When agencies become media sellers—inside the industry’s controversial growth engine

Principal-based buying, where media agencies buy media and resell it to clients, got a bad rap during the transparency controversy that emerged in 2015. Nine years later, regardless of its image, principal-based buying is increasingly a fact of life in the ad industry. Marketers often don’t know their agencies are doing it, and agencies don’t like to talk about it. But the controversy over principal buying could be rekindled with a new report on the subject expected to be released by the Association of National Advertisers soon. The ANA’s 2016 report from investigative firm K2 and consultancy Ebiquity led to a firestorm of controversy, a wave of audits of media agency contracts and performance, and even subpoenas and a Justice Department investigation that never produced indictments. The upcoming report from the ANA probably won’t go that far, but does aim to explain the scope of principal trading and include surveys, including one showing many marketers aren’t aware of whether their agencies are acting as principals, Keri Bruce, partner with the ANA’s law firm Reed Smith, said at the group’s Advertising Financial Management Conference in Orlando, Florida, on Monday. Check out the latest Ad Age events and award programs In many ways, the rise of principal-based buying is the workaround agencies and marketers adopted following the last transparency controversy, where the primary focus was on alleged undisclosed rebates agencies received when acting as agents on behalf of clients. An agency holding company might receive incentives, such as free media inventory, by trading for multiple client accounts. Agency executives saw these incentives as belonging to the agency, while many clients wanted the incentives passed back to them, at least on a pro-rated basis equivalent to their share of the buy. Pivoting to just having agencies use their clout to negotiate the best possible deals with media companies, and then reselling the media at a markup under contracts where clients opt in, eliminates questions of who owns the incentives, even if it doesn’t eliminate all the controversy. ‘Non-transparent’ Under terms of agency contracts, the actual prices agencies pay to media owners or others and the markups are almost always not disclosed and not subject to audits, Bruce said during a presentation at the ANA Media Conference in March. It was clear from a flash poll she conducted that many clients in the audience didn’t know whether their agency uses principal deals or not. And about half of agency executives polled during the conference session didn’t believe their clients understood principal-based buying or whether they’d opted into it. That’s not surprising, Bruce said, because “everybody uses different terminology. It might be called value-based service solutions, option agreements, proprietary media, non-traditional media.” Throw in “inventory media,” for good measure. And principal-based deals cover a lot of things, Bruce said. “It may be free inventory or other value the agency received in lieu of monetary rebates. You may be buying another client’s rebate in lieu of buying your own.” Also, she said, it’s often not media at all, or it may be media bundled with data, technology, content or other services or benefits. “I’ve seen agencies offering influencer services this way, content opportunities this way,” she said. “It’s all in this sort of bucket of non-transparent services where you don’t get to see the markup.” Manuel Reyes, CEO of audit firm Cortex Media, said it’s not unusual for clients to be taken by surprise when he tells them their agencies are acting as principals reselling media. It’s always buried in the fine print of contracts, sometimes with an asterisk, but it’s there, he said. The reality is agencies often aren’t just agents, or just principals reselling media, but often both. Agencies in the U.S. generally are acting as agents and compensated with fees or incentives based on that work, but often with side provisions allowing for markups when they resell media to the same clients. “What clients are paying agencies is not enough to make them a viable business,” Reyes said. But the alternative has been opening the door for principal deals where ultimately clients don’t really know what they’re paying agencies overall, between fees and markups on resold media. The rise of principal trading by agencies also raises the fundamental question of whether agencies that take big positions in media to get the most favorable rates are then incentivized to move that media to clients, regardless of whether they need it. Agency outlook Representatives of major holding companies either declined to comment or didn’t respond to requests for comment. But multiple agency executives questioned how much principal trading is really growing and if it even presents conflicts of interest. Principal trading, which may go by many other names, they acknowledged, doesn’t happen if it’s not disclosed or authorized in contracts, these people said. Agencies are being compensated for their work, for using their scale to deliver discounts, and for taking risks, they said. And marketers are the ultimate arbiters of whether the media gets authorized and represents a good value. “The proliferation of principal-based purchasing underscores a heightened appreciation of its efficacy alongside its integral role within advertising campaign strategies,” said Ashwini Karandikar, 4A’s executive VP of media, tech and data. “Advertisers are afforded the opportunity to engage in principal-based purchasing and to be deliberate upon specific terms of disclosure within contractual agreements negotiated with their respective agencies, who often assume the risk.” Signs of growth Anecdotal evidence found at the time of the ANA’s investigative report in 2016 suggested principal-based buying was a relatively small, if lucrative part, of agency dealings, confined mostly to digital media, with markups as high as 90% to 100%. But today, the practice extends across digital media, linear and streaming TV, out of home, radio and just about any kind of media buy, according to industry consultants. And as it’s become more widely practiced, markups tend to be in the 10% to 25% range, according to industry consultants and auditors. While you won’t find a line item labeled “principal buying” in financial reports of any agency holding company, sorting through details that are disclosed suggests it’s been a steadily growing share of the business in recent years at least for WPP and its GroupM media arm, Publicis Groupe and Omnicom