Natural born swindlers? The murky world of ad buying

There’s a fable that tells the story of the scorpion, a notoriously bad swimmer, asking the frog for a ride across the river. At first, the frog, cautious of the scorpion’s reputation, declines out of fear of being stung. But then, the scorpion puts on his legendary second-hand car salesman smirk and says: “That’s ridiculous. For if I were to sting you, I would go down as well.” Of course, by the time they reach the other side, the scorpion does what it does best and leaves a neat hole in his amphibious buddy’s back. And as the frog sinks into the water, he asks, “How could you?” To which the scorpion replies: “Because it’s in my nature.”

While much of the emphasis in the story is usually attributed to the lesson that you shouldn’t trust armoured arachnids with a tendency toward stinging, what’s far more interesting is the argument offered by the scorpion to convince the frog to take it across: “If I were to sting you, I would go down as well.”

There are few lines that better capture the overall sentiment of watching numerous international media agencies—which invariably ride on the backs of their clients—caught out for value banking (as MediaCom was in Australia in 2015), inflated digital margins, rebates and misreported campaign results – or when the dollars they’ve been making become harder to come by.

All of this runs directly against the grain of the word ‘agency’, which, when applied in perfect circumstances, denotes a relationship whereby a media agency is paid to always act in the best interests of its clients. But things aren’t always as clear when there’s a dollar to be made.

Industry vet Antony Young, who last year left the business after running media agencies in New York City for a decade, says there’s always self-interest at play when any form of agency is involved, whether it’s a real estate agent jostling for commission or a lawyer charging fees for services. It’s simply the way business is done— and it’s part of the reason why GroupM chair Irwin Gotlieb believes the word ‘agent’ no longer fits the description of the role media agencies play. Neutrality, it appears, is no longer a guarantee.

In the past, the fees structure employed in media buying involved the inclusion of a commission, which often amounted to around 15 percent of the spend being made.

Over time, largely due to increased competition and the rise of procurement departments, commissions have been squeezed, leaving media agencies with lower and lower margins and ever-increasing costs of staff and technology.

One New Zealand industry source recalls the drop in commission becoming so significant at one stage that the agency she was working for was making a loss on one of its biggest clients, managing only to sustain the overall business through profits made on other clients. That’s also a fairly common scenario for local agencies working on global accounts.

To counter this drop in revenue, media agencies have had to find new ways to supplement their earnings while still staying competitive in a cutthroat market.

For international agencies, much of this additional income comes from volume-based incentives that media agencies earn from buying a certain amount of inventory from a single media owner. If, for instance, a media agency agrees to buy a certain amount of inventory and pays up front, then the media owner might give a discount or rebate the commission in proportion to the volume of inventory purchased (it’s worth noting that this doesn’t tend to happen in New Zealand largely because media agencies have a one-to-one relationship with media owners). 

Do you trust your builder?

Deals of this nature are, of course, not limited to media buying and are also prevalent across a number of other businesses.

Builders, says Young, strike deals with suppliers that allow them to bulk-buy products at a reduced rate and are then free to sell them on at an increased rate.

“Do I mind that my tradie is selling me these light fittings and taking a bit of a margin on them? I don’t mind, but my wife might mind. So there are different views,” Young says.

However, to have a view on something, you need to know that it’s going on in the first place. And this is where the controversy comes in. 

Enter Mandel

While dealings of this nature have been widespread and common practice across the industry for a number of years, the issue really came to the fore when former MediaCom CEO Jon Mandel spoke at an Association of National Advertisers (ANA) event in Hollywood.

His series of off-the-cuff remarks were essentially the snowball that triggered an avalanche that would later see an ANA investigation into the transparency issues in the media business.

“When this got blown open, a lot of CMOs got exposed and realised [there were issues with]their agency agreements,” says Young who, though not interviewed as part of the process, was in the States during the ANA investigations. “And the next thing, you’ve got the CFO breathing down your neck.”

What the ANA investigation did was give marketers insight into how media agencies make their money and thereby better equip them to negotiate contracts that they’re comfortable with.

So, this poses the question: should local marketers push for a similar investigation in this market? 

ANZA chief executive Lindsay Mouat doesn’t believe there’s much to be gained from doing this.

