Is it time to disrupt the murky media-agency business model?
In this guest post Nico Neumann argues it is time for marketers to have a long hard look under the bonnet of their media agency’s trading desk.
The discussion around transparency, hidden income, and walled gardens reached a new milestone this month when TubeMogul released their ‘manifesto of independence’.
One of the key issues raised by TubeMogul is the conflict of interest when a company is making money from being both seller and buyer for the same transaction. It’s crucial to bring this practice to the attention of advertisers and TubeMogul should be commended for their efforts in doing so.
Unfortunately, it’s not the first time media-buying processes have been questioned in terms of ethics and profits. In particular, media agencies have been the focus of such discussions.
The tale of kickbacks
Firstly, about a year ago, a debate on kickbacks and rebates took off both in Australia and overseas. While we can only speculate about the actual scale of undisclosed discounts, value banks and bogus bills, some evidence has emerged that these seem to exist (see here, here and here).
Independent of the motive (which we review later), let’s keep in mind that undisclosed kickbacks do not only inflate the costs for advertisers, but are also a form of bribery and therefore unethical and –depending on how you define them– illegal.
Wiring money to your family
Secondly, many advertisers have started inquiries about the role of agency trading desks over the last years. These inquiries have been triggered by concerns of massive hidden arbitrage and the conflict of interest given by being both media planner/ consultant and beneficiary of the recommended purchase channel or media.
Put differently, this is like going to a doctor who then prescribes the medicine that a) has the greatest return for him (e.g., thanks to potential kickbacks) and b) is only sold or distributed by his spouse.
Because the recommended medication may not be the best treatment for patients in such cases, prescribing and dispensing functions have been largely legally separated in the pharmaceutical industry.
While there is no similar regulation in media, the fact that agency trading desks tend to be gifted with client budgets from their media-planner colleagues (even though it may not necessarily be the best procurement source or strategy) is one of the reasons brands have started moving to independent trading desks or bringing trading desks in house.
Most importantly, the same logic should apply to the spending on other media channels, such as social or search. It’s prudent to rely not only on the agency-aligned services, but to test and compare different other providers or in-house solutions.
Grading your own homework
Thirdly, there is a huge conflict of interest when the same [holding] company which executes the media buying also carries out the research and analyses on whether the media buying was efficient.
This is like asking a butcher whether or not meat is healthy and should be bought more often.
Will you get an honest answer? This is more than questionable. And it is the exact reason that, in finance, the independence of auditors from the entity to audit is required by law.
Yet, in media, it is not uncommon that holding agencies win a client through a low-priced media buying mandate, but put a clause in the contract that any additional services (such as analytics, research, etc.) must be sourced through their network.
This point is very critical. Clients should reject any clauses as described above for obvious reasons. Any analysis that affects budget allocation (viewability, fraud, analytics, etc.) should strictly be done by a completely independent third party that has nothing to lose from the outcome of the analysis.
Bear in mind the stakes at hand for a media agency group. For example, an agency analytics division may obtain $100K for performing marketing mix or attribution modelling, but their related trading desk, search optimisation or social media team could lose millions if the analysis suggested shifting budgets away from them.
What would your CEO say if you were responsible for such a large loss of revenue for the agency holding group? So, don’t be surprised if people fudge the numbers.
Why this is all happening
Overall, the described business practices represent murky ways to generate additional income for an agency group.
What could be the reasons for applying such rather unethical methods?
Well, it’s no secret that agency managers are under tremendous pressure: declining fees for traditional services, such as media planning, combined with unrealistic revenue targets dictated by headquarters can force division bosses to take extreme measures.
Clearly, pursuing such a strategy is risky and mainly benefits the C-level suite. In extreme cases, greedy superiors could even jeopardise their agency business in the long run when fostering such behaviour through unreasonable KPIs. But they may not care, as long as they and the shareholders receive sufficient financial rewards in the meantime. And should any unethical practice ever be revealed, it is typically not the top-level executive’s head that rolls.
Market corrections and disruption
However, if we have learnt one lesson from the global financial crisis in 2008, it is that such a crooked system will fall apart at some point.
The demand for transparency does not only create more efficient markets and higher consumer welfare over time, it also opens up new business opportunities. For instance, independent digital start-ups centring on transparency, such as Anagram in the U.S, Louder (founded by IPG’s former Head of Technology Andrew Hughes) or DigDeepDigital in Australia, have thrived on this recent trend.
Hence, to stay profitable and survive, media agencies should concentrate on those non-conflicting parts of the value chain where they can provide the greatest value, clearly define whether they offer a product or service, and be fully transparent about data ownership and how much they charge.
And CEOs need to provide the right incentives and environment to enable this transition.
Change can only come from the very top. Otherwise, management consultancies and smaller niche players will keep taking away business from the traditional media agency houses.
