Sir Martin and the Terrible, Horrible, No Good, Very Bad Week

Sir Martin Sorrell must feel like he’s trying to hold water in his bare hands.

First, the normally bullish European Investment Bank Exane BNP Paribas – double whammied Sorrell’s WPP last week with a double downgrade – from “outperform” to “underperform” – and dropped their target price for the stock by a whopping 27%. The analyst quoted in the release, Charles Bedouelle, said, “Marketing is driven by mobile, nimbler brands, ecommerce and automation. These areas are dominated by platforms where agencies are sparse, raising the risk of lower mid-term growth.”

Then, just yesterday, Mediapost’s Joe Mandese told us that Pivotal Research Group downgraded the entire ad sector, including Interpublic, Omnicom, Publicis and WPP. This time, analyst Brian Wieser said, “While we continue to expect growth for agencies, challenges that became much more visible by the middle of last year are likely to compress expansion in years ahead vs. prior expectations.”

Or, in simpler terms – “The gig is up Guys.”

WPP and the rest of advertising’s usual suspects have depended on an ad market with a significant amount of inherent friction. Friction creates pockets of value for intermediaries, who turn a profit by dealing with that friction on behalf of its clients. This friction has been relentlessly eliminated from the market in the past two decades thanks to technology. Yes, advertising has become more fragmented, but more significantly, it’s also become more fluid. The advantage once offered by agencies has been flipped into an anchor. Business models founded on the exploitation of friction in markets are not very good at dealing with transparency and fluidity.

When I was heading my own digital service company, we could chart the lifespan of a client with pretty reliable predictability. We specialized in search and most of our clients retained us when they were just starting out. This is the period when there is the greatest amount of friction – starting from standing still. We’d get them up and running and within a few months start delivering some pretty impressive ROI numbers. Over the next few years, we’d expand campaigns and find pockets of unexploited potential. Returns would grow. Budgets would increase. Clients would be happy. Life was good.

For awhile.

But there was an inevitable tipping point. As campaigns matured and Google – bless their techie hearts – relentlessly removed friction from the search advertising market, our perceived value would start to decline. At some point, it became an academic line item decision. When the cost of bringing search in house was less than our agency fees, we knew the end was near. We might prolong it for a year or two but the math was working against us. I remember one particularly somber December 24th when we received word from our largest client that they were not renewing our contract for the coming year. That represented about 16% of our total yearly revenue. And this was a client who loved us to pieces just 12 months earlier. It was not a happy Christmas. But it was pretty hard to argue with their logic.

Now, compared to WPP, we were a pimple on the butt of a flea on the tail of a dog who happened to be riding an elephant. And just like WPP, we were always looking for ways to add value by diversifying in other areas. But I suspect the logic is the same. If you depend on friction to add value, and that friction is disappearing, sooner or later you’ll disappear too. Your business model will slip right through your fingers. Just like water in Sir Martin’s hands.

 

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