By Guillermo Girola

When you thought that the advertising profession could not get any lower, then came the opt-in media buys. 

Wait, something is wrong with the headline and the first line. Maybe you misread it. What could it be…? I know! You thought we were speaking figuratively! Sorry for that. We get that a lot, we auditors are so bad at poetic writing… Let us put it straightforward.

If you decided to use opt-ins because you received a very convenient, hard-to-resist low pricing, that price should -from now on- be set as the new baseline to evaluate the agency’s performance in media cost containment.

Let this idea sink-in understanding how opt-ins work, what market dynamics are at play and how you, the advertiser, can come out with a long-term benefit from these transactions.

How do Opt-In transactions work?

When your agency approaches you with a proposal for you to ‘Opt-In’, what this means is that you agree to purchase some media inventory that the agency purchased on its own and is now offering it to you at a different (lower) pricing level than regular buys. This is also known as media purchases made with the agency acting as principal in the transaction, as opposed to acting on your behalf as an agent.

These types of offers are usually attractive because the cost tends to be significantly lower than what you get for the same type of media. For this to happen, the agency needs to have had the ability to obtain that inventory at a lower cost, so that it can sell it to you at a discount. The big question is: if the agency was able to get such advantageous conditions, why didn’t you get a similar chance. Pull from that thread and you will start seeing behind the curtains of the agency-media vendors relationship. 

Market Dynamics at play

In a nutshell: media vendors are concerned that you, the advertiser, exert significant pressure to lower the cost of media. The agencies, at the same time have significant pressure to keep their profitability at historical levels. The risk of these concurrent needs is that media vendors could be ceding some value from their inventory to the agencies for them to sell at higher margin, as long as the agency keeps bringing their advertisers to the table to pay ‘regular’ price. In this hypothesis the agency retains the full margin as profit and the media vendor would have in the agency an ally to keep downward pricing pressure at reasonable levels. That would be a win-win, for the media vendor and the agency.  We are not saying that this happens, but we see the risk and hope you do too.

The agencies may say in some cases that they are assuming the risk of advanced payment and that’s the reason why they get the deep discounts. While that may be the case, not all agency networks do in fact pay in advance. And the risk is really low. Or do you think the media vendor will make the agency “eat up” any inventory paid for and not used? Not likely, right?

Also… if the agency obtained the deep discount in a bona-fide negotiation and assumed the risk and everything is crystal-clear, why not revealing the full nature of the value chain? 

Also… Why don’t you have at least the same chance as the agency does to obtain a similar deal? Did anyone ask you if you could get the same price by paying in advance?

And finally, let’s assume and extreme scenario: the media vendor will only be able to deliver on one of two purchases, one is your regular buy and the other one is your agency as principal buy. Which one will the agency prioritize when negotiating the fulfillment by the vendor? Even if there is no shady negotiation behind, do you see the conflict of interest? 

In any case, the bottom line of this market dynamic is that there is value already ceded by the media vendors. But instead of flowing all the way to the advertiser, the ceded value is kept by the agency as a source of profit. Put a pin on that thought.

How can you, the advertiser, benefit in the long run

The short-term benefit of an opt-in buy is clear: you get a deep discount for some media space. You really don’t not want to turn away from that. So, the conundrum is how to get the short term benefit without being an enabler of a system that is less-than-transparent. 

The answer is: push to make the new low price be the new baseline for your year-on-year cost containment goals for the agency.

Your argument is: if the agency got for you a special pricing for the opt-in buy, there is no reason for you not to get the same pricing conditions for all purchases for that particular media vendor. 

Remember that thought about value transfer we asked you to pin above? Go bring it back. In our previous hypothesis, the media vendor is willing to deep-discount some buys. But there is a condition: ‘regular’ buys can’t fall below certain pricing levels and/or volumes. Otherwise, the trade-off does not work. 

Here comes your strategic move: if you set the new low pricing as the new reference point, you are demanding that the value cession that the media vendor made in favor of the agency is from now on fully transferred to you and for your entire purchase. 

This has two likely outcomes. A) the equation would no longer work for the media vendor. This should cause it to stop happily ceding so much value to the agency for those special buys. B) The agency would not meet the media cost containment goals and you will retain some (or all) variable compensation. You retain part of the value. 

In the mid- to long-term, the effect of this strategy is that you get in the way of the mentioned win-win deal between the agency and media vendors where the losing party are the advertisers. It makes non-transparent deals less valuable for at least one of the parties involved. And in the end the market returns to a more natural dynamic where payers and receivers are the only ones able to make decisions on the margins of a transaction, and intermediaries are paid for facilitating the transaction and/or actually adding value. 

There are a few conditions for this to happen:

1. You need to be ready to negotiate hard,
2. Your contracts must be ready to support you, with clear transparency clauses, full audit rights for every purchase and strong advertiser rights protections, 
3. You need to be ready to dig deep into your media numbers and ask all the tough questions. 

