Interview Transcript

Can we step back to the 80s, when you started WPP? What was your original M&A strategy?

If you go back to the original document, which I think still exists, you can find it, at Companies House. In the circular that went to shareholders to approve the issue of new shares, to Preston rather than myself, we said our objective was to build a major multi-national marketing services company. That was it. When you start, of course, with a wire basket manufacturer and you want to try and do it in your own life, organic growth is stronger, but it takes longer; you are probably dead and buried before you get to any scale.

If we were going to do it on any scale and, if fact, if we were going to build a business, it had be done not just organically, but by M&A. In those days, acquisitions were a way of doing it; today, I think it’s very different. It is mergers, but we’ll come onto that. I think, in the first 18 months, we acquired 18 companies. Then, of course, the breakthrough if you like, was JWT Group. People forget that it was not just the agency, which is now no longer, very sadly, but it consisted of the media part of the business, which is now Mindshare, which continues to thrive. It also consisted of Hill+Knowlton and it actually consisted of an agency called Lord, Geller, which had a sad end to it when the management walked out with the IBM business, which they promptly lost. Actually, the IBM business came back in 1992, about three years later. You also had MRB, Market Research Bureau, which included BMRB, quite a famous research company here in the UK. That was the core part of Kantar, which is now part of Bain Capital.

We had a fast start, but the breakthrough was JWT Group which was 13 times our size.

How much did you pay for those assets, on average, in terms of multiples?

I can’t remember what the multiple was, but we paid $525 million for JWT and we found the Japanese property. We knew there was a pretty old property and we thought it was Berkeley Square but it turned out to be Japan, so that was a gross of $200 million; we had to pay $100 million tax. But that reduced the net purchase price by $100 million. Margins were appalling at JWT and we improved the margins, so that was a great buy.

With Ogilvy, I think it was about twice our size and was about $825 million. No profit was there and I made the mistake of funding it, in part, by convertible preferred. I forgot that convertible preferred is really debt, particularly in a bear market where the conversion rights have no value, so we were saddled with debt. We had to do a restructuring, in 1991, so it was a bit of the Perils of Pauline, but we did manage to fight our way through.

In terms of multiples, in those days, I would say that JWT looked, on the surface, to be a high multiple, but when you looked at the underlying potential profitability, we did very well out of JWT. Not just because of the property, but because they had some good assets. We brought Burt Manning back to run the agency. Don Johnston, who was the CEO of JWT Group, had got rid of Burt a year or so previously, who was his natural successor, so it was highly political. There was a disgruntled bunch inside Ogilvy and Ken Roman and David Ogilvy didn’t appear to have a good relationship on the surface, but when you dug down, it really wasn’t. When we sent the facts attack, as we called it, in 1989, to Roman, he removed the last paragraph of the letters, when he showed the letters to David Ogilvy, so David didn’t see that we had suggested he become chairman of the joint company.

That’s all history and, value wise, those were good deals; even today, with the destruction of JWT, the agency, which is extremely sad, not just because it’s a reflection of history, but because of its value. I think management comes in with big boots and stamps all over the history. It’s an ageist attitude, not just to people, but an ageist attitude to companies, in a bizarre way. Corporate memory is lost. I remember when I went into JWT Group, Jeremy Bullmore and Stephen King were being shown the exit door by Miles Colebrook and Allen Thomas, who were taking over JWT. It was the young guns again. In a way, it was very similar to what we’re seeing today; pushing out the old, without out any reference or understanding.

There’s an Israeli professor who talks about the difference between wisdom and intelligence. He says that older people have wisdom and younger people have intelligence. At the end of his YouTube video he says, make sure your companies are run by wise people and that intelligent people work for them. The older people run the business because they have the wisdom and the younger people, who have the intelligence, work for them.

So I said to Jeremy and Stephen, join our board. To this day, Jeremy is still at WPP, I’m glad to say. As he’s a leading national treasure, if they booted him out, there would be uproar.

How would you compare the assets you were purchasing at WPP in the early days to today at S4?

It’s a very different model. Both Saatchi’s, where I was previously to WPP and WPP itself, were what I call market share models. This is not a phenomenon that started in the 80s, with me or with John Wren, with Omnicom, then later on, with Publicis and Maurice Lévy or Dentsu. This is a model that started in the 1950s, so it has run its course. It has been around for 70 odd years. Marion Harper, of IPG, used to fly around in a big jet; it was amazing, really. When you read some of the books about him, he was quite funny, in a way. But it started with him. His view was, I think, primarily for conflict reasons, you had separate businesses because you couldn’t service Unilever and P&G in the same agency; they wouldn’t accept it. You had to have different channels or verticals or organizations.