“Whether the same [international]rorts occur here may be moot; that the potential exists for them to occur is certain,” he says. “So instead, our focus is on the steps advertisers need to take to assure themselves that their media transactions are transparent and that they can have confidence that one of their largest business costs is managed correctly.”

The point Mouat makes here is that marketers already know what to look out for, so there’s no real value in running the same drill here. After all, the ANA investigation didn’t name and shame any organisations; it simply gave a rundown of what some unnamed agencies were getting up to.

While alarmed by the trickery at play in the international markets, CAANZ chief executive Paul Head doesn’t believe local agencies are engaged in similarly nefarious activities.

“The market here is different from the US and Australia,” says Head. “The way media is bought and traded is different, with negotiations with media owners done at an individual client level… In my experience, both as a client and CEO of CAANZ, agencies are transparent and if clients have concerns they should ask agency heads to address them.”

While most agree that New Zealand agencies do tend to be more transparent than their international counterparts, one source expressed doubts that things were as squeaky clean as they might seem on the surface. 

“Where [agencies]are part of global groups, the local operations are under the same pressure as in other markets to deliver revenue to their shareholders, and to use parent company systems, so it’s difficult to see, in this globalised media landscape, that they can be an island of transparency,” the source says.

In this context, it’s easy to cast the media agency as the villain, which has deftly found a way to make more money while appearing to offer a better deal.

However, Head warns against such a simplistic narrative, saying that clients have also played a role in creating the environment in which shady deals flourish.

“Local marketers should expect their agencies to be transparent about how the agency makes a fair margin on their business—and the key word here is fair,” Head says. “Over the past decade or so we’ve seen agency margins squeezed, particularly by large multi-national clients. It doesn’t make sense in a world where media is increasingly complex and media agencies arguably add more value to marketing outcomes than ever before, that so many clients treat media as a commodity, and by extension, under-value the service provided by their media agency.”

This also goes a long way to explaining why P&G’s head of marketing (and industry godfather) Marc Pritchard posited some of the blame on his own marketing teams for not scrutinising their contracts closely enough and agreeing to terms that were prejudicial. 

‘Let the buyer beware’

Marketers have had decades to learn about all the tricks, hoodwinks and hornswoggles being played on them in the traditional channels. The same cannot, however, be said for digital and, in particular, programmatic buying. 

The more esoteric and new the medium, the more likely for vendors to push their luck and the more likely it is for margins to be inflated. You need only look at the example of buying a second-hand car to know that a lack of knowledge (or not asking the right questions) can quickly lead to you rattling off in the wrong direction.

This is not to say that anything illegal is happening. Half the frustration of buying a lemon lies in knowing all too well that you agreed to it in the first place. It goes without saying that the Latin contractual phrase caveat emptor (‘let the buyer beware’) is as applicable to trading media as it is to buying a car. 

The point here is that clients can expect the terms set out in the contract to be respected, but, as one source points out, they should also expect agencies to push to the edge of those terms.

There is certainly a strong indication that this is at play in digital. While interviewees told few stories about agencies taking chances in traditional media in the local market, there were numerous tales of dodgy dealings in digital.

The most consistent concern expressed in discussions involved inflated margins imposed by agencies and ad tech operators on programmatic inventory (one story alleged a margin as high as 1,000 percent).

The problem with this is that the client is really in the hands of the specialists working on trading desks in these instances. At the moment, it still remains difficult for advertisers to get independent verification of whether they’re paying a fair amount for the inventory they’re buying.

IAB NZ chief executive Adrian Pickstock claims he isn’t aware of programmatic specialists in New Zealand taking marketers for a ride, but admits there’s an “emerging need for greater transparency globally”.

Pickstock says one way that marketers can get a gauge of how much they should be paying is by using the IAB US’s programmatic fee transparency calculator. However, due to the complexity of programmatic, this provides more of a guide than an accurate indication of what is happening in real time.

OMD managing partner Andrew Reinholds argues that digital transparency is largely dependent on the deal agencies strike with their clients.

“[In programmatic], agencies can operate on two different models: one being a ‘disclosed’ model and the other being an ‘undisclosed’ model,” says Reinholds.

