Tag Archives: principal-based buying

Has France Solved the Media Transparency Issue?

24 Feb

dreamstime_xs_13261288Earlier this month the French government passed a new edict extending the coverage of Loi Sapin, their anti-corruption law passed in the early 90’s which made the process of buying media more transparent.

There are two key tenants of Loi Sapin, which afford French advertisers a level of protection related to certain non-transparent revenue sources which the Association of National Advertisers (ANA)/ K2 2016 media transparency study showed were prevalent in the U.S. (and elsewhere around the globe). Specifically, we are referring to the practice of media owners and publishers paying rebates to the agency and the use of media arbitrage, where agencies purchase inventory on their own to be resold to their clients at a higher rate.

Loi Sapin prohibits agencies from selling media to their clients that the agency had purchased in its name. In today’s parlance, it prohibits media arbitrage or “principal-based” media buys. Secondly, the law clearly stipulates that the ad agencies cannot derive revenue from a media owner, stating that agencies can only be paid by advertisers.

To France’s credit, the new decree, which will take effect in January of 2018, expands the coverage of the anti-corruption law to include digital advertising and digital advertising services. Of note, this includes agency trading desks, which sometimes buy and resell digital media to their clients. Yes, agencies will still be able to provide programmatic media buying services through their trading desk operations to advertisers, they will simply have to disclose to their clients, upfront, those affiliates or entities where they or the agency holding company have an ownership interest.

Interestingly, the decree will also require the media owner to direct bill the advertiser and compels them to provide detailed information about the services that they provided to the advertiser. This particular aspect of the law will further enhance advertiser transparency and virtually eliminates the ability of an ad agency to blindly mark-up said services.

As U.S. advertisers and the Association of National Advertisers (ANA), continue to evaluate the most effective means of improving media transparency, France’s anti-corruption law and its new decree covering digital media services certainly provides some interesting food for thought.

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Principal-Based Buying: A Wolf in Sheep’s Clothing?

29 Apr

dreamstime_xs_36536323Recently, Ad Age ran an article entitled: “Risky Business: Why Media Agencies are Betting on Principal-Based Buying.” To be honest, my first reaction was, what in the world is principal-based buying? It didn’t take long to figure out that it was simply a new descriptor for media arbitrage.

Clever, principal-based buying sounds so much more appealing and less subversive than media arbitrage. However, arbitrage is arbitrage, regardless of what moniker that is placed on the act of purchasing media and reselling said media to advertisers. According to Merriam-Webster, the definition of arbitrage is clear:

“The nearly simultaneous purchase and sale of something in one place and selling it in another in order to profit from price discrepancies.”

We certainly understand the primary allure of media arbitrage to agencies; the potential for higher margins than what traditional remuneration models would allow for. Let’s face it agency holding companies are publicly traded entities with a fiduciary obligation to drive shareowner profitability.

Simply, “principal-based” buying is a practice that is in clear violation of the principal- agent relationship, which has long been the driving concept behind client/ agency relations.

Forget the opacity, which is a hallmark of this buying tactic and the potential risks to advertisers seeking to optimize media value and boost working media ratios. The main issue with agency ownership of media is the potential impact on the objectivity of the advice, which it offers its clients.

Media time and space is a perishable product. It is also speculative in nature when it comes to projecting future value from a relevancy and audience delivery perspective. So what happens in the event an agency, indulging in arbitrage, has a significant ownership position in distressed, dated inventory? Could such a position create internal pressure on the agency’s media staff to move that inventory? In turn, might such pressure result in agency media team’s pushing that inventory off on clients, whether it represents the best fit at the best price?

Assuming that an advertiser knowingly engages their agency partner’s trading desk and believes that this relationship will yield a price advantage over traditional buying practices there are a few questions to consider; “How will you know? What methodology will you apply to vet the quality of the inventory and the price paid? Who will conduct that analysis for you?” In short, is this a proposition whose economic benefit to the advertiser can ever be accurately evaluated?

Sadly, while the agency community may shrug off the notion of ever having committed to a principal-agent relationship with its clients too often we find that agencies, which have embraced media arbitrage, have not disclosed this fact to their clientele… in spite of the position often taken in the trade publications.

In our agency contract compliance practice we find that in most instances there is not a separate letter of agreement between the agency’s trading desk operation and the advertiser, that the language dealing with “related parties” within the contract is inadequate to cover such a scenario and that there are no limitations in place regarding the percentage of an advertiser’s media buy that can be run through the trading desk.

Hopefully, those agencies that intend to engage in and or extend their use of principal-based buying will also commit to fully disclosing this practice and its application to each of their clients, well in advance of implementing this buying approach on those clients’ behalf.

From an advertisers perspective, it is imperative to assess the type of relationship that you desire with your media agency. If a principal-agent relationship predicated on full-disclosure and the fiduciary obligations, which underlie such relationships, are important to your organization, the client/ agency agreement will need to reflect that position. On the other hand, if there is interest in exploring principal-based buying consider contracting directly with the agency trading desk and establishing caps on the percentage of the budget, which can be invested through that operation.

                                   

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