The advertising industry is not at its peak in reputation. But if they go low with their opt-ins, you can still come on top. Or something like that. As said, we auditors are the worst at poetic writing.

By Guillermo Girola

It is said that Louis XIV was obsessed with dress codes. He demanded that his court was always appropriately dressed for any occasion. It is also said that this obsession made the noblemen and women play a continuous catch-up game with the latest fashion to assert their position in the court. Those among the chicest, were close to the King. Perhaps King Louis also understood something about politics. While he kept the court busy with concern for dress codes, he felt less worried about conspiracies against him.

One of the fun things about working in an ecosystem full of communications people is that language evolves quickly. You are always playing catch-up with the latest buzzword. An unspoken goal of every ascending advertising professional is to drop one of those words at a Zoom meeting– as if it’s obvious that EVERYBODY is talking about it– and see the other faces turn to a paler shade of “what the heck is s/he talking about?”. Most will discreetly turn off the camera and frantically google the word. And when they return, they’ll look for the first opening to talk about what they just learned… as if they were fully involved in the topic from the very beginning. Who wants their place in the court to be in jeopardy for not having language improperly dressed for the occasion?

And if you are waiting for herd immunity to keep you safe, forget about it. If you are not part of the solution, you are most definitely part of the problem.

In the same way that Engagement, Transparency, Viewability, and so many other words entered our vocabulary at a certain point, ‘Fluidity’ is now making a debut. You’d better be prepared. If you are just an advertising courtesan, know what it means and look good saying it with confidence. If you are a decision maker worried with the efficiency of your costs, try to figure out what is behind it.

About the explicit meaning: Fluidity deals are agreements by which a network can deliver on its audience commitments either through its linear venues (say TV and risk to be banished) or any of its on-demand platforms. In other words, if a spot planned to air in a show tomorrow fails to harvest the expected impressions– (and it will!), the network can compensate the advertiser with impressions delivered online by that show or any other in the cohort established in the deal structure.

There is something intuitively good about this type of deal. Rather than relying on the chance of finding a person who happens to be 10 feet away from the screen at the exact moment the spot airs–(remember that buzzword “appointment viewing”?), the said spot is shown to viewers who specifically choose to watch something at that very moment. Did you hear “Cross-Platform” or “Omni-channel”? Yes, I did too. I’m only missing ‘TV Everywhere” for Bingo!

That is exactly what media vendors want you to think: you will start receiving a higher quality audience for your spots, and you don’t even have to issue a different IO (insertion order). They will be a natural outcome of the linear buy you are used to placing. And since you are such a good client, they will do it at the same price.

How nice of them!

Let’s dig into a small comparison between Linear and On-Demand.

Back in 2018, a Prime Time CPM in a major National Broadcast TV Network would cost, let’s say -just for the sake of argument- $50. A spot in the VOD/FEP space in the same network, same advertiser, same demo would cost $25. Just about half.

By 2019, those deals grew a bit due to inflation, etc. Maybe $52.5 for Linear (+5% inflation), and $27.5 for FEP/VOD (+10% inflation). At this pace, by 2033, both would be the same cost ($104, if you are curious).

Please note: Values above are not real. Proportions are. From actual data.

Advertisers and agencies did not fail to notice the gap. Leaving traditional media is an attractive proposition to push in board meetings. And so, a migration trend started to happen. Agencies recommended it cautiously, knowing that hurting the Linear TV business structures currently in place would be a bit like spitting upwards. But clients clutched onto it as if it were the last cup of coffee before an early morning budget meeting.

That is when media kings and queens realized that they needed to impose a new dress code for the upfront meetings. And this is how Fluidity Deals were born.

All of a sudden, there was an excuse to bring the VOD/FEPs up to the level of the old linear CPMs. And it even makes sense conceptually: higher quality viewers, engaged with their programming of choice, at the time of their choosing.

With this movement, media vendors are trying to accelerate 13 years of progressive pricing catch up.

People from ancient times in advertising remember that when Cable TV started carrying advertising, it did not have a plan for an accelerated catch-up with Broadcast. Many projected that Cable would, eventually, catch up, but the momentum slowed when the Cable TV offering fragmented so dramatically that it could not justify the increase. With alternative on-demand venues mushrooming across the globe, these guys now in board rooms applied the lessons learned.

And so, this winter the word Fluidity started to echo in the virtual ballrooms of the conf-call-sphere. Behind it, there were promises of lakes of data to feed your data-driven decision making. All of it so appealing. So fashionable.

But, my Noble Count of Media Buying, and Marquee of Accountability, there is something you can do: Rather than waiting for the upfront meetings to start with Linear TV reps graciously giving you these on-demand impressions through ‘Fluidity Deals’, skip directly to talking through the digital team and set your old VOD/FEP costs as the starting place for cost conversations. Whoever anchors the first price in the conversation will have gained the most terrain. That’s negotiation 101.