Group. Interpublic Group of Cos., which for decades generally rejected principal dealing as a potential conflict of interest with its clients under former CEOs Philip Geier Jr. and Michael Roth, is considering moving away from that stance now, current CEO Philippe Krakowsky indicated during an earnings call last July. A spokesman declined to comment on whether IPG actually has shifted to principal buying, outside of its longstanding Orion barter operation. But what prompted an analyst question during the July 2023 call in the first place is clear: Rival holding companies are seeing revenue and margin gains from principal trading, pressuring IPG to follow suit. For WPP, an analysis of financial reports and disclosures on earnings calls indicate the costs of media purchased for resale to clients amounted to 32% of GroupM’s $8.7 billion in revenue last year. In all, pass-through costs, mostly from media purchased for resale to clients, amounted to about $11 billion of the $60 billion in gross revenue for the big four global agency holding companies last year, according to Brian Wieser, principal of the consultancy Madison and Wall. WPP is the sole holding company that breaks out media pass-through costs, or what it pays to buy media for resale, separately, making it easier to analyze. Wieser also estimated what Publicis, Omnicom and Interpublic paid for media as a share of total pass-through costs or, in Omnicom’s case, what the company reports as “third-party service fees.” WPP and Omnicom did not respond to requests for comment on this story. Publicis Groupe and Interpublic declined to comment. Principal trading has been an important driver of holding company profit margins in recent years, which averaged 17.3% last year on an earnings before interest, taxation and amortization (cash flow basis), according to Wieser, even if it’s impossible to tell exactly how much of each company’s business it represents. Financial engineering behind the growth In much of the world, including many markets in Europe, Latin America and Asia, principal dealing is the norm or even legally required. It’s sometimes seen as security for media owners to ensure they get paid, by having the agency making the deal responsible for payment. In some markets, such as France, where principal trading was once the norm, it was essentially banned last decade under a law that prohibits agencies from taking a markup on media they buy. In the U.S., the agent model—i.e. agencies buying on behalf of declared clients – remains the norm, but principal buying is getting more common. Procurement practices and financial engineering on both the client and marketer sides have played a role. Helping fuel the trend are marketers where chief financial officers and procurement departments use the “working/non-working media ratio” as a benchmark of efficiency. “Working media” is what’s paid to media companies;. “Non-working media” is what’s paid to agencies. Ad Age Small Agency Conference & Awards Join us July 23 & 24 in Boston Learn more here Principal trading makes the ratio look better, because it shifts the agency’s compensation from a fee into what gets reported as media spending. The agency markup and the media cost get reported as one number. So it looks like it’s 100% media spending or “working media,” even if a big part of it actually compensates the agency. That also means clients end up not knowing what they’re actually paying the agency, since the contracts generally say agencies don’t have to disclose costs or margins. That’s one reason the working/non-working ratio is deeply flawed as a metric, Wieser said, even if it’s still widely used. Another factor is that procurement people are often under directives and compensated for driving down agency fees. “Procurement has driven the negotiated agency fees down to oblivion,” said Ruben Schreurs, chief strategy officer of consulting firm Ebiquity. “We see cases where the take rate for agencies is 1% or 2%. If the client is big enough, there are amazing concessions just to win the account. Procurement is happy because they managed to get it down from 3%.” Yet agency margins are stable and growing, so it’s clear that what agencies have given up in fees they’re getting elsewhere, including in markups from reselling media, Schreurs said. (Wieser in a recent note showed cash-flow margins of the four leading holding companies reached their highest level in 17 years.) The push by more big marketers to extend payment terms from 30 days to 90 or longer also plays a role in some cases, Schreurs said, since many media companies won’t let marketers go longer than 30 days before cutting them off, but may offer better terms to agencies acting as principals. In such a case, the agency becomes a bank, essentially, handling the float and helping justify the markup. Senior managers in procurement, legal counsel and possibly top media executives of companies globally may know what’s going on, and that principal transactions have been authorized to get lower fees, cost guarantees, longer payment terms or other benefits, Schreurs said. But that information doesn’t necessarily flow down to lower-level media and marketing managers, so they aren’t aware, and they’re surprised if they find out. “What we say is that it needs to be declared in the media plan and proposal stage,” he said. “So when the agency submits a media plan for review to the brand with line items in it, that should clearly state which line items are to be executed on a principal basis.” Alternatives to principal Some independent agencies have developed alternatives to principal dealing aimed at countering the negatives but delivering some of the positives, specifically savings. Crossmedia, an independent global media agency, has long prided itself on refusing to do principal deals, even once walking away from business in a case where a marketer insisted it do such deals, according to people familiar with the matter. But it also operates in a market where holding companies are winning business based on perceived cost efficiencies associated with principal deals. So it developed Cross Connect as a sort of private marketplace alternative built around “triple opt in” and “triple bids.” Clients must opt into the process at three stages: when signing the master contract, when approving the media plan and when approving the buy. Crossmedia doesn’t buy media upfront, take possession or resell it. But it does put the buy, generally for less-premium inventory, up among media companies, requiring three bids in a private marketplace, and then takes a disclosed fee as part of the transaction. The savings are equivalent to what