At last year's Association of National Advertisers financial management conference, GroupM Chairman Irwin Gotlieb publicly acknowledged that the relationship between media agencies and clients had gotten to the point that the term "agent" no longer fits. "You cease to be an agent the moment someone puts a gun to your head and says 'These are the CPMs you need to deliver,'" he said.
It was a bold statement, particularly given the growing debate over the appropriate level of transparency in agency buying practices. Moreover, it contrasted with the standard practice, adopted in the early 1990s, of "sequential liability," in which agencies buy as agents on behalf of clients, which bear the onus of paying media vendors.
In the market dominated by TV buys and commission-based compensation agreements, the arrangement made sense for both agency and client. Today, agency-client relationships are not quite so simple, and neither is the way in which media is bought. So shops looking for new sources of revenue are warming to the riskier practice of owning all sorts of ad inventory outright and selling it to clients, often after bundling in tech and service fees.
"Conversations have definitely picked up," said Ron Amram, VP of media at Heineken USA, regarding what agencies are calling "principal-based buying."
The payoff: Potential for new income and an alternative sales pitch to marketers. "It's a way to get a good deal on inventory, depending on the media vendors' financial needs throughout the year," said Dave Penski, chief investment officer for Publicis Media U.S.
Principal-based programmatic buying, often referred to as arbitrage, is already common at media agency networks' digital buying arms and trading desks, such as WPP's Xaxis and Omnicom's Accuen. It usually requires marketers to agree to pay a bundled price and waive their right to see how much agencies originally paid for inventory and made on fees.
But there are risks for agencies now expanding their principal-based buying operations beyond just programmatic. Clients' needs could change after agencies purchase print, TV or other advertising with them in mind. Agencies could lose money if ad prices fall before they sell what they've bought. And conflicts could arise if the need to sell off inventory tempts them to recommend it to clients.
"There is a conflict of interest," said Mr. Amram. It's manageable if the client isn't buying such inventory from the same agency that handles its day-to-day media buying, he said. "A holding company could be doing principal-based buys, but they should not be selling to existing clients," he said.
Some marketers see the appeal, but it's not for everyone, especially at a time when the Association of National Advertisers has put a spotlight on media buying practices with an investigation.
Kargo, a firm that sells digital advertising and the technology services to target specific audiences with it, is currently in talks with a holding company's media agency network about selling it large amounts of inventory. The agency network would buy the inventory at a discount and then be on the hook to resell it to clients.
Kargo CEO and founder Harry Kargman said it's the first time the company is in talks to do this kind of deal on a large scale. The media agency network could buy all at once or in smaller increments. "They can determine whether they want to take a principal stake and buy ahead of time so it's locked up, or risk the price going up and not having inventory," he said.
Publicis Media, through its two-year-old Apex Exchange, is making principal investments in both traditional and digital media inventory that it then resells to clients. It's also buying as principal when there's an opportunity to co-create content and take a stake in that content, "to give clients an advantage in price" or "a first look," Mr. Penski said.
While it's currently small -- only about 25 people out of the network's 2,500 investment arm -- Mr. Penski said he expects to take it into new markets and nearly double that headcount by the end of the year. "We'll grow as we see client demand," he said.
The trend is being fueled partly by changing compensation models, replacing structures pegged mainly to full-time employees and media spending, as well as marketers' desire to pay their vendors more slowly. "We have to provide multiple go-to-market options for clients," Mr. Penski said. "A one-size-fits-all model of FTEs and commissions is not going to work."
"Clients want extended terms," he added. "Vendors are really struggling with this along with agencies. Because of this, alternative business models are coming up and being created to deal with it."
Apex also includes programmatic buying. "We either have to partner with a third party or take on that risk ourselves," Mr. Penski said. "We are very clear with clients where we've made an investment." Those clients waive their right to transparency on costs and fees.
Omnicom Media Group's Omnet is similar to Apex in that it buys up media based on what it thinks clients will want to buy, and then sells it to clients just as a media company would sell its inventory in the scatter marketplace, according to people familiar with the operation. Unlike Publicis Media's approach with Apex, however, Omnicom handles principal-based programmatic buying through its separate programmatic buying arm and trading desk, Accuen. Omnicom declined to comment.
"Is this happening? Yes," sais Doug Ray, CEO of Carat U.S., though he noted that neither Carat nor its parent DentsuAegis are currently taking principal positions on inventory in the U.S. "It's certainly likely we'll see a trend moving forward."
The shift toward more principal-based buying is driven by "clients looking for more flexibility, continued pressure on pricing and agencies looking for alternative opportunities to increase margin," Mr. Ray added. And it's happening "within the construct of it being contract compliant," he said.
That said, Mr. Ray noted, "I don't think it'll be as significant a percentage of the market. It represents a fraction, at least for now and in the foreseeable future."
"I definitely think there's a ceiling in the 5% to 10% range," said Heineken's Mr. Amram, regarding the share of media buying that principal-based buying could represent. "It will ebb and flow, but it really depends on inventory and times of change and pivot, and we may potentially be at one now."
"I don't think it's going to be more than 20% of the market," said an angency executive who wished to remain anonymous. "Today it's probably less than 5%."
Still, one agency executive said he's seeing a boost in demand from clients for these kinds of buys as they look for more "financial flexibility." It started with the shift to digital, which is purchased on a short-term basis, he said. Traditional media commitments are longer and bigger, with less flexibility for change.
It's also gotten easier for agencies to take on these kinds of risks, he said. "We've got much better data than we used to. I can take a principal risk on properties that I know my clients are going to have demand for based on data and analytics to support that."
He agrees that principal-based buying is only going to assume a small percentage of the market, but the growth of this kind of business depends on what happens in a "digital world." "Legacy pricing is what's driving the majority of what's spent in media now," he said. "When you move to biddable places in a new world, who knows how that changes."
"It could go one of two ways," said another executive. "Either the client bodies putting pressure on us decide they have to clean up their own act as well, and then things go back to the way they used to be in the legacy days, or the short-term pressure increases and we do more principal activities. I would bet on it getting worse."
In a suggestive development on that front, executives with experience in principal-based programmatic buying are moving into leadership roles at individual agencies. Xaxis' Brian Lesser is now overseeing the larger GroupM network in North America, and Omnicom Media Group recently appointed Annalect's Scott Hagedorn as CEO of its new media agency Hearts and Science.
"There is a movement of thinking from the trading desks and the more novel business models into the AOR, which then changes the direction and thinking of the AOR from the inside," said Mr. Kargman, the Kargo CEO.