A couple of weeks ago in this column, I wrote about the missed opportunity digital seems to be for many advertisers, procurement departments and media agencies ('Media agency meltdown', Marketing, 28 April).
The central thrust of the piece was that the agency deal has long been a corrupting influence both on the neutrality of agencies' decision-making and on the value that advertisers get for their money. Yet, it is not a construct agencies have imposed on unwitting advertisers; rather it's a conceit that is accepted by agencies, procurement, marketers and auditors.
It is a framework that they can all work within, which gives the credible illusion of accountability. Agencies get to charge low fees (but balance this via undeclared discounts). Procurement departments get to report low numbers. Marketers get to abdicate responsibility for ensuring the delivery of true value through media by hiring auditors, who earn tidy fees by giving the whole unsightly edifice a veneer of integrity.
Digital might have offered a way out of this mess, moving the basis of the relationship from cost to value; instead, the old model is spreading through the new world like smallpox.
I received more correspondence from people on this one article than I have in the whole of the past year. The chief executives of three media companies expressed their dissatisfaction with the system, which, for them, hides from advertisers the true value of what they produce, by making the (agency-paid) volume discount the key driver of appearance on a media schedule.
However, disgruntled as they are, they're in no position to challenge the arrangement - the agency sector is substantially more consolidated than the publisher side in many media.
Agency people supported the piece, too. For them, their business is no longer about finding smart solutions to consumer challenges, as this is often subjugated by the deal.
I was surprised. Not by their opinion, but by their volunteering it. However, I was more surprised when I had dinner with the managing director of a substantial investment bank last week.
A media sector specialist, he waxed lyrical about valuations, and about the sector embracing the change that digital was bringing. In one analyst briefing that he had attended the company told him it 'didn't know' what the value of advertising in social media would be in two years' time, as so much of it was currently not paid for. He had found this candour refreshing and 'transparent', and left encouraged about the business' prospects.
Given this thesis, you won't be surprised that 'transparent' isn't a word I'd apply so confidently to agencies' business. So I read the notes to the accounts to the major players in the media buying world. Although passing reference is made to volume rebates sometimes being retained in one or two of these, nobody sets out the threat lurking if their part of the reputed £300m overtrading position in TV unravels.
Wall Street created collateralised debt obligations - the infamous CDOs that bundled together good and toxic debt, and sold them on to investors who were unable to penetrate the complex web of components that made up the instrument.
Media agencies have created (and overtraded) the agency deal. It might not be as complex as the CDO, but its opacity has similar implications for the underlying value of the businesses that participate.
Maybe it won't happen. As one agency manager put it: 'Just as Wall Street ran rings round the SEC by hiring smarter people, we've just got to be smarter than the auditors.'
Andrew Walmsley is co-founder of i-level.
30 SECONDS ON... Collateralised Debt Obligations
- Collateralised debt obligations (CDOs) are highly complex financial instruments that developed out of asset-backed (mostly mortgage-based) securities.
- These involve a bundling up of individual loans into a product that can be sold in a secondary market. This made it possible for financial institutions to sell securities to global investors that were based on home loans taken out by US consumers.
- Because primary lenders were selling on the mortgages they had agreed, they became less concerned about ensuring repayment, leading to the adoption of increasingly lax practices.
- Moreover, because CDOs are so complex, many investors were not able to understand what it was they were buying.
- When the US property boom began to falter the number of mortgage foreclosures began to soar, leading to sharp declines the valuation of CDOs.
- Uncertainty over the losses faced by financial institutions though CDOs led to the financial crisis that peaked in the autumn of 2008.