The real £1m question facing agencies

Leaving aside the merits of Sorrell's pay - he got ambushed as the FTSE-100 boss who just happened to be presenting results on the morning a report on fat-cat City pay came out - the state of the UK advertising and marketing industry is worth discussing.

The past three months have not been easy. There has been eurozone turmoil, a rollercoaster ride for the stock market, riots in August and renewed talk of a double-dip recession as consumer confidence slides.

Given this gloom, the assumption might be that marketing spend should be falling off a cliff. Yet, judging by third-quarter results from WPP and the other big agency network groups, things don't look so bad.

WPP - home of agencies such as Ogilvy & Mather and Group M - saw like-for-like revenues in the UK rise 6.7% and it's part of a trend. Sorrell's firm has seen its quarterly growth accelerate in Britain as the year has gone on (in contrast to a slowdown globally). WPP has also increased UK staff numbers - another positive sign.

The world's second-biggest group, Omnicom, which owns Abbott Mead Vickers and DDB, grew even faster. Quarterly UK revenues were up 10.6% on a like-for-like basis. The other big advertising holding groups such as Publicis and Havas also saw their British turnover rise in the region of 4%.

No one can be fooled into thinking everything is rosy. The boss of one traditional ad agency says trading conditions are as tough as 2009, which might be excessively negative but explains why plenty of people in ad land don't sound that cheerful.

Several factors explain this paradox that marketing revenues are apparently rising in a tough climate.

First, the good news from the ad industry's point of view appears to be that many clients believe it is worth continuing to invest in their brands. With UK inflation running at 5% and wages rising by just 2%, companies need to persuade consumers to pay more for goods and services. Investing in advertising is less risky than big capital expenditure.

UK agencies are picking up more global accounts too.

Second, some of the big ad agency groups are grabbing market share as demand - particularly for media buying - continues to consolidate around a small number of players.

Sorrell points to WPP winning Barclays' media account, worth £40 million, from independently owned M&C Saatchi in September.

Third, the bad news is operating costs are getting tighter. Whether it is big-spending clients such as BSkyB and Marks & Spencer or the agency networks themselves, the signs are that procurement departments are putting renewed pressure on costs.

Fourth, and most important, client spending is shifting to digital - and perhaps faster than ever. Tough times tend to accelerate change.

Sorrell says WPP agencies now spend $1.3 billion (£810 million) a year with Google globally, roughly half what they spend with Rupert Murdoch's News Corp.

Google's UK revenues - a good paradigm for digital advertising as a whole given the internet search giant's dominance - surged 21% in the last three months. Contrast that with Britain's TV ad market where growth has been anaemic since the spring and is likely to end the year close to flat.

France's Publicis Groupe, owner of agencies such as Saatchi & Saatchi and Starcom MediaVest in the UK, says that globally, 56% of its revenues from financial services clients are now spent on digital media. Only 44% goes to what it calls "analogue" media.

Other clients remain more committed to traditional media such as TV, press, radio and outdoor because of its effectiveness at brand-building. Consumer goods firms only spend 20% on digital and 80% on analogue.

For now, the big marketing and communications holding groups are coping. "What you lose on the TV roundabout, you gain on the swings with digital," says Sorrell.

But many remain anxious - not so much about next year, when the Olympics should provide a lift - but about 2013 and beyond as economic recovery looks like being a long slog.

The digital revolution is also shifting power in unpredictable ways.

It is the new generation of media owners such as Google, Facebook and Apple - and not the agencies - that own the valuable data which advertisers need to target consumers.

What's more, the rise of social media means many brands are rethinking their communications as one-way advertising messages alone are no longer seen as so effective. That poses a major threat to the established agency network model.

The likes of WPP can claim that only they have the size and scale to help clients stand up to the new digital goliaths on a global basis.

But are the agency networks, with all their legacy overheads, nimble and entrepreneurial enough to adapt?

That is the real £1 million question.