Opinion

Is it time to disrupt the murky media-agency business model?

nico neumanIn 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

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