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Audience Fragmentation and Media Consolidation Are Hurting Most Clients

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Typical media agencies are ill suited for getting client’s real value from media buys. Media audiences are fragmenting at an increasing rate. There are very few opportunities in mass media to reach large audiences, yet most brands need reach to drive new buyers to their brand. Buyers at large agencies are siloed into “centers of excellence”, meaning some buyers only buy Cable, some only buy Prime, some only buy Syndication, etc. While this might give them some knowledge of a media market there’s an entire ecosystem occurring over their heads and they know nothing of it. It comes from media company consolidation. And only savvy, de-siloed media agencies can capitalize on it. Disney is a large media company. The image below includes many of their media properties. They operate in Network, cable and local TV, radio, online, print and on-site. They also have partial ownership in Hulu and other properties.

Now think about how companies like CBS own TV, online, radio, outdoor properties. Every major media company owns multiple properties, and I’m not just talking about online extensions. They own different brands in different media.

How are today’s large over-siloed media agencies structured to get clients an advantage? Media buying is set up to favor the sellers in every way these days. How else can you explain audience CPM’s increasing while individual media property audiences are shrinking? One reason is that media agencies don’t negotiate price. They negotiate increases.

There’s a better way. Smaller media agencies are better suited to deal with today’s complex media market. Senior management who establish the strategies stay close to the end product. They identify media companies and deploy programs regardless of which department should get which budget. There are fewer fiefdoms to feed and fewer “centers of power” fighting for survival internally.

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Ad Sales Rep Consolidation

An interesting trend is happening in traditional media and it has interesting consequences for marketers. Meredith Publishing is now managing all the business operations, including ad sales, for Martha Stewart’s print properties. Hearst recently launched a division that provides scalable solutions for smaller and medium sized publishers, including ad sales consultation. Today a number of spot radio rep firms announced they were partnering to form an umbrella radio and digital media sales rep firm.

While these decisions make sense for these media companies' needs it will have impact on marketers in ways that might not be good, most notably upward pressure on ad inventory pricing.

Marketers get the best price when they pit multiple sales organizations against one another for share of a media budget. Now that Meredith represents an even larger share of the viable print inventory what is their incentive for negotiating price down? The power they have to creep pricing up will have dramatic impact on the market. And not just for the companies participating in the sales co-ops or outsourcing. Their competitors now know that fewer players are negotiating so it would not surprise me if CPM’s begin to inch up. I recall having this conversation over breakfast with Tom Harty, The President of Meredith’s Magazine Group, a few years ago when Hearst acquired Woman’s Day from Hachette. I thought, in the long term, that it was good for both Meredith and Hearst to not have a wildcard single book that could only be a spoiler on price.

On the radio side, this impact will be felt most by agencies that buy through the rep firms. As far as I can tell it is mostly large media agencies who buy their inventory this way because the buyers simply do not have time to negotiate with every station in every market. Again, where in the past two or three rep firms were negotiating against one another for radio buys now they will not because there is no incentive at the company level to do so. This is one of the reasons why the FCC has ownership limits on radio and television stations in any given market.

Does your radio buyer buy through rep firms? If so, what does that mean for you?

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Repercussions

The fallout from Jon Mandel's statement at the ANA about Agency kickbacks has led to a number of anonymous executives admitting it has happened under their watch and some even confessed to participating themselves. Now, this doesn't mean that these individuals received kickbacks, but that they allowed their agency/media company to take or give money for a media buy. Initially I thought Jon Mandel was overstating a problem, but apparently it is more prevalent than we could imagine. This is certainly more significant than an agency taking the 2% cash/pre-payment discount--which is still sometimes offered--and not offering the money back to the client. In my last blog I focused on the kickbacks that were occurring out in the open via mega holding company specialty shops. Read that blog for background. So to go into more detail, here's how the mechanics would work in two scenarios:

  • Moving buys through a barter division. To simplify things, media companies sometimes want to take clients on a trip or schedule a sales meeting in a nice venue away from the office. Rather than pay cash for these trips the media company will offer future access to media inventory at a reduced price or for free to a barter agency. This is easier than going to management and asking them to pay out-of-pocket, but the media company offers value of inventory that is higher than the cost of the trip. The media company can be more lavish and less cost-conscious, especially when it comes to taking clients on a trip. The barter agency sells the inventory either internally or externally at closer to market pricing and makes a significant profit. The barter division of the mega agency holding company tries to move this inventory internally first, where they can ask for equivalent market pricing. If they sell it externally it needs to be sold at below market pricing. Suddenly a 2% commission on national Cable TV becomes 25% or more--I'm being kind. Remember, some of this inventory can be accessed for free. Barter division provides kickback to media agency to ensure the deal goes through.
  • Non-disclosed media buying. Marketers less familiar with the agency process or infrastructure might be led to believe that their media buying is falling under the master contract with a creative agency when, in fact, it does not. The media agency adds their commissions into the media prices they quote, taking a high commission rate. The creative agency keeps all of their fees, not having to pay for media service while completely offloading the labor. Sometimes they even get a kickback above and beyond their fee.

