MMC Chairman Nick Manning writes for the industry website Marketing Procurement IQ about channel and audience fragmentation in the modern media landscape, and how advertisers can capitalise on the opportunity and minimise risk.
Today’s media market is one of infinite choice for consumers and marketers. Digitisation has led to a fragmentation of channels and audiences which dictates a new, higher level of marketing capability to capitalise on opportunity and minimise risk.
Paths to purchase and sales funnels are shortening; some media are becoming newly ‘shoppable’; Retail Media Networks and Digital Commerce are booming; Amazon, Shein and Temu are rewriting the rules for e-commerce; Social channels are teaming up to compete with TikTok Shop; digital video is ubiquitous.
Now the reliable staple of TV advertising is morphing as linear TV yields audience and revenue to streaming, some of it subscription, some ad-funded, with measurement problems galore. Addressable TV brings direct functionality to the most powerful medium.
The convergence of marketing and direct selling means that advertisers have to manage a constantly evolving mix of content and channels to achieve the right business results, factoring in product, price and fulfilment.
Data is in vast supply but measurement is hard with so few common yardsticks and so many incompatible platforms. ‘Walled Gardens’ provide little reliable data.
These days a broader range of capabilities is required, some of which may fall to existing external partners, some new and some in-house. Talent and capability is in short supply.
Choosing who to work with is no longer as straightforward a choice as multiple agencies, tech and data partners may be required. More specialised knowledge is needed, as is more organisational and operational management. Internal collaboration is needed to juggle the many needs of different departments whose interests have converged but may not be aligned.
More time and effort are required on contractual management and governance. The contracts themselves are getting longer and more complex, with more bear traps.
In this dynamic landscape advertisers have to find reliable partners who can help them navigate the complex jungle of content and channels, opportunity and risk. Trust is key to successful commercial relationships, and transparency of data and money is vital to facilitate the measurement of outcomes.
So it is regrettable that the big Ad Agency Holding Companies have chosen to double down on the lack of media transparency that has plagued the relationships between clients and agencies for several years.
They are increasing their practice of ‘principal-based’ media trading models, whereby they supposedly buy media wholesale on their own account and resell it to clients at undisclosed mark-up. This is often called ‘Inventory Media’.
The advertisers know what it costs them but not what the agency paid, and therefore the agency margin. New clauses in the client/agency contract can prevent the advertiser knowing how much the agency is making on their dime.
What is obvious is that the margin they make is significantly higher than the conventional fee rate, and this is driving big margins for the agency groups.
For many years Media Agencies have made unseen money from their clients, often in cash, but various industry initiatives (notably from ISBA and the ANA) have narrowed the opportunity for rebates.
Instead the Media Agencies have turned to ‘Inventory Media’, which is both more lucrative and ostensibly transparent. The client often (but not always) knows that the agency is using ‘Inventory Media’ using their volume as collateral in their trades with media vendors.
This trend is well-established and now set to grow further.
The media agencies have long been the main profit-drivers of the big Ad Agency Holding Companies, both in volume and higher margins. They subsidise the other divisions, and now they are having to push even harder as the Holding Companies come under more profit pressure in the fluid new marketing landscape.
As one trade title has declared “media has become more central to growth than ever before”, and the analysts identify ‘principal-based’ trading (ie ‘Inventory Media’) as an important factor in driving growth.
Those Holding Companies who do more of it are in turn more profitable and IPG in particular has openly stated it will do more to catch up with its peers. The analysts calls are the only place this practice is publicly talked about, almost as though it was an unfortunate necessity that the agencies do not talk about in their marketing materials.
The media agencies claim that the arbitrage model behind ‘Inventory Media’ benefits the client. By using their clout, they can negotiate better rates at their own risk by buying in bulk. They can then pass on some of the additional savings to their clients, but without disclosing their own mark-ups.
They may even receive inventory that is entirely free, so anything they charge the client is pure profit.
And low cost or free media can help deliver media cost guarantees that contribute to performance-based bonuses for the agency. So the client can pay a higher margin for media that in turn triggers more agency revenue.
It is a perfectly valid question to ask why the agency is only able to offer lower media prices at a higher margin. After all, advertisers often appoint agencies for their buying power and they agree a compensation rate.
There is no real answer to this other than the agency’s assertion that they have assumed liability for the media as principal, and they therefore have to pay for it whether it is sold on or not. In many media markets outside of the US the media agency is already the principal to the transaction.
In reality this is at best a grey area and it is unlikely that any media agency or group has ever had to pay for ‘Inventory Media’ it has been left with.
The other reality is that the nature of these deals is a carefully guarded secret between the media vendor and the agencies; the client signs away the right to know the true price of the media, and instead ‘opts in’ to the supposedly beneficial scheme at the expense of audit rights and with limited access to media data.
What is also not in doubt is that the media agency is incentivised to sell on to the client the media inventory that has supposedly been bought already by their buying group, whether it is right for the client or not.
It is also the case that the inventory in question will be of inferior quality; media owners are not going to offload volumes of prime media at knock-down prices.
And if ‘Inventory Media’ gives the agency a bigger margin, it is obviously in their interests to sell on more of it. Media Agencies routinely sell such media to clients without disclosure that it is ‘Inventory Media’ or they exceed an agreed percentage of the budget set aside for it.
So, how should Procurement approach ‘Inventory Media’?
The natural starting-point is to agree with other internal stakeholders whether ‘Inventory Media’ has any validity at all in the organisation’s marketing. Some advertisers who are performance-led sometimes agree to waive access to true media pricing in exchange for ostensibly lower media rates, rightly or wrongly.
For most advertisers ‘Inventory Media’ has little relevance, often because the kind of media on offer is either not relevant or of negligible value. It is often ‘long-tail’ media in a market where media is in over-supply and much is worthless.
The best policy is to avoid it completely unless there are exceptional circumstances. It is possible that an agency may produce exactly the right media at a knockdown price that is only available to the advertiser at a higher margin for the agency.
But it is unlikely.
Advertisers should be able to get the media they need at competitive prices without recourse to media reselling by their chosen Media Agency.
As ever, the contract is all-important and luckily help is at hand. The recent Master Media Buying Services Agreement from the ANA and ReedSmith contains new clauses that define and control the use of ‘Inventory Media’ and ‘non-transparent services’.
The wording of these clauses gives the advertiser the protections they need, but it is not uncommon for agencies to flout such clauses. It is important to have processes to track agreed practices on a continuous basis and to audit compliance systematically.
There will be an increase in the amount of ‘Inventory Media’ in the market as the Holding Companies use it to drive margins and offset pressure in other parts of their business.
Today’s media market requires transparency of data and money to inform the best decisions in a world of infinite choice and clients need to trust their partners to look after their best interests.
Whether it is called ‘Principal’, ‘Inventory’ or ‘non-transparent’, it is unhelpful to both.
This article originally appeared on the Marketing Procurement IQ website.