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The rise and rise of ‘inventory media' is a further blow for client/agency trust

Nick Manning: The rise and rise of ‘inventory media’ is a further blow for client/agency trust

Holding groups are increasingly using ‘principal-based’ media trading models, but their lack of transparency goes against any progress made in client trust.

The 2023 financial reporting season from the quoted advertising holding companies has been even more illuminating than usual. In particular, the growing importance of media within their portfolios resonates loud and clear.

This is a trend that has been developing for some time; media is becoming an indispensable growth driver for business as it becomes more directly transactional. The trend is towards “shoppability”, shortening the path to purchase and breaking existing models for marketing.

This trend is the driver of current and future explosive growth in retail media and digital commerce, and holding companies that have invested most in the technology and data that underpin this trend will be the ones on top. It also helps explain why the Omnicom/Flywheel deal was so important.

AI transforming creative agencies

It is also clearer that generative AI is going to have a severe impact on creative agencies, changing their role and squeezing profits. The big groups are playing Top Trumps on investments in AI without saying out loud the quiet bit about job losses.

The sectors that are growing the fastest are ones that advertisers can best carry out themselves via automated systems and they tend to be those that require the most organisational alignment within brand owners, as product, pricing and distribution meld with marketing and media into a homogenous whole.

AI will also enable more in-housing for advertisers, especially as media becomes a more powerful generator of direct customer data. AI is enabling and speeding up the “flywheel” in digital commerce.

The backdrop to all of this, of course, is the steamrolling effect of digital on all aspects of creative, production and media. As the path to purchase shortens, media will become the shop window that eases the sales process. “Shoppable” TV is on its way, building on its earlier incarnations, while social commerce with TikTok Shop, for example, is already well-established. Amazon continues to dominate and shorten the funnel.

Quicker route to more profit

If the big trend is towards shorter funnels, are network media agencies jumping on this opportunity or are they fearful of it?

Once again, the reporting season provides the answer. They are taking the easier and quicker route to more profit.

They are doubling down on the lack of transparency that makes it harder for clients to measure effectiveness. And at a time when measuring actual business results is the hot button that is driving retail media and digital commerce.

Holding companies are increasingly using “principal-based” media trading models to inflate their media margins.

Also known as “inventory media”, this involves the groups purportedly buying up media inventory wholesale and selling it on to clients at a higher price. Broking by any other name.

The groups have traditionally had specialist units devoted to this form of arbitrage, but it is now a staple part of the network media agency offering. The agencies secure low-cost inventory as part of their media negotiations, package it up and sell it on at an undisclosed margin to their clients.

The client is “allowed” to see where their advertising appeared (if they ask) and the exit price they have paid (if they insist), but not the wholesale price. It’s a fair assumption that the margin the agencies make is somewhat better than they would make from trading in the normal way.

Bearing in mind that some of this inventory may be free of charge to the agencies, the profit potential can be infinite.

Quality-wise, it is not surprising that inventory media is not at the prime end of a market that is vastly oversupplied. There is a very long tail to media these days, as amply demonstrated by the recent Association of National Advertisers (ANA) programmatic study.

Lack of transparency

The lack of transparency that inventory media perpetuates is a major backward step at a time when advertisers need and want better access to data. Without the true cost that underlies inventory media, a vital element is missing — as is the agencies’ fiduciary duty to their clients.

It has been the case for a while that media agencies have become resellers of ad space, but never quite so blatantly and at such a volume.

Quaint though it may seem now, the role of the media agency used to be one where they acted in the clients’ best interests and negotiated hard on their behalf. Now, they negotiate hard on their own behalf and hide the arbitrage margin from the client. These deals are legally unaudited through carve-outs in the client/agency contract.

These carve-outs are regularly ignored, unless the client stays alert to the possibility of infringement.

This is happening because the holding companies are under profit-and-margin pressure. Media has always been a cash cow; now, it’s a life-saver.

In his results commentary, the CEO of Interpublic reconfirmed its commitment to increased “principal-based” trading, especially in the US, as the company’s growth and margins lag those of Omnicom and Publicis — both deemed to be more “advanced” in such trading. So we can expect more from every group, despite the unfortunate history of undisclosed revenues in previous years.

