Tete-a-tete at Cannes with Sir Martin Sorrell

On the slowdown that’s taking place: With both top-lines and bottom-lines under threat, how do you see ad agencies and media buying agencies figuring their way out?

Advertising and media buying is about 45% of our business; so you’re missing the other 55%. Let me straighten out what we think is happening. A few of our competitors here at Cannes say they see no signs of any tightening. I have to disagree with them. What we’ve seen is the start of some tightening in Western Europe. We saw that in March. We believe that is going to continue. That has spread a little bit into America, but not seriously so. That’s understandable, because in America you have low interest rates and liquidity in the system, whereas in Europe you have higher interest rates.

We’re seeing the early signs of the impact of the sub-prime crisis with house prices falling in the US and the UK and consumers are feeling the squeeze. We’re also starting to see the impact of very significant price increases in packaged goods, which have been increased on the back of commodity price increases; oil and others. Packaging costs have risen and several clients are saying that the increase in costs has been very significant and they’ve raised their prices. As yet, we are not seeing the full impact on the consumer – and the consumer cannot remain unaffected with this scale of price increases. For example, the US car market has shrunk from 16 or 17 million units to 13 million units. So we are seeing an impact despite what others might say and that will have a rolling impact particularly in 09.

With WPP as a business it’s dangerous to say things are different now to what they used to be, because the moment you believe that, you’re in trouble. But there are some differences in the nature of our business. Twenty five percent of our business is digital. It’s a bit like China and India. If the world economy slows, China and India will still grow faster. Instead of growing at, say, 10%, China and India will grow at 5-6%, which I think is a good thing. China and India cannot grow at 10% compound forever and our businesses there cannot grow at 20-30% much as we would like them to do. There has to be a relaxation and we’d be delighted if that was the case, because if our competition disappears, and run away and leave the field to us totally.

2009 will be challenging because we will have a new American president, and in China, post Beijing (Olympic games) you will have a little bit of a slowdown. But then, in 2010 I think the prospects are very good; you’ve got the World’s Fair, the Expo, you’ve got the Asian Games, you’ve got the World Cup in South Africa, you’ve got the Winter Olympics and you have the mid-term Congressional elections in America.

It’s going to rough in 09. Do I think there’s going to be a recession? I’m not even sure there will be a recession…although in the last few weeks people have become extremely gloomy. Which is interesting, because when everybody becomes gloomy is the time when you know that things are changing. I wouldn’t say there is panic, but people are getting very anxious about what is happening, not just in the financial markets but in the real markets. With people I spoke to in Cannes, there’s a very mixed view. I spoke to one client, who’s in consumer goods, who says there’s been a sharp slowdown in May.

Getting back to what I was saying, 25% of our business is in digital, 25% is in Asia, Latin America, Africa, Middle East and Central and Eastern Europe. We have much more variability in our cost structure; 7% of our revenues, which is an all time high, is in incentives, freelance consultants. But these are going to be testing times.

On the google threat: poaching talent and business from the holding companies, etc

In order to reach the big budgets, companies such as google will consider going direct to clients. In our business with google, we buy about $900 million of search, which is about 5% of their projected revenue, whereas our normal market share would be about 25% with a media owner. So you ask yourself the question, where is the other 20% going? The answer to that is that Google has built it’s position in small and medium sized companies; they’ve increased the primary demand for search with people who don’t normally advertise. What they’d like to do is to reach the big-budget clients like P&G, Levers, etc, which they can do through us or they can do direct. That’s the frenemy or froe, issue.

The other question that you asked, why did they hire Ogilvy’s creative director? That’s more of a mystery. They suggested that he was going for branding or corporate identity. If that was the case we could have given them Landor to work on it, or Fitch or The Brand Union if it’s a brand identity job. That’s when we get a little nervous. To be fair, lots of companies are frenemies or froes. If you take a Google, a Vodafone and a Nokia, they all have competitive positions and they all have complimentary positions. You’re a supplier or an advisor and at the same time you’re a competitor. It’s something you have to get used to. It’s something we never had in the advertising business historically, but now we have to get used to it. The real point about yesterday (the discussion on threats from Google and Microsoft) was the power of these companies – Google is capitalized at $ 180 billion , Microsoft is capitalized at $ 280 billion, Time Warner is $ 50 billion and Yahoo is $33 billion. You take these top four and you take ourselves and Omnicom – around $13-14 billion each, and you add Publicis at about half that, and IPG abour half that and you get about $40-45 billion. That’s pretty daunting.

On Indian adland’s increasing wage bills

In India it’s very difficult. Our turnover rates are extremely high. Usually people would say, “high turnover, bad management.” That’s not the case – we have very, very strong management. The market’s growing and it is very difficult to manage. So if the average turnover is 30% or whatever it is, we have to learn to manage with it. I don’t think there is anything you can do about that in high growth markets. Can inflation continue to grow at the current rate with economic stability? The answer is, no. And so those rates will come down. If you say to me, has inflation had an impact on employee turnover in the UK or the US? The answer is no. But in the fast growth markets such as China and India and Brazil and Russia, even in the absence of inflation we have high turnover rates because of the demand for people and talent.

On the non-poach agreement between WPP companies. If someone is unhappy with a particular WPP company, when he or she leaves, the whole WPP system loses the talent. Are you rethinking the non-poach strategy?

We’re conscious of that, but anything else would lead to chaos. There’s no point poaching people from one another. We can focus on our competition, not on ourselves. The disadvantages of what you’re suggesting far outweigh the advantages.

On Media buying margins in India being under pressure

You’re being very parochial. Pressure on margins is there everywhere in the world and India is no different from anywhere else. Clients want you to do more for them for less, or for the same amount. That’s because they’re under very heavy competitive pressure, too. I think it’s all part of the very competitive dynamic all over the world, and that’s understandable. The great thing about the BRICs and “next 11” is, I remember one major Indian businessman, very, very successful, saying to me, “Do you think we should run separately (as a management team) or run holding hands.” I said, “If you were operating in an economy that was growing at 2-3% like the UK, running holding hands is very important in getting people to co-operate. But when you have an economy that is growing at the rate that India is, and is likely to continue at that rate, running together holding hands just slows people up. So the great thing about BRICs and the next 11 is that they’re growing so fast. So it’s not about just India. Growth cures a lot of problems. Our business is growing at 20% (that’s the first 5 months), so that makes people smile.

On India in the next three years

Corporate India is extraordinary. Take MTN. You have Sunil Mittal out on Sunday night and you have Anil Ambani in on Monday morning. Then you have him doing something with Steven Spielberg. Then you have Tata. Mukesh Ambani having operations on 200 million sq ft of property. Then you have Walmart and Bharti. You have Tata owning British Steel, Tetley Tea, Landrover and Jaguar, it’s incredible.

I see Indian businessmen become more and more powerful.