Transparency Debate Rages at 4A's
Ad-agency leaders gathering early last week in New Orleans for the American Association of Advertising Agencies' annual Transformation Conference struck a largely cohesive tone until Tuesday morning, when sparks flew on a rare panel of media-agency chiefs.
The contentious topic? How should media agencies make money on their digital-media trading desks.
The oft-debated issue was raised by moderator David Verklin -- a former media-agency chief himself, and now partner at Calera Capital -- when he directed a pointed question to Group M Chairman-CEO Irwin Gotlieb: "If you agree that clients' business comes first, where do you stand on transparency? How can trading desks be fair to your clients?"
Digital-media trading desks, about 5 years old, are sort of like a Nasdaq for online-ad inventory. Advertisers use them to buy media and audiences (aka programmatic buying) in an instant auction that determines the best price and placement for their ads across a number of sites. Often the desks layer on data to make the ads more targeted, and media agencies have been eager to tap the business model on behalf of clients.
But their philosophies around making money from it diverge.
Some of Group M's trading-desk revenue comes from arbitrage. It might bid on online inventory through ad exchanges and relationships exclusive to Xaxis, its trading platform. Rather than acting as the agent bidding on the media for a client, the agency group might buy the media at cost, overlay it with data insights and then sell that changed inventory back to the client at a premium, taking on a degree of risk in buying that media before locking it into client budgets.
It's the cost of the original inventory that the group does not disclose to clients, who are asked to sign "nondisclosure" or "opt-in" contracts.
"We have to be transparent with the client on what the business model is and we have to execute that way," Mr. Gotlieb told the panel. "But it doesn't say in Genesis that everything we do has to be on a fully disclosed basis to clients."
His reasoning? Media shops must find ways to make more money to reinvest in technology -- all for the benefit of clients. And, Mr. Gotlieb said, arbitrage helps fund those massive investments, which "don't lend themselves to overhead charges of 200% to 300%."
Interpublic Group of Cos. takes a different tack. It operates a trading desk, but has been vocally opposed to arbitrage. Matt Seiler, who runs IPG's global Mediabrands group (which has a trading desk, Cadreon), was quick to attack his fellow panelist's words and suggested most practices don't give clients enough information. "We're totally transparent," he said. "We don't arbitrage at all."
In describing the firm's philosophy, he referenced Interpublic's revisions of its financial statements over the past decade. Partly as a result, he said, "we are ridiculously squeaky clean."
All agencies make money on their digital-media trading desks, if not by arbitrage then often through fees or commission, and the varied takes on risk and revenue reflect unique philosophies. But as the groups invest in new in-house data technology and place more emphasis on buying audiences than actual inventory, they are beginning to find they have more in common than they thought.
Omnicom Media Group's trading desk, Accuen, typically works with third-party digital-ad trading platforms, such as Turn, Google's Invite, MediaMind or DataXu. And, said Scott Hagedorn, CEO of Annalect, the OMG data division that houses Accuen, it doesn't do arbitrage -- at the moment.
He didn't eliminate the possibility of embracing arbitrage in the near future, however. "We could get there," he said. He explained that the group's willingness to even consider arbitrage has to do with its ability to apply new technology and audience data to inventory for clients, as well as built-up trust from clients who would allow the firm to take on the task.
Still, Mr. Hagedorn said that the decision to get into arbitrage is less about having the tools to do it and more about whether the agency would want to assume more risk, as well as the "perception issues" associated with it. (Some clients, meanwhile, are launching their own trading platforms -- and hoarding the data.)
At the 4A's panel, VivaKi's soon-to-retire CEO, Jack Klues, said Publicis' trading and demand-side platform model is more akin to that of Mediabrands, but acknowledged that the group needs to identify other "models of remuneration" as agencies get squeezed. "We're in a dangerously risky spiral with the [fulltime employee] cost model," he said.
Unlike the other holding companies, which license audience-buying platforms, WPP owns Xaxis.
Group M's global digital chief, Rob Norman, called his company's approach "transparent but not disclosed," in a separate interview with Ad Age, and pointed out that his clients know his group makes money, but don't know the cost of the original media -- no more than they would if they bought inventory from a third party, such as Turn.