Nico Neumann, senior research analyst, University of South Australia
If Tubemogul are so squeaky clean &”independent” why can you still not choose the exchange you want to buy from in their platform?? Hhmmmm
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Music to my ears, a great read and so very true!
http://www.blix.com.au
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What a great article, and so on point. The kick back issue needs to be resolved for our industry to move on. And while the media agencies are deservedly in the spotlight, the procurement departments who create this environment need to take responsibility, as well as the media companies who pay up. Glad to see Mumbrella keeping their attention on this issue, rather than worrying about burlesque dancers at a private party….
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This is where the training, discipline, certification and adherence to industry ethics and protocols come into play, no matter who the work is for. At the end of the day, researchers must remain true to the data and their science.
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The isn’t news, its stating the obvious.
It is rerun of a hundred articles and similar points of view. Its generic and boring because once again no culprits are named.
This recurring cycle sees the culprits keeping their heads down until the ground swell disappears and then get back to it.
Accuen, Dentsu Amnet, Cadreon and Xaxis – your thieving has destroyed the media industry.
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Yes, it’s all been said before. Many times. Put money and high pressure together in the same room and the potential for problems will soon follow, in any industry.
Where does the pressure come from? Head office certainly, but more than that – it’s called ‘shareholder value’.
It’s been said before but the pubic nature of these companies creates the intense pressure to deliver for the shareholders. The Genie is probably out of the bottle on that score now, but the big publicly aligned media agencies need to find a solution to this matter or the privateers will proliferate and start to eat their lunch, without question.
Oh, and advertisers – tell your procurement Dept. you pay for what you get. Take your foot off the pedal a touch and understand the nature of what you’re buying before you start turning the screws.
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I’ve been following this post since the weekend, sorry but I can’t help to throw in another cheeky plug.
Peeps, if you want greater visibility on your TV and other media, do please reach out -I’d happily show you how we can help.
http://www.getblix.com/tv-analytics
cheers
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There are alternatives. For 2 years ADMATIC has been running as a full programmatic media agency, paying programmatic marketing the respect that it’s due. Programmatic does not work unless it is 100% transparent, unless it is omni-channel, unless it is tech-platform agnostic, and unless you are being policed by a 3rd party.
ADMATIC provides clients 100% fully transparent programmatic media agency services. Full stop. No hidden secrets. No bonnet to look under.
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interesting analogy.. the doctor recommending a pill that’s only distributed by his sister would be wrong because “the recommended medication may not be the best treatment for patients in such cases”. I totally agree with that.
BUT – what if :
(a) the recommended pill is proven to be better and more effective than anything else in the market.
Is this still a problem? Why? Because his sister runs a pharmacy? So we don’t treat the patient in the best way possible?
Or
(b) what if the doctor tells the patient that the pill he is prescribing is better than anything else in the market, but is only sold at a shop owned by his sister?
The doctor says you are free to go to that shop and buy this best-in-class pill from my sister, or here’s a prescription for something else that’s not as effective, but you can buy it anywhere. Up to you.
Is this a problem for anyone at all? Why?
I put it to you that (b) is what is happening in the marketplace at present.. and so the rest of the article is irrelevant.
Let’s (re)state some facts:
No client is being sold agency trading desk inventory without their knowledge or consent.
Every client has the CHOICE to opt-in to the ATD model before being sold ATD inventory.
Every client has the CHOICE of buying digital inventory the normal way if they wish to do so. Indeed some very large clients do exactly this – opt-out.
I know all the main agency groups operate like this.
If there are any media agencies selling pills to clients without telling them the pharmacy is owned by their sister, then that’s completely wrong, but I would like you to name which agency is doing that? Your article makes it sound like the whole industry is doing this.
So again – what’s the problem, if clients are willingly signing up to the ATD terms offered by media agencies? All clients have the CHOICE to opt-out or opt-in.
I note there’s a small handful of clients that are setting up their own trading desks… good luck to them.. its their CHOICE after all.
However, I happily predict of the 10,000 advertisers in the country, only 5-20 advertisers would do this at most… as you need large economies of scale to do it yourself properly and staff it up with the tech and talent required to make it effective. Good luck.
At the end of the day, the ATD model will survive so long as its better than what’s the best alternative available in the market (normal digital display buying).
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Dear JB,
Thank you for your interesting comment.
First of all, please note that the article is not only about agency trading desks (ATDs). Hopefully, the article encouraged different stakeholders in the ad value chain to ask questions and think about “conflict of interest”, which is an issue in many industries.
The second key point of the article (wiring money to your family – the ATD section) could be summarised in one sentence: simply compare and test different offers in the market. And as I wrote, this should apply to all media buying (including search and social).
Is this bad advice? You would do the same if you bought a car, no? (or anything else of significant value). In the case of a used car, you would probably check which model to buy and at which dealer. There is no argument to always use the ATD (please don’t tell me that they know the client strategy best because they can work closely with their media planner colleagues – any expert can do this).
