentiation is affected by all three of those - new markets, new media and consumer insight.

What that all means is that we sort of do five things. Whereas the traditional agencies or the traditional approach would be to focus on planning, creative execution and distribution, in our case, we are very focused on the application of technology as a fourth area, and data analytics as a fifth.

We do fundamentally believe that we are in the business of applying technology - not originating technology - to our business. We also believe that we think - you know we do have a media portfolio of $72 billion I think we should manage that in a totally independent way and not be influenced in any way by arrangements with media owners, special arrangements. That's the reason we have a platform, as we do, the platform being 24x7 Media. Just like Google, and just like Microsoft's bought into Double A and Avenue A, we bought into 24x7 Media, which gives an independent platform.

So that's one area - application of data. Then the fifth area is research - data analytics. And we think it is extremely important that we have significantly differentiable consumer insights, insights into how consumers are behaving and how their habits - consumption habits and media habits - are changing.

Now, as to the strategy, and there is significant differentiation in new markets, new media, certainly consumer insight because nobody has a consumer insight business.

Do you think media and creative silo structures work better?
What, the separation? Well the cat's out of the bag. If you were a media person, or indeed a creative person, why would you agree, having separated these things, to put them together. The issue would be who reports to who, or who originates the ideas. If you think there is a coordination problem. You know, if you are a client and you think you are a coordination problem, the issue is to get the two agencies to work together.

I do think coordination is important, but I do think the medium is becoming more important than the message. Therefore media people probably, rightly, stress their importance and the problem in the old full- service agencies used to put media in the back of the agency. They never got the nice cars, the nice offices or the incentives or the bonuses. So why would they, having gained their independence, why would they want to go back. The creative part of the agency - so-called creative, because everyone is creative - would like to see it. They made a mistake, they lost control. But they lost control because they never gave the media side enough importance.

So I think it is unrealistic to expect a fusion - if clients do want fusion, which a number of them do, and I don't know if it is an increasing number, some people say it is an increasing number - you can achieve the same organizationally by putting the two together.

By putting them into teams, you get them to work together. I mean, if you think there is a planning deficiency, you put the planning staff into the creative agency, or the creative staff into the planning agency, they remain as employees of individual agencies but you fuse them together.

The sort of think we are doing for Ford. I was in London a day ago, visiting our Ford unit - I remember it very clearly, because I came out of the office and Tendulkar was out after it- we have taken a 120 people out of three agencies and put them together as Team Ford. And that includes media planners.

What it means, is strong client direction. That's the critical issue. Because the agencies working in a vacuum won't do it, it's about ego, turf and territory, but if the client directs it, and directs it strongly, it works.

So it will be a team basis, not on a company structure basis?
It's a mixture, because you have client conflicts, which you have to manage and you have to maintain separation.

And you have companies with diverging interests and their competitors...
What do you mean diverging interests?

I mean, they might have differences so how do you bring them together...
What do you mean differences?

I mean, a media planning agency may not get along well with the creative side. So how do you merge three different...
Well hold on a second - What are we in business to do?

Offering holistic solutions to viewers and clients...
Fine. So if two people don't like one another, what do you do? Is it our business to get two people to love one another? The objective is to, as you said, to try and provide the solutions. And our people had had better understand - which I think they do - that clients want the best people working on their business.

Now, it might be that for internal reasons, for motivation reasons, it is important to maintain the verticals. But I think what is happening is that clients want more horizontal connections between different geographies and different functions. So the team approach is becoming more and more important. The first pitch that demonstrated that was HSBC, which was probably seven years ago.

How are you doing on the talent front? How is India on the talent front? Are you getting the people you want across all the three - new media, consumer research and the businesses...
Very strong. There's always a shortage of good people and if I compare Indian talent - and we now have about 9,000 people in India - if I compare our talent to the rest of the world, it is as strong as you will find anywhere, arguably stronger. You know, I have often said when I come to India, that if all our business were as good as our Indian business, I could retire. The same thing applies. I don't know whether our own people are as good as the Indian cricketers - I think they probably are. We will find out tomorrow.

It's very good, it's very competitive.

One of the interesting things about India - I am going to the Indian School of Business in Hyderabad tomorrow - I don't know about business schools, but certainly in universities, advertising and marketing services is given a greater degree of reverence here than in many other markets. That might be because people like David Ogilvy used to come here and be treated with the utmost respect. It may be due to other reasons. It may be to do with power of the press, the traditional media - newspapers and periodicals.

You have not been - the advertising industry in general - has not been big recruiters on the B-Schools...
We have. We have been very aggressive, particularly with our fellowship programme, which is unique. After ten years, it remains unique because nobody has been able to copy it. It's a three-year programme, we do three different disciplines in three different geographies. To be fair, it tends to be done more at the Western business schools than at the Eastern ones.

The problem with our industry is that the philosophy or the ground rule is if you win a piece of business and you need people, you nick them, you steal them from the competition. That in the long run can never be a solution. We have to change our attitude. The reason why McKinsey is such a strong company or Goldman is such a strong company is that they consistently recruit the best people at universities and schools.

