Media buying: Are we at breaking point?

Arvind Hickman
By Arvind Hickman | 29 June 2016

Australia’s media buying ecosystem is more transparent than its counterparts in the US, but broader concerns about pricing and a race to the bottom exist.

In the wake of the ANA’s damning report on US media agency transparency, AdNews carried out its own investigation, questioning executives in agencies, media companies, consultants and clients about whether media rebates and transparency are problems here.

While most executives wouldn’t talk on the record – ironic in an article about media transparency – many offered detailed off–the– record accounts on the current state of play.

Three main takeaways are:

• Media rebates aren’t a problem here, although there are questions about opaque digital trading practices using group demand–side platforms (DSPs).

• Clients are in discussion with agencies about contractual obligations despite pitch consultants warning that not all of them understand or turn a blind eye.

• The spotlight needs to shift to fixing an unsustainable media buying model where procurement–led pitches are forcing agencies to look elsewhere for margins.

It’s important to note that media rebates can refer to a range of vastly different practices and grouping them together under a blanket term is often unhelpful.

For example, a media agency receiving a commission is completely different to an agency using client money to create a value bank of inventory, or being encouraged to trade using a holding group’s DSP.

The ANA report focused on the US media market where many of these rebates are outlawed if the value is not passed back to the client.

The investigation, led by K2 Intelligence from October 2015 to May 2016, found 59 non-transparent business practices in relation to media buying in digital, out of home, print and TV.

These cases stemmed from a third of the people interviewed (41 separate sources) with direct knowledge, including 34 rebates that were pocketed by agencies or their holding companies without advertiser knowledge.

Different folks, different strokes

In Australia, such practices are legal provided there is full disclosure and agreement with clients.

With a couple of notable exceptions, nobody AdNews approached felt there was anything particularly underhanded going on, but if the report encouraged clients to be vigilant over media agency contracts, then it had at least one positive outcome.

What we did learn is the media buying ecosystem is under strain and each part of the system – advertiser, media buyer and media owner – contribute, forcing agencies to create new services that fall outside of the scope of buying.

Andrew Howie, group marketing manager at Meat and Livestock Australia, told AdNews that agencies finding creative ways to make money is no surprise.

“By building partnerships and paying your partners properly, the need for them to cheat and steal to make a buck is hopefully removed,” he said.

“If as an industry we start to place a greater value not only on the services we provide, but also the services we request, the instances of cheating will hopefully diminish.

“If budgets and retainers are kept as a marketing function, rather than a procurement exercise, that may well be a good place to start.”

ANA report short on detail

All agency executives AdNews talked to were left frustrated by a lack of detail in the ANA report about which agencies were at fault as to allegations of non-transparency.

“Most people are disappointed with the report and the way it’s been issued and the lack of detail in it,” one agency executive said.

“It’s a pretty broad brush approach they’ve used, with no real clarity around what they’ve found.”

Agency bosses also stressed Australia has already gone through its own ‘ANA moment’ 18 months ago in the wake of the MediaCom scandal.

The discovery that MediaCom had on–sold value bank inventory to clients and fudged TV audience figures led to a period of soul searching that several sources said placed Australia well ahead of the US and UK in managing client–agency transparency.

AdNews understands marketers at many larger companies have sat down with their media agency partners and worked through contracts that provide them with the transparency and confidence required.

“There is a case of ‘buyer beware’ here. If you are not happy with what you are getting and you don’t think you’ve been given enough transparency and oversight into how the value is shared within the ecosystem they will find a way to get it,” an advertising industry body spokesperson said. “That’s within their power.”

The Media Federation of Australia (MFA), which represents agencies, told AdNews it agreed with the ANA that both media agencies and clients should ensure contracts address key areas of concern.

This includes “the basis of which a client’s business is being conducted; contracts are fully understood and are regularly reviewed; contract compliance is measured; and client media management training is provided as required”.

Some observers have said the one–page MFA Transparency Framework doesn’t provide a great level of detail to address transparency, while others believe it’s as valuable as the sheet of paper it’s written on.

Are marketers naive?

Trinity P3 managing director Darren Woolley, a marketing management consultant, believes marketers are naive and media has become incredibly complex.

“You need to spend the time to understand media,” he said. “Marketers spend far more time on a piece of creative that’s worth $200,000 than they do on media plans worth $20 million – it’s just crazy.”

It’s a view echoed by Pitch Partners Advisors’ managing director Peter McDonald, that marketers don’t fully understand complex fee structures, particularly around the way digital inventory is traded and the value derived from it.

Even if we accept that agencies have improved transparency, AdNews still wanted to find out whether media rebates, commissions, value banks and other forms of incentives were prevalent and if they present a problem.

This publication received an internal document showing that one agency received millions in rebates from a blue chip client, but that alone isn’t a problem if the client was aware and this was written into their contract.

The general sentiment is that rebates of various shapes and sizes do take place, but advertisers are across it and either do not regard it as a problem or don’t care as long as KPIs are met.

