Web 2.0 - more powerful than 1.0
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 billion of WPP's revenues, or around 25%. It is growing rapidly. There seem to be three reasons why.
- First, there is still the threat of disintermediation. Let's take an example from our own business. Over $2 billion of WPP's revenues 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 has 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.
- Second, you continue to be disintermediated by lower-cost business models that are evaluated by investing institutions in different ways. 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. There might, however, be a change coming in the fortunes of some Web 2.0 companies. All or virtually all depend on advertising revenues for their growth and survival. All cannot capture those advertising revenues and we may be reaching a point in the investment cycle, when 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.
- Finally, the internet and new media companies still steal your people. After the bankruptcies and failures of Web 1.0, many young people returned to the more traditional businesses they had left. WPP lost a number of such bright talents and later welcomed some back to the fold. I conducted a number of so-called re-entry interviews, and hoped to see and hear that the returnees were relieved to have their jobs back. Far from it: few grovelled. Instead they admitted that given the opportunity again, they would take it or seize a similar one. And recently, in the last year or two, with the emergence of the second internet boom, the so-called Web 2.0, it is clear there is another wave of interest among bright, young people over new technologies and attractive opportunities at new technology companies.
Clearly, the age of apprenticeship inside large corporations is finished. It was weakened by the corporate downsizing of the 1980s and 1990s, and the final nail in the coffin was the internet boom of the late 1990s. Young, bright talent will always seek out new, flexible, un-bureaucratic, responsive companies. Staying with one company for 40 years or so – as my father did and my mother and father advised me to do – no longer seems the best career choice. However, some recent polling and attitudinal analysis in the UK shows younger people want a better work-life balance. Hedge funds, for instance, are more attractive than investment banks, offering fixed work times and not demanding all-night toil.
Google, Microsoft, Yahoo! – where will it all end?
Over the past year, Google's dominance has grown further. It has a market capitalisation, despite recent extreme volatility, of approximately $170 billion, projected 2008 revenues of around $22 billion, approximately 17,000 people and growing, and 95 offices, including 30 DoubleClick offices. The stock markets are saying something about Google's valuation in relation to our own $15 billion, with approximately half the revenues at $12 billion and more than 90,000 people (excluding associates) in over 2,000 offices. Put together the four largest communications services parent or holding companies – WPP, Omnicom, Publicis and IPG. You will have approximately $35 billion of revenues and a $45 billion market capitalisation – almost 50% more revenues than Google, but only a quarter of the market value. To the former CFO of Google, the law of large numbers may start to operate at $5 billion of revenues, but Google's success is clear and its economic power substantial.
Google's success, particularly its dominance of search continues to catalyse and shape the industry and drive the actions of the largest players, even Microsoft. In 2007, it gave Warren Hellman and Hellman & Friedman a 800-900% return over two years on DoubleClick, paying over $3 billion – 10 times revenues and 30 times EBITDA. Entry to the first round of the auction was 13-14 times EBITDA, which we could not reach. It seems that this last transaction finally awoke the dragon. Microsoft initiated a heavy response, not only on regulatory fronts, but from transactions, too. Through DoubleClick, Google may control more than 80% of targeted and contextual internet advertising, along with much valuable client and publisher data.
Microsoft's response was to acquire aQuantive in an equally expensive transaction, valuing the company at more than $6 billion with the largest takeover premium seen in the US for several years. Despite heavy lobbying in the industry and an extended delay in closing the transaction, the DoubleClick deal was finally approved by regulators and closed a year or so after the announcement. Even before the regulatory approval of DoubleClick, Microsoft bid for Yahoo! and at the time of writing is seeking to agree an offer. A strong lobbying response from Google can be expected as well as further competitive moves from Microsoft. While the valuations may seem extreme to people in our industry, the amounts are small change to companies capitalised at $200 billion or $300 billion and are relatively the same as WPP's successful offer for 24/7 Real Media.
How do we think Google will respond? Eric Schmidt has already said that Google is targeting the advertising sector. It is experimenting not just in digital media but in traditional media such as radio, print and TV and in recent years these initiatives have become less experimental. As traditional media are increasingly becoming digital, we can expect these efforts to expand.
As we have said before, our relationship with Google – and now with Microsoft – is complex. Perhaps the frienemy or froe epithet is becoming worn but in the long term it sums up how our relationship is likely to evolve. As Rupert Murdoch is reported to have said recently: "There's a very interesting dynamic going on there in that world where Google is going forward, marching forward, with tremendous momentum. It presents a lot of questions to everybody, whether they're ordinary marketers or advertising agencies. Are they being cut off? Is Google really going to get control of the advertising world and should Microsoft be supportive in (an attempt) to try and stop that, and do they have the capacity to do so?". In the past year, there have been growing signs that Google wishes to work with our industry. We believe we are its largest agency customer, spending around $500 million last year (excluding the potential of the Dell search account, itself the third largest search account after eBay and Amazon). Our market share is around 3% which says a little about the nature of Google's business. Normally our media investment management market share, according to RECMA, the independent organisation that measures scale and capabilities in the media sector, is around 25-30%.
This shows Google's long tail and its heavy business-to-business and e-commerce connection. In a sense Google is a mechanical 'Yellow Pages' – opening up advertising to small and medium sized companies, that did not advertise before. To continue its meteoric rate of growth and develop the next pillar of its business outside of pure search, Google needs to build relationships with packaged goods companies and other brand marketers. Hence the acquisition of DoubleClick and, perhaps, its desire to build relationships with our industry, indicated by a very well-publicised but non-exclusive partnership with one of our competitors and the decision to sell the parts of Perfomics that compete with the search engine marketing industry. We have run joint seminars on both sides of the Atlantic, for some of our largest and most important clients, to try to nurture mutual relationships, have had Google train many of our people in our media and creative agencies and are building joint sales programs with a Google sales team designed specially for us. Our hope is that we can continue to do this and to develop the constructive side of our relationship.
The denoument of the Microsoft-Yahoo! takeover, still unresolved as we write this article, will be critical. Clearly, a combination of Microsoft and Yahoo! will bring greater balance to the markets. Our clients and our agencies will favour a duopoly rather than a monopoly. But our relationship with Microsoft is as complex as that with Google. Indeed, in some ways it is more complex, because as well as being a customer of Microsoft through our purchase of media from MSN and its other online properties, and a competitor to AvenueA/Razorfish, (part of aQuantive), we also work for Microsoft which is one of our top 10 clients.
Our response to these competitive moves has to be to work with these technology companies and to seek to develop our own technological capabilities – either owned or in partnership with Google or Microsoft or others - thus enabling us to succeed in 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, which acknowledged the critical importance of the application of technology. This was not about the acquisition of a digital agency – such as the acquisitions of jewels like AGENDA, Blast Radius, BLUE or Schematic. This was about the development of search technology, advertiser and publisher advertising management systems, the application of technology in general and to media sales.
In a way, if the 80s was the decade of the brand idea and the 90s was the decade of media consolidation, then this decade is about the application of technology to media and marketing. Our job as purveyors of media investment alternatives, provided we are not excluded from any single, powerful technology and have the talent to analyse the media alternatives, will remain relevant and valuable to our clients.