A lack of transparency in media trading was a hot topic throughout 2017 and continues to gather pace as we move through 2018. Given momentum through the concerns of digital trading and the ongoing visibility requested by industry bodies, auditors and procurement, it is an ongoing cause of concern for many media owners and agencies.
In this post we look at the reasons for the rise in transparency issues and look at what clients need to be concerned with.
The role and commercial model of the media agency
In simple terms, media agencies spend clients’ money, acting as the conduit between the client and the media owner. The media agency traditionally generates income from the media owners through commissions when representing them in the planning process, and clients allow the agency to retain this income as ‘payment’.
Clients pay media agencies for their specialism in the strategy process (media planning) and leveraging trading skills at the implementation stage (media buying), whereby they ensure the client is achieving fair and considerate rates for the activity placed with the media owners.
The critical point is that media agencies are charged with keeping the clients’ best interests at the heart of the planning and buying process, and get paid for doing so.
Current trading landscape
Over time, the traditional income model has been eroded through client negotiation, the role of procurement and the growing supply of media buying points available to clients. This creates a downturn in traditional revenue models, so agencies have had to revamp the commercial model. With a clear ceiling to income from major clients, agencies turned to media owners to improve their income, striking deals based around spend levels whereby the agency would be further remunerated for the volumes of spend.
Without drowning in figures and stats, Neilsen-registered media owners reported £6.7bn in advertising spend in 2016 (for reference, total media spend in 2016 is commonly reported to be £21bn). Of this, WPP trade around 45%, 18% with Omnicom, 15% with Aegis, 14% with Publicis and 5% each with Interpublic and Havas.
This reliance on networked agencies for their income has meant that the negotiation strength sits with the buyer (media networks) rather than with the seller (media owners).
This position allowed the networks to develop complex trading agreements that deliver income and profit from the media owner above and beyond the traditional income model, and the media owners have had to play ball due to a reliance on income from a small volume of buying points.
Put simply, the process of trading in these groups is now so complex it has raised further concerns with procurement and auditors who have become gravely concerned with the issue of transparency.
In the large groups there are two critical levels. One is the client-facing agency (e.g. Mediacom or Carat) with whom the client trades, and the other is the buying organisation which is part of a larger corporate group (e.g. Dentsu, Group M) that the media buying agency is a trading division of. It’s likely that there is transparency between client and agency at the point of the buying and trading agreement, because the deals that benefit the groups are done at the level above (i.e. between Dentsu and media owner). So it’s not as transparent as it might first appear.
In short, the buying process is an extremely weighted buyers’ market.
This has resulted in agencies holding media owners to ransom by culling spend until trading deals are met.
It’s easy to see that a worrying level of power sits with the large buying groups when, in many instances, one media trading group is responsible for over 35% of a media owner’s income.
Why are we here?
Agencies undervalued their services, allowing tighter and tighter margins, knowing they could essentially force the hand of the media owner into higher rebates and deeper deals that now, in the example of the television market, include co-funded programming and more.
As this process grew in complexity so did the lack of transparency with clients.
Because the traditional income routes of media commissions are being squeezed by the larger spending clients, there is more pressure on the biggest agencies to diversify their income.
For the listed network agencies (Omnicom, Publicis etc.) this has caused a significant problem. The media agencies were always the cash cows, generating large revenue and turnover and delivering handsome profits.
As the industry bodies push for greater transparency in trading, and the network agencies come under pressure to expose some of their processes, profits have unsurprisingly, dropped. WPP, the world’s largest network agency, has been reporting declining profit and therefore a plummeting share price. The link between the demand for transparency and the sudden drop in profit is undeniable and demonstrates the lack of transparency that existed (sorry WPP, but you’re not alone) and the transparency debate has ultimately led to the exit of CEO Sorrell.
Further, in October 2017, three of the six executives in the biggest media agencies left their posts. No doubt because of pressure from above due to diminishing profitability and issues over transparency…. though I am only hypothesising of course!
How does this all impact on a client?
There are two routes for trading; agency/group deals or line by line. Agency deals mean:
- Clients’ spend is allocated in accordance with the groups demands in terms of percentage of spend by media owner
- This means an inability to apply a media neutral approach to planning whereby the recommendations are delivered in accordance with the client goals
- The price a client pays is not the price the agency (or agency trading point) pays (we can use a variety of language but the point remains!)
- Clients’ spend fuels deals for the larger spend clients whereby pricing and deals are not flat
- Nor are they negotiated based on that clients spend and share. Instead, pricing is based on total group spend across the full client list.
In contrast, line by line trading means:
- The trading and buying process does not impact on the planning process (media neutrality)
- Negotiation is done based on that client, campaign, budget, share, objective (and more)
- Agencies are not remunerated beyond the traditional commission model
- Transparency is available through one simple process; the sharing of media owner invoicing
- Flexibility to amend and manipulate plans based on client needs
So where does this leave clients?
There’s a simple fact in business that there’s always someone who can do it cheaper. No truer than in media trading.
There is now a need for all agencies to show true value in the strategy they offer to clients and monetise the thinking, not just the doing.
At Boutique we focus on demonstrating our value in both the planning and buying phases. Only when we offer the strategic elements can we be confident we are adding real, measurable value to a client’s media trading. Furthermore, we believe that this process must be 100% driven by the client opportunity or challenge and not by the agency desires.
I once wrote about us not being everyone’s cup of tea and the sentiment seems to be more pertinent now than ever.
There is absolutely a need for the biggest spenders to be running complex audits, ensuring absolute maximisation of value from the agencies and media owners. The issue is how this translates to the collective of clients across those agencies and groups. It’s now time clients questioned whether their agency is working in their best interests.
Auditors and procurement depts are squeezing agency deals at the highest end and the biggest clients benefit because they can justify that process, but it’s a process the smaller clients don’t see or benefit from. If the agencies are squeezed and have maximised their income from the media owners, the opportunity lies in complex trading deals that maximise revenue from the ‘smaller’ clients in agencies.
Those clients might still be getting good deals but here’s the thing; that client is no longer benefitting from the raison d’etre of a media agency; the planning and buying expertise done in the best interests of the client. After all, it’s their money the agencies are spending.
So the long story leads to a short one; a client engages a media agency to represent their best interests in the planning and buying process. That isn’t happening for many clients using a networked agency.
It is my opinion that the largest agencies are not fit for purpose to fulfil this role for the ‘smaller’ spending clients because they simply are not built to fulfil that role of best representation of the client. Right agency, better results.
Let’s be clear, I’m not for a moment suggesting those agencies are not fit for purpose in the modern market. Quite the opposite. They’re the perfect fit for the right client. My point is that they’re also a poor fit for the wrong client, as are we.
So let’s talk about Boutique….
As an agency we put strategy and ideas at the heart of what we do. True collaboration with media owners means ideas come from all angles and its only through a truly media-neutral approach that we can ensure the planning process is driven through client objectives. Only then do we buy, line by line, ensuring maximum value against the plan we produced. It means work like the partnership with the Telegraph and Craghoppers come to life, it’s how we ensure that the mix of solutions for our full-service clients such as Ryobi, Costcutter or Express Bi-folding Doors are driven by strategy.
Want to find out more? Download our F*** the Funnel whitepaper to discover how you can market your brand to the right people at the right time.