Our catchment area is different, because it includes the design schools, the film schools. This is not a WPP thing. This is an industry wide thing. We have to be far more consistent in recruiting people and not just steal them.

I thought it was quite amusing- there was an exchange at a session down in Austin. Michael Roth said, we don't you might at WPP but we don't.

Then he made some comment about he had made his strategy officer in charge of talent. I listened to what he said, because what he said generated quite a laugh, of approval. It doesn't stand data review. The person he was referring to was doing strategy and talent, and the person he had reporting to the talent officer is somebody who is well known in the industry. All he does is go around and try and recruit people at escalating salary and incentive packages in order to nick them. It's outrageous!

Because he posited that they were doing something virtuous but when you actually dig into it, it is the complete reverse. And it's exactly the problem I am referring to. Because strategy guy also does investor relations and also does talent. I mean, that's a 150 per cent of your time job, the talent job. And he has reporting to him somebody who professionally goes around nicking talent. Print it! (laughs)

There is an accusation that WPP in India has driven the commoditization of the business, commoditization of media, because you control over 40 per cent of the business.
Who says that?

People say that, your rivals...
Well, of course they would say that! They would be upset because they didn't think of it first!

So you do that?
No, no, no. No I didn't say that! I said they would say that because we thought of it first... we thought of actually consolidating the media. Of course, they would say that, because they are jealous of our position. I don't blame them. I think that is a good indication that what we are doing is right. Not commoditising it, you know, because if you look at the media side, there is media buying, media planning. You can't commoditise it. What it does do is it gives you that opportunity to leverage that position on behalf of your clients to get better content, to get better content across platforms, to integrate more effectively, to produce better results.

I mean, how can you explain, if it was such a bad idea, how can explain everybody is trying to follow us. Haven't got particularly far here, but they are trying it.

In new media, what is your view on how things are evolving. Do you have an idea of where things are going or is it chaotic?
Generally... It's not chaotic, because we know that you and I spend 25% of our time struggling to get online. We know that clients spend about 14% of their budgets online. We know that packaged goods companies by and large spend less than that, but don't admit that they spend less than that...I doubt whether packaged goods companies spend more than about 10% of their budgets online.

So there is a disconnect between what consumers are doing and what clients are doing. So over time, you would expect that 14% to go up to 25%. It certainly goes up by one or two share points a year. So in five years, 14 would certainly go to 20. This is an average worldwide.

In India, is the mobile going to be the new internet?
I do think it will, because you have what, 450 million mobile subscribers in India? Must be much more.  China now is up to 750, and China Mobile is 600, it will trend to 650. There are three mobile providers with over a 100 million [subscribers] here - Airtel, Vodafone and Reliance. Theoretically, you would leapfrog the PC, and you would have a new model, here in India, or China or Brazil or Russia, where mobile phones or smart phones will be the cheap form of access to the internet. That seems to be the way things are going, but we haven't seen much of allocated or diverted from budgets.

But there is a bit of activity. You know we have 40% of the largest mobile agency icon [iconmobile GmbH, a mobile marketing network], started in January, went to the West Coast, and is pretty much throughout the world now. That has tremendous volume, but its profitability is limited, to put it mildly. Which is an euphemism for saying that it doesn't make much money, if any. So there is lot of volume, but not much money. I think it is still in the infancy of it.

The other problem is that, historically, the operators, the network operators, would never cooperate. It's a bit like the private equity industry. You put them all in a room and they are alpha males, and they don't cooperate with one another.

When Google and Apple - Google first with the Android system and Apple more out of iPads than iPhones - started to develop their own operating systems, that put a lot of pressure on the mobile operating networks to get their act together, and indeed the handset providers.

So I think what you are seeing now is a reaction to that, and in becoming more active. Having said that, we still haven't reached tipping point yet. I think we may be in the process of getting there. I went to the GSM conference in Barcelona, and amazingly there were 60,000 people! Unbelievable!
It was quite interesting to see all the mobile operators and the handset manufacturers together.

I think the answer to your question is that its going to be very important but we haven't reached a tipping point as yet.
New media for us is about 30% of our business. We have not upped the target from a third to 35 to 40%, as we had done for the fast growth markets. The reason for both those is because we had got near the target.

As to where it goes, I really don't know. I think it will trend towards 25%, I am talking about globally. I think over time, may be five years, it will get into the 20-25 range. By the time it gets there, we are probably be spending more of our time than 25%...

Ultimately, people are right when they say you can't differentiate between the two. For example, you know, when I am in London, and I use my Gnome box - it has an audio feed from a Sky box. Its that radio, is it digital or is it TV? When I listen to radio on this (gestures at his iPad), which I can do, and listen to any radio channel anywhere in the world at any time, is that radio or is that new media?

