‘Ultimately, all spending will become digital in some way, shape or form’: S4 Capital founder

In today’s $1 trillion advertising economy, the share of traditional media has shrunk drastically. Do you see traditional media losing relevance than later?

The total advertising market last year was about $1.2 trillion. This year it will probably be about $1.3 trillion. Out of that, traditional media was $300 billion last year, going backwards. The $900 billion of digital was growing at 15-20% and this year digital will cross a trillion dollars mark for the first time, excluding mainland China. So, the traditional media is under huge pressure. I think even in India, where traditional media has been stronger, it’s going backwards.

The future is digital. That’s the reason Larry Ellison is trying to combine three studio operations into one with Paramount, Viacom and Warner Brothers. That’s why IPG and Omnicom merged, because they’re trying to rationalise the capacity. I see that the holding companies have a bigger market share in the $300 billion traditional market, which is declining, and a smaller market share in the $900 billion digital market, which is expanding.

The $900 billion digital advertising business is ruled by a bunch of walled garden tech players. But advertisers are increasingly moving towards independent ad tech firms like The Trade Desk for media buying and Magnite for media selling. What does the future look like?

I don’t support that thesis. Of the $1.2 trillion economy, Google was $300 billion last year, Meta was $200 billion, Amazon took $75 billion and TikTok was about $40-50 billion. This makes up more than $600 billion. So, more than half the market is on four platforms. This doesn’t support the thesis that marketers are moving towards independent platforms. And those four platforms are spending as well. Amazon is going to spend $240 billion, Google $200 billion, Meta $140 billion on capital expenditure. The four biggest hyperscalers that I mentioned are going to spend a trillion dollars each year for the next five years. So they will spend $5 trillion over the next five years.

AI is changing every segment of busines. Have brands and marketers been up to speed?

Consumers are using AI. But companies have been slow to adopt.

Human beings don’t change unless they have to. You can see that in the car industry. The Chinese EVs (electric vehicles) are becoming more important and more effective and challenging traditional car manufacturers. In Korea, a number of major car manufacturers have no choice but to adopt AI at scale. Globally, you see the work we’ve been doing for GM, BMW, Honda, and others in the automobile industry. The reason why that’s happening is there’s an existential threat from Chinese EVs. BYD can produce an AV (autonomous vehicle) for $10,000 using God’s Eye, their in-house technology, or an EV for $25,000. Even Elon Musk is feeling the heat from that.

In financial services, the fintech platforms like Newbank or Revolut are putting branch banking under huge pressures. In Korea, there’s a company called Toss, which is doing the same thing in relation to the financial services. With packaged goods, there’s a little bit of progress on an AI transformation scale because they can’t get the price increases that they used to get during COVID and beyond COVID, and supply chain difficulties are becoming more and more prevalent because of the geopolitical issues around the US, China, Iran and Ukraine.

So all those things mean it gets more and more difficult. People only move when they have to. The S&P 500 Q2 EPS (earning per share) was up by 50%. You strip out the gains from SpaceX and private equity, it was up 30%. Strip out the hyperscalers, it was up about 14%. And this is the seventh quarter in a row where the S&P 500 EPS is up by 10%. So, if you’re doing well, you don’t have to change. Simple.

With the fast adoption of generative AI tools, the conversation is now shifting from search engine optimisation to generative engine optimisation. How can brands and agencies navigate this shift?

Now companies are spending more than 70% of their marketing spending on digital platforms, and it will be increasing this year and might go up to 80% and upwards. Ultimately, all spending will become digital in some way, shape or form. You have to make sure the agents that are crawling the web or the internet, have as much information as possible about the brand, or about the product, or about the service and the company. It means that content and diffusion of content becomes critically important.

Consultants are becoming full-blown ad agencies. A decade ago Deloitte acquired Heat acquisition. Accenture Interactive acquired Droga5. So what happens to the USP of the likes of WPP & Ogilvy?

This is not a new phenomenon. When I first started WPP in 1985, it was always the consultancies that were going to eat our lunch. So the consulting companies, whose roots are in IT and tech, are trying to move into marketing, and the agencies whose roots are in marketing are trying to move into IT. The problem with agencies is that their business is rooted in that declining industry that we talked about before. The agencies tend to be too traditional in their approach, and they are cannibalising their own business. For instance, with Publicis traditional is probably about 25% or 30% of their business. In the case of WPP and Omicron, 40% and 45% and the same in the case of Dentsu. It’s the classic example of an innovator’s dilemma. Do I displace or disintermediate my own business? And if I don’t eat my own children, somebody else will.