The idea was that you had McCann and you added Lintas – they bought Lintas from Unilever, because it was actually Lever International Advertising Services; that’s what LINTAS stood for – and they had these separate brands. It meant that you knew, if you had competing brands or you launched a competing brand, that you would cannibalize some of your existing business. It is a bit like detergents at Procter or Unilever; you knew you would lose sales because of cannibalization but, on the other hand, you would build your market share overall. It is very much what I would call a market share model.

Whereas S4 is really about top-line growth. The biggest determinant of total shareholder return, of added value, to shareholders, is like-for-like growth. This morning, WPP has its capital markets day and it talks about accelerating growth. The growth they are accelerating to is about 3% or 4% a year, which is a modest target, to say the least, when GDP is growing at about that rate. But everybody understands that, in the market share model, margin is probably equally as important as top-line growth and you balance the two. Certainly, in our incentive plans at Saatchi’s and at WPP, it was very much about top-line growth and margin, equally weighted.

Today, at S4, I would say it’s two-thirds, three-quarters top-line growth – maybe even more than that – but with decent margins. At S4, we’re doing 20% and a bit more, after central costs. There is not much operational leverage in the business, in the classic sense. There is a bit, but it depends on where the new business comes from.

Is there more operational leverage in the digital business at S4 versus traditional agencies?

Probably a little. We were talking about it with an institution yesterday. I think, when we add an account like Mondelez – Mondelez is an existing client, but we add in the area of content – or when we add BMW and MINI, in Europe, each one is going to add more than 10% to our revenues. We are 3,200 people at the minute and we’ve hired around 300 people and, in that number, a few are the hiring for BMW MINI, but we’ll probably be at about 3,600 - 3,700, in fairly short order, excluding deals, which will drive us over 4,000. I would say, when we add an account like BMW MINI, we are adding people at pretty much the same rate.

Within BMW MINI and Mondelez, in addition to the scope of the business we’ve won, we’ve already added, in a few weeks, additional assignments and in that, that’s where you get the operational leverage. Your operational leverage is better when you do land and expand, which is win a project, add a project – you have to add people – add a project, add a project. Our revenues are around $400 million, trending upwards, obviously, from that level. A whopper, to us, is about $20 million, about 5% of our revenues. The biggest whopper we have is Google; our second biggest is a major tech communications company. You can guess who it is; one of the most valuable companies in the world, but we can’t say because of an NDA. Third and fourth would be BMW MINI and Mondelez; they would be vying between one another, I would think. The fifth is Facebook.

Facebook has come through land and expand. Win a project, grow it. Apple has come through that and Google, to some extent, has come through deals but has, principally, been driven by land and expand. That’s a much healthier way, I think. In terms of big pitches, Mondelez took nine months and BMW MINI took a year and a week. These are great drains on resources. For the bigger agencies, they’ve got more resources, but we’re getting there; we’re getting able to do it. We very carefully assess the likelihood of us winning, before we get involved.

On the operational leverage point, if you just look at Omnicom’s or WPP’s EBIT margin, for the last 20 years, it’s very sustainable between 11% to 13% margin, so very little operational leverage.

We were targeting 20% when I was at WPP. I think we got up to the heights of 17%, 18%. In this plan today, they’re talking about 13% to 15%, I think.

That’s their high end?

It’s not, historically, the case. For gross profit on net revenues, 15% seems to be where they are all aiming for. I think that indicates, to some extent, a commoditized business. I think a “good” professional services business should be doing 20% plus. There was one account that WPP actually won recently, where they basically offered guarantees on $160 million of media and they offered 120 days payment terms. Any mug can win or keep pieces of business if you offer those sort of trading terms. Finance and procurement do well in these sorts of environments. I was talking to our companies in Australia, just now, and they were saying how 2020 was the year of the CFO, because the CFO managed to exercise tremendous control over what was going on. I think the margins should be 20%, 20% plus.

You think S4 could get some more operational leverage, from a higher base?

Limited. If Peter Rademaker, our CFO, was on, he would say that there is 22%, 23%, 24% that you could get, depending on where the plans come from. Obviously, if you are doing deals, it depends on what the margins of the deal company is. It so happens that in stuff that we are looking at, at the moment, margins are north of 20%, but we’ll see. I’m satisfied with 20% and I would sacrifice a little bit of margin over 20%, 21%, 22%, for top-line growth.

How has your thinking about organizing operating company evolved over the years?

