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WPP: Big is beautiful at Sorrell’s marketing group – but for how long?

Category : Business

World’s largest marketing services group continues to grow, but questions remain what would happen if its chief left

This week MediaGuardian 25, our survey of Britain’s most important media companies, covering TV, radio, newspapers, magazines, music and digital, looks at WPP.

L’Oreal is one of the seemingly few global advertisers that Sir Martin Sorrell hasn’t managed to snare, yet after he pocketed almost £18m for running WPP last year some investors have been left muttering a version of the beauty brand’s famous strapline: “Is it really because he’s worth it?”

WPP’s chief executive took a rare blow on the chin last week, bowing to shareholders’ outrage at the scale of his pay packet, accepting a £150,000 salary cut, a 20% reduction in bonus and a significantly reduced long-term incentive programme.

Investors will get a chance to have their say at WPP’s annual meeting in June, with some complaining the board is too quick to kowtow to the company founder’s will. “WPP will probably trot out ‘oh but he formed this company from scratch …’, and he has sold [people] that [line] over and over again,” says one City source. “Entrepreneurs only tend to get paid out once when they float their company. Sorrell likes to be paid like an investment banker.”

It has been 28 years since he took the gamble on Wire and Plastic Products, a stockmarket-listed manufacturer of wire baskets, which he has used as a vehicle to create the world’s largest marketing services company. Last year WPP made more than £1bn in pre-tax profits and £10bn in revenues. It has a market capitalisation of more than £13bn.

“WPP is doing incredibly well, I think Martin is a force of nature and has built an amazing company,” says a senior advertising executive who once worked with Sorrell. “It is the most successful communications group in the world and Martin has led it brilliantly.” But some wonder whether the sprawling juggernaut – which employs 165,000 staff globally – is getting beyond the control of even the indefatigable Sorrell.

“It is too big, it is a bit like the Roman empire and is held together by one man’s force of will,” says the senior adman. “Therein lies the danger, there is something Napoleonic about it all. WPP is so big, it is almost unmanageable.”

Maybe so, but City analysts love the company – last year WPP’s share price rose 31% from 675p to 888p: “It will take more than another fat pay cheque to Sir Martin to spook the shareholders into selling,” says Anthony de Larrinaga, managing director at financial research company WYT.

Although there is an ongoing debate about whether Sorrell, who hates to see a prize asset go to a rival, overpaid in deals such as the £1.1bn purchase of research firm TNS, WPP is ticking the right boxes. “WPP is well-postioned from the three key angles of geography, clients and devices/product mix,” says Johnathan Barrett at Singer Capital Markets.

WPP’s engine is fuelled by its massive media buying capability: its Group M division uses its advertising buying power to get the best deals for clients across media including TV, press, radio and online. The advertising and media buying operation made £4.2bn in revenues last year, almost 42% of the total, and operating profits of £755m, just under half of WPP’s total.

The growth rate of WPP’s media buying operation alone, which is well over double the size of any rival in the UK, was a storming 7.4% in 2013′s first quarter. Group M controls about £1.2bn of UK TV ad spend, 30% of the market, and is almost as strong in other media. Potentially most concerning is that in most cases the closest rival media agency group is lucky to hold a market share of about half that of WPP.

“It has reached a stage that [media owners] can’t say no to Group M,” says a senior executive at a rival agency. “Their clout is unmanageable.” An example is Group M’s highly-publicised move to pull its £300m annual TV ad spend from Channel 4, close to a third of the £1bn the broadcaster takes in ad revenue annually, in a bid to drive down prices on commercials for WPP clients.

“[The outcome] was a draw, of sorts,” says one TV industry insider. “Group M didn’t come out looking so good reputation-wise, the publicity and the boycott turned out to be an uncomfortable place to be.” WPP would counter that such views are rivals’ sour grapes.; that other media groups have pulled client ad spend to get better deals, and that Channel 4 is perhaps not the force it was in terms of value for money Rival Aegis Media once boycotted Channel 5 for the best part of nine months, and more recently there was a spat with News International over the value it delivers for advertisers.

“Dominance and market leadership are two different things,” says a spokesman for WPP. “There is no lack of competition in the market. Group M is a strong leader in this highly competitive market, and benefits of leverage accrue to the clients.”

ITV’s family of channels has a 46% share of the TV advertising market, Channel 4 about 28%, Global Radio almost 60% of the radio advertising market and News International’s newspapers 25% share of press advertising. They are big enough to handle forceful negotiations, some say, adding that if you want to look at market dominance focus on Google’s 92% share of the UK search market.