Both of these scenarios would pass muster on an audit because the audit only goes one transaction deep. The auditors are not examining every transaction nor do they know there are secondary transactions. The kickback would always be treated as a separate transaction, not discounts on invoices.

The more you know, the more you don't want to know.

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I'll Have Two Scoops, Please.

The ad industry is abuzz with the recent accusations by Jon Mandel, a longtime media exec, regarding widespread kickbacks between media companies and media agencies. I can believe that there are kickbacks, personal favors, some tit-for-tat agreements, but the claim that it is widespread is difficult to believe because of the number of people that need to be involved, all either partaking in the fraud or looking the other way. In order for them to be as widespread as Mr. Mandel states it needs to be systemic. To get away with it strict non-disclosure agreements between the agency and the media vendor must be in place. It would also survive an audit because any kick-backs would be treated as a secondary transaction. It would be disturbing if it is indeed happening. Read the following for more info on Mr. Mandel's statements: http://adage.com/article/agency-news/mediacom-ceo-mandel-skewers-agencies-incentives/297470/ But there is another practice that is widespread in our industry, one that happens out in the open. I’ll call it “double-dipping”. Double-dipping is when an agency buys services from itself in order to improve its bottom line. And it is happening at the biggest agencies out there.

Not to pick on any one, but look at the major holding companies and you’ll see how agencies are making money today when the stated commissions seem to get lower and lower every year. Each major holding company owns creative agencies, media agencies, barter companies, mobile agencies, tech platforms, CRM companies, research and strategy companies, branded content companies, etc. So you can see for yourself, below are links to their organizations:

IPG: http://www.interpublic.com/our-agencies

Omnicom: http://www.omnicomgroup.com/ourcompanies

WPP: http://www.wpp.com/wpp/companies/

Publicis: http://www.publicisgroupe.com/#/en/maps

Their worst offenders are their trading desks where there is no transparency between the amount they are paying and the amount that they are selling it to themselves.

High-level executives at any company like this are encouraged, and likely their bonuses are dependent upon, how they can improve the bottom lines of the parent company by moving money between organizations internally. Whenever and wherever possible they will buy services through an internal partner who is arbitraging inventory. The client thinks the margins are slim, but they can easily double or triple when no one is paying close attention.

Marketers have contributed to this by creating an environment where this can happen. Every year procurement led reviews occur wherein a marketer’s stated goal is to reduce the service costs. This is compounded by their insistence on extending payment terms. Who in their right mind would continue to accept lower terms AND wait to get paid? The answer is simple. Someone who’s figured out another way to make money.

If you’re a marketer who is now concerned about these practices look carefully at your agreement. Is your agency able to subcontract without your permission? Is your main agency constantly parading in specialty divisions? If they use an internal subcontractor with your knowledge do they not want you to have a direct contract? Do you not audit your agency and their vendors? If so, there’s a possibility they are double-dipping.

Holding companies developed these arcane multi-discipline organization charts for one reason and one reason only. They’re not interested in being the best at anything, except discovering new ways to separate you from your money.

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A Matter of Efficiency

If you ask any media planner or buyer what the term efficiency means they will tell you that it is the way to determine relative value of different media and is usually defined as the cost per thousand impressions, CPM, of the media vehicle or buy. This results in their decisions on which media to buy being made strictly on costs. That definition is dead wrong and leads to overemphasis on a surrogate measurement that may not correlate with sales results. Something is efficient if it is capable of producing the desired results without wasting materials, time, or energy. Can the vehicle deliver sales at a lower cost than other options? There is a cost/benefit perspective inherent in that definition. Nowhere in this description is there any indication that trying to get as many people as possible to see your efforts compared to other choices is the goal.

Making decisions based exclusively on audience cost of a media vehicle can waste tremendous resources. One of the sayings I’m known for is that the cheapest media is the most expensive media you might buy if it does not work.

Today we have so many tools at our disposal to apply metrics other than CPM to define efficiency. We also have ways to insert intermediate steps in the purchase consideration path to measure whether we are on the right track.

Are your media buyers looking at data other than audience delivery to track your progress? Are they looking at your Google Analytics data? Are they making adjustments based on how well their buy is driving traffic? Even if your ultimate goal is sales at retail there are intermediate steps that can be taken to identify what is working and what is not.

The secret is predicting in the planning stage what the potential return on each vehicle will be based on syndicated data, prior transactional data, behavioral modeling, etc. During the execution stage, make sure you align an inbound intermediate mechanism for tracking. You can use unique landing pages or promo codes, statistical modeling on web traffic, coupon downloads, social media actions or good old fashioned phone calls. A holistic look at this activity can prove helpful in making the proper optimizations to your campaign. Now that’s efficiency.

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