There is a short window of opportunity to do this, and it will be over by the next Upfront cycle. The pressure may be too strong, and it may be impossible to reverse the flow. But that margin is in play this year and soon someone will own most of it. We have our bets on you. It is in your power to see that the emperor has no clothes.

This legislation focuses on transparency and preventing “bad practices” in the industry. 

While the genesis of this law is unclear, it appears to have been drafted by people with knowledge of industry practices regarding rebates, transparency, and opt-in transactions (inventory buys) done by agencies as principal. However, the law itself is only three pages long and not very well drafted.  There is a lack of specificity in some areas and language is not very clear.  Anyone with proper knowledge of current advertising practices can quickly imagine several ways in which the intent of the law can be skirted through use of barter agencies and/or other “third-party” or “non-agency” entities within or related to agency holding companies and other mechanisms. While the law provides an opportunity to improve the advertising ecosystem in Mexico, advertisers should expect new models that may allow current practices to continue in one or another form.

Transparency law for fighting and preventing bad practices in the purchase of advertising time and space: 

Here is a short summary of what the law contains and some recommendations for advertisers. 

Key Points:

• Agencies may not buy media inventory as principal for resale to advertisers. Agencies can only buy media that the advertiser orders. 
• All discounts that the agency receives from the media must be transferred to the advertiser. 
• An agency can only receive compensation that has been agreed with an advertiser. 
• An agency that provides services to an advertiser may not provide services to a media vendor at the same time. 
• Neither an agency nor third parties used by the agency can receive compensation, commissions or financial benefits from a media vendor. 
• Agencies must inform advertisers about financial relationships that they may have with media providers.
• Media vendors will have to issue the invoices directly to the advertiser and not to the agency, although the invoice can be paid through the agency. 

For Programmatic Media:

• Agencies must inform media vendors of the identity of the advertiser as soon as possible. 
• Media vendors will have to comply with transparency obligations to advertisers by providing detailed information on the dates and location of campaigns, ad formats, unit costs, including all discounts provided by media vendors. 
• Agencies must provide detailed reports to the advertiser during the month following the media activity. 

Sanctions:

• The law indicates that for violating it there will be fines for the equivalent of 2 percent of the income to the advertiser or the agency that does not comply with the law.
• Agency that acquires advertising space on its own, for its subsequent resale will receive a fine equivalent to 4 percent of its income.

Recommendations for Advertisers:

• Consult your legal team on how to be compliant from a contractual and operational perspective. 
• Review your current agency contract as soon as possible and make changes to ensure compliance with the new law. The law will go into effect in early September 2021. Consider using vetted agency contract templates, such as those available through ISBA or the ANA, as the basis for agency contracts that would be compliant with Mexican legislation and regulations. 
• Expect agencies to encourage advertisers to increase activity through their barter agency or another party that will be purchasing or receiving free inventory for resale. There is lack of clarity on how the law may or may not apply to barter companies related to the advertiser’s agency. If there is a separate contract between an advertiser and a barter company that is reselling media, it is recommended to get a legal opinion on how this relationship should be governed and how it should be reflected in the contract in order to be compliant with the law.
• Issue strict operational guidelines to all personnel involved in media decisions to ensure compliance with the law. This particularly important in regard to any “inventory” buys or any transaction through a barter agency or similar entity.
• Have a conversation with your agency on how 2021 rebates/AVBs that have accrued this year will be returned to advertisers. These conversations should happen as soon as possible and rebates/AVBs should ideally be settled before the law goes into effect.
• When negotiating media rates, keep in mind that media vendors will no longer be paying rebates/AVBs to agencies, as this may allow for improved pricing.

By Guillermo Girola

Unless you have been hiding under a marketing rock for the last years, you know there is a disease spreading in the marketing community. The symptoms are CFO discomfort, feverish battles about auditing rights clauses in contracts, increasing pressure to ‘opt-in’ on inventory deals, and an overall feeling of distrust. You can’t take this disease lightly. It is called lack of transparency. And it has the power to kill your client-agency relationship.

As a client, you can inoculate yourself against it. As with many vaccines, you may experience a little pain in the year of the implementation, you may feel a little dizzy running your numbers and supporting your decision at management meetings over and over again. But you will not only be preventing major effects in the future, but you will also help leading the way to a healthier advertising environment.

And if you are waiting for herd immunity to keep you safe, forget about it. If you are not part of the solution, you are most definitely part of the problem.

You know what Opt-In means, right? If you do, skip ahead a paragraph or two. Opt-in are those media purchases where you opt to procure the spaces from inventory the agency purchased itself at a non-disclosed cost. The price you are “opting-in” at is usually somewhat below what you pay when the agency buys this as your agent. Which is great. Until you realize that the agency can buy for itself at a better price than it buys the same thing for you. And that is when you say Wait a minute!!!

