Meet the Small Digital Agency Doing Arbitrage

Technology has Democratized Data and Buying Tools so Even IMM Can Compete

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Adam Edelman
Adam Edelman

IMM, a Boulder, Co.-based digital media and marketing agency with 100 staffers, has neither massive scale nor the size typically associated with arbitrage -- a practice in which the agency takes on the risk of buying media for clients before getting paid by clients. Yet the shop touts a growing business with clients like Chili's and Quiznos, as well as a buying model that thrives on arbitrage.

IMM could represent either a short-lived phenomenon or a window into the future of media buying agencies once reliant upon scale and size. This digital indie is betting on the latter as it aims to compete with the giant holding companies that are also aggressively fine-tuning their programmatic buying systems.

"We don't have the massive multi-billion-dollar buying power of the holding companies, but technology has democratized data and buying tools so even IMM can compete," said IMM CEO Adam Edelman .

The programmatic buying model
The shop buys digital inventory in advance in bulk for "preferential rates" from private marketplaces and open exchanges. Then, when charging a client for a buy or larger campaign, it bundles the cost of the inventory, analytics and technology, among other items, as well as its own fee, in one lump sum. For clients who want to know how much the agency is making and how much the media cost, it will break out those costs.

"We have media providers we have relationships with based on volume commitments," said Mr. Edelman.

Some of IMM's clients sign on for pay-for-performance compensation in which they're paying for results based on metrics agreed upon in advance, such as sales. "We're optimizing media down to the unit-sale, if the client is capable of supporting that level of measurement," he said. For example, Chili's might measure the impact of online media down to the point-of-sale based on credit card and other data.

For premium inventory bought directly from the publisher, the shop tends to act on behalf of the client and waits to get paid to place the buy.

On the programmatic front, IMM's arbitrage model is not too dissimilar from that of GroupM's Xaxis. Omnicom's media group also recently started doing arbitrage, indicating a win for a practice that has no shortage of critics. Critics decry what they deem a conflict of interest when the agency group wears both buyer and seller hats.

"Once media agencies can make more money based on a media choice, there is an inherent conflict of interest," said Christian Juhl, the CEO of Essence Digital, an independent digital media and marketing shop, which does not take an ownership position on inventory. "As media agencies, we are paid for our time and unbiased expertise. The digital age should not change this time-honored pact we make with our clients but arbitrage does."

Mr. Edelman defends the model, emphasizing that its inventory commitments don't compromise the shop's "neutrality or fiduciary responsibility to act in the client's best interest," thanks in part to diverse inventory pools across display, search, mobile, social and video.

Is arbitrage financially viable for a small shop?
So how does IMM, a shop much smaller than the WPP and Omnicom networks, gather the capital it uses to invest in media before getting paid itself when other larger shops won't even take that risk?

Mr. Edelman wouldn't go into specifics on where the investment capital comes from, but he explained that IMM is a low-overhead business with wide margins. The shop has also turned to startup investments for alternative sources of revenue.

"Our first venture was a profit-sharing JV with an SEO startup that resulted in strong top-line revenue contribution," he said. IMM acquired the company in 2011. IMM's founders were also early-stage investors in TruEffect, a Boulder-based ad server that the shop also used as a vendor. It most recently invested in a startup Mr. Edelman described as a "pre-launch CPG concept with lifestyle brand potential."

"We're a privately capitalized business," said Mr. Edelman. "We're structured to be able to support that. There's a lot of capital invested, and that's part of the value proposition."

He says payment hasn't been a real issue since the shop vets prospective clients, and the benefits outweigh the risk. "We have buy commitments and relationships that give us preferential rates," he said.

Mr. Edelman says IMM's margins are healthy, but as more players get into arbitrage and more clients bring buying in-house, debate swirls around how long agencies can maintain their lucrative fee models.

For IMM in the long-run, continued diversification is key, Mr. Edelman said, adding that the shop is adding more creative and production business.

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