“ITV and Associated [owner of the Daily Mail] may be able to withstand Group M, but most others are bullied and fall over,” says the senior media industry executive. But for how long will WPP still have that kind of power? What happens when Sorrell steps back is the question WPP-watchers describe as the elephant in the corner of the room.

The 68-year-old has ruled with an iron grip and there are those who believe that WPP will founder without him. “They’ll be fine until he goes,” says a senior advertising executive. “Then it’s a house of cards.”

Philip Lader, WPP chairman, said last week that there are twice-yearly discussions to prepare for Sorrell’s eventual departure – which could theoretically be abrupt, given his contract allows him to leave “at will” – and that the aim is not to “identify another Martin”.

“We earnestly endeavour to remain prepared for this inevitable transition,” Lader told shareholders. “That time, however, is not now. There’s no ‘elephant’ in the [WPP board] room.”

Trinity Mirror chief’s turnaround plan hits first glitch

Category : Business

Since Simon Fox joined, the company’s share price has soared, but it still has a long way to go to catch up with its rivals

Trinity Mirror chief executive Simon Fox’s honeymoon period came to an abrupt end on Thursday with the arrest of four current and former senior journalists for alleged phone hacking, while a 75% slump in profits stripped £60m from the Daily Mirror publisher’s market capitalisation.

News of the arrests – the four, including former Sunday Mirror editor Tina Weaver and Sunday People editor James Scott were bailed later in the day – broke on Thursday morning as Fox was making his maiden financial results presentation and detailing his “One Trinity Mirror” master plan to a packed room of investors and analysts in the plush 16th floor City offices of merchant bank Rothschild.

Fox’s 85-page strategy document took a backseat to investor fright at the potential financial implications of a major widening of the phone hacking scandal, including potential compensation payments, with Trinity Mirror’s share price slumping almost 20% at one point in trading on Thursday, before closing more than 13% down. The share price had already taken an 8% nosedive that morning after Trinity Mirror’s 2012 full year results were released.

However, the City consensus is that Fox’s turn around plan for Trinity Mirror will not be derailed by one bad day at the office. “The company’s market capitalisation has now fallen by almost £60m but do we honestly believe the unfolding arrest scenario will have a financial impact of that or more?,” says Alex deGroote, analyst at Panmure. “No. It is an over-reaction, I do not believe [the Trinity Mirror phone-hacking arrests] is the next News International.”

Trinity Mirror’s share price has soared since Fox joined on 10 September from HMV, where he was also chief executive. Last week it hit an almost three year high of 123p before Thursday’s double dose of bad news, giving a market cap of £300m, as investors bought into the belief he can drive the publisher’s stagnant digital development.

“The share price was 36p when I joined but I am not going to attribute it to the ‘Fox effect’,” Fox said on Thursday. “The markets have been up in general, the tide is rising although not by that much [to account for Trinity's performance], the company has not been waiting until today to get started.”

However, Fox admitted that the company has a long way to go to catch up with rivals, with digital revenues from its newspaper business flat year on year.

Digital advertising revenues actually slumped by 7.3% year-on-year in 2012, although within this online display grew by 11%. It was digital classified advertising that slumped by 18% and led Fox to take the realistic step of a £60m non-cash writedown on the future potential earnings of websites such as SecsintheCity, Fish4jobs and SmartNewHome.

Fox’s digital strategy for reviving Trinity Mirror’s fortunes includes free iPad tablet editions for the Daily Mirror and Daily Record, with Android versions by the end of the month. He says he has not ruled out introducing charges for the tablet editions, as most Fleet Street rivals do, but not in the short term.

“We considered [charging] very carefully and keep it under review,” he says. “It is important to go for reach and get scale with an ad-funded model.”

With total digital revenues of £40.8m, less than 6% of the sales, Fox – like other newspaper publishers – is facing a major challenge if he is to fill the widening gap in Trinity Mirror’s balance sheet left by declining print income.

To help maintain profitability cost cutting led to the loss of 500 more jobs across the company last year, and a further 200 were targeted for redundancy at the beginning of this year, mostly in Trinity’s regional papers, as a more digitally-focused and content sharing strategy across titles was unveiled.

This forms part of a further £10m in cuts planned in 2013. However, 52 new editorial jobs are also being created – half in the national titles, half in regionals – to help provide more digital and tablet content. Fox has also grasped the nettle in the difficult issue of dealing with the steep declines of regional newspaper operations. Investors were cheered by the strategic initiative to take a 20% stake in David Montgomery’s Local World regional newspaper business in late 2012.