One step back before we move on: let’s understand the nature of the agency relationship. An agent is someone who “is given agency” or “the power to act on your behalf.” Part of your contract with your advertising agency states that you are giving them the power to generate obligations for you towards third parties (such as media vendors) in agreed exchanges. You use media spaces for your messages; media gets your advertiser money. The agency has a role facilitating that interchange and is compensated for that role. The role has to do with multiple parts of the exchange: evaluating alternatives, recommending the ones that better fit your needs, negotiating a cost that maximizes the benefit for you the advertiser, securing the space, controlling the service was delivered in the shape of an ad placed in front of consumer ads, etc. That is why you pay the agency. They are your agent throughout the process.

When the agency comes with an Opt-In proposal, that relationship suddenly becomes something else: the agency becomes a vendor. They have something in their inventory, and they want to sell it to you. They already know at what price you are purchasing that same type of media, so they will only make you an offer if what they have in their inventory is at a cost advantage. Sounds legit, right? Why wouldn’t you? You may even score a few points for lowering the cost!

But take another step back and think again. Ask yourself: Am I being recommended the best spaces for the brand or the ones that get the agency a better margin? Why can the agency buy a media space at a lower cost than what they buy it for me? Why don’t they want to show me the actual cost they paid by including these non-disclosed clauses in the opt-in language in the contracts?

For that last question, here are a couple of hypothetical dialogs that never happened, all of them highly speculative and none of them proven to be real– (that’s what my attorney asked me to clarify, so hold your lawsuits, y’all).

Hypothetical Dialog 1 – Conversation between am agency buyer and a rep during annual negotiations:
Agency Buyer: Hi, Media Rep! I come on behalf of my client Brandex. They may want to invest 10 Million with you this year. What is the price you are willing to offer them.
Media Rep: The cost is $10.
Agency Buyer: Oh! C’mon! It’s 10 Million! You know that last year they already paid $9.7. I need to beat inflation, give me a better price!
Media Rep: OK. I will keep the price flat vs last year.
Agency Buyer: I know you could do better! But OK. That makes me look good enough. You know, if I’m audited, I can show savings after inflation adjustment.
Media Rep: Great. Let’s sign the contract.
Agency Buyer: Before we do that…. (lowering the voice). What do you say if I throw in an extra million of my own into the mix. It’s the agency’s money, not the client’s. What would you say is a good price for us, if you get this extra investment. (repeatedly winks an eye to the rep).
And… scene!

Hypothetical Dialog 2 – This time it’s a phone call between a Global Agency Group CEO and its counterpart at a Global Media Conglomerate.
Agency CEO: You know, Media CEO? I’ve been looking at what all the companies under my supervision are buying in your properties. You may have realized that we have directed to increase our investment significantly, wouldn’t you say?
Media CEO: That is right. Our audiences have grown and.
Agency CEO: Sorry to interrupt, but you have not heard me well. We have directed our teams to plan investments there. I think it’s time we make this a good business for both you and us. I heard that you have some media spaces that are floating around and are not yet sold.
Media CEO: Well, the annual negotiations are still.
Agency CEO: We can help you get rid of that unsold inventory. Honestly, imagine the embarrassment of having those empty spaces in your operation!
Media CEO: Well, they would not be empty.
Agency CEO: Exactly! They do not need to be. We would put high quality advertiser there. It would look great. And you don’t even have to pay us to do that. We would do it absolutely free. You don’t need to worry! I’ll make it happen. And you know what else I could make happen: I could ask my teams to look again if they are not overinvesting in your company. But I will not. Because this is such a great business for both of us. Do we have a deal?
Media CEO: We do… always a pleasure… Can we at least be paid in Isle of Man?

We see often that media vendors may be willing to give away some additional value during negotiation. That value is either captured by you or by the agency. If you Opt-In, you are letting the agency capture some of that value, in order to get a portion of it for yourself. You should be entitled to all of it.

One of the explanations that we hear from agencies is that they are putting their own capital at risk and that’s why they get better conditions. Sorry, but unless you have been offered the same conditions when they made their own buy, they are failing to act as a good agent.

How do you prevent this from happening?

We have seen several ways, none of them free of inconveniences.

Create a relationship with the media. Remember: agencies and media are engaged in a longer lasting relationships than agencies and advertisers. If you have a direct relationship with media vendors, you can at least get a back-channel and make sure that nothing can be hidden from you. Trust, but verify. That takes time. And may result in pesky phone calls from media to offer you the latest and greatest they have in shelf. It may be a steep price.

Do not accept any non-disclosed buy. If the deal is legitimate, there is no reason not to show you the whole value chain. And it should be fully auditable. The risk is that you will not be offered the deals at all.