At S4, we are not a holding company. Ironically, we did a win a holding company award, just a few days ago. The organization who gave it to us asked me for a quote on it and I said, fortunately we are not a holding company, so we were mis-classified. The holding company is very vertical. In fact, people talk about simplification but all they are doing is entrenching the vertical. I was talking to somebody from the Dentsu Group, just recently. The Japanese talk about One Dentsu, but he said that what’s actually happening – and it’s the same thing as Maurice Lévy with One Publicis and it also applied with WPP – is that they talk about it, which is the right way to do it, because you do have to be one, but what happens is that you just entrench the verticals. All they’re doing is entrenching the verticals. I’m told that the woman that came from DBB, to run Dentsu International, Wendy Clark, instead of having One Dentsu, is now not making it into separate verticals, but reinforcing the verticals, rather like you see at Publicis and WPP and that goes against the idea.

They all talk about seamless and waffle on about how seamless they are. The reality is, Victor Knaap who, along with Wes ter Haar, runs our content practice, MediaMonks, goes around the world taking pictures of Publicis lobbies, where they say One Publicis or Power of One, or whatever it is, then they have 26 different agency names underneath it. It makes no sense whatsoever. Having said that, it is true that when you slam these things together, you lose value. That’s what’s happened. Again, you see it at Publicis; you see it at Dentsu. I think Maurice Lévy had the right strategy, but he insisted on sticking the Publicis name over Saatchi and the agencies being destroyed; the same for Burnett.

Why do you lose value?

There’s a subtle balancing act in the holding company model. There’s a subtle balancing act between trying to get everybody to work together and maintaining the strength of the brands. I think you get caught between the devil and the deep blue sea. The process is a long-term process but, unfortunately, the market which is focused on much shorter-term metrics, is looking for implementation at speed and I think that’s when you destroy value.

Our mission is to build the new age, new era advertising marketing services model and to disrupt the old and has four basic tenets or amendments. If we say that our constitution is as I have just described, the first amendment is purely digital, because that’s where the growth is; 20% growth next year, but digital will be 70% of media advertising spend by 2024. Secondly, this holy trinity of first-party data driving the creation of digital advertising content being distributed through digital media, in a continuous loop, rather like an election campaign, without an election date and 24/7; the 24/7 environment is ideally suited to that. Thirdly, faster, better, cheaper. Faster is about agility; better is understanding 20 or so companies; the hardware companies, the platforms and the software companies. Cheaper means efficiency. Finally, our fourth principle is a unitary model. One seamless operation and one P&L, which we’ve embarked on from the very beginning. This wasn’t something that was imposed, like it has been in the holding company models. The complications are just huge.

CEOs wax lyrical about how their businesses are seamless and how they operate one P&L. When you actually get down to an operating level, it’s complete BS. You have people running individual brands, for egotistical reasons. For good reasons, because they want to be successful and good people are egotistical and they like to get credit for what they are doing and what they do is very good. They’re not easy to manage; they are difficult to manage. You are doing that and creating these verticals and it makes it impossible to bring them together. When they are trying to win a piece of business and when they’ve won it or kept it, they tell the client how seamless and wonderful it’s going to be and it turns into a car crash.

Why does it make so much sense to integrate the assets at S4?

It makes sense because that’s what the client wants. The client doesn’t worry about where it comes from; we worry about brands and everything. When you collapse the brands, you lose so much, in terms of corporate memory, corporate knowledge and good people. I was talking to somebody who was in a very strong digital unit, inside one of the holding companies and I asked why he had left; he’d been at that company for 16 years. He was in a part of the company that was put in the ascendancy and he said, we drove the business and we were very ambitious then there were four companies that were put underneath us, who were good. But because they were so ambitious, everybody in that top company was promoted and put in charge.

It’s rather like when you talk to people at JWT. When Wunderman and JWT were merged, the joke was that you had to have been at Wunderman to get a senior position. What happened was that all the people in JWT were demoralized. This other guy that I was talking to had been in this organization where he was put on top; all the good people left and took clients, or the clients went, because the good people had left. It’s a very subtle balance and it’s very difficult. Going through it, it explains to you how difficult it is.

Why does the unitary structure works for S4, but is really difficult for the holding companies?

You’ve got to remember that it’s different because we started with a clean sheet of paper; we started with a very distinct philosophy. Those four principles are very distinct. Let’s look at the other side of it. What they say is, we’re not going to do any traditional. It says, when we talk to merger candidates, what we say to them is, look, if you want to sell your business, we’re not interested; do you want to buy in. Everything we have done has been half shares, half cash and, therefore, people are, effectively, cashing in part of their asset and they’re rolling their equity, into ours. They have to have faith in our mission and in our determination.