One media owner senior executive said that if you added up all of the commercial rebates, which are legal and compliant, it would amount to less than 1% of total agency billings in the Australian market.

“The hyperbole around it has gotten so toxic, and so unfortunate, and the CMOs I speak to aren’t fazed about their media choice,” he said, pointing out that rebates are a fact of business in most sectors, particularly retail.

The DSP dilemma

Another media owner told AdNews the area most opaque is the trading of digital inventory on DSPs.

In these scenarios a media agency could use the trading desk within its holding company and the client signs an opt–in waiver that allows the agency to pocket any margin achieved on the guaranteed price.

“Where it becomes murky is when the agency which is supposed to be an independent agent actually owns or is clipping the ticket on the way through a transaction,” the media owner said.

Questions have been raised over why there isn’t the same level of transparency for DSP transactions that there is in traditional media trading.

“If there is consensual agreement around the way money is earned, there should be no need for hidden fees or transactions, every– thing should be above board,” the media owner added.

Simon Rutherford, chief executive of independent agency Slingshot, told AdNews there may be concerns about internal pressure to “drive revenue into their digital coffers” in this scenario, raising doubts about the independence of media planning.

Woolley added that holding companies can arbitrage a whole lot of media through the trading desk to the agency.

“We’ve seen contracts between some trading desks and the agencies, which have a common ownership in the holding company,” he revealed.

“The contracts basically agree the trading desks will withhold 20% as a commission, even though the agency’s client has a contract that says the agency will not withhold any commission.”

AdNews took these claims to two separate agencies from the big six. On both occasions we were told that agencies were not compelled to use DSPs within the holding group and they typically offer clients several solutions that may include external digital trading components.

One agency head told AdNews that all methods are tested and the client is made aware of how successful each strategy is before choosing.

Agencies also stand to lose money on trading desks if the price achieved ends up being higher than what was promised.

Who banks the value?

Rutherford also questioned whether value banks that use client money to negotiate free inventory, return that value to the client or whether it is used to win new business by lowering the price.

“Are they effectively using other clients’ money to win new business by saying we can get this cheaper and then loading it up with free media,” he queried.

A couple of agency heads told us that any value derived from such negotiations is returned to the client.

One media owner explained that agencies try to negotiate extra value for clients all the time, such as bonus air time, extra integration pieces, research and so on. However, this only becomes a problem when pushy agencies hold media companies to ransom.

“In the digital space you’re told to use a certain product that they’re involved with or you don’t get the business,” the exec said.

This could be anything from a certain technology platform, product or data overlay. It could also be a product that is required as part of the transaction, but one where an agency makes money from.

“Where it becomes challenging for some is if the bonus is negotiated from a total agency perspective and that is then sold out by the agency as they see fit,” one media owner said.

'Greed, stupidity, naivety'

The fact media agencies need to be more aggressive when negotiating and come up with new ways to make extra revenue highlights a bigger problem with the media buying ecosystem.

Almost everyone AdNews spoke to believes procurement–led pitches have been driving down prices to such a low rate that the very sustainability of the media buying ecosystem is under threat.

“Procurement around the world has been putting continual pressure on agencies to buy media at lower and lower prices and guarantee it,” Woolley said.

“It’s a blatant disregard for their impact on the marketplace. We’ve got to this point because of greed, stupidity and naivety.

“Why did anyone think they could pay the agency less and less money and not put the larger investment (of media they buy) at risk?

“It is mistaking that agencies will continue to act in your best interest when you are refusing to pay them a reasonable amount.”

Rutherford recently told AdNews it is this sustainability he would like to see more focus on.

“Clients should demand transparency, however they should also want to know that their agency is profitable and able to sustain itself long–term,” he emphasised.

One media owner executive told AdNews that everyone has a role to play in where the industry is now. “The clients are pushing, through procurement, to the lowest common denominator,” the exec said.

“They are not valuing the expertise agencies bring. There’s a devaluation of the entire industry and it’s not healthy and creates undesirable behaviour. Everyone has to put their hand up in some way.”

An agency holding group executive said clients under their own cost pressures are leaning heavily on agencies and placing higher expectations on them to deliver more with less.

“Somewhere in between, there will be a breaking point,” the executive said.

“There’s no doubt at all that media service companies are going to have to continue to look for and offer services that generate income for us outside the buying and selling of dots and spots on media schedules to be able to continue to invest in technology and people.”

Given the sheer volume of media pitches that have gone to market in the past year, some of which have been designed purely to lower prices, it’s a problem many in the media are concerned by.

The ANA’s report may have highlighted some murky practices going on in US media agencies, but a more valuable report would switch the spotlight onto each area of the buying ecosystem to look at what can be done to improve value throughout.

It is time to move the debate on, much more is at stake.

Have you heard what analyst Nico Neumann and Group M's Rob Norman think about the ANA report?

This was first published in AdNews magazine. If you want to check it out hot off the press, subscribe here.

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