Reject opt-ins altogether. If every advertiser did, we would be closer to ‘herd immunity’. There is no cheap inventory to be sold to anyone. Wishful thinking, but it seems there’s always someone willing to buy replacement hubcaps from the guy on the corner.

There are ideas floating around about hi-tech solutions. Block-chain and stuff. We’ll need to see to believe. Cost efficiency of the solution may be an issue.

Also, there have been attempts at creating ecosystems that separate planning from buying and make every buy an auction. It has proven impractical.

Here and now, transparency has only one solution and it’s not pretty: reject deals that are too good to be true. Don’t feed the monster. Take a deep breath and say no to a lower cost at the expense of a fully transparent deal. As with most vaccines, it’s not a pleasing experience. But they keep things healthier.

The Internationalist talks with two industry leaders in two quite different roles who are both passionate about encouraging transparency in advertising.  Doug Wood of Reed Smith believes that if brands abandon efforts to bring transparency to the digital media process, brands will cause grievous harm to their shareholders. Manuel Reyes, with his company Cortex Media, is working to encourage transparency among their marketer clients.  However, he is also finding that transparency is possible only if marketers care.  Often, to his great disappointment, short-term pricing gains matter more than long term principles.

Today’s conversation looks at ideas moving forward as both men discuss how issues around trust and transparency can become a greater priority to marketers.

Speakers:

Moderator:  Deborah Malone of The Internationalist 

Douglas Wood is a partner at Reed Smith, where he leads the firm’s Advertising and Marketing Law team.  He is the champion of the ANA Trust Consortium, an alliance among industry members that acts as a voice for the ecosystem on transparency, measurement, auditing, digital fraud, and brand safety through ongoing reporting and analysis.   Doug led the advertising industry’s legal team in the transformative media transparency investigation in 2016 and establishment of the industry standard contract template. 

Manuel Reyes is a member of the ANA Trust Consortium. He is also the founder of Cortex Media and has been providing media auditing and consulting services to top-tier advertisers in North America, Latin America, Europe, and Asia since 2001. The company is recognized globally as a resource for balanced and independent viewpoints on key advertising media topics in US and worldwide.

Issues Covered:

An update on where the marketing industry is today in understanding the complexity of transparency issues.

Are we now living in a “Post Transparency” World?  Is this semantics or reflective of marketer attitudes? 

Do people with varying roles in the marketing organization have different views regarding issues of transparency?

Will perspectives on transparency change as there are greater financial concerns ahead– both at the advertiser level and the agency level?

Doug Wood: In January, you offered a top 10 List of legal issues of concern to the marketing industry.  Have any of the items on that list changed in priority?

Manuel Reyes: You have just completed a major proprietary study for your clients on the Current US Media Market Outlook, which includes a discussion of media cancellations, Upfront concerns and a Media Inflation Outlook– for which Cortex is well-known.  Can you share some insights with us from that work?  And tell us what that means for Transparency?

What needs to be done to make these matters of trust and transparency a greater priority for marketers?

Many media plans have now been deferred, delayed, or cancelled entirely as marketing messages, as well as budgets, are being re-calibrated for an anxious world.

Amid this complex and fast-changing environment, Cortex Media is providing advertiser guidelines to likely scenarios going forward. There are three critical areas for U.S. media right now:

1. The Current Outlook for Media Cancellations
2. The Status of the 2021 TV Upfronts & Likely Scenarios Going Forward
3. The Media Inflation Outlook for both 2020 and 2021

The Current Outlook for Media Cancellations

What can be cancelled now in terms of TV commitments, as well as other media– including digital? 

Television….

Although the deadline to exercise Q2 cancellations for Upfront TV commitments was February 1^st, networks are allowing Q2 cancellations for affected categories including airlines, cruises, hotels, restaurants, etc. However, cancellations for Consumer Products Companies and other categories not directly affected are not being accepted.

Shifts from Q2 to Q3 are being allowed with limitations, but there are concerns that Q3 inventory could become scarce.  Networks are cautious about advertisers moving Q2 activity to Q3 and then exercising Q3 options– effectively canceling Q2 activity.  This will require negotiation.

It remains to be seen how Q3 options will net out and how much inventory will be available after May 1^st.  Many advertisers are expected to exercise all options and buy back in Scatter, which is expected to drop by about 10% in terms of CPM. Options are likely to be exercised in full to provide flexibility and take advantage of lower Scatter pricing.

Other Media, including Digital…

Yearly or long-term commitments will need to be renegotiated on a case by case basis.  Rescheduling flexibility is expected in most cases where inventory is not a critical issue. Short-term commitment cancellations will vary depending on standard practice for specific media.

Digital will offer the most flexibility, particularly any real-time bidding (RTB)  or Programmatic plans, since it is purchased on a short-term basis.