How do the clients look at the integrated solution of S4?

They want access to all your resources, in a seamless fashion.

But what about if I’ve got a competitor that’s working with you?

You can sort that out. You can have separate organizations. Because of the procurement pressure that clients put on the agencies, I think that’s put the clients in a much more difficult position to demand exclusiveness and it has made it much more difficult to enforce. Because of the conflict, the frenemy – the situation that you see increasingly, where whoever was your competitor becomes your friend – there are so many frenemy situations, particularly with digital transformation, that the competitive lines become blurred. There are always the bananas conflicts, as we call them. Bill Phillips, at Ogilvy, used to say that there are bananas conflicts, by which he meant, when you told one client about another, they went bananas. There is always that emotional conflict, for which you may have to have separate organizations.

By and large, that friction has diminished and what clients want is access to the best. McKinsey don’t go through that; Goldman don’t go through that. They don’t have to set up separate organizations. Sometimes they might have to have different teams, within the same brand, but they manage to get away with it. You’ve had some classic cases with those uni-brands, where they’ve been advising one client and, a year later, they pop up the other side, in an M&A deal and that causes a bit of friction. But by and large, it is accepted.

The reason it is accepted comes back to your margin question. If what you do is so good and so valuable, firstly, you get an increased margin and secondly, they want to work with you.

But back in the day, with holding companies, it was an issue because you didn’t want the creative side to be the same as your competitor’s. For example, if I was working with WPP and I’m Unilever, I wouldn’t want Procter to work with the same agency?

Yes, but when we bought Grey, I had a big conversation with Unilever as to whether that was acceptable and vice versa, with Procter, as to whether it was acceptable to them. It turned out to be acceptable because we had separate organizations. I think, today, that friction is less. Maybe between Unilever and Proctor & Gamble, it’s a bananas conflict, but you can often handle it. You may not have the global brand; you may have regional brands, so you might work for Procter in Asia and Unilever in South America. I’m not ducking the issue as I think there is an issue there, but you can handle it and you can make various different locations secure and different organizations secure.

Going back to the point you made on rolling the equity and structuring these deals, why don’t you use debt instead of partly cash? Isn’t it more efficient?

Risk. Why did we raise 130 million in July? We didn’t need the money immediately, but I just felt that it was too risky to take on debt. There was another reason as well; we wanted a bit more flexibility. In merger negotiations, it’s good to have the money in the bank, so that you don’t have to go to shareholders, and you can do deals quickly and effectively. If you look at our competition, the holding companies are not in the market at all. They’re talking, like WPP and others, about getting into the market, but we’ll see what they actually end up doing. In terms of selling companies, you don’t want people who want to sell companies and do earn outs. You want people who are going to commit to the mission.

There is a missionary zeal here. We want to build that new model and we want to aggressively take down the existing models.

To tap into the emotional side of people you hire?

There’s a passion for this that is extremely important.

It’s important to have a villain?

It’s important to have a target, that’s for sure.

My question is also around how much leverage these businesses could take because they are so cash generative with low operating leverage.

I would say, in comfort, they could take two times leverage. In our area, there are a lot of private equity companies, in fact, on deals. On the client side, it’s Accenture; that’s the competition for us. They were the competition on BMW; they were the competition on Mondelez. We are two-zero, Victor Knaap likes to say. We are about four or five to zero up, according to him, but on the big stuff, it’s been two-zero. They compete with us on the client side, then compete with us on the deal side and then PE, private equity, on the deal side, because they have more money than Croesus. They’ve got about a trillion dollars of unleveraged equity and they could leverage that three, four or five times. You are talking about huge resources and they are very aggressive.

I was speaking to one of them yesterday and he’d just raised a new fund. He said that they’d done extremely well this year, given Covid; they’ve raised new money but it’s not proving easy to deploy the money and the pricing has gone up; so private equity and Accenture on the deal side.

For debt, I think you can probably go to two times. I think private equity goes more than that, but I wouldn’t feel comfortable. We’ve said to the market that we would leverage up S4 by one and half to two. We probably have a couple of hundred million pounds of debt capacity, it we wanted to push it. My closest financial advisor said to me, when we were contemplating the equity issue, go for it. So we went for £75 million and we upsized to just under £115 million.

On the pricing, due to this private equity and competition coming in, do you expect these assets to really increase in price because of the cheap money and competition?

