Keeping clean in the era of Principal Media
Whilst I think Principal Media poses challenges, there are workable models for this that I think exist going forward. Unfortunately they all mean huge changes to the operating models.
Principal media is on everyone’s lips these days. As margins tighten, debt becomes more expensive, and globalization gives way to fragmentation, the traditional ad agency model is under severe strain. It's becoming increasingly difficult for agencies to make money at scale. Structural forces—like rising debt-to-equity ratios—are squeezing large holding groups and challenging their ability to sustain share prices.
With this, comes a back to the future move: Principal Media.
To be clear: I see no issue with principal media or media agencies. But I do think there is a careful conflict to manage here and one we need to think through carefully as an industry together to ensure we keep a high degree of trust with clients. The worst outcome of the rise of principal media would be degrading trust in media agencies, which can be hugely important partners and market makers in the trading of media generally.
A "Back to the Future" Moment for Media Agencies
If you believe agencies aren’t seriously considering principal media or think your unique relationships shield you from this trend, you’re either wrong or delusional. It’s literally cropping up everywhere, publicly and explicitly.
Take this quote from Adnews (https://www.adnews.com.au/news/is-principal-media-buying-shady-or-a-legitimate-way-to-squeeze-margins):
At IPG, it’s early days for principal media buying. The global holding company is approaching clients and media partners in a “measured” way.
The company points out that its media business has been “really successful” for a long time without principal media buying.
Philippe Krakowsky, CEO of IPG, revealed his global advertising group’s plans when being questioned by market analysts after the agency announced June quarter results.
“We're very focused on it,” he said in reply to a question from Steven Cahall of Wells Fargo.
“You've got to get clients who opt into the model and understand the benefits. And then that volume yields a benefit. We're going to move thoughtfully but at pace.”
Or this example from Mi-3 in the Australian market (https://www.mi-3.com.au/13-11-2024/were-killing-industry-short-term-greed-broadcasters-battle-freefall-annual-rate-volume):
An example unpacked to Mi3 this week involved an advertiser who assumed they were buying broadcaster BVOD in a principle media deal – but the CPM rate was double what broadcasters are selling at themselves and was loaded with cheaper connected TV (CTV) ad slots, not broadcaster video on CTV.
“The BVOD market is twice as big as is being reported,” a broadcast executive told Mi3. “BVOD is about $450m but the actual market is around $900m when you take into account agency principal-based media mark-ups, tech fees, 'magic dust' fees and the rest. It needs to clean up," they said. If the broom was swept by vigilant agents – i.e. not principal media arbitragers – "those channels that do not exist in the real total TV market would be gone in an instant".
They added: "If Seven, Nine, Ten, Foxtel and SBS were being paid the amount of money that an advertiser pays for BVOD, we’d have a very different outlook at the moment – if we received 75 per cent, even 50 per cent of the price advertisers are paying in market it would be different.”
What Is Principal Media?
Principal media reintroduces an old revenue model but with a twist. Instead of earning kickbacks for placing media, agencies buy inventory upfront, lock in lower prices, and resell it to clients at a higher rate. This creates margin opportunities in alternative revenue streams.
But is principal media inherently problematic?
Is there anything actually wrong with principal media