The Status of the 2021 TV Upfronts & Likely Scenarios Going Forward

Live Upfront presentations have been cancelled, and many networks have moved presentations on-line.  Currently, Newfronts have already been pushed back to late June. And the 2020 Olympics have been delayed, so budgets are likely to move to 2021 and not be allocated this year.

Note that only one of 54 new shows are in the can and many pilots have not been produced, which means they cannot be shown at Upfront presentations.  In fact, many season finales for current shows have not been produced yet.

The likely scenario going forward is that the Upfront process is expected to be delayed to late 2020, which means that Upfronts will probably cover Q1 2021 to Q3 2021.  (Q4 2020 is likely to be Scatter only.) Networks don’t want to move to a Calendar Upfront permanently.  They are also expected to use this opportunity to move to bundled upfront offerings-in other words, both linear & non-linear offerings.

In terms of Inventory Supply and Demand, CORTEX anticipates that while the supply of impressions is currently up due to C19 restrictions, the impact is likely to wane when schedules return to normal.  Demand for Q4 is hard to predict and will depend on how the economy rebounds.  In any case, pricing is expected to be down.

The Media Inflation Outlook for both 2020 and 2021

Media Inflation 2020 Outlook:

National TV…

• Q2 TV CPMs may see a reduction due to over-deliveries, however, efficiencies may be reduced if media is cancelled or re-scheduled. 
  • Cancellations of live-sports programming has seen minor reallocation of budgets to other properties but not enough to create inventory pressures yet.  However, campaign reach goals are being affected due to lack of live sports audiences. 
• Q3 pricing for existing Upfront commitments should be flat but Scatter is expected to be down 10+% due to low demand
• Q4 pricing is also expected to be down 10% but may be affected if market moves to 100% scatter for the quarter.  Pricing will depend on demand that will hinge on how strong the economic rebound is.

Digital

• Addressable, Data-optimized and Non-linear Video offerings are seeing a high increase in viewership.  (Nielsen predicts an increase of 60% in content viewing.)  This will result in lower pricing for some offerings.
• Programmatic pricing is expected to decrease due to investment cuts and increased inventory. 
• Social usage rates have increased dramatically but this has not resulted in more investment.  This will result in short-term pricing decreases.  Cost decreases are likely to last into the recovery.

Other Media

• A 10% decrease in pricing is also expected for all media.  There may be some pricing distortions for Local TV and Radio due to elections.

Media Inflation 2021 Outlook:

National TV

• 2021 planning is already being done with flat pricing vs. 2020.
• Upfront pricing for 2021 is likely to be 10% to 15% down.
• Due to the increase in non-linear viewership, networks will aggressively package Linear with other offerings.

Digital

• Display is likely to see a sharp drop of 15%+
• OLV will be more resilient in terms of pricing.  Budgets are likely to increase due to flexibility vs. broadcast.  Pricing is expected to be flat to -5%.  Premium content will fare better.
• Social usage rates are likely to return to normal levels, but pricing is likely to be down about 5%.

Other Media

• A 10% decrease in pricing is also expected for all other media overall. 
  • Print at -5% to -10%.  A lot of publications are expected to close or move to on-line only.
  • OOH will also see decreases of 10%+.  Based on experience from the 2008 crash, advertisers will try to hold on to incumbencies in premium locations, but all other inventory will see decreases in pricing.
  • Local TV and Radio are likely to see pricing down by 5% to 15%+, depending on the market.

Agency Fees, Payment Terms and Opt-in Buys

• Agencies are getting requests from clients to reduce fees and extend payment terms. 
• At the same time, agencies are really pushing non-transparent “opt-in” transactions to clients to improve their revenue.  In many cases, they are requiring advertisers to opt-in to these transactions in order to reduce fees or extend payment terms.

Cortex Media and has been providing media auditing and consulting services to leading advertisers in North America, Latin America, Europe, and Asia since 2001. The company is recognized globally as a resource for balanced and independent viewpoints on key advertising media topics in U.S. and worldwide. 

Cortex is also well-known for its Media Inflation Outlook.

An Issue in TWO PARTS….

Part 1: BACKGROUND ON OPT-IN MEDIA BUYS:

Agencies have been placed under tremendous pressure by continual reductions to agency fees and commissions, increased payment terms, and a rise in operational complexity due to digital media.  Not surprisingly, they have had to become very creative in developing alternative revenue models, many of which have led us down the path of eroding trust between advertisers and agencies.

Originally, agencies resorted to simple rebates from media vendors based on the overall volume they traded with them on a yearly basis.  These were commonly referred to as AVBs (Agency Volume Bonuses), rebates, rappels, sur-commissions, etc.  Agency contracts were cleverly crafted so that the client would be entitled to any discounts, bonuses or other benefits based on the client’s investment only.  This sounded like sound language but allowed agencies to keep anything that was derived on “overall” agency volume.  Many advertisers have closed this loophole, but others have appeared.  The cat and mouse game continued.

