wall-of-china

Marketing Services Genius in China? 3 Questions to Ponder

WE Communications Blog: Alan VanderMolen

7/31/2018
— Alan VanderMolen 

Last week, as reported initially by Sky News, the marketing services world found out that WPP is in “early stage” discussions to sell 20 percent of its Chinese business to a group of Chinese technology and media giants. WPP’s China operations are valued at roughly US$2.5 billion.

My first reaction to this was “genius” on behalf of WPP*. The group already has the strongest China presence amongst the big four marketing services groups, which in addition to WPP, includes Omnicom, IPG and Publicis. A deal like this would arguably provide WPP with unparalleled access to the most influential and commercially-viable media, social and e-commerce platforms in the country, while giving clients both creative and distribution services in a single entity. So, a 20 percent stake for what could be a massive competitive advantage seems like a slam dunk.

That said, the potential deals do raise several questions.

 

1. What’s in it for the Chinese Giants?

Considering the Chinese tech and media companies in question have a combined market cap in excess of US$1 trillion, the estimated cost to buy into WPP China is pocket change and it takes any possible transaction out of the “strategic” bucket. I think it is more likely that the Chinese companies are looking at this as possible downstream integration. Growth in the domestic digital media market will eventually slow leaving the platform giants with the question of where to get more growth and how to solidify their positions with marketers and advertisers. The answer could be adding creative and execution services. That would certainly put a chill into marketing services players, making similar moves to take creative in-house by clients and downstream integration efforts by the management consultancies seem like mere inconveniences.

 

2. Is there a Chinese Wall big enough?

It is common practice for agencies to separate client conflicts by using “Chinese Walls”. If two clients feel that one agency representing both of them presents a conflict to the agency, then many times the clients work with the agency to eliminate potential issues. In the case of WPP accepting an equity stake from the most powerful tech and media platforms in China, how could the group ensure it is conflict-free when buying media from those platforms? The simple answer is they could not build a big enough Chinese Wall to maintain an appropriate distance. It is not without precedent for media companies and agencies to have crossholdings – notably Dentsu in Japan and Havas in France. That said, Dentsu is an historical Japanese anomaly; and, Havas, with Vivendi, is somewhat cleaner given the latter provides an entertainment content engine to supply Havas’ clients. The proposed WPP deal in China goes much deeper into questions around privacy, security and media arbitrage practices.

 

3. Who’s going to perform the risk management assessment?

It is going to be a gargantuan task to evaluate current and emerging risk for WPP. I see the law firms lining up already. Consider for a moment the calls for new standards of behavior in the UK, EU and – soon – the US in the wake of the fake news epidemic, GDPR and the alleged unethical use of data and algorithms by platforms. Marketers and marketing services agencies will be quickly thrust into the ethics debate on these topics in Western Markets. In fact, Unilever and P&G are already putting substantial pressure on YouTube, Facebook, Twitter and Google to clean up their content and data practices or the consumer giants will withhold advertising budgets. Now, consider Western client reaction to (and potential investor pressure on) a deal which sees WPP taking investment from Chinese platforms in the China market where clarity and enforcement on these modern marketing issues is nascent at best. I foresee a lengthy ethics, risk and compliance debate on the horizon as this deal potentially progresses.

No matter where this goes, I do think it portends things to come for the relationships between technology platforms, media owners, marketers and agencies. We are on the front-end of a period of unimaginable disruption with business model and ethics questions galore.

 

*In its initial story on this topic, Sky News credited the still ubiquitous Sir Martin for originating the idea.