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Cash cow ... Yeo Valley negotiated directly with ITV last year to buy seven slots for its ‘rapping farmers’ ad in The X Factor
Cash cow ... Yeo Valley negotiated directly with ITV last year to buy seven slots for its ‘rapping farmers’ ad in The X Factor

Media buying: a flawed system?

This article is more than 12 years old
Ofcom is poised to lift the lid on the lucrative, and sometimes controversial, world of media buying – but the ad industry seems strangely unconcerned

Forget Don Draper. Today the real power in advertising is with those who control the money. Call them the media buyers - and they control billions, buying and selling advertising space for clients. A total of £43bn a year washes through the books of the world's largest advertising firm, WPP. That's bigger than the GDP of a small country such as Ecuador.

So much money creates so many opportunities. What in theory is a simple business of buying 30-second television spots or pages in newspapers is in fact fiendishly complex, with multimillion-pound deals sweetened by a system of complex discounts that have always been a source of controversy.

"Media agencies are the ATM of the big advertising companies, they throw off a lot of cash," says industry veteran Nick Manning, whose firm Ebiquity advises advertisers on procurement. "The big groups make a lot more money out of media buying than they do out of anything else. They are reliant upon the margins and upon the cash, because it's a treasury business as well, and money sticks to money."

Dummy companies

Now, though, regulators are threatening to lift the lid. This time the focus is on the trade in television advertising in the UK. Media watchdog Ofcom has announced a review, and if it doesn't like what it finds, it will refer the matter to the Competition Commission. Other countries have seen instances of fraud by employees – in 2009 Aleksander Ruzicka, president of Aegis Germany, was sentenced to 11 years in prison for embezzlement. The scheme, which harmed Aegis but not its clients, involved a network of dummy companies and bills paid for fictitious TV advertising slots.

Ad space is traded in similar ways for TV, newspapers and billboards. Here's how the system works: in exchange for buying space with a media owner, such as ITV or the poster firm JC Decaux, media buyers receive a discount or "commission". The more they spend, the larger the commission. And it is from these discounts that they draw their profit. But questions have always been asked about the impartiality and quality of their advice on where to advertise. Does the payment system really skew where ads go – favouring the broadcasters and publishers that offer the most commission? And is there any likelihood of regulators changing the way agencies are paid?

Today, 10 buyers now account for 80% of money spent on British television, and the activity is concentrated in six major holding groups: France's Havas and Publicis, the US's Omnicom and Interpublic Group, and the UK's Aegis and WPP.

Margins in media buying, even after the recession, are between 20% and 25%, Manning estimates – and, critically, those margins are higher than for other advertising activity. Profit, in short, is concentrated here. By far the largest cost for any advertiser is buying ad slots, and most of the $380bn spent last year offline around the world flowed through the bank accounts of media agencies. But they have become adept at finding legitimate but not always transparent means of holding on to a percentage of the cash.

Traditionally, in exchange for taking the risk of advertisers defaulting, agencies are entitled to a 15% discount on the headline price for buying, say, a newspaper page or 30-second spot on TV. One third of that money was kept by the media buyer (expressed as a commission of 5%) and two thirds passed back to the client, most often to pay the creative agency. But in recent years the buyer's 5% take has fallen to close to 2.5%. And during the recession it dropped further, with agencies agreeing to take perhaps 1.75% as guaranteed pay and 0.75% as bonus.

"Commissions are at such a low ebb that media agencies don't earn enough money out of their clients to do the work that they've pitched," says Bob Wootton, a director at the advertisers' trade body Isba. "They have to seek bridging income from others sources, they can't go to the banks, so they go to the media owners."

Luckily, other discounts are available. First there is "pooled buying". Instead of negotiating "line by line" – agreeing separate terms for individual advertisers – most agencies negotiate using a total projected annual spend from all their clients. WPP, for example, pools all the spend for its roster of media agencies under an organisation called Group M, which then agrees discounts with individual media owners. Then, in television, ITV, Channel 4 and the other commercial broadcasters will be promised a percentage share of a group's total spend for the year ahead – the so-called "share of broadcast" deals. The greater the share, and the greater the money spent, the greater the discount.

Open to abuse

So far, so straightforward. What clients know less about is the "rebate" agencies receive at the end of the year in exchange for the actual amount of money spent with a media owner. Rebates can be a cheque to the agency, or free advertising for the following year. The levels of rebate are commercially sensitive and undisclosed. In TV, they can reach 5% of the total amount spent with a particular media owner.

The agencies themselves are relaxed about the prospect of the Ofcom review. Jerry Buhlmann, the Aegis chief executive, does not attach huge significance to the inquiry. "Pooled buying is a very implementational, downstream part of our business," he says. "We operate within the regulatory environment to get the best deal for our clients." He contends that a rule change in the UK would be mitigated by the fact that Aegis, like other groups, is moving away from its reliance on traditional media buying, with a third of revenues now coming from digital work.

Controversy centres on the fact that the rebated money is often redistributed in selective ways, for example to sweeten prices on a pitch for new business. The worry is that smaller clients, or advertisers not reviewing their media account, often lose out by paying more for their ad space. And, because the amounts changing hands are not often declared to clients, the system is open to abuse. One media agency insider says: "There's not one client on the planet who'll disclose his own ignorance about rebates, but most haven't got a clue. And the ones that haven't got a clue are subsidising the ones who do. The agencies use that fact to win new business and to fill their coffers."

Share deals also skew campaign planning. The smaller airtime sales houses used to argue that the big TV groups such as ITV, Channel 4 and BSkyB benefited by extracting a larger share of advertising revenue and squeezing them out. They were right. The only two small sales houses of any significance – Viacom Brand Solutions and IDS – folded during the recession.

Such volume deals can remove creativity from the planning process, argues Walker Media chairman Phil Georgiadis. His agency, which plans and buys for Marks & Spencer and Barclays, and is owned by M&C Saatchi, is one of the few that negotiates separate deals for each client. "Share deals discourage planners from being extreme in their planning and makes them risk averse," says Georgiadis. "If an agency has committed ahead of knowing what's in their book, they can't take brave decisions."

Last year Yeo Valley spent most of the money for its first TV campaign, which featured rapping farmers, on seven slots in ITV1's The X Factor. It was negotiated directly with ITV, and Georgiadis says few media agencies would have pushed a client in that direction.

Nevertheless, the TV trading review is unlikely to introduce wholesale change. Siobhan Walsh, who will lead the Ofcom inquiry, , says she will focus not on the principle of whether media agencies should receive discounts from TV sales houses, but on the structure of share deals and volume rebates. "The Competition Commission has been explicit in identifying share of broadcast and pooled deals as potentially being of concern, because they may lead to a lack of price transparency," says Walsh. "There is some concern that the advertisers are having to pay more than they would under a more competitive model."

However, the industry believes nobody outside the regulator is bothered by the byzantine discount system. Wootton says: "The people in the market, advertisers, agencies and media owners, are not calling for this review. Most clients set nice aggressive terms and don't worry about how the agency delivers them." In short, the advertisers know the buyers need profits, and don't necessarily mind how they generate them, as long as they don't feel obviously taken advantage of.

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