The CEO of the World’s Largest Advertising Company Says These ‘Fearsome 7’ Tech Firms Are Upending Media
Shares in WPP, the world’s largest advertising group, are plunging after the company announced a 0.9% drop in net sales for 2017, which founder and CEO Martin Sorrell described as “not a pretty year.”
WPP (WPPGF), which owns ad firms such as Ogilvy & Mather and Young & Rubicam, as well as various public relations and market research companies, also forecast zero growth for 2018.
WPP shares were down 12.4% at the time of writing Thursday morning.
In his statement accompanying the results, Sorrell claimed the drivers of the moribund results and outlook were “probably the long-term impact of technological disruption and more the short-term focus of zero-based budgeters, activist investors and private equity [rather] than, we believe, the suggested disintermediation of agencies by Google and Facebook or digital competition from consultants.”
To handle the turmoil, Sorrell said that WPP would speed up structural reform within the group, shifting from an approach based on individual companies “to a cohesive global team dedicated to the core purpose of driving growth for clients.”
The market’s negative reaction suggests it is less than convinced by Sorrell’s analysis and solution, and certainly indicates deep jitters over the ongoing upheaval in the advertising market—and the “suggested disintermediation” by Facebook (FB) and Google (GOOGL).
That’s because the two tech giants have become something of an advertising duopoly. Media buyer GroupM—itself owned by WPP—said in December that the two web giants likely accounted for 84% of all digital ad investment outside China in 2017. There’s often no middle-man in this picture, so less business for the likes of WPP.
Consumer goods companies such as Unilever are also cutting ad spend to save costs, although it’s worth noting that Unilever recently threatened to yank its ads from Facebook and Google if the digital platforms don’t stop dividing society and amplifying hatred.
While Sorrell downplayed the effects of Google and Facebook on his business, he did suggest they would have major effects on the companies whose content runs alongside his ads, telling CNBC on Thursday that a “fearsome seven” tech firms—Amazon, Google, Facebook, Microsoft, Netflix, Alibaba and Tencent—would cause major consolidation in the media.
“On the content side, companies like Netflix and Amazon can pay significantly higher sums for an hour of content than traditional content producers. And that has created changes in the market, some would say distortions in the market, that are driving this consolidation,” he said.
WPP’s price drop had an immediate effect on other European media stocks, hitting ad giant Publicis Groupe (PUBGY) and broadcaster ITV (ITVPF).
Shore Capital downgraded WPP to a “hold” rating on Thursday and JPMorgan Chase left it at “overweight.”