While competition issues surrounding Local World remain unresolved, the deal opens the door for a possible future disposal of Trinity’s embattled local titles, as rival Daily Mail & General Trust has managed by putting its Northcliffe regional division into the Montgomery joint venture alongside Iliffe News & Media’s papers.

Continuing talks over the potential sale of a stake in the Sunday People to a consortium led by former Sunday Express editor Sue Douglas would further reduce costs. Many investors view the People as non-core to the main Trinity Mirror national newspaper operation.

DeGroote says that the publisher’s balance sheet is in the best shape it has been for perhaps a decade, stripping out the non-cash charge profits were about £100m last year, and to watch this space for a buyer in the next few years.

His view is that the company’s net debt of £157m will be wiped out in the next two to three years, shareholders can look forward to their first dividend payout since 2008 next year, and it will produce £50m surplus free cashflow this year and next.

“If they can get the pension sorted they may end up being owned by some Russian oligarch or quasi-private equity house in the next two or three years in my view,” says DeGroote.

“In spite of revenue declines they have mastered profit protection. They remain trophy assets and a potential vanity project, buyers could be drawn in by the high profits of the core Mirror business and strong cash flows it generates. It is an attractive investment.”

The numbers

Pre-tax profits in 2012: £18.9m (-75% year-on-year)

Adjusted pre-tax profits: £98.7m (+7.4%)

Revenue: £706.5m (-7%)

Advertising revenue: £292.8m (-10.4%)

Circulation revenue: £297.2m (-7.9%)

Digital revenue: £40.8m (+8.5%)

Earnings per share: 29.9p (+10.7%)

Net debt: £157m (-29%)

Employees: 5,300

Pre-Marketing: Big bank subsidy?

Category : Business

Big banks: Subsidy study was flawed. Also: Next Intel CEO may be an outsider. And is YouTube’s co-founder prepping a rival video platform?

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Samsung loses Apple case in UK

Category : World News

South Korean phone-maker Samsung loses another patent fight against rival Apple, in the UK High Court.

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EU fines Microsoft over web browser

Category : Business

The EU’s competition regulator fines Microsoft 561m euros ($731m; £484m) after it failed to keep a promise that it would promote a choice of rival web browsers.

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Sharp shares jump on Samsung reports

Category : Business, World News

Shares of Japan’s Sharp surge, after reports that rival Samsung may invest as much as 10bn yen ($107m; £70m) in the struggling firm.

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Airbus to switch batteries on A350

Category : World News

Airbus says it will not use lithium-ion batteries in its forthcoming A350 plane because of problems that have grounded rival Boeing’s 787 Dreamliner.

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Ryanair: EU to reject Aer Lingus bid

Category : World News

Ryanair says that the European Commission intends to block its proposed offer for rival Aer Lingus and says it will appeal against any such decision.

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HMV sites attract interest from supermarkets

Category : Business

Morrisons is thought to be interested in 20 stores as HMV looks to sell off up to half its 230 sites

Supermarkets are looking at snapping up HMV outlets to boost their convenience store chains.

Morrisons is thought to be interested in up to 20 sites to boost its M Local chain as administrators for HMV look at selling off as many as half of the company’s 230 stores.

Hilco, the restructuring company, is the frontrunner to buy up HMV from administrators. It acquired the entertainment chain’s £120m of debt for £40m, giving it effective control of the company as it is able to block any rival bids. But Hilco is only expected to want about half of HMV’s stores and so the property consultants CBRE and Savills have been brought in to help offload potentially unwanted sites. They are expected to examine offers for the stores in 10 days’ time.

Morrisons has 12 convenience stores at the moment and wants to open at least 50 more this year as it races to catch up with rivals. It is also rumoured to be looking at Blockbuster stores after the retailer went into administration last week. Morrisons admitted that a lack of smaller stores contributed to its poor Christmas performance compared with rivals.

Tesco and Sainsbury’s, which already have significant convenience-store chains, are also thought to be looking at HMV sites. Neither chain would comment on its plans.

All the supermarkets want more small neighbourhood grocery stores because small stores are seeing sales rise rapidly during the economic downturn. Sales rose 4.6% in convenience stores last year as shoppers avoided large out-of-town hypermarkets where they might be tempted to splurge on non-essentials. The total food market grew at 3.2% last year, according to the market analysts Conlumino.

Asda is thought less likely to take on any HMV sites as it does not operate in stores under 750 sq metres (8,000 sq ft).

