Sorrell sees more gloom for media

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It has been a brutal year for the media industry. Since the credit crunch began to hit the sector in August 2008, broadcasters, newspapers and advertising agencies have all been suffering, with thousands laid off across the sector in the UK alone.

Yet over the summer, many media executives dared to suggest that the worst was over.

July saw Omnicom and Publicis, two of the world’s largest communications groups, as well as JCDecaux, the billboard owner, describe improvements since the spring. Michael Grade, ITV’s outgoing executive chairman, said in August that the UK was “at or around the bottom of the market” after the country’s “worst ever decline” in advertising spending.

Even Rupert Murdoch, the News Corp chief, said this month that business was “very much better than it was a couple of months ago”.

“Confidence is getting better but that isn’t translating into people spending more on their brands,” Sir Martin Sorrell tells the Financial Times. The WPP’s chief executive’s sober outlook contrasts with the improving mood of other industry executives: he said last month that he expected revenue to be flat in 2010 after what Citigroup forecasts as a 7.7 per cent fall in like-for-like revenue this year.

“People keep saying I’m more gloomy than others,” Sir Martin says. “I think it’s a difference in tone or spin. We are being more realistic about it . . . To me, recovery is year-on-year growth of like-for-like revenues. I don’t think the fact that July and August were less worse than June is a recovery. It seems to me to be statistical semantics. If we are not falling off a cliff, the sequential quarters have to improve.”

This short-term improvement should be not surprising, he adds, given the scale of governments’ economic stimulus packages.

“This is a deceleration of negatives,” he says. “Everyone at the moment is looking for green shoots and signs of improvement, so they fasten on to things far too quickly.”

Administrations in the UK, Germany and the US all have a “vested interest” in talking up a recovery, as elections loom. Media owners, too, are trying to talk up demand to encourage more up-front ad bookings, at a time when most advertisers are buying media space at the last minute.

So while the first part of the stock market rally of recent months was understandable out of relief that “Armageddon didn’t happen”, the second leg is “more questionable”.

In the first half of this year, only Brazil, Argentina, Russia and Poland provided growth for WPP. The world’s largest advertising and communications group by sales saw its revenue fall 8.3 per cent in that period. Sir Martin has admitted the group should have cut costs faster than it did but says staffing is now better aligned with the sales drop; headcount had been reduced by about 8 per cent at the end of August.

“In the short term we are looking to costs . . . In the long term we are all about new markets, new media and consumer insight,” he says. He expects Asia, particularly India and China, to lead the world out of recession, followed by North America and then western Europe.

But while WPP has interests worldwide, other UK-based media businesses – such as ITV – are not so fortunate. “If you are a single-medium company in a single country, you have lots of headaches,” Sir Martin says.

That will force mergers between different kinds of media owners, on both a regional and national level.

“There has to be more consolidation, it’s inevitable. These organisations cannot continue at these levels of profitability. The pain suffered in newspapers, magazines and free-to-air television is so great there is no other way, or a lot more of them will go into bankruptcy.”

The presence of the BBC in the UK means the pressure on these media is even greater here than elsewhere, he says.

“In a way, the BBC is getting close to being in a Google position in the UK,” Sir Martin says. “It’s becoming increasingly dominant.”

James Murdoch’s criticism of the BBC in his MacTaggart lecture at the Edinburgh TV festival was “right on”, says Sir Martin.

“As James raised in his lecture, it’s a question about what we want as consumers. Are we prepared to rely on the BBC to this extent? We have to decide whether having a healthy non-BBC sector is important.”

Sir Martin also backs Murdoch senior’s push into charging for news online. Advertising isn’t enough to sustain such titles alone on the web, he says. “There isn’t enough advertising to go around in a more fragmented media model.”

But it is not all gloom for traditional media. Television pricing is at its cheapest for a decade, which is luring back big advertisers. “The balance of cost between online and offline has shifted in offline’s favour,” Sir Martin says. “Online has always been cheap, offline has looked relatively expensive.”

Five large events should spur media spending in 2010, including the World Cup in South Africa, the Winter Olympics in Vancouver and the Shanghai Expo. These “mini-quadrennials” should add 1 per cent to advertising growth next year, which Sir Martin says should be just enough to stop WPP’s revenue falling into negative terrain.

But Sir Martin – who famously described the last recession as bath shaped – sounds half-hearted when he describes this downturn as L-shaped. “The L signifies we probably won’t go back to where we were before and signifies that the pre-slump situation was a bubble,” he says. “But I don’t think this applies so much for the south or east . . . The alphabet soup game is a little bit ridiculous.”

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