2.0 – more powerful than 1.0
The internet will continue to exercise us and our clients. After the dotcom implosion of 2000, it became fashionable to dismiss the web. However, WPP’s smarter clients and those who missed out on opportunities in the 1990s have taken advantage of depressed values and a contrarian position. Web activity, broadly defined, currently accounts for around $3.5 billion of WPP’s revenues, or around 25%. It is growing rapidly. There are a number of reasons for this.
One is disintermediation, an ugly but useful word. Let’s take an example from our own business. More than $4 billion of WPP’s revenues (post-TNS) comes from market research. Traditionally, research has been done on the phone and through the post. The process was long and cumbersome. A questionnaire had to be designed, distributed and filled in by consumers or interviewers. Then data was collected, analysed and conclusions developed. That could take three to six months. Many CEOs despaired that by the time the solution had been identified, the problem had changed. Using the internet, however, the research process can be transformed and responses obtained almost instantly. WPP’s Lightspeed panel interrogates more than 17 million consumers globally and can deliver answers inside 24 hours. You may also be disintermediated by lower-cost business models. The gambling industry, for instance, has been shaken by the emergence of peer-to-peer sports betting sites, cutting out the traditional bookmaker.
Despite the relatively recent vicious compression in valuations and consequent losses, the financiers of new media and technology companies still focus on sales, sales growth and market share, rather than on operating profits, margins, earnings per share and return on capital employed. The hour of reckoning, however, could be coming for some Web 2.0 companies. All, or virtually all, depend on advertising revenues for their growth and survival. There will be losers in the battle to capture those revenues and we may have reached a point in the investment cycle where revenues, operating profits and cash flow become paramount. Financing institutions and strategic investors may no longer continue to support excessive valuations by re-financing cash burn, particularly in the midst of the financial crisis. Even venture capital companies will be more picky about matching or raising pricing in the next round of financings and may cut off funding altogether and admit their mistake.
These problems, however, are nothing compared to those faced by traditional media owners, few of whom have managed to deal with new technologies. Take Craigslist, for example. Established in 1995 by Craig Newmark, the site provides largely free classified advertising to millions of users across the globe. The result – a massive reduction in classified advertising revenues for the traditional players. It is estimated that Craigslist costs newspapers in the San Francisco Bay area up to $65 million a year in lost employment advertising.
The response from traditional classified advertisers is to produce their own free classified sites. The effect: a permanent reduction in classified advertising revenues, as established classified media owners justify their activities as necessary cannibalisation. If they don’t eat their own children, someone else will do it for them. The internet is probably the most democratic phenomenon we have seen: free information or nearly free information breaking the tyranny or monopoly of distance.
Few newspaper or periodical publishers have mastered the connection with the new internet platforms. Rupert Murdoch’s rapid and successful purchases of internet assets such as MySpace is one example. Similar initiatives have come from network television: NBC owned by GE with iVillage, and ITV in the UK with Friends Reunited (since revoked). Others such as The New York Times have made similar moves, but none seem to have been able to replace the lost revenues by new ones. And will NBC still be a part of GE in a few years? Will it be sold or spun-off? Will it merge with Yahoo! or another internet company? Will even The New York Times survive or face the fate of some US newspapers? The Chicago Tribune has filed for bankruptcy protection, the San Francisco Chronicle faces closure if a buyer cannot be found and the Seattle PI has gone to a wholly online model.
It is no longer enough just to be in the newspaper or network television business; you have to be in the communications business. This idea is not dissimilar to Professor Theodore Levitt’s analysis of the horse and buggy in the context of the transportation industry. Rupert Murdoch is one of the few who seems to understand this.
Perhaps the mistake was not to charge for newspaper content on the web in the first place. It is easier to take the consumer down in price, rather than up. If you can’t charge for content as strong as Condé Nast’s Vogue or The Wall Street Journal, for example, when can you? It was interesting that Rupert Murdoch made it clear at Davos in 2008 that he would continue to charge for some Wall Street Journal content. Maybe the internet has resulted in a permanent reduction in the revenues and profitability of traditional media owners.
As a result, clients are re-examining the relative levels of their advertising and marketing services investment. The econometric analysis of media investment is becoming increasingly important. How much should we spend and through which media, have become ever more critical questions – the Holy Grail of advertising, the answer to which half of advertising is wasted.
The application of technology and the data it provides are important components to succeed in the new technology-based media. We had already invested through WPP Digital, GroupM, Kantar and our direct and interactive businesses, such as Wunderman, OgilvyOne, G2 and RMG Connect, before purchasing 24/7 Real Media. This was more than the acquisition of a digital agency — such as the acquisition of jewels like AGENDA, Aqua, Blast Radius, BLUE or Schematic. This was about the development of search technology, advertiser and publisher websites, the application of technology in general and media sales, and followed, on a much smaller and less lavish scale, Google’s acquisition of DoubleClick and Microsoft’s purchase of aQuantive.
With enough investment, we can reproduce any of the media planning and buying technology developed and have already accessed search revenues effectively. Unlike the media owners, we are not investing in a single technology or making technological bets. We are purveyors of media investment alternatives and, as long as we are not excluded from any single, powerful technology and have the talent to analyse the media alternatives, we will remain relevant and valuable to our clients. Unlike media owners, who unless they cover the media waterfront, are exposed to one technology or another.