Neil Saunders at Conlumino said: “There is a big push for good convenience store space and there is probably more demand than supply. HMV has some quite prime sites on high streets, but not all its sites will be suitable.”

HMV fell into administration last week, putting 4,000 jobs at risk. As many as 50 parties have expressed an interest in buying all or part of the business with Hilco, which runs HMV in Canada, leading the field. It is thought to have the support of music labels including Universal Music, Warner Music and Sony for a takeover.

Other retailers thought to be interested in HMV stores include New Look, JD Sports and J Crew, the US retailer which has been looking for a London flagship. Game Retail, which was bought out of administration last year by Comet’s former owners, OpCapita, is interested in buying 45 stores.

Steve Jobs threatened to sue Palm over no-hire agreement, documents show

Category : Business

Documents released as part of a civil lawsuit, which claims there was an illegal conspiracy to eliminate competition for employees

Steve Jobs threatened to sue the rival smartphone maker Palm over poaching of Apple staff, in a bid to enforce a clandestine pact between tech companies in Silicon Valley, new documents reveal.

The late Apple co-founder menaced Palm with a patent lawsuit to try to compel adherence to a possibly illegal agreement between rival firms to not recruit each other’s employees.

The email from Jobs, along with other documents tech industry chiefs tried to keep secret, surfaced on Tuesday in a civil lawsuit brought by five tech workers against Apple and other companies including Google, Intel, Adobe, Walt Disney’s Pixar animation unit, Intuit and Lucasfilm Ltd.

The suit claims there was an illegal conspiracy to eliminate competition for each other’s employees and to reduce wages, an alleged dark side to Silicon Valley’s freewheeling, sunny public image.

Judge Lucy Koh, of the US district court in San Jose, is considering a plaintiffs’ request to turn the civil lawsuit into a class action, increasing their chances of winning damages which could run into hundreds of millions of dollars.

The August 2007 exchanges between Jobs and then-Palm chief executive Edward Colligan were the latest embarrassing revelations to enter the public record because of the case.

In a sworn statement Colligan said Jobs called him to complain that several Apple employees had moved to Palm and to propose an “arrangement” whereby neither would hire the other’s employees. Jobs threatened a patent lawsuit to encourage compliance, said Colligan.

At the time Palm, which has since been bought by Hewlett-Packard Co, was developing its Palm Pre to compete with Apple’s iPhone. Jobs was especially concerned that senior staff such as Jon Rubinstein, senior vice president of hardware development, had moved to the rival company.

Colligan rebuffed Jobs in an 24 August 2007 email: “Your proposal that we agree that neither company will hire the other’s employees, regardless of the individual’s desires, is not only wrong, it is likely illegal.” He said the lawsuit threat was “just out of line”, would not intimidate him and would serve only to enrich lawyers.

Jobs replied two days later, a Sunday, curtly noting “this is not satisfactory to Apple” and reminding his rival of the “asymmetry” in their financial resources should the lawsuit proceed.

Last week Judge Koh ordered Apple’s chief executive officer, Tim Cook, to give a deposition, saying it was “hard to believe” he was not consulted about no-poaching agreements which may have violated antitrust laws.

Apple did not immediately reply to a request for comment on Wednesday.

Court filings on Tuesday revealed that such pacts were common in Silicon Valley.

In February 2006 , a year before his clash with Palm, Jobs emailed the then Google CEO Eric Schmidt: “Eric, I am told that Google’s new cell phone software group is relentlessly recruiting in our iPod group. If this is indeed the truth, can you put a stop to it? Thanks, Steve.”

Schmidt proved receptive: “I’m sorry to hear this; we have a policy of no recruiting of Apple employees. I will investigate immediately! Eric.”

In a separate exchange the Google chief urged his human resources director to be discreet when seeking such agreements with rivals. “Schmidt responded that he preferred it be shared ‘verbally, since I don’t want to create a paper trail over which we can be sued later’.” Schmidt was briefed that a recruiter who tried to poach an Apple employee “will be terminated within the hour”.

The plaintiff’s lawyers are due to question Schmidt next month. Google declined an interview request on Wednesday but in a statement said it has “always actively and aggressively recruited top talent”.

Rumours of a no-poaching agreements between top tech companies prompted a US justice department probe in 2010, leading to a promise by Google, Apple, Adobe and others to refrain from such pacts.

Authorities believe the practice continues in parts of the industry. The justice department and antitrust regulators sued eBay last year over an alleged no-poaching deal with the software firm Intuit.