14 May 2024 | Nick Manning

Principal-based media’ is bad for the whole industry - here’s why

Opinion

Let’s be clear. Principal-based media only exists to make media agency groups more money.

The business models underlying today’s advertising eco-system are buried deep.

The new supply-chain includes media agencies, adtech providers, data, research and analytics companies, as well as the myriad smaller fish who swim alongside and feed off the whales.

It’s a lot of mouths to feed and only one caterer.

In former times, the supply-chain was short and the media agencies strove to make the clients’ money work as hard as possible.

But the balance has tipped over from being demand-led to supplier-driven. That means that the big media agency groups have become part of the supply-side, selling so-called ‘products’ to their clients at inflated and undisclosed prices.

And advertisers are often unaware of the full extent of the businesses involved in the provision of their services.

The scale of principal media today

Marketers are also blissfully unaware of how much money these agencies and intermediaries are making out of the client’s dollar.

It’s likely that non-transparent sources of media-agency revenue are now the principal funding mechanism for the network media agencies, accounting for between two-thirds to three quarters. These revenues come in many guises and these increase and morph continuously in line with the ingenuity of the people who pull the levers.

One vital and increasing source of these revenues is ‘Principal-based Media’ or PM (also known as ‘Inventory Media’ or ‘Proprietary Media). It is common to all network media agencies and some independents in some countries.

Importantly, it enables agencies to low-ball fees and media costs to win an advertiser’s media account, because they can make money on the money, via the total ‘extraction rate’ from the client’s business.

It keeps the engine stoked up. This is akin to the printer cartridge and razor markets, where the initial costs are low but the add-ons are high.

It’s not a good look when a professional services industry acts in this way, but that is the reality.

It’s also a gamble by the agencies on being able to word the client-agency contract in ways that prevent detection of the many extra sources of revenue and gaming the audit process (performance and compliance).

The older non-transparent services were hidden behind the scenes, but now the client-facing agencies have to go out on the thinnest of limbs at the behest of the guys behind the curtain, re-selling PM and maintaining the pretence that it is the best thing since sliced bread.

ANA report shows some clients need serious help

Today’s ANA report delves deeply into the PM phenomenon; the conclusions are precisely right and the recommendations strong.

While it accepts that advertisers may choose to use PM for some logical reasons, they should include in their agency contracts a laundry list of caveats over the extent of how it is used, how it is identified on plans and in buying reports, and insist on stringent governance on how it is justified and approved.

However, we know from experience that the intricate process of policing PM on a daily basis can mean that the highly sensible recommendations in the ANA study can get overlooked (or ignored) in the trench warfare of daily life, especially on international contracts where the other countries may either not know of the contract’s terms or just ignore them.

Often the agencies’ central teams don’t know what is happening in their own further-flung outposts and, unless they employ internal compliance teams, they can’t know. And these teams are expensive, so they need more revenue to fund them (but not from client sources).

Often advertisers don’t even know that they are using PM. The ANA’s sample of 121 advertisers contains 18% who don’t know if they are or aren’t.

That’s 22 clients who need some serious help.

The number who are (47%) outnumbers those who aren’t (35%). Of those who are, 38% have no guidelines at all on the use of PM, so theoretically the agencies could use as much as they like. Coincidentally, that’s another 22 clients who need help.

Sometimes advertisers only find out a year or more after the event that they had been unknowingly using PM and then find out that they are prevented from auditing the money-trail as much as they had planned and their agency has been making extra money they didn’t know about.

Some advertisers who have agreed to a limited amount of PM find that the limit agreed has been significantly exceeded. It’s never less.

Tight governance takes specialist expertise and the ANA, among others, have long advocated the recruitment of the right kind of people within the client organisation to ensure it. Hard-pressed procurement people don’t have the bandwith nor often the experience to do this.

The agencies prefer to apologise later than seek permission before. So while the ANA’s guidelines are perfectly sensible, compliance with them cannot be taken for granted.

PM is the worst ‘non-transparent’ practice of them all

Media agencies promote PM as the answer to a maiden’s prayer; the inventory you would have bought anyway at lower prices and sometimes commission-free. What’s not to like?

The stated rationale is that the agency buying group has flexed its unrivalled negotiation power and prowess to secure highly discounted rates that can only be achieved when the agency group guarantees to the media vendor that they will pay for the inventory anyway, whether or not their clients use it. Sometimes this includes access to some inventory that allegedly can only be secured through PM.

This may strike some as rather odd.

Surely the media vendors wouldn’t make some of their best properties only available to clients of network media agencies who ‘opt in’ to PM, would they?

You don’t have to be Sherlock Holmes to figure out that agency groups would never really do any of this. There is no value to any agency to hold unwanted inventory and they have many ways to avoid having to pay upfront or even after the even Equally, you don’t need similar detective powers to work out that it is in the interests of the agencies to promote PM to their clients because it makes them more money, and they have quotas to meet set by the Agency group; they may even be incentivised to meet those quotas and, possibly, sanctioned if they don’t.

