Hear how clients and media owners are losing out due to undisclosed revenue streams within large network media agencies.
I’ve chosen a pretty meek title for my presentation, which is: how media agencies are ripping off their clients and media owners. Okay? Now, the touch paper to this debate was lit in the summer of last year by the ANA, the Association of National Advertisers over in the US. That debate, it’s now crossed the pond and it’s over here, and it is consuming the upper echelons of our industry today, and the debate is fundamentally about how media agencies make money and the ethics of it. I’m going to explain to you what this is all about.
Imagine you’ve got a UK client with a £20 million ad budget, and they’re going out to market to look for a new agency. They will inevitably involve a procurement team, whether that’s in-house or outsourced, to help them do this, and naturally that’s a big budget. All of the big guys are going to want to a piece of this. It will ordinarily be awarded to a network agency. One of the large guys, okay? Now the procurement process will mean that the price for the services that the agency provide will be commoditized and heavily, heavily suppressed. What’s been happening for a long, long time in our industry is large agencies have been winning briefs of this size at a fee structure that means they do not make money. In many, many cases they’re taking on clients, and they’re losing money on the fees that they charge.
That’s where the debate starts. That’s where it gets interesting, because these agencies have become brilliant at creating undisclosed revenue streams, and we know categorically that an agency like this, with a client of that size, will look to make £5 million in undisclosed revenue on that brief. To be clear, that money does not go back to the client. The client does not know that money has been made, and none of it goes to the media owner. I’m going to give you a few examples of how these agencies create that revenue.
The first one is rebates. Most clients know about rebates, okay? It’s commonly known within the industry. I’m going to explain to you what happens within the rebate side of things. You’ve got the client. They’ve appointed the ad agency. Now, the ad agency, they don’t just work on behalf of that client, they work on behalf of many clients. What they do is they go to the media owner and they do a bulk deal. Let’s use the Daily Mail for instance. They may go to them, and they may say: “We’ve got huge buying clout. We have around £100 million of investment that potentially we could provide to you this year.” What they’re doing is they will then, naturally they’ll commoditize the trade, and they will force the price down for the media that they’re purchasing, which is what they should be doing. Remember, that’s part of their argument on why they win business. They’re big. They’ve got buying clout. They can get you your media cheap. Okay?
So, they get huge discounts. Some of this discount is passed to the client, but what happens when these deals are getting done is really interesting. They get rebates. They sit with them, they’ll do that deal, and then they’ll say: “Right, if we spend this £100 million when we get to certain benchmarks, let’s say, the end of the deal, £100 million we’ve placed with you, we want £10 million in cash back. You got to write us that cheque, and we want £2 million in free advertising inventory.” Now, that cash, do you think that makes its way to the client? No, it doesn’t. They bank that. What do you think they do with the ad inventory that they get for free? They sell it to the client. So, they’re making a lot of money.
Now, we’ve dealt with the commerce of a rebate. Think about the psychology of what’s going on. What’s happening to these planners and buyers within these agencies? What you’ve got is a planning and buying agency working on behalf of a client that has gone out to certain media owners and done massive deals. They have purchased huge amounts of media, or at least a commitment to buy it. What have they become? They’re not an agency anymore. They’re a media owner. What will happen to the planners and buyers in that agency working for their clients? They’re going to be motivated by the network, by the drive for revenue to place their client campaigns in the areas in the media where they have these deals. Where they know they will secure the rebates. They will have no objectivity, and we know for a fact that in some cases planners and buyers in these agencies are already told where to put their money before they’ve even seen a client brief. That’s frightening enough, okay? That’s the tip of the iceberg on this. Honestly, it is a fascinating debate.
I’m going to talk to you about a second area which I’ve called firewalls. To tell you about firewalls I’m going to talk you through a poster trade when a client is buying an outdoor campaign. Billboards, okay? You got the client, you got the agency, and you’ve got a number of media owners that own billboard inventory, but in the middle, these agencies what they tend to use is a specialist poster agency. There’s only really a few of them. They use these guys to do the deal, and to use their specialist expertise to buy on behalf of their clients.
Now, these specialist poster agencies, they’ve got massive clout because they have all of the ad budgets for all of the clients, so what do you think they do? They sit with people like Clear Channel who own the outdoor, and they do these deals that I just spoke about a moment ago. They get huge discounts. How much ends up back with the client? Unsure, but they get these massive rebates. So, what’s happening in these poster specialists? Do you think that they’re driven by an absolute furious passion for delivery for a client, or are they driven to place revenue in the areas where they get the best kickbacks? You got the same thing happening here, but this is where it gets interesting. Who do you think owns those poster specialists? It’s the network. Right?
All of those cogs in between the client and the media owner are owned by the network. A lack of objectivity. If the client, which clients do on campaigns or budgets of this size, if they’re interested in auditing all of this, because of that network ownership, they’ve created a firewall. Client A ask Planning Agency B: “We’re going to audit the account, see what’s going on.” Do you think that they’re going to get a clean paper trail? They won’t. The specialist poster agency can furnish the planning and buying agency with whatever they need and want.
To bring this, as a final point, closer to home I want to talk about programmatic trading of display inventory. It’s widely accepted now that when a client spends a pound, generally the media owner – obviously it makes its way to the ad agency – the media owner generally will get about 30 pence. That’s because there is a technology stack that will sit in between the buying agency and the media owner and the ad agency, and between that tech stack and the ad agency they’re taking about 70%. So, we’re starving the teams, the platforms and the publications that work so hard to create audiences for us to advertise to, and within this who do you think owns the tech stack, or at least part of it? Surprise, surprise, it’s the network, right?
Do you think the planning and buying agency are attacking this with objectivity with their client’s best interests at heart, and using the technology that may be best for the clients? No, they’re not. They’re told what to do, and it’s not working. We’re not serving the client’s best interests. Again, you have a firewall, so good luck to any client trying to audit a programmatic display campaign. They won’t get very far indeed.
To finish up my talk, I want to look at and reflect upon all of that, and ask you to consider what type of industry have we created? I think we’ve totally screwed it up. You have the client on one end. The client who funds this entire industry with their budgets, and we are servicing them with a complete lack of objectivity. We are not looking after their best interests. The agency networks, they’re looking after themselves. They are driven by an agenda of revenue generation for them, and the media owner on the other hand, right at the end, these people that we so need to create engaged audiences that we can advertise to, we’re starving them and we need them to thrive.
This is why I am so delighted to be part of this team, an independent agency. An agency that has never once had undisclosed revenue with a client piece of activity, and that every single time we arrive at work and we look at a campaign, we’re doing so with complete objectivity, and we know the cornerstone of our work is always what’s in the best long-term interests of our clients.