In Enth Degree’s opinion that’s what it is, a practice that corrupts the buyer/seller relationship.
Essentially principal media is the practice where media agencies buy or secure media inventory upfront from media owners and resell it to clients at an undisclosed markup.
We do not know the size of the mark up as the media is “purchased” by a separate Company within the Holdco and is protected from third party audit.
Estimates of the size of the discount range from 100% (the agency pays nothing as they are selling pre-agreed bonus airtime) to as low as 20%.
In a recent panel discussion, the head of one Australia’s largest Holcos is quoted in the trade press as saying that his agency doesn’t actually buy inventory. Does this indicate that it is selling bonus airtime it has secured through negotiations with the media?
As to the size of the margin agencies secure from selling principal media, we can perhaps take a guide from a lawsuit in the US where an ex-employee of GroupM (now WPP Media) estimates that “… over the past five years, GroupM generated between US$3 billion and US$4 billion by striking rebate-driven deals, of which the agency improperly retained approximately US$1.5 to US$2 billion (AU$2.29-3.05 billion).” The suit doesn’t provide further documentation to support this claim.
The above, if true, and we hasten to add this is a disgruntled ex-employee’s allegation, demonstrates that the discount an agency receives from principal media could be 50%.
Let’s do some basic math to identify the potential “undisclosed” client generated revenue from a $10million client, where $2 million (20%) of the media buy is subject to investment within principal media.
Not a bad earner!
Back in simpler times, when media rate cards were published, there was a prominent clause that stated, “NO AIRTIME CAN BE SUBJECT TO RESALE”.
This clause was to prevent unscrupulous advertising agencies from marking up airtime and selling to advertisers at a higher price.
It had the highly relevant name of “space farming”.
So, while the media world has changed significantly, buying and selling of same has not changed all that much … space farming has just become more sophisticated.
Wrapped up in a suit and tie, under the guise of principal media, it really is just another means of generating revenue from the advertiser’s media budget.
The agency can only generate principal media through the aggregate of its clients’ media budgets. We would therefore argue that the discounted/no charge airtime the agency has secured belongs to the clients in proportion to their spend.
There are two ways to deal with the agency that encourages you to engage with principal media:
- Refuse and demand they negotiate additional discount and bonus activity from media partners to claw back concessions that belong to you.
- Negotiate your terms. While agencies position principal media as a great deal for the advertiser, treat this as you would any negotiation, and only buy in at a meaningful discount. I’ll start the bidding 50%. If the agency refuses, see point 1 above!
Remember, it is only a rort if you are not in it!