Yes, I think it is. We’re seeing a lot of activity in the US, before the year end, because they were worried about capital gains tax increases, under the Biden regime. I actually don’t think that 2021 will see that, but we’ll see. But there was a rush to complete stuff, to avoid the risk, before the year end. We are seeing a bit of frenetic activity but, with zero interest rates, people want to deploy capital.

Somebody said to me yesterday, about SPACs, it’s a good place if you’re not getting any interest on money. You park it in a SPAC and, effectively, you have a warrant on the upside.

How exactly are customers evolving, as ad dollars are shifting digitally?

Covid-19 has just accelerated the transformation. You see it at the consumer level, whether it be online shopping, education, healthcare, financial services and games and entertainment. You see it in media and the further demise of the traditional newsprint distribution of magazines and newspapers and the demise of traditional outdoor rather than digital. The rise of the streamers, free-to-air TV being under pressure. Then thirdly, enterprise transformation is being driven forward at a more spectacular rate. Change agents become even more and more important and we see them being given much more oxygen, within companies.

I think we’ve really seen a tremendous acceleration in the interest and, more importantly, the commitment. There has always been interest in digital transformation, but there’s been lack of commitment because people have said, why do we have to do that; we’re doing okay. Before Covid, GDP was up 2%, 3%, 4%, you grew top-line. If you’re talking 3% or 4% growth, that’s GDP and there’s nothing spectacular or difficult about that, at least in theory, although executing to even that for the traditional agencies is going to be difficult.

But you talk about 3% or 4% growth, you cut your costs and you buy back stock, so you increase your EPS by zero to five and 5% to 10%. The average life of a CEO is about five years, of an uncontrolled listed company, so that was a good legacy to leave.

What exactly are customers insourcing, between the creative and media buying side?

They’re looking at everything. If you look at the stats, with WFA, or whoever it is, it is about half to three-quarters of clients that are looking at in-housing. Because of digital’s 24/7 and always-on nature, that means that the traditional structure, the Marion Harper model if you like, the market share model, is no longer fit for purpose because it relies on a static model. You brief the agency, the agency comes back, you re-brief the agency, you go out and film. We have a studio where, if you want to produce a commercial, we can film anywhere in the world; we can instantly do it with the Epic Games, Unreal Engine technology. We have a huge advantage, nowadays, to produce things at warp speed, which are fit for purpose, in a market which is 24/7.

It is like running an election campaign without an election date. You have your competitors sending messages and, more importantly, consumer preferences, changing and developing and maturing, all the time. So you have to respond, at warp speed, in a nanosecond. Producing a commercial, in two months, just doesn’t make any sense. We can do high-quality stuff, quickly and effectively.

Is this only for digital?

Actually, this is a little-known thing but, Mondelez, globally, including Europe, including the stuff that Publicis says that they are doing, are producing TVC content, television commercial content, but that comes from what we are doing digitally. We put digital at the center of everything and then everything we produce can be used.

In the old days, and still now, people strip down TV commercials and use them online. Wrong. You have to have content that is fit for the devices that you are using, whether they be an iPhone, and iPad or whatever it happens to be.

I’m curious as to how you look at the creative agency relationship with the clients. Historically, we’ve seen companies like Oglivy, Saatchi’s, literally have creative relationships for over 50 years or even 100 years, sometimes. How are these relationships changing, given the disruption?

They are being turned upside down. Ford, which was the anchor client at WPP, had brought in other agencies, like Wieden and BBDO. Another ex-client of WPP had been with them for years and years. It hasn’t been publicly announced but they have moved to a smaller agency. It happens all the time. I think clients should be focusing on a number of things. They should be focusing on agility because that’s the attribute that everybody needs, not just in the Covid world, but generally; the VUCA analysis, volatility and uncertainty. Secondly, they should be focused on first-party data. The pressure on the platforms, whether it be Google, Facebook or Alibaba in China, means that first-party data is going to become even more important, so you have to focus on that.

The last thing is that you have to take back control. The nature of the environment is such that you cannot operate at arm’s length. You can have an outsourced model, to an agency, as long as they are responsive and agile; faster, better, cheaper, in our terms. You can have an embedded model, where we embed people in the client. Then you can have the insourced model, which we do which is subject of a Harvard Business School case study, the insourcing media case; that has morphed into T-Mobile. Bayer, another one of our clients, has been selected as in-housing client of the year. Traditional agencies have been unwilling to do this, historically, because it does them out of their business. We’re agnostic about that. We will do things that are in the interests of the client.