holding companies deliver through principal deals but with full transparency, said Christine Merrifield-Wehrle, Crossmedia’s head of investment, who’s a veteran of Publicis and Ebiquity. Known takes a different approach. It will handle the media planning side of principal transactions, but turn the buying over to another independent buying agency, said Kasha Cacy, chief media officer of Known. “I don’t think there’s anything inherently wrong with principal-based buying,” Cacy said. “It can be good for publishers, good for an agency and good for clients, because it can deliver a lot of value. Where it gets murky is when the planning agency is related to the principal-based buying agency. When their P&Ls are intertwined, it opens the door to planning decisions being made to drive the principal-based buying needs.” She believes Known can deliver savings while eliminating the conflict of interest. Crossmedia’s triple opt-in is similar to what Schreurs recommends apply to principal dealing as well, but he doubts separating planning and buying works. “It’s not really scalable,” he said of separating planning and buying in a principal transaction. “The whole reason agencies and their trading entities are able to get such beneficial rates and priority positions is that they represent a bulk of agencies of record, and a bulk of clients, and that creates negotiating power that makes principal trading so appealing. If you put walls between planning and buying, the juice isn’t worth the squeeze for the buying agency nor the media owner.” Procter & Gamble Co. hasn’t billed its shift to buying in house as a transparency move or avoidance of principal buying, but as an efficiency move to remove touches from the media supply chain. As such, what it’s done is a surefire way to avoid principal trading. The company has brought media planning and buying in house for 100% of brands in the U.S. and China and a growing share of Europe, according to Chief Brand Officer Marc Pritchard. P&G still pays media agencies, but for consulting, new technology and algorithms to support its programmatic trading. Many flavors and new risks If there’s confusion about what principal dealing is, complexity certainly is a major reason. Some of it does involve simple upfront deals for traditional media such as TV, radio or outdoor that agency holding companies buy and later resell. But agency programmatic trading operations are likely the biggest part of the trend. Perhaps the most famous is WPP’s Xaxis, which was more than a $1 billion business in its own right a decade ago, according to Wieser. In digital auctions, the agency may only take possession of inventory for a nanosecond, but that still counts as a principal transaction and qualifies the agency for a markup, which is generally not disclosed. Holding companies may have multiple principal buying operations. Publicis Media Exchange (PMX) has two major units engaged in principal trading. Those include Apex, billed as providing principal-based access to emerging media and technology, and Epsilon Conversant, which for various clients in various transactions can operate as a demand-side platform, a supply-side platform, a media reseller or sometimes more than one. Traditionally, one of the core areas of principal buying was barter operations of holding companies, which might acquire excess media from media owners and excess goods or, say, unbooked hotel rooms or seats on flights, from travel marketers to trade in open exchange. That’s the original part of principal buying, and still part of the action, but not the biggest or fastest growing. A growing part of principal deals is new technology, such as AI systems, cloud storage or clean rooms, often bundled together with media from companies that have them all, said one person familiar with the matter. This means agencies are bundling buys of media with early access to advanced technology that agencies can negotiate for because of their larger scale but clients might not be able to get on their own. Given that much of principal-based buying involves programmatic trading using marketers’ first-party data, one of the lesser-known risks is that they can unknowingly be giving up more than money. That includes data that could be made available to other marketers, including competitors, or risking privacy violations. “It may give agencies the rights to your data that they would not otherwise have,” Bruce said in her March presentation. “That’s why it’s really important to read the fine print. Keep your lawyers and your privacy folks involved. Make sure everybody’s on the same page with how the tools and platforms are operating and applied to your data.” Blurring buy and sell side lines If media agencies becoming media sellers adds complexity, the growing number of marketers that also sell media adds an even murkier element. Several people familiar with the matter said an increasing part of media agency reviews for work on media companies is a commitment by the winning agency to buy a certain amount of media, or incremental amount of media compared to prior years, from the media company for the agency’s other clients. Doing that via principal trading may be the easiest way to ensure it gets done. As more retailers establish retail media networks, the same practice is spreading to retailers’ media pitches, these people say. Agencies sometimes guarantee a certain amount of volume from their other clients gets spent on those networks to help win the business, these people say. So, basically a media company or retailer, in awarding a new media account, receives assurances of how much, or how much additional money, the winning agency will spend with the media company or retailer's media network on behalf of other clients. Ebiquity’s Schreurs said it’s a growing issue, but also that such guarantees are more likely to be implicit or verbal and never make their way into written contracts, because, he said, “in many jurisdictions, this is highly illegal.” It might seem like good advice for clients, when they learn their media agency has just won a media company’s or retailer’s account, to make sure their plans don’t suddenly see a surge of buying from those same media companies or retailer networks. But Schreurs said the effect is likely to spread across enough accounts as to go unnoticed. And as a growing number of industry verticals get into the business of both selling and buying media, it may get even harder to detect. 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When agencies become media sellers—inside the industry’s controversial growth engine

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