“With undisclosed, this is where a bid price level is defined up front and then the agency makes the profit and loss dependent on the bid price at the time of buying. In this case, agencies could walk away with a sizable profit.” 

Reinholds says that OMD made the decision to operate its trading desk on a disclosed basis, specifically because it gives clients clarity upfront as to the costs involved.

“Not all trading desks work on a transparent basis in New Zealand so this is a key question for marketers to ask their agencies,” he says. 

Seek and you shall find

When digital first emerged as a media-trading channel, agencies were able to negotiate a different remuneration structure from that used in traditional, arguing that the complexity involved in digital necessitated a higher level of expertise. This led to higher margins in digital than those used in other channels.

With this as the backdrop, it comes as little surprise that another common narrative to emerge in discussions with several sources involved media agencies shifting spend to digital, not because it was in the best interests of the client but because there was more money to be made there (it’s true that some marketers are also guilty of specifying a certain percentage of their budget to be spent on digital, no matter the audience).

To hark back to the metaphor of home renovations, this is the equivalent to ordering a security lamp, having the builder install a pink mood light simply because he has a stockpile of these in his garage, and then being told that a pink hue provides superior security for your home.

But the problem with digital is that there’s a lot of murkiness, which leaves marketers at a disadvantage when it comes to the negotiating table. However, ANZ head marketers Astrud Burgess and Matt Pickering say clients are becoming wise to the dark arts of digital.

“Advertisers are asking harder questions of programmatic in particular, compared to when it first kicked off a few years ago,” Pickering and Burgess tell NZ Marketing in a joint statement. “Undoubtedly, there have been industry issues with things like ad fraud and ad viewability. Many advertisers, like ourselves, are now taking steps to have greater confidence on these issues, for example through screening tools and direct relationships with reputable publishers.”

In the ever-evolving digital landscape, this is an ongoing struggle that necessitates continuous investment.

“Advertisers can’t just leave it to their media agency to understand the effectiveness of their digital investment,” the ANZ marketers say. “Up-skilling marketing teams to have this expertise in-house to drive these conversations directly is critical, which can be challenging as it is such a specialised area.”

Air New Zealand and BNZ have also placed emphasis on upskilling in this space, with the former hiring media stalwart John Buckley as its manager of paid digital channels, digital and direct marketing, and the latter hiring former Vivaki executive Nick Boulstridge as its media director.

Whether these steps lead to trading being taken in-house is yet to be seen, and it will largely depend on the willingness of the companies to invest time and resources into making a long-term commitment in this regard.

As Boulstridge recently explained on an IAB panel: “It’s important to understand how much is involved in programmatic buying. It’s okay to take it in-house, but then who’s going to be investing in different tech stats, who’s going to evaluate which new tech partner you should be working with, and who’s going to be doing the programmatic buying? All of these questions have to be answered and they also have to be financed.” 

Trust issues

Further muddying the waters is the fact that digital is proving difficult to measure accurately – an issue further exacerbated by media owners setting up walled gardens that prohibit third-party verification of data.

“The idea of media vendors grading their own homework is bad business and advertisers are beginning to realise that,” says Mouat. “We are used to external, third-party verification in traditional media and we should accept nothing less from online media channels. There have to be checks in the system, rather than relying on blind trust as to how ads perform on the newer platforms.”

Until recently, the biggest offenders in this space have been Google and Facebook, but the tide is turning.

Earlier this year, Facebook announced various measures to increase transparency, most notably a commitment to an audit with the Media Ratings Council.

Steps such as these will help to break down some of the walls, but marketers need to stay vigilant and aware if they don’t want to get stung in the future. In most cases, media agencies add significant value to clients. But, as the recent attention has shown, not always. In business, trust has never been a given. It has to be earned. And the agencies and clients with the best relationships work hard to maintain it.

The main point to be drawn from all this is that clients aren’t naïve little frogs being taken advantage of. The onus has always been on them to understand the industry, and then decide if they still want to give the scorpion a ride. And if clients do take the plunge without a protective ream of legal paper over the scorpion’s stinger, then they can’t complain when things go wrong. 

  • This story originally appeared in the 2017 Agency issue of NZ Marketing magazine.

  • To subscribe, click here.

About Author

Comments are closed.