Secondly, there is no section that recommends insourcing trading desks – the article just mentions that this trend has been driven by concerns around “conflict of interest” related to ATDs.
Generally, the issue is that you never know whether the treatment really is the best if someone could make a lot of money from recommending it (hence it is legally separated in other areas – that should make you think).
However, you make a good point. What if the “pill” is actually the best?
The biggest issue is: Who will prove this? An independent party or the agency-related analytics group? (now we are back at point three, “grading your own homework”). Clearly, there is only one answer: don’t let an agency assess whether their own media buying was efficient/done correctly (and ironically be even paid for this on top). You may have overread this (because it is ‘irrelevant’?), but in finance, this would not even be legal.
In sum, you basically have two options to address concerns around conflict of interest.
1) Avoid it from the very beginning (by using independent trading desks) or
2) have an independent party checking (auditing) everything (may be good advice anyway).
And my final comment: yes, clients have a choice – they just need to be educated about the pitfalls and potential issues. Then they can select the best option for them by making an informed choice.
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@nico – I can only speak for my agency. All clients are completely informed of how our ATD operates, the fact that our sister owns the shop, and the promise that the pill will be demonstrably better. I imagine our competitors probably say the same thing to their clients..
So to your question of who grades the homework – normally I’d agree with you, clients should have an independent party grading results. Eg we regularly welcome media auditors who audit our buying performance to earn our annual Kpi’s for example. The buying data is averaged out over the course of a year, and so this can be assessed by auditors against their data pools, which are always correct and up to date 😉
But for digital inventory bought in real time on ATDs – after-the-fact assessment isn’t really the best way to evaluate, as the key question is “what was the best alternative available at that point in time when the campaign was run?” An auditor coming in a month later can’t effectively answer this question, despite their independence in the process.
So – how do we do prove our value ? Simple .. By allocating a % of the ATD budget (eg 20%, or whatever is agreed with our client), and using it to buy best available non-ATD inventory at the same time, which the client chooses. Then we look at the cost effectiveness of our ATD buys against what else was available at the same time in market at the same time. This process serves two purposes:
(A) keeps us on our toes as our ATD is only of value to the client if it’s better than market. Like the analogy above, the pill is only going to be bought from the sisters shop, if it is better for the patient.
(B) every campaign’s effectiveness is self-proven against what was available in market at the time. Using alternative media suppliers chosen by our client, or client auditor.
To be honest, our ATD doesn’t win the evaluation every time, but probably 90% of the time. to me this is good proof, as you can’t expect a system to be infallible.. Even the best algorithms get it wrong sometimes.
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Dear JB,
Thank you for your engaging discussion. I am glad to see that this topic appears very important to you. Nevertheless, I am not sure whether I share your views. You claim to have the best pill and you mention the ‘promise’ to provide better value. That may be indeed the case. However, you may not be surprised that every agency or vendor promises this, including the bad actors. Promises don’t mean very much, in particular given that trust has been exploited more than once in media before (and other industries).
Regarding your “grading your homework’ comment, I could not disagree more. There are many ways to check which media buying is or was better: A/B tests, attribution modeling (my key area) or marketing mix modelling. And it’s actually statistically more sound to do it after the buying was completed.
Moreover, I doubt that anyone can really evaluate on their own what would have been the best solution on the market (there are also options outside of the trading desk, direct deals, different skills among traders etc.). Without pitching different solutions and trading desks against each other it would be impossible to tell which one can perform the best – it’s not about winning a single auction of line items. The final goal of the campaign and the client matters and there would be many ways to reach that.
In any case, you do not have to agree with the article. As long as people discuss what can be done to improve media business and reduce dodgy practices, I am happy.
BTW: there is an interesting saying (from Shakespeare’s Hamlet if I am not wrong): “The lady doth protest too much, methinks.”
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Looks like someone found our whitepaper on the state of the programmatic industry from last year (REAL Programmatic).
Every time a Big Player makes a comment about transparency and honesty in the industry it’s a BIG GAME CHANGER…. should it not be expected that we are or should have already been honest and transparent.
I am perpetually perplexed that we are all still talking about this like it is a new discovery. We should be expecting a lot more from our media partners, agencies AND their group owned trading desks.
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Excellent post Nico! You touched on a lot of interesting points.
Would love to hear your thoughts on the publisher side and their unscrupulous behaviour of using bot traffic to inflate ad impressions and clicks.
We’ve helped our clients identify bot traffic which their media agencies are buying up. At least the fraudulent traffic a client bought from Tube Mogul was refunded promptly, but I can’t say the same for other publishers. After getting burned so many times, I recommend our clients to exercise extreme caution with display media.
Sadly it’s very dodgy.
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