One unnamed contributor to the ANA study says: “I don’t know if my agency is recommending principal media because it’s the best media for me, or the best media for them.”

I suspect on balance we know the answer to that question.

PM is only one of many non-transparent practices but it is the worst. Unlike the others, it purports to be in the advertisers’ interests and is positioned as a fair trade-off between lower media costs and loss of back-end transparency.

Call me old-fashioned, but I would have thought that an advertiser’s media agency should be able to buy hyper-competitively without having to resort to shady practices and loss of clarity on how much money the agency is making behind the curtain. I would also have thought that advertisers shouldn’t have to turn their bullshit detectors to ‘high’ when reviewing media plans, or arguing the toss over contract clauses a year after the airtime has gone out.

Nor should clients be forced to make tough choices on what to do when the agencies place obstacles in auditors’ paths.

There is only one kind of transparency, and being ‘transparent about being untransparent’ isn’t it.

PM is bad for everyone

PM is the tip of the iceberg and only one of many non-transparent practices that are simply bad for advertisers, the media and ultimately the agencies and their supply-chains, too.

It perpetuates a business model that artificially sustains advertising’s unhealthy buy-side oligopoly

There is a limited number of multi-national players (six), so choice for advertisers is restricted if they want international coverage with well-resourced offices and the right people, capabilities, systems and processes (-ish).

All six players work in a very similar way, employing techniques that they mimic from each other, often transmitted by people leaving one group to go to another, taking their toolbox with them.

Network choice is limited but the six are insanely competitive with each other. Pitching is vicious, with rounds of increasingly insane offers on media cost guarantees that are not available without chicanery. Fee rates are set below cost because the agencies hope that the difference can be made up elsewhere (and this is normally unknown at the point of appointment). The horse-trading over precise contractual terms usually happens too late.

This oligopoly operates in a merry-go-round of client moves, with the general thrust of cost reduction as a main (if illusory) outcome. It has made pitch management a nice earner for some, with the dreaded and increasingly irrelevant media cost grids making the problem worse.

We are living in a spreadsheet world where the ‘dark arts’ of media horse-trading fabricate money for agencies, replacing the rather quaint art of advertising. The focus is on spending money, not generating profit for advertisers.

This circular firing squad has not only famously commoditised media, it has helped sustain a business model that is more than just a race to the bottom.

It means that network agencies ‘plan the buy’ rather than ‘buy the plan’ and prioritise media channels and other intermediaries (including Out-of-Home specialists and ad tech companies) with whom they have a financial reward mechanism.

Not being on the ‘Preferred Supplier List’ is the velvet rope at the cool nightclub.

So it’s not just the planning that gets distorted, it’s also how the plan is executed. No matter that another DSP can do a better job.

It relies on the client turning a blind eye in the interests of a quick win

It invites the advertiser to take the short-term benefits of lower cost media at the expense of the kind of transparency that delivers a trusting relationship.

By reducing the transparency that advertisers have over their budgets, it consolidates what Travis Lusk of Ebiquity accurately describes as the agencies’ hold over the effectiveness of media spend through taking a principal position on the media and its measurement.

No doubt there are agency voices that would say that in this instance it is better to earn more revenue from clients than from the agency’s supply-chains, but this is tantamount to saying that it is better to rob a bank than mug the bank’s customers.

Non-transparent revenues artificially prop up the holding-company profits and at an unrealistically high margin. This is why the investment community like PM so much and either don’t understand its consequences or only care about a quick fix before swapping their funds into something else.

The additional profits generated by non-transparent media trading do not benefit the media agencies actually doing the work. The revenues flow up, eventually, to the holding company and only a fraction (‘earned’ by achieving a quota) remains with the client-facing agency.

The people doing the work are having to do more with less. The demands from clients have multiplied, the speed of response required has accelerated, the amount of systems and data has mushroomed. Pitches get harder, more aggressive and demanding and the immediate benefits are not enough on their own, given that the big money gets made later behind the scenes and this doesn’t help the pitching agency.

It was always difficult for the client-facing agencies to explain why out-of-Home (well known as a source of rebates) or certain media vehicles appeared incongruously on the plan. But with PM, this problem is replaced by the need to explain why PM is on the plan, often unheralded at pitch stage. As it is dressed up as being in the client’s interests, it is easier to justify but it strains the agency’s credibility.

We would all like media agencies to move upstream and reflect the new needs of the client, as described by Ailsa Buckley in The Media Leader yesterday , but this can only happen with a different business model that legitimately funds the recruitment of highly skilled specialists.

These are industry-level problems and they cannot be solved if too much of the additional revenue goes into subsidising Holding Company profits, given their dominance of the global industry.

