Credit: Trent Jackson Unsplash
The sometimes controversial practice of principal media buying has been revealed as a significant contributor to Omnicom's revenue.
The latest profit results from Omnicom give some insight into the size of its principal media business, where inventory is bought directly from media owners at a discount and then resold to clients at a margin.
Omnicom reported that organic revenue increased 3% to $4.015 billion, better than estimates by Wall Street analysts, for the June quarter. However, net income fell 21.5% to $US257.6 million as costs increased from the IPG takeover and from cutting employee numbers
The biggest revenue increase was 8.2% for Omnicom’s Media & Advertising business.
The part of the holding company’s accounts which indicates strong revenue from principal media buy is third party costs.
Third-party service costs for the June quarter came in at $US 918.4 million, up 13.2% from the same quarter the year before, including those costs when Omnicom acted as the principal.
This represents about 22.9% of revenue, the biggest cost after paying staff and is a strong indicator of the rising importance of principal media buying to Omnicon.
Analyst David Karnovsky from JP Morgan noted that Omnicom’s third-party principal costs increased in the quarter.
He said this would indicate a continued strong contribution from principal trading.
At an earnings call briefing, Karnovsky asked about the sustainability of that growth for principal media and it continuing to help lift the overall performance of Media & Advertising.
CEO John Wren said media is probably the strongest area within the industry.
And principal media, a product Omnicom has had for a long time, continues to grow, he said.
“I can see very clearly that it's going to continue to grow into the future,” he told the analysts.
“It isn't a unicorn by any standard other than the fact that everybody else that you speak to in the industry doesn't tell you the truth.
”It's a product that our clients opt into. We plan with them and then we execute against it. And the client gets a better deal, and we get incremental revenue with an incremental margin.”
The Association of National Advertisers (ANA) in the US found that agencies and holding companies have increased their use of principal media due to downward pressure on margins, deterioration of payment terms and an overall focus on “driving media costs down”.
The ANA, in a report, the Acceleration of Principal Media, said there are multiple challenges marketers must navigate, including an overall determination as to whether such purchases are in their brand’s best interests.
“Multiple respondents confirmed they had concerns about agency conflicts of interest,” the ANA said.
“Other issues cited include the loss of full audit rights, the quality of actual media inventory delivered and lack of visibility into agency profitability.”
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