If we think in-housing makes sense and the client agrees, there is after-sales service in the sense of keeping them up to date with technology, because it’s often difficult for clients to keep up with technological changes and we see in more verticals so we get a better understanding. And then people; there tends to be more churn of people because, again, good people like to work in lots of verticals. So we keep them in touch and we’re hands on keyboards, if they need them, in that process of change.

The models are very varied and we can offer all three. We can offer outsourced, embedded and insourced.

Let’s just walk through a typical customer journey. Let’s say I am a big auto or FMCG business and I’m moving most of my budget digitally. How do I go about finding a partner? Do I focus on the creative content side first for my campaign?

I don’t think that the review process is a good process. It diverts resources from the client and diverts resources from the agency. If you’re the incumbent, you need to have a team running the business and making sure that trains run on time and you have to have a team pitching for the business. It’s a very difficult balancing act. I think you have to be extremely careful. I think the best way is land and expand. It’s best for a client to see how you work. Give us a project and see how we do. If you don’t like the way we do it, fine. If you do, let’s go onto the next. It’s tremendous waste. In the teeth of Covid, to have all these resources, you can imagine the resources and the process.

Do you aim to go in with creative, with MediaMonks? Is that the entry point for S4?

No; it can be either. With Mondelez, it was data and analytics and it morphed into content. With BMW, it was a straight content thing, although we’ve started to get involved in some media areas, as well.

So there’s no one way you go-to-market or look to enter accounts; it can be with either MediaMonks or MightyHive ?

No. As I said, I was talking with our companies in Australia, this morning. What’s interesting is that first-party data is an issue that, in the so-called C-suite, is really important.

How does MightyHive, in this case, have an advantage over the Accentures or other competitors that would be bidding for that business?

It’s motor torpedo boats and aircraft carriers. It’s a bit like saying, why is it that Tesla or Amazon can do what they do. The answer is the incumbents are so overwhelmed by their internal structures that they can’t move.

Is it a cost saving that the customer cares about or is it more about the quality side, for the analytics, with MightyHive?

The answer is probably both but I think what’s driving it at the moment is, primarily, the qualitative side. It’s getting the digital transformation or digital acceleration and the change done, rather than just focusing on procurement or cost.

I saw a recent comment from WPP’s CEO, where he actually said that, from £100 allocated on Google, they earn 5% to 6% for media buying, where I believe it’s around 3% for TV media buying, even though it’s somewhat more concentrated, with Google and Facebook being most of the digital inventory out there. Why is digital media buying somewhat more profitable than TV?

I don’t know where he gets that statistic from. It may be that it’s because, when we were there, we created a thing called Xaxis, which acted as principal and bought media online inventory. That may be the reason. The thing that drives all these advertising holding groups is the media business. If you’re WPP, you have $50 billion of media buying and your biggest customer is Google. That’s online and offline but, mainly in the case of WPP, it would be principally the online business.

The same is true of Publicis; it has $30-35 billion. The reason why the advertising groups have done okay in the recession, in a way – WPP are down about 8% or 9% this year, in the top-line, and people might have thought it was going to be 10% - 15% – is the media; that’s what drives it. I don’t know where Mark Read gets that statistic from, but it may be that he has mistakenly referred to Xaxis and the inventory profit. That’s a controversial area. You asked about why MightyHive has an advantage. The advantage it has is that it is transparent. You can’t be totally transparent; you’re either transparent or you’re not. You’re either transparent or you’re opaque.

It’s true that when we were at WPP, we went to clients and we said, look, here’s Xaxis. We can buy inventory cheaper and we can turn that inventory. We’re not going to tell you what the prices are. Do you opt in? Havas took the opposite way. They just did it, without going to clients and asking them to opt in. We actually ripped up, I think, 2,000 contracts and went back and renegotiated each contract and said, are you prepared to opt in, on this basis? I think that’s probably why.

First of all, there has been this great hoo-hah ever since about 2016 about transparency, driven by privacy, brand safety, interference in elections, but there is controversy about transparency in the digital ecosystem anyway. The more relevant statistic is not what we quote, but what is the proportion of client cost that goes through to the publisher and gets to the publisher, because there are so many sticky fingers. That’s where new blockchain technologies may, actually, be quite helpful in eliminating the friction and risks in the channel. But I think what he was talking about – and again, I think he tripped up on this inventory issue – is something that irks clients a lot; clients are very concerned about transparency. Transparency in the Indian and Chinese markets is really top of the pile, in terms of importance.

Let’s just say, for example, that buying digital media is somewhat more profitable than buying TV or analogue media. Does scale actually matter or is it really the competence and purchasing?

You said more profitable; it may not be sustainable.