PM is not beneficial to media owners and vendors either

The ANA study shows that TV is the medium that is most affected by PM trading.

Some of the roots of PM can be tracked back to the ‘Programme Finance’ schemes that emerged in the 2010s. These are effectively barter deals that the media Agency groups agree with TV programme makers (mainly independent production houses) and the broadcasters.

They effectively swap TV programme budgets for airtime; the broadcaster gets money for content that saves it from having to pay for commissions; the production companies get their programmes financed; and the Media Agency groups can sell on the ad inventory at any price they choose.

Advertisers are not involved in this process and almost entirely unaware.

The quality of the programmes thus made can be subjective, but it is clearly in the interests of the broadcasters to buy in high rating programmes that don’t cost the earth in bartered airtime, so more likely Reality TV than a documentary about Schoenberg.

The way that the money-go-round works in Programme Finance is fiendishly convoluted and not known to many. It has virtually nothing to do with advertising other than providing plenty of airtime for the agencies to carve up as they see fit to subsidise their client contract deals, including performance-related fees.

The TV broadcasters may like Programme Finance up to a point but when content budgets get pulled (as they are), they may have to increasingly rely on the agency traders to help fund new content, and never mind the quality, just feel the width. This could, in extremis, affect audience levels if the quality of programmes declines as a result.

You can make your own judgements on the quality of today’s programming, but the Lazarus-like revival of formats from the 80s and 90s is possibly a clue.

Other media vendors are vulnerable to the kind of coercion that PM can generate

We work within an extremely unbalanced industry where an unnatural amount of adspend goes to the biggest players, mostly digital, despite plenty of evidence that this may not be the right answer.

The big broadcasters can find ways to absorb the effects of PM through combinations of airtime within the linear feed and now the On Demand element, and on paper it evens itself out. But others don’t have this choice.

The media vendors who are most likely to be pressurised into doing PM deals, at higher discounts, are those that have small but often valuable audiences and can’t use paywalls for subscribed content.

Often this will include minority media owners, others with high fixed cost bases due to their content costs and others who just can’t afford the attention they deserve.

The dilemma for smaller media owners and supply-chain players is how to resist the need to agree to PM and other non-transparent practices. Damned if you do….

Meanwhile, the big digital players don’t need to play in the same sandpit

The tech giants are not beholden to the big agency groups given their scale and their long-tail customer bases. In fact, the big agencies have to keep the platforms happy to remain on the right side of the velvet rope. They have no sway with them.

And let’s not forget the crucial matter of cash on cash. With the return of decent interest rates, the agencies have another lever to pull with media vendors. For those with tight working capital (ie virtually everyone other than the big digital players), this is another area of exposure.

And, of course, the agencies are processing vast volumes of money through their treasury systems and earning nice returns on cash preservation.

All of these are paid for by advertisers and the more that money slips through the gaps, the less effective advertising will be.

Industry reset required

The risk is that PM becomes legitimised and a normal way of working.

The agencies and their shareholders like it because it is the most lucrative of all because it uses the high volumes of TV. Agencies also like it because the ‘opted in’ advertisers are not allowed to audit the mark-up on PM inventory.

It‘s a useful smokescreen that clients have agreed to and it provides plenty of scope for obfuscation.

They also like the control it gives them over what TV airtime is PM and non-PM. There is plenty of million row, multi-tab Excel involved in this process that remains a firmly-guarded secret. Discounts and price can be manipulated beyond the capabilities of any media auditor.

Ideally, advertisers should not permit the use of PM. If they do include it for valid reasons they should take the new ANA study, apply it in full, monitor it microscopically and sanction any misuse.

Advertisers also need to realise that low fees and pressure on media cost guarantees have contributed and even caused a lot of these problems, exacerbated by the agencies’ voracious appetite for money on the money, especially with interest rates back.

Paying the right rate to the agency (not ultimately the Holding Company) for services delivered is eventually going to have to happen.

There are deeper solutions to these matters but they would require a true reset in our industry. This document takes a purist view on how we can reverse out of the situation we’re in. It may take time, but there is little alternative.

In the meantime, the ANA study into PM is the answer to one specific aspect; let’s hope it gets the support of advertisers and, crucially, their independent advisors even if the media agencies will be less keen.

And if you care about issues such as this, join our ‘Who Cares?’ initiative as detailed in Brian Jacob’s latest blog.

Disclosure: one of the independent consultants who gave their time voluntarily to the report is Media Marketing Compliance (MMC), for whom I am the non-executive chairman.

Nick Manning is the co-founder of Manning Gottlieb Media (now MG OMD) and was chief strategy officer at Ebiquity for over a decade. He now owns a mentoring business, Encyclomedia, offering strategic advice to companies in the media and advertising industry, and is non-executive chair of Media Marketing Compliance. He writes for The Media Leader each month.