Martin Sorrell: vicious price competition

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The lingering effects of the global economic recession have led to "vicious price competition" among media services shops, including at least two situations in which agencies have personally guaranteed the media prices paid by their clients, noted Martin Sorrell, CEO of WPP, the world's largest buyer of media.

Speaking at the UBS Media Week conference in New York, Sorrell did not disclose the names of the media shops, but said at least one of the deals -- which he described as "giving guarantees on media pricing beyond the fees" the agencies receive -- has led to a lawsuit by a client seeking to enforce the guarantee.

"It's been denied, but I would rebut the denial," Sorrell said, calling the practice "extremely dangerous in my view. It's particularly dangerous if we see media price inflation."
He said that's likely to happen, despite the fact that media suppliers have sought to control their margins by cutting costs; there already is some evidence of media price inflation. For example, network TV scatter prices have surged relative to the prices advertisers paid during last year's upfront marketplace in the U.S.

Sorrell said the media price guarantee practice was one of several "short-sighted" steps being taken by agencies, media companies and clients alike to deal with the pressures of the global economic recession. As far as WPP is concerned, "media continues to be the really tough part of the business."

He cited the incessant pressure from client procurement departments to put greater pressure on agency fees, as well as the prices they pay the media.

Sorrell characterized such advertising marketplace behaviors as irrational, and attributed them as reactions to the near economic collapse that happened last year. Also, that many companies have simply been seeking to remain in business, as opposed to developing long-term strategies to grow their businesses.

He began his talk by shaking his head at the giddiness of some media companies reporting revenue declines of as much as 25%.

"How can you defend that the minus 25% is an acceptable solution? Or that you get some sort of joy from reporting numbers like that?" Sorrell emphasized later during the question-and-answer portion of his presentation. "In three years, you're out of business."

Sorrell did say that the marketplace appeared to have improved in November, but that it is not clear how sustainable that growth might prove to be.

He described the turn as being "more, less worse," and even suggested that the characterization would be "mis-reported" by the trade press, but what he meant was that on a relative basis, the ad industry is losing less ground than it had been at the height of the recession.

He said the global advertising outlook is more likely to look like the forecasts reported on Tuesday by his GroupM unit and Publicis' ZenithOptimedia, which called for slightly less than 1% expansion in 2010, and called Interpublic's forecast of 6% growth a "rogue" forecast.

Sorrell said the real engines of growth continue to be digital media and emerging markets -- especially China -- but characterized some new digital media phenomenon, particularly social networks like Facebook and microblogs like Twitter as potentially being short-lived, and said it is rare that digital media companies such as Google emerge with long-term traction in the advertising marketplace.

He also said that mobile media remains more underdeveloped than he would have expected, or would like to see, but that he believes Google's new Adroid operating system, and the smartphones being powered by it, would ultimately create a marketplace around mobile search and mobile advertising models.

"Google is the push for this," Sorrell predicted.