‘Agency scale has moved from buying power’: WPP looks to break with tradition

Advertising and media services account for 75 percent of WPP’s earnings, but there’s more emphasis on the commerce, technology and experience parts of the business that generate the remaining 25 percent. Some advertisers believe they don’t need the buying power of the agency networks for biddable media as the right price for the likes of display and search is more a function of data they own. It’s why WPP’s CEO believes there’s $100 billion opportunities in those newer areas that could deliver between 5 and 10 percent of growth for the group.

“It’s clear that scale has moved from buying power to the power of intelligence, and the heart of that is data,” Read said.

Media is where WPP is losing money. Both HSBC and American Express left the business in the second quarter of the year and with them took a combined $700 million in media spend that WPP can no longer make a margin on. There’s also the Volkswagen and AT&T accounts, which took a reported $5.5 billion in media spend with them when they ditched WPP in 2016. That’s a lot of margins to replace in a little more than two years.

“In a biddable media environment, it doesn’t matter how big you are,” said one senior agency executive with knowledge of the business on condition of anonymity. “In the old days, WPP could say, ‘We’re 40 percent of the market and therefore demand that we get the best price.’ They can’t do that now because larger advertisers don’t need that so much. A lot of the practices WPP thrived on in the past are coming back to haunt them.”

It will take time for Read to figure out the economics of this shifting media marketplace. There are still legacy issues within WPP that need to be addressed, he admitted, but did not say whether any of those issues lay at its media agencies.

The growth areas for media are still in programmatic, search, innovation in artificial intelligence and the application of technology, said Read. He did, however, tease two potential areas of change. The first is data. Future earnings will be less dependent on the business owning data and more about how it uses it. The second area is on WPP’s media agencies running more like technology companies than traditional buying shops.

In a nutshell, Read’s plan is less a radical revolution of its media agencies and more a way to do many of the things it was already doing better.

“Clients are not cutting spend — marketing spend as a share of our revenue has stayed relatively constant over the last five years — but they are shifting it to broader partnerships,” said Read. “It’s no longer enough to work with only the chief marketing officer. The chief information officer is increasingly important.”

WPP’s pitch to advertisers starting to sound a lot like the consulting firms it once said weren’t a threat to agency business.

This approach was clearest in the fact that media agency-cum-consultancy Essence was wheeled out to tout WPP’s revised approach to media buying as opposed to a business like Xaxis, the WPP-owned trading desk. The issue, however, is whether there’s enough knowledge among advertisers to scale a business like Essence. The media agency may be built on a transparency buying model that offers custom planning and campaign management at a time when more advertisers say they want control, but it doesn’t have many global clients outside of Google.

“Essence is potentially the media agency of the future, but the issue is whether clients understand the long-term benefits of that model,” said the agency executive. “If a client moves away from a non-disclosed deal they will likely have to pay a higher margin, which their procurement team might question. There are a lot of clients out there that don’t want to do that, especially if they already accept what that a non-disclosed model delivers.”

Rather than be proactive and predict guess how the turbulent media landscape will pan out, WPP has opted to be reactive and adapt its model when probed by clients.

One of those areas is e-commerce, which WPP has bet a considerable amount of its future prospects on. WPP talked up new revenue streams from the growth of e-commerce sales and told analysts its agencies were in prime position to exploit how close ads on emerging advertising platforms like Amazon were pulling ads closer to purchases. Importantly, a focus on e-commerce puts the group in contention for both shopper marketing and IT budgets that it would’ve otherwise missed. Indeed, British Airways, Sony, Danone and Adidas have all expanded their remits with WPP from just advertising and media to also cover technology, commerce and experience, said the agency group’s chief transformation officer Lindsay Pattison.

WPP’s plan proves it has been its own worst enemy. Neither Omnicom nor Publicis nor IPG has had to embark on transformations as big as WPP’s this year, which suggests company-specific issues, rather than industry ones, are behind a downturn that has forced it to cut 3,500 jobs and shut or merge almost 200 offices. The overhaul will cost around £300 million ($376 million) over the next three years, but will ultimately save £275 million ($345 million) a year by the end of 2021, half of which would be reinvested in the business.