There’s a transparency issue?

Yes; it may come from inventory profits. The key, in our view, is to have a transparent model. MightyHive, whose margins are strong, buy transparently. They don’t buy as a principal and they advise. The more complex the landscape becomes, the better it gets. If the regulator did succeed in breaking the tech companies up, from our point of view, that wouldn’t be a bad thing, because it makes it more complex. I don’t think the regulator would be correct in doing that.

What is the advantage in having MediaMonks and MightyHive closer together or more integrated, versus the Accenture’s of the world?

Again, it comes back to the motor torpedo boat versus the aircraft carrier; to have a fully integrated business, where people work – that much overworked word – seamlessly, together. On the call to Australia, I had our content people and our data and analytics and digital media people and they work extremely closely. We are moving towards one office in each city. We operate in about 46 cities, in 30 countries. Actually, the great thing about Covid – if there is a great thing about it, as at least 1.6 million people have been killed by this virus; it’s probably higher, given the lack of the veracity of the statistics – is that one of the things it has done has made us eject offices and reduce the number of offices much more quickly than we would have done anyway. Sydney is a very good example. Melbourne were probably in one building already because of jettisoning leases but, in Sydney, we’ll move together as well.

Can we focus on the consultancies, for a moment, and the deep relationships they have with the C-suite and doing digital transformation?

Accenture had a deep relationship with BMW and it didn’t do them any good in the review.

Why do you think that is?

You’ll have to ask them; I’ve got no idea.

Would you be looking to move S4 somewhat into that realm, potentially?

We have continuous debates. I think there is a fourth leg, if you like, beyond first-party data, digital advertising content and digital media, into something more strategic. On the other hand, a lot of what we do is very strategic. I don’t want to take on board these heavy structures that the agencies have. The problem the agencies have is their most highly-paid people are the overpaid people. They’re overpaid and you get this imbalance. The growing parts of the business are the ones that are probably underpaid, which is natural. It’s the analogue that the resources were devoted to, historically.

But those big strategic relationships, with the C-suite, can sometimes get you into bigger accounts?

You make a sweeping statement there. What big relationships?

They’re sticky relationships that the Accentures, the Deloittes have with these companies at C-suite level?

I’m not sure about Accenture and Deloitte. If you’re talking about McKinsey or BCG or Bain, then yes. Deloitte, Capgemini, Accenture; I’m not so sure. When WPP wanted a strategic review, it went to McKinsey.

I’m referring to more the digital transformation work?

But that’s different.

That’s what I was referring to with the more strategic work.

I think Accenture do a good job and, as I’ve said, they are our competition, both on the client side and the deal side of the business. I’ve said that extensively, elsewhere, that they are the competition that we fight, on a day by day basis.

Are there any barriers to non-technology advertisers, such as FMCG and auto, switching from agencies of record?

There’s Inertia and there’s the, this is way we’ve done it for 50 years and this is the way we will continue. Covid-19 was such a shock to the system that, if there is any good that comes out of it is that change agents inside companies have been given more oxygen. I mentioned the steady state model of GDP growth at 2%, 3%, 4%, no inflation, no pricing power, focus on costs. Reduce your costs, increase your share buy-backs, get 5% to 10% of EPS growth. That was the model that went along and that’s been disturbed with a tremendous shock to the system in Q2. Profits were off by 50%; colossal changes, as a result. The model has been disrupted and changed.

What would you do if you were running WPP today?

I’d break it up. It’s served its purpose; it’s gone. The senior management of WPP have no financial interest in the company; virtually nothing. There is a separation of ownership and control. It’s a job, so they want to retain their jobs. It’s rather like what’s happened in Australia. They bring in a guy from Germany, who loses the confidence of people inside the business. WPP have come along and bailed them out. He doesn’t care. He got a large payment for coming into the business and he’ll probably get a large payment on his exit from the business.

Omnicom is different. John Wren has been at it for many, many years. I’ve said this before, he doesn’t have a strategic bone in his body, but he does execute well. I was talking to an investment banker yesterday and he knows them well. I think John has been very shrewd during the Covid crisis. He put in massive provisions, which nobody has really raised a question about and I think Omnicom is probably likely to emerge from this recession.

The other thing that shocks me is that Omnicom is the only agency group that doesn’t report, supposedly, net revenues. Actually, they do. If you go to their presentations, all you have to do is subtract pass-through costs and their top-line is actually down, at the end of the third quarter, by about 8%, which is roughly the same as WPP. People are focused on the top-line because of the pass-through costs and because Omnicom tends to be much more of a black box, from an analytical point of view. They have done better than people think and they’ve taken very heavy provisions. They took provisions for a million square feet of office space; IPG took 500,000 square feet of office space. These are non-cash provisions – there must be some cash provisions there, as well – that will buttress their profitability as they go into 2021, so you should see a sharp snapback.