The difference now is that principal-based trading and inventory media are out in the open(ish).

Agency groups argue that the negotiation clout they use to acquire the low-cost inventory is a result of their scale and the price that the advertiser pays is lower than it would otherwise have paid. They also argue that by taking a “principal” position, they are at risk, on the basis that they have to buy the inventory on their own account.

The extent to which any of this is true is debatable, especially in the UK, where media agencies have always been principals. The clients aren’t able to judge any of this because “inventory media” is shrouded in secrecy and this lack of transparency has been made official contractually.

The legitimacy of any of this is doubtful, but it is undeniable that the media agency is bound to want to oblige its clients to buy whatever it has already secured (if true), whether it fits the client’s needs or not. Unless of course they have 100% foresight of what all of their clients need and are masters of allocating it all correctly.

Closed shop

In short, the advertisers are being sold cheap goods at a store where the goods are what the agency has bought in, reducing client choice. The mark-ups are invisible.

But clients are buying in a shop they have exclusively chosen as a business partner that (they say) will act in the client’s best interests, at least at pitch stage.

Some advertisers don’t mind buying this way, especially if they are trying to acquire customers cheaply. Some don’t mind allocating some of their budget to it, on the grounds that cheap inventory is supposedly even cheaper. Such advertisers routinely find that their media agencies exceed the agreed proportion of inventory media without approval.

All advertisers should accept that inventory media favours the agency more than them — otherwise why would it happen?

As profit pressure grows for media agencies, they have to sell more inventory media to earn more and thus offset the profit pressure on other parts of the agency group. So clients are in effect subsidising the lack of profitability in, say, the creative agencies.

Declining trust

Much has been made of the need for trust in our industry. Consumer trust is one problematic matter, but trust between advertisers and their agencies has been in decline for years. The 2016 ANA Media Transparency study was arguably brushed off by the sell-side of the industry.

Inventory media casts the media agency as a reseller to the client at undisclosed prices and this can only harm trust with clients. As its prevalence grows, trust can only suffer further.

Much inventory media selling relies on a lack of client knowledge, bandwidth or willingness to challenge. Not a good look.

As usual, the answer is for advertisers to resist the blandishments of their media agencies and only buy media where full access to all data and money is guaranteed contractually and is subject to audit.

We perhaps shouldn’t be surprised that the big groups are taking a shortcut to margin maintenance as a response to the storm they are in. But given how retail media and digital commerce are redrawing the map, the lack of transparency in inventory media goes against the industry grain — and the sharp rise in its use should give advertisers real cause for concern.

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.

Brian Jacobs, Founder, BJ&A Ltd, on 21 Feb 2024
“This is an important piece by Nick publicising a real problem for the industry. Without trust the industry fails; and this sort of untransparent practice erodes trust. There is an interesting historical context for this too. Carat was built in France on a broking model. No client knew the 'wholesale' price paid for media; in fact it was said that only Gilbert Gross, one of the two founding brothers knew the deals he had done with the media vendors which were allegedly written in a little black book. Carat manipulated the media prices they charged clients depending on circumstances. In an important pitch they could and would drop below the 'wholesale' price; the price charged to unsophisticated unaudited clients would be far above the price paid. They went further too. If a vendor refused to sell in bulk to Gilbert (as 'The Readers Digest', an upright American publisher did) Carat would remove the title from all media analysis systems. So, in the case of the RD it literally could not be included in any cost rank, or optimisation. How? Carat developed and sold the systems used throughout the industry to analyse media data. So excluding the RD from the systems was pretty simple to do. This broking practice was stopped by law, the famous Loi Sapin passed by the French Government originally to stamp out corrupt practices within the construction business. The large French agencies lobbied successfully to have the terms of this law extended to cover media purchasing. Carat margins dropped by c. 90% as a result. At the time (this was around 1993) the agencies (most were creatively driven) were well-connected politically; hence the success in the lobby. I well remember, pre Loi Sapin that the later-to-be CEO of what was to become GroupM, Irwin Gotlieb used to refer at every opportunity to the Carat model as 'the French disease'. Ironic, really.”

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