Trying to find other sources of revenue, agencies began selling services to media vendors.  This came with two problems.  First, there could be potential conflicts of interest since the media were now vendors and customers at the same time.  Secondly, there has been a concern that many of these services were sold at a “premium”.  Essentially, for much more than they were worth, allowing the agency a backdoor to get rebates in another form.  Again, language was added to agency contracts to limit this as much as possible.

Starting with programmatic media, agencies began making large scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model.  By doing so, advertisers allow the agency to buy as principal and waive audit rights, thus preventing them from seeing what is being paid to media vendors and allowing the agency to make an unknow margin on these transactions.

Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions provided they get approval from their client.

Initially, opt-in transactions were truly “opt-in” — meaning the advertiser could decide to participate or not.

Trying to find other sources of revenue, agencies began selling services to media vendors.  This came with two problems.  First, there could be potential conflicts of interest since the media were now vendors and customers at the same time.  Secondly, there has been a concern that many of these services were sold at a “premium” — for much more than they were worth.  This provided the agency with a backdoor to rebates in another form.  Again, language was added to agency contracts to limit this as much as possible.

Starting with programmatic media, agencies began making large-scale use of undisclosed, non-transparent buying practices by promising media savings to advertisers, provided they opted in to this model.  By doing so, advertisers waive audit rights  and allow the agency to buy as principal. This prevents advertisers from seeing what is paid to media vendors, and it allows the agency to make an undisclosed margin on these transactions.  Opt-in transactions allow the agency to be compliant with contract conditions and make a margin on transactions– provided they get approval from their client.

Initially, opt-in transactions were “opt-in.”  The advertiser could decide to participate or not.  As long as the client went into these transactions understanding the consequences, they were entering into this at their own peril.  The issues with these transactions are obvious: (1) The agency was now an advisor and a vendor at the same time, creating potential conflicts of interest.  The advertiser could no longer trust that recommendations were in their best interest or instead to the benefit of the agency; (2) There now was potential for the agency to “comingle” their regular buys executed as “agent for a disclosed principal” (disclosed pass-through pricing) with their “principal” transactions designed to drive gains for the agency.  This could result in a situation where the “agent” buys are at acceptable price levels while the “principal” buys receive significant discounts.

This allows the agency to make a higher profit at the expense of the regular buys performed as “agent.”

As advertisers put their media agency accounts into review and agencies continue to promise huge savings, the delivery of these savings is now often contingent upon the use of opt-in buys.  In short, some agencies are requiring advertisers to agree to opt-in transactions upfront– as long as the agency is providing “equivalent” media as would have been purchased normally and offer a certain level of savings.  Once this is agreed upfront in the contract, the advertiser is no longer in control of when opt-in buys are done and what gets purchased specifically.  In other words, the agency is in full control of what gets purchased, how it gets purchased and how much margin they make.

So, this is where we are today.  Advertisers are truly between a rock and a hard-place when they decide whether to opt-in or not.  If they don’t opt-in, they may forgo value in the short-term by not taking the “discounts” offered.  If they do opt-in, they are encouraging the expansion of this practice, with all consequences involved.  Either way, value that should have gone straight to the advertiser in the old days now stays at the agency.  Media vendors don’t care which pocket they get paid from as long as they make their numbers.

No wonder trust has been eroded.

Continue to Part 2

An Issue in TWO PARTS….

Part 2: CONSIDERATIONS FOR ADVERTISERS ON OPT-IN ISSUES:

What should advertisers consider as they approach opt-in transactions:

• Make sure they are truly opt-in.  Agency contracts should not include a contractual obligation requiring advertisers to “approve” these transactions if the agency says the media being proposed is “equivalent” to what they would buy as agentand/or supposed savings will be delivered.
• When negotiating savings guarantees, ensure these are not contingent on opting-in.  Any additional “savings” from opt-in transactions should be on top.  During agency pitches, agencies should be made aware from the start that any savings guarantees should not be tied to opt-in requirements.
• Set up clear internal procedures on how opt-in approvals should work.  An agency should be required to provide a recommendation in advance with a clear rationale supporting the media being proposed, as well as an outline of savings against the same media being purchased through regular, disclosed, “agent” transactions.  Advertisers should also limit approval authority to senior management who have a clear understanding of what is being approved and the issues involved with opt-in transactions.  Training should also be provided to marketing, media and procurement personnel who have anything to do with these transactions.
• Understand the media agency landscape.  Some agencies are very aggressive in pushing opt-in transactions.  Other agencies also offer savings and efficiencies, but do not engage in this practice.  There is choice in the market regarding this.
• Negotiate directly with key media vendors.  Many large advertisers are doing direct deals with large media vendors such as Facebook and Google.  In some cases, these deals are global.  Direct deals give advertisers full transparency to what was negotiated and reduce the risk of agency rebates and other leaks in the system.
• In–house.  Many advertisers are taking their media buying in-house, particularly programmatic buys.  This allows advertisers to take full control of these buys but require investment in technology and specialized personnel.
• Unbundle media planning from buying.  Agencies should not be recommending what to buy and be your exclusive sellers of the same media.  Opt-in media purchases should be arms-length transactions.  In order to do this, advertisers should consider assigning planning and buying duties to different companies. Advertisers could have a planning agency and several buying agencies to whom they could bid out the plan.  If agencies want to be media vendors, they should be subject to the same rules as other vendors. 
• Ensure you negotiate maximum audit rights regarding these transactions.  At a minimum, the agency should report what they are charging you on a unit-by-unit basis, so you can evaluate if opt-in buys deliver savings vs. regular buys.  Some advertisers are asking for caps on margins for these transactions with audit rights that allow them to verify this. 