The big question about the holding companies is whether it’s a dead cat bounce in Q2. It was the worst in Q2, this year. It will be the easiest to cycle but, this morning, WPP said they’re not going to get back to 2019 until 2022. You would have expected the rebound next year, when you look at the GDP, minus four to five this year, plus five to six next year. Just as we’re talking, I’m seeing headlines from Goldman’s saying that the consensus underestimates the rebound. We’ll see what happens. I’m very bullish on 2021 because of the GDP rebound driven by vaccines, the tailwinds from Euro 2021 and Tokyo 2021, however those tournaments are implemented and however full on they are and, last but not least, the micro tailwinds around us that will make life really interesting next year, around BMW and Mondelez and everything else.

If we just take MediaMonks, what would you say their competitive advantage would be in winning new content business?

It sounds a bit glib, but it all stems from faster, better, cheaper. The alternative way of describing it is speed, quality, value. Faster, as I said, is about agility; better is about understanding. It’s worth running through the companies; Google, Facebook, Amazon, Tencent, Alibaba, TikTok – to anywhere it goes – Apple and Microsoft, Adobe, Oracle, Salesforce, IBM, SAP, Twitter, Snap, Pinterest, LG, Samsung, Spotify, Netflix.

Can’t the holding companies win some of this business?

They do. I was just talking, in Australia, where there were two big Adobe driven pitches. We didn’t pitch one of them; we weren’t invited on one of them. On the other one, we won. Who did we win against? The incumbent was AXQA. They can, I’m sure, and they will try to. As I say, their organization gets in their way.

When looking at driving a real competitive advantage, as a network, over the next five to 10 years, as S4, what do you really focus on?

Those four things. Focus purely on digital. It’s half the business at the moment and it will be 70% within a few years. Understanding the holy trinity model of faster, better, cheaper. And the unitary structure. Those are the four things and that’s what applies to our content practice around MediaMonks and our data and digital media practice, around MightyHive.

How do you think about allocating the cash flow from the core business?

Our structure remains the same. We don’t pay a dividend at the moment and we’ve said that we’ll probably pay a nominal dividend in due course, but in terms of the rates of return that we get in the capital allocation process, where can you get the better return? The better return is by investing in our business. For example, our Epic investment, our Fortnite investment in India, in the new technologies; our production centers in Buenos Aires or in New Delhi or Kazakhstan or the Ukraine or wherever it happens to be. Those are data and analytics centers. Obviously, also investing in M&A. The structures of our deals remain the same; basically, half shares, half cash. No earn outs because that creates fragmentation. That’s part of the problem. WPP will probably go off and buy companies and they’ll have people who want to sell, which is a key thing. You don’t want people to sell; you want people to buy in or sell into your company and you want people to continue. It’s no good having companies drop dead after the earn outs.

With the land and expand, now you’re getting into these bigger accounts, like Mondelez or MINI, how much deeper can you move into other services for clients?

We started with brand awareness, in the last half of 2018. In 2019, after going through awareness, it was a brand trial. Then we moved to conversion at scale, the 20 squared objective of around 20 whoppers, which actually, if we didn’t have a cent or a dollar of revenue in those, it would mean that we would be recreating $400 million of revenue. But a lot of these clients are clients that we work with, so we’ve identified the top five. We’ve identified another five where we’re running at $5 to $10 to $15 million of revenue a year. Then we’re identified another 10 where we think we have potential. Over the next couple of years, we want to get to 20 clients of 20 million of revenue or more.

So the answer is, the priorities for next year are, obviously, consolidating our organic growth and growing more whoppers. Secondly, unifying the business even more strongly, through rebranding which you’ll see shortly when we launch the rebranding. Thirdly, continuing to expand our offer by broadening our capabilities, within the three pillars of first-party data, digital advertising content and digital media.

In the long run, another pillar?

No; I think we’ll stick to those three. We may move up the funnel, strategically. We may do more in the way of systems integration, but that’s really within the three areas that we are interested in and the two pillars, as we’ve created them, content and data analytics and digital media.

What is the biggest challenge you are facing?

I wouldn’t say it’s a challenge; it’s an opportunity. It’s the conversion at scale. We have to demonstrate that this model works at scale. We’ve already won business at scale. Now we have to not just show that it works in those cases, but go well beyond.