The distinctions and differences are blurring. So at some point in time, it will be impossible to differentiate communication from one source or another. And in fact, it is probably right to say that you shouldn't really make that distinction. Some of these things are very arbitrary.

I mean, when we classify 30% of our revenues or thereabouts comes from digital, the way we do that, we probably underestimate it, because the other 70% has a digital element to it which we don't codify.

You think media agencies are better than creative agencies when it comes to digital?
You always ask the controversial questions! I don't think you should say that. I think it would be very unfair to say that one is better than the other. (Pauses.)

Well you said media and creative agencies... everyone is creative, even financial people, sometimes they can be too creative.

So I don't know whether that is the right designation. You know, you could say you got the old agencies, the traditional agencies, you've got the digital agencies, and you've got the media agencies. And if you were to choose between the three of them, you would have to say that somebody who focuses on one thing, digital, would probably have a stronger call in that area.

But you know, it's a bit like flying an aeroplane and you have to change the engines in mid-flight.  Its exactly the same in a newspaper. How does a newspaper accommodate and adjust to digital? When you been felling trees and distributing newsprint, which is not a particularly profitable or sensible economic model. It's certainly not good from an environmental point of view.

And if you can just tap away and download on an instrument like this, it's a totally different world.

So it's a bit like that. If you have a traditional business, which these new creative agencies or new digital agencies or even new media agencies are very jealous of, because you've got big clients, lots of them, lots of revenue and a profitable business, and here they are, startups in competition, they have no clients, limited resources and some good people, and they are trying to do their business.

It's the usual thing- the have-nots like what the haves have, the haves - the legacy companies - have got to adapt....

So you've got to try and differentiate yourself somewhere, haven't you.

Mr Murdoch's plan to put up pay walls, do you think it is working out, succeeding for him?
Vital! Vital, it succeeds, for your sake!

Has any model evolved - pay per view or subscription per month?
Three things have to happen. One is you have to have paywalls- you shouldn't call it paywalls. You have to have consumers paying for content that they value. If they think you know what you are talking about, and you write good stuff, they should pay for it. It is the ultimate economic measurement for knowing whether what you do has any value....

No, you have to pay for content, you can't give it for free, otherwise you won't exist. Otherwise, all we are going to have is user generated content. If I see somebody with a mobile phone taking pictures, am I prepared to trust that as reporting? Probably not. Do I think good reporters or commentators are worth reading? Yes. Am I prepared to pay for it? Yes.  So if you want professional journalism to survive, this has to work.

Number two, You're going to get more consolidation, because there are too many media owners. So BskyB being bought by News Corp or the equivalent will continue.

And the third thing is, which is probably much more controversial, is that you would probably need state subsidy. One of the things about the web is it disintermediates to such a great degree that newspapers and periodicals are probably one of the biggest examples of it, that the models are never going to be as profitable... So you would probably have to have state subsidy.

The way the BBC has state subsidy or you have charitable institutions like the Scot trust. The Guardian gets upset if you say it's a charitable institution. but basically the Scots Trust  protects the Guardian from going out of business. There is not the degree of economic pressure, but I think they face exactly the same problem. You know, in Australia, the government says we'll give the free to air networks 200 million Australian dollars back in terms of license fee refund (the fee they pay the government)  because digital has been so aggressive in attacking the free to air networks.

I think those are three things that have to happen for the traditional market to establish equilibrium. If you were doing a Harvard Business case study on marketing, you wouldn't launch at zero cost. Or the shaving model, where you give the shaver away for free....

Your research business in India. How much data have you mined from set up boxes?
There are issues of privacy... getting consumers to opt in or opt out-we prefer the opt out route-is critically important. For example, the opt outs you find on an iPad, it cant be that you give the consumer 45 pages to read, because no consumer is going to read it, so they just press the accept button. So what you have got to do is to simplify the language simplify the understanding and have a few sentences that the consumer reads before they accept or reject.

We insist on building jargon, we call it addressable media, it means I know more about the person I am trying to communicate with than I did before in the form of mass communication. That is what they call location-based marketing, in which you use mobile phones and the like. You would know who you are talking to, and therefore it is likely to be much more effective...

But all that raises big issues of confidentiality and privacy. What you have to do is you have to work out a system with the regulators-whether its FCC  in America or EU in Europe about how you control that. Obviously the consumer has legitimate concerns, and the trouble with most social networks is they are open platforms... The hacking, the bugs, the worms, the malware, is at an incredible scale. And this is not just bad guys in the sense of crooks or criminals, these are bad guys in the sense of state-based interventions too.

So this whole area of hacking, of internet penetration, security, is a big big issue. That links in with the privacy issue.

There are some clients of ours who every day have very, very, very high levels of security attacks...

Is inflation a problem for you?
It's more of an opportunity, because it gives our clients more pricing power....As long as it stays in modest proportions... Once it gets out of control, it puts pressure on wage levels, which is not good...In markets like you have such strong growth, if you have eight per cent growth, you are probably going to get faster inflation. But, I always look at the growth rate rather than controlling inflation.