Sir Martin Sorrell, Executive Chairman at S4 Capital plc, was in conversation with ISBA’s Director of Agency Services, Andrew Lowdon.
Andrew Lowdon (AL)
Has the government's lockdown and the approach to the lockdown damaged the economy beyond what we could have reasonably predicted? And particularly thinking about the advertiser, agency, production landscape, has that now been changed forever as a result?
Sir Martin Sorrell (SMS)
Well, on the first question it was probably inevitable that people would overreact because it was a black swan. I mean technically it wasn't a black swan because it was a known unknown, black swans are unknown unknowns, but to my mind it was a black swan.
You had Bill Gates warning in 2015 at TED Talks, you had several people warning about pandemics. President Trump had a report from his own Commission in 2018 about the impact of a pandemic, but it was from the point of view of a terrorist attack rather than the way it happened in a Wuhan food market, or however it actually happened.
So, I think it's inevitable in those circumstances that people overreact. I mean governments overreact, federal and state governments overreact, companies overreact, because it's such a surprise and because they were unprepared for it; it's natural for people to be thinking as conservatively as possible, if I can put it that way.
The one thing that I'm upset about is that the government knew. I know that the government knew in late January, The Sunday Times has picked this up, but they knew in late January early February that if you extrapolated the Chinese mortality rates you could have 300,000 [deaths] - and [if] COVID-19 was unchecked, you could have 300,000 to 500,000 deaths in the UK.
In terms of the second part of the question - has the advertising landscape changed forever, the digital acceleration is happening at three levels. First at consumer level, where you know one third of US households are buying goods - essential goods and groceries online for the first time. Maybe the one third will not all continue, but you've set up your account, you've had your fear of technology, or fear that it wasn't going to work, and the answer is yes.
So, we're shopping online more in the lockdowns. We're consuming - we're communicating online, like we are here. And we're educating our kids online. So inevitably the technologies will improve, the technologies are not perfect, but they will continue to improve. So inevitably at the consumer level.
At media level, as we well know, the media level - newspapers are dying faster, magazines are dying faster, the streamers like Netflix and Disney+ - you know probably the most successful product launch that we've seen, ever, 50 million plus subscribers.
Outdoor is interesting because traditional outdoor is on the decline but digital outdoor, if you look at the numbers carefully, is on the up.
So, you've got it at the consumer level, the media level and then finally at the enterprise level, people who are running enterprises were being much less fearful of disturbing the status quo and accelerating digital disruption. So before COVID-19, the world was growing at 2, 3 or 4%, no inflation, no pricing power - therefore a focus on costs, but you could buy back your stock and you could increase your EPS by 5 to 10%, or 0 to 5% and life was okay. The average life of a CEO in an uncontrolled listed corporation is about five years and they didn't want to disturb the status quo.
Now all bets are off because Q2 is going to be a bloodbath, it's going to be a disaster and we'll see that in July and August when the companies report. And so now the gloves are off, there's no status quo to upset, there's no applecart to upset, so you might as well get on with it
And we know that CMOs and CDOs are under pressure to boost their digital disruption and transformation even quicker.
AL
How is it going to play out with the sort of relationship side of it, because agencies have always been people businesses, our Zoom call suddenly makes it two dimensional - no chemistry or briefing, how are those interactions going to change, what's the impact likely to be?
SMS
We were talking about this a couple of weeks ago and we do think that, our people are digital natives; we've got 2,550 as of yesterday - people. The average age on the media side - and there's 550 of them, is about 25. The average age on the content side is about 32, 33. And there is no doubt that online communications, not being in the room, some of the chemistry it becomes I would say, more commoditised. And you know you have to think about that and you have to do something about it.
But our people are digital natives, working from home was no discomfort for them, they've been working from home for many years. They work 24/7. They work on clients' premises, on our own premises' and at home. So, we heard horror stories about agencies in London who didn't have the technology to work at home and were panicking in order to accommodate it.
We've just completed a deal yesterday, we didn't do it wholly online or digitally, we knew the people before - we had met with the people before, but largely the process was consummated online. And we will be doing similar transactions very shortly.
I think we waste a lot of time travelling, I think we spend a lot of money on events wastefully. I think having our own Cannes Festival - which I think we should have, but in the South of France, in the middle of June, is a farce to be honest, because we spend fortunes.
I think some of these changes are going to be permanent. We are moving to a hybrid office model; our people will be spending more time at home; they'll have more flexible commuting times, because this is what they want.
And in a year's time, or two years' time they may change their mind and we may go back to the old patterns, I don't think so. And this has implications for real estate prices in cities and suburbs and country, both office and residential. And some cities are going to benefit from it, you know places like Austin, or Columbus, Ohio or Kansas City will probably benefit. But we'll have to see.
AL
So, you take the network agencies, they've been under increasing financial pressure over the last two years. As they move into their new future, do you see them trying to restore their profitability through their traditional structures, or do you see them trying to reinvent themselves?
SMS
Well I don't see a future for them. I think they should be broken up. I think they're too big, ungainly, and too rooted in the analogue history; and I think McKinsey say the average life of a business in the S&P 500 or FTSE 100 is about 17 years. WPP I started 33 years ago, so it's had twice the life and I think it's past its sell by date. And I think it would be better for clients and most importantly for the people inside the business if it was broken up.
So, I see no future unless somebody, a private equity company, comes along and buys it, privatises it and dismembers it.
AL
Just picking up on what you were saying earlier about the employment levels and the demographics of your staff. A lot of the larger agencies and the big networks, are where it seems likely the early victims, for want of a better word, of furlough and likely candidates for redundancy, are going to be the millennials and the Gen Z’s , because I guess the suits and the senior managers are going to protect their roles. What is the impact of that? Is that just going to accelerate the problems within the agencies?
SMS
Well, I think it was ever thus. WPP is a very good case in point, it received £600m of government money and the CEO, he didn't pay himself, this is what the press usually say; they paid him an £800,000 bonus. So, it was ever thus. I mean it's rather like Dominic Cummings isn't it, there's a law for the rich and there's a law for the poor. And the people who get hit first are the sort of lower and middle ranks.
For example, the WPP Fellowship scheme is a good case in point, it has been abandoned, which was recruiting good graduate talent. And interestingly we're thinking at S4 what we should do - you know at precisely the time that everybody is abandoning that sort of approach, should it be something that we're embracing? And I think we will embrace something along those lines.
And, I think what's interesting is our view that precisely at the time the lockdowns are easing, is the time when we should be becoming more aggressive on expansion and hiring and that's precisely the time the holding companies and others are going to be cutting their headcounts and getting rid of those people that they probably shouldn't be getting rid of.
AL
Within any crisis there are always opportunities. Where do you think the opportunities are going to arise from COVID-19, and who is best placed to capitalise on those opportunities?
SMS
Well the opportunities, if you agree with the thesis of digital transformation acceleration at the consumer level, at the media level, and at the enterprise level, that's where the big opportunity is. Then it's a question of figuring out which of the verticals are more V shaped or U shaped as opposed to L shaped, or W’s. You have to figure out which are the verticals.
So, verticals that are clearly V shaped, any of the tech areas are much more V shaped, or U shaped. Any of the healthcare areas is so. Any of the gaming and entertainment areas, you know which don't rely on live [events]. On the reverse end would be travel and leisure or travel and hospitality, which clearly are going to be more L shaped, or will take longer time to recovery, or a deep U.
So yes, I think the opportunities lie in those three areas. You know the acceleration at consumer level, the acceleration at media level, the acceleration at the enterprise level and then picking the winners, - you know 53% of our portfolio, client portfolio is tech driven; Google, Facebook, Apple, Microsoft, Amazon, Spotify, Netflix, Uber, ServiceNow, SoFi.
AL
What about with those advertisers, where they are always very flexible, and they thrive on agility?
SMS
Agility is the key corporate attribute. And the tech companies, because they are looking at the sky rather than at their boots are better at it. Easy to say because their revenues generally are growing, but even during COVID-19 their revenues are not declining by that much or are flat. They are seeing a different environment and their mindset is totally different.
But you're right that agility is the key attribute and we see more agility amongst the tech companies than we do amongst the others. But then we see certain companies of the others being much more agile. Nike is being very agile at the moment and they're obviously benefiting as a result.
AL
What about your businesses, how well do you think they've reacted to the crisis and are you ready for the future?
SMS
Well you have seen our Q1 results, whilst everybody else was struggling in the industry we were up 19%. You'll see what happens in Q2. You will have seen recently that we added Digodat, the data and analytics company in Latin America, and there will be more of those things. We don't want to compromise our balance sheet. We have no net debt, we have net cash, so we want to make sure that we're as liquid as possible and un-geared as possible as we come through COVID-19.
But with the lockdowns easing we'll be fit and ready to expand further. So, we're being cautious at the moment but you'll see us do a number of other things.
AL
What about advertisers, do you think they're going to go down a path of sort of safe and cost effective, as opposed to being more innovative? Any thoughts around that one yet?
SMS
I think clients, and you would know this at ISBA, are in a perpetually experimental mode. What they want to do is find out whether outsourcing is best, whether an embedded model which is like our people working on clients' premises, or whether and in-house model, whether they should take those people on themselves, is best. Which is the best model?
I would say in summary clients basically want to take back control.
AL
So, media trading, and I’m thinking AB deadlines for example, has the TV model got to change for trading?
SMS
The three layers of consumer, media and enterprise, on the media free-to-air television is under attack from the streamers, from SVOD and whatever. They are going to have to change their model. Whether it's upfront in the US, which clients, I think, by and large want to try and get rid of. Whether it's more flexibility in their model, to your point. I think it’s obvious when you consider ITV is on the cusp of coming out of the FTSE 100 with a market cap of around £3bn. So the answer is, if your competitor is digital and they are totally flexible and you were running ITV what would you do?
Interview date 27 May 2020