Laying out the challenges and opportunities facing advertising companies, Sir Martin Sorrell, WPP Group’s CEO, opened his presentation for the UBS Global Media & Communications conference with a comparison of Google (NSDQ: GOOG) to the major ad holding companies. Google’s market cap is four times higher than WPP and its top rival ad firms put together. But its revenues are less than Omnicom Group, the largest of the ad agency parents. “The market is saying something about the digital space,” Sorrell said. “And that’s the challenge we face.”

-- Market cap comparisons: “We have a $15 billion market cap. If I take Publicis Groupe, which is roughly half that, and IPG, which is a third of that, its a combined $50 billion market cap. And all those companies’ revenues put together is $33 billion. In comparison, Google’s revenues are two-thirds of the top four ad holding companies and its market cap is more than four times those same companies.”

-- The goal: Currently, 23 percent of WPP’s business is digital. “This is a big difference from seven years ago. I would never be happy – I’m just a restless soul - just having a third of our business in such a growing segment, but that’s what we’re aiming for within the next five- to 10 years.”

-- Search is the driver: Looking at the spate of acquisitions over the past few months, Sorrell singled out WPP’s $649 million purchase of 24/7 Real Media last May from the rest. “24/7 was totally different from Publicis Groupe’s purchase of Digitas and it was different from the other acquisitions WPP has made – from Blast Radius to Schematic or Blue. It was also different from the investments we made. It’s about the application of search technology and publishers’ technology. That is what is driving this business.”

-- Digital and geography: At one point, Sorrell displayed all WPP’s recent acquisitions, with a large Venn diagram showing companies that fit into “emerging geographies” and “emerging media” and which ones intersected. That’s where he’ll focusing most of his acquisition targets moving forward. In particular, Sorrell expects that the next wave of investments and acquisitions will resemble the recent 75 percent stake it took in Indian ad agency Quasar. He outlined some of the other tasks ahead of the company in the digital space: one is to activate what he called the company’s “legacy businesses” – those units that have evolved within WPP over time and include interactive shops OgilvyOne, Wunderman, G2. “We have roughly $2 billion in our legacy businesses. Under our strategy, we look for complementary businesses and then graft them on to it. That’s what we’ve done with our new acquisitions, such as Bridge and Schematic, Blast Radius.”

-- On Google: “Of all the things that Google is aiming for, from moon shots to alternative energy, mobile search is the most interesting thing they’re looking at. But they are difficult to deal with. I’ve referred to them as openly as a ‘frenemy’ and I now describe them as a short-term friend, long-term enemy. Doubleclick, if it goes through and I think it will, makes them a shorter-term friend. The question is: are they going to disintermediate us or not? Everybody dances away from this question. We spent $450 million with last year, $600 million this year and will remain their biggest customer as we forecast spending $800 million with them next year. Yet, they are a competitor, despite their public statements. Their comments suggests that they will not disintermediate the ad industry.” But Sorrell finds Google’s progression ineluctable: “It’s a mechanical Yellow Pages right now. It’s sucked in people who were doing classified advertising or were doing advertising that we didn’t do. Therefore it’s attacking the long tail and it’s going to attack the higher reaches of the tail, eventually going for the bigger clients: the Fords, the P&Gs, the Unilevers. If I was them, that’s where I’d be going too. And we have to find a way to co-exist.”

Update: After having been on a monthly shopping spree for digital agencies since last spring, it seems either fitting or just plain unfair for Sorrell to be the one who says the wave of acquisitions has ended. I spoke to him following his presentation, where he said his primary focus would be in Brazil, Russia, India and China. “Our clients are obsessed in top-line growth. And where do you get that? You get that in the faster growing geographies and the faster growing technologies. That’s what our clients are trying to do and so, by extension, are we.” More from that interview after the jump.

He said that the acquisitions he engineered over the past several months - from 24/7 Real Media onward - have left WPP in a stronger position to compete in the U.S. and Europe. Now, having bought Indian online ad agency Quasar last month, Sorrell said he wanted to concentrate on the BRIC countries—though he doesn’t think the M&A market outside the west is all that strong to begin with. Here’s some excepts from our interview:

-- M&A fever has passed: Asked whether the non-stop M&A activity of the past year will continue into 2008, Sorrell said: “It’s cooled down a bit already. Certainly we’ve seen that in the U.S. Internationally, I don’t think it was as hot, except in France - with Hachette, Lagardere, Nextedia, Publicis buying WQ and Business Interactif - where it got out of all proportions. So I do think it’s pulled back. Private equity is less invasive, largely due to the credit crunch. The interesting thing, which I didn’t mention before, was that if investing institutions continue to take a negative view, then what’s going to happen is some markets will continue to fall and private equity will have to sort out the problem. So markets will be down. But soon after, private equity will be able to gear itself up - though not to the extent it previously had - and then they’ll have another bean feast.”

-- Google to the rescue?: Mobile advertising is among Sorrell’s obsessions. He began the year with an investment, through WPP Digital, in mobile search company JumpTap. But, like many, he’s found the mobile market in the U.S. to be frustrating. And just a few minutes after expressing his deep ambivalence about Google’s impact on the ad industry, he said he believes mobile is one area where the company could do some good: “I think mobile is still a major opportunity for advertising, even in the U.S. But the technological difficulties seem to be holding operators back. They’re unable to get their act together and so Google may steal their clothes with Android and spectrum bids and everything else. Perhaps Google will provide the stimulant to get them going.”