With everything going on, we agree with Reed Smith, General Counsel to the ANA, that 2019 should be The Year of the Audit.

 

Last Thursday, the Wall Street Journal reported that Federal prosecutors in Manhattan opened an investigation into media buying practices by advertising agencies. According to Manuel Reyes, CEO, Cortex Media, “This is, by far, the most important news on the media transparency front to come out since the ANA (Association of National Advertisers) published their report on media transparency two years ago.”

He outlines why this changes the game:

• Subpoena Power: Investigators are now empowered to compel disclosure across all holding company units and any other party or vendor involved in the supply chain.
• Digging Power: They will be able to follow transactions across the entire ecosystem, starting with the advertiser, through the agency (and affiliates) to media vendors, other downstream re-sellers and publishers.  They will not be limited by any advertiser/agency contract and have the full resources of the US Government at their disposal.
• Perjury Power:  Investigators will also be able to interview all parties involved with their knowledge that it is not a good idea to lie to the FBI.

He says, “It will be interesting to see how far they go in looking at holding company units outside the US, as it is possible that payment of rebates and self-dealing (buying from a party controlled by or related to the holding company) might have taken place via a non-US party.”

While many advertisers are reporting unprecedented low levels of trust toward their agencies, it is clear that not all agencies are engaging in mischief and not every advertiser is affected.  However, Reyes believes it is likely that investigators will find instances of unsavory practices at some of the advertising holding companies.

He suggests that prosecutors are likely to find:

• Rebates:  Rebates may have been paid to agencies and not returned to advertisers as required by contract.  Even if the advertiser/agency contract does not require the return of rebates, this could be an issue if the agency was acting as agent for a disclosed principal.
• Revenue from Opt-in Transactions.  Agencies are making money on opt-in media buys, where the advertiser has agreed to forego transparency, the agency buys as principal, and the advertiser understands that the agency is likely to make a margin.  Provided that the advertiser opted into this, the agency is likely to be in the clear.  However, if they were careless and the advertiser was not asked to opt-in, this could also be an issue.

He adds, “Up to this point, we don’t expect agencies to have a major financial exposure since most have been very careful to enter into contracts that clearly state how rebates and principal transactions should be managed, and agencies have made efforts to govern themselves accordingly.  However, they may face significant reputational risk if these practices are further exposed by the investigation.  Government contracts could present additional complications for agencies.”

Yet, Manuel Reyes believes that investigators may also find:

• Self-Dealing: Agencies are sometimes buying from themselves when they were supposed to buy from independent third-party vendors in the open market.  This could be even more problematic if this was not disclosed to and accepted by the advertiser before the purchase was made.  Keep in mind that some holding companies have an interest in media vendors or resellers, particularly in the digital space.
• Disguised Rebates: Some agencies have been selling “services at a premium” to the same vendors from which they buy media.  While these services may be legitimate, this could also be a way to provide minimal services in exchange for disproportionately large payments.  This could be seen by investigators as a mechanism to disguise rebates.  Some types of “discounts for early payment” provided by media vendors to agencies or other “financial services” provided by agencies to media vendors could fall in the same category.
• Comingling of Media Buys: Negotiations done by agencies acting as agent for a disclosed principal on behalf of advertisers may have been comingled with negotiations done as principal for the agency’s own account for resale.

According to Reyes, “One could envision a situation where an agency is negotiating a $200 Million agent-based upfront buy for its clients while contemporaneously negotiating its own $50 Million buy as principal for resale. The agency could ask for a reasonable deal on the agent-based buys while separately asking for an outstanding deal for its own buys for resale.  This could result in a transfer of value from advertiser buys to agency buys.  It is unlikely that any paper trail would exist on this, but there may be vendors or ex-employees who may be willing to cooperate.”

We will see how far investigators get down the media rabbit hole.

In the meantime, he recommends that advertisers should review their agency contracts and set up regular and complete audit programs to protect their interests.   A strong contract and a tight audit report now may come in handy later depending on the outcome of the investigation.