Over the last week, the media agency commission model has been given the axe by the National Business Review. It’s a decision headed by publisher Todd Scott, who dished out plenty of heat to media agencies on social media, including declaring that the “gravy train reign is over”.
The media agency commission model conversation is not a new one. For years, publishers, agencies and clients have deliberated over fair allocation of resources which provides fair value for the client.
Provocatively described in a NZ Marketing story last year as ‘natural born swindlers’, value banking, inflated digital margins, rebates and misreported campaign results have been an issue in the media agency world, with many calling into question their objectivity. And many media owners find it hard to swallow that they get, at times, 20 percent of the pie it has been traditionally handed out.
However, it’s certainly not all sinister activity and connivance inside the gates of agencies. It’s also not all gravy and stuffing. In recent times, agencies have succumbed to a squeeze in media agency commission cuts due to increased ‘competition’ and ‘procurement’.
In 2012, Fairfax and TVNZ halved the agency commission from 20 to 10 percent with a belief from publishers that the rate card needed to be lowered accordingly.
While commission has been the most conventional structure of remuneration for media agencies, many argue that is antiquated. And after discussion with agencies, it is no longer the be-all-and-end-all of client agreements, with a movement towards a fees structure or net cost on a client-by-client basis.
It seems, for the most part, publishers and agencies agree that it’s not a one-size-fits-all situation and that more transparency and fairness needs to occur between agency, publisher and client.
Co-founder of media and digital agency MBM Sean McCready believes NBR’s choice to boycott agency commission isn’t an issue for them.
“Media commission levels are not a major factor in how we run our business. These days commission levels vary by media publisher, some are 20 percent, some are 10 percent and others are zero percent. It’s more transparent to rebate or remove all commission and charge any service fees based on the net media cost. Plus, in many cases, we are remunerated by fees that are not related to the media spend.”
Matt Bale, fellow co-founder and managing partner, adds the pair believe the key is the net cost, and the value of that cost, in terms of what that spend delivers for the client. He says the decision-making process is never based on commission or non-commission arrangements.
In his view, if the net cost of NBR stacks up in terms of value for money, then he would consider recommending it to his clients. He adds that it’s up to publishers to price themselves at a value point.
McCready says while he can’t talk on behalf of the whole industry, most agencies he’s worked with rebate commission and then have remuneration on top, or rebate a chunk of the commission, unlike the 80s or 90s, which keep full commission.
“Media agencies provide a lot of strategic value in such a fragmented media environment, I don’t think there is a ‘gravy train’ at all. In fact, there’s enormous pressure on making a sustainable return for the agencies.”
McCready adds that there is no right answer to the right amount of commission or markup that agencies should charge, he says it’s about how you structure a deal with a client that allows you to resource it appropriately and provide a fair deal with the client, and each client’s needs are different.
Bale says the industry is in a real transition phase, with a drift to standardise with Australia. He says the agency commission is 10 percent in Australia and there is also a rise in global digital platforms that are self-served with no commission.
“Look at 15 years ago, it was mostly commission-based in the industry and now a big chunk of large client arrangements is based on service fees.”
Andrew McLeod, channel planner/buyer at advertising agency Contagion, dubbed himself as one of the “pimply-faced teenagers who are not the people who turned up in suits to win the business in the first place from the client” who Scott referred to in a New Zealand Herald article.
While McLeod wasn’t happy with Scott discounting young media agency people, he says the commission model is somewhat outdated.
“Commission in itself, how it is deducted from a gross cost down to a net cost, is outdated and doesn’t necessarily align with how agencies pass on those cost with clients. In media at the moment we see a number of publishers who give agency commission at different rates, that doesn’t necessarily align with how we bill our clients if a publisher gives us 20 percent commission that takes gross down to net and we will bill our client an agency commission on top of net.”
He says that removing commission from a publisher doesn’t necessarily affect Contagion as long as the net cost is comparable with other publishers. He adds as long as the prices are competitive in the market and that involvement with the agency is from a strategic perspective without trying to cut them off entirely.
“We net everything down from the gross cost at a rate card or the cost given to us, in our eyes that rate is fairly arbitrary, we deal with some publishers who don’t offer agency commission that cost compares with net cost, it doesn’t really affect how we work if they do it or don’t do it.”
McLeod sees a definite shift from accepting agency commission as remuneration to a model that showcases a net cost from the publishers once a net cost is deducted before adding a client-specific net billing.
“We have never seen it as a commission for Contagion, rather gross cost down to net cost, from Contagion’s perspective we would never favour a publisher if they did or didn’t have an agency commission.”
Stuff is less unequivocal about the media agency commission. Its chief revenue officer, Robert Hutchinson, believes the problems faced by media companies and media agencies in terms of its business models are global and broad in its reach.
He says the media agency commission model has been used for a long time and continues to serve a purpose. Additionally, Hutchinson adds the commission structure isn’t the most material risk or problem.
“Paying customers make for engaged audiences and a stable revenue stream but by their very nature have scale limitations. Stuff seeks to partner with agencies and advertisers to ensure we provide the best advertising solutions we can while at the same time building new business opportunities where we have a direct relationship with consumers. We believe that it is only through pursuing both opportunities that, at scale, national and local news capability can be sustained in New Zealand.”
Kaylene Hurley, commercial director at Bauer, says based on her understanding media agencies and publishers are working harder than ever to add value to its clients. She says while “gravy train” doesn’t seem apt, it’s worthwhile to re-examine models and the value it provides.
Bauer currently runs a flat 20 percent commission structure for its accredited ad agencies.
“Some of the bigger agencies have shifted globally to a fee structure so in these cases it could be timely to look at a new approach. However, I know some of our smaller agency partners still work to this model and it works well for them. The future is likely to not be ‘one size fits all’ and will potentially reflect the campaign type and level or resource required.”
Hurley says a fee structure could be worth investigating, given the pressure on media suppliers to offer more and more content creation, rather than just media space.
“Seldom are the days where agencies simply book a supplied brand ad and we pay them 20 percent commission – the relationship has become more complex with every campaign.”
“More often than not, the negotiations involve offering insight, design, strategy and implementation – it’s a whole new world.”
Hurley adds that because commission is built into the majority of media schedules irrelevant of media suppliers, there doesn’t appear to be wrong incentives for media agencies to work with specific media companies.
Bridgette Smith, founder of Lassoo Media, argues that the commission model is not antiquated, and fairly represents the exchange between media agencies and clients, and a value exchange she says significantly lowers the cost for media owners.
“What is a fair percentage is up for debate and in part is a function of the scale of the transaction. Our position is that the 20 percent commission rate is fair and reasonable on average.”
Smith reiterates the integral role media agencies play in bringing client business along with IP and infrastructure costs, which it funds. She also mentions the conversation is not new and is one that agencies have with clients consistently in regard to remuneration.
“How that compensation is treated is a function of the trading relationship between agency and client and varies greatly. Media agencies are certainly not on a ‘gravy train’ and haven’t been for decades.”
When asked whether there are wrong incentives for media agencies to work with specific media companies, rather than the best fit for the client’s objectives, Smith was diplomatic.
“It is possible that this could be a risk but it is certainly not something that is factored into any of our client recommendations. Any agency that worked that way would be soon exposed. We are agnostic across all channels and transparency is key in longevity of client relationships.”
Scott has been at the forefront of opposition to the media agency commission structure, making his opinion clear to Radio New Zealand and New Zealand Herald as well as wielding his sword across social platforms.
Scott says the very reason NBR stopped offering advertising agency commission was that he was concerned about the motivation behind media planning, and by boycotting NBR, it proves he had reason for concern about its motivations.
When asked if he was surprised by the reaction of media agencies, he said no and that it has affected advertising revenue very little because they are focused on direct relationships rather than a reliance on agencies.
“The reality is the clients were always ours, we allowed agencies to represent our brand and clip the ticket at the same time, the clients are ours and will always be ours.”
He reiterates clients and publishers need to see what the motivations are of media agencies, and says if the motivation is to clip the ticket at 20 percent, then there needs to be transparency, and if agencies are giving it back to the client, then the system needs to be dropped.
“Why screw the publishers down so far, and then insult them for booking that discounted ad in the first place. It’s a failed model so let’s scrap it, and call it what it is, it’s further discounting of the content that publishers are spending good money to produce.”
It must be said NBR has a strong subscription revenue and garners a healthy audience revenue through its paywall system. However, not all publishers are in that position, so what are Scott’s words to those who rely more on advertising revenue and the assistance of media agencies?
“I’m sure that other publishers and other media companies are looking at what we do, and saying good on you, but just quietly we can’t say that. We have more of a reliance on member subscriber revenue, which is the most ethical way to fund a newsroom.”
StopPress approached NZME for comment, however, have been unable to get answers. The story will be updated accordingly.
MediaWorks and TVNZ
Both were asked for comment but chose not to.