Vicious circle of cutting advert prices will help no-one

"Now the chickens are coming home to roost," the WPP chief executive tells the Evening Standard. Some firms "went short in the market, then the market has hardened and they get caught out [on prices]," he says. "They are unable to deliver".

Sorrell is not alone in being concerned about how some agencies have been driving down prices to unrealistic levels to win clients' business. In fact, many within the ad industry say privately it has become a serious problem.

For once an agency accepts a cheap deal, it then demands to pay less for the media owner's ad space. The danger is that a vicious deflationary circle can begin as everyone feels under pressure to do business under cheaper terms.

Sorrell declines to offer any specific examples of agencies being "unable to deliver" — he will only say he is thinking of two firms in the UK and Germany.

But one recent case has caused great debate within the advertising world. Telecoms giant BT has dropped its media-buying agency Publicis after less than two years. BT had handed its ad account, worth a reported £75 million, to Publicis after the agency giant offered an extremely competitive deal in 2008. But the speculation is that Publicis's media-buyers subsequently struggled to hit the terms of the deal.

Publicis insisted that it did hit its targets but it is clear things have not worked out as BT has switched the account to Maxus, a WPP subsidiary.

The BT case reflects a wider anxiety about the general health of the ad industry. Paul Hayes, managing director of NI Commercial, publisher of The Sun and The Times, unexpectedly went on the record to voice his concern in a letter to advertising magazine Campaign. "Agencies shoot themselves in the foot over unprofitable terms to win business," he wrote. "They appear more addicted to the drug of account wins than driving bottom-line success."

It would be wrong to think this is just the fault of some agencies for foolishly or reluctantly agreeing to cheap deals. Clients — that is big brands — have understandably been under huge pressure to cut costs in the last 18 months during which the UK economy shrank 6%.

Sorrell says one unnamed client saw monthly sales plunge from $600 million to $150 million in the space of two months during the banking meltdown of autumn 2008. The client has seen sales bounce back to $450 million a month and is now earning the same profit as it had on $600 million turnover — by cutting costs "they thought were impossible to cut".

Sorrell describes it as "getting there ugly", adding: "Sadly, the fact that you cannot cost-cut your way to prosperity has not been accepted — as yet. Long-term growth depends on brand building." He quotes Deutsche Bank research showing 30 firms that increased advertising spend saw their sales grow 30% and profits 50% faster than their peers over the past 15 years.

So the message from industry leaders such as Sorrell and Hayes is that brands need to be realistic about the knock-on effect of slashing budgets.

"Severe pressures from client procurement departments and auditing processes can create a pure commodity market," says Hayes. "For the health of the industry and clients' brands it is vital that agencies refuse to bow to these pressures and instead we should aim to focus on what actually delivers the most effective communications."

It is clear that hard-pressed media owners have a vested interest in helping to break the vicious circle of clients and agencies pushing down prices, particularly now the ad market has stabilised. There is anecdotal evidence that some agencies, anxious to boost depleted margins, have been asking and getting unofficial discounts from some media owners.

No wonder many feel the situation is untenable. If there is no winner in this — client, agency or media owner — it may be time for a change. In everyone's interests.

Spring is in the air — advertising revival is raising TV spirits

April was the cruellest month for TV advertising in 2009 as it fell 22% but this year looks rosier as ITV forecasts its revenues will be up 20%.

The good news for other commercial broadcasters is that ITV sets the market, so Channel 4 expects a similar uplift. Five is not quite so bullish but still reckons on double-digit growth in April, after a stronger first quarter than ITV, which expects to be up 7%.

The big spenders are retailers — "thank God for the supermarkets," says one media owner. But other sectors to splash out are booze (beer and lager brands up as much as 250%) and confectionery. ITV says its biggest growth area is household goods. Fast-food brands McDonalds and Pizza Hut and computer firms Microsoft and Intel are also upping spend.

Sales teams remain cautious, with ITV warning that April's rise is following a trend, rather than a flood of new money.

As Five sales director Kelly Williams says: "You've got to look at March and April as a positive story. But there's still some way to go." Pedro Avery, managing director at Arena BLM, agrees: "Is this a recovery or are marketing directors spending early before the election when uncertainty could strike and affect consumer confidence?"

Experts say visibility is low. Paradoxically, May could turn out well in this World Cup year as female brands tend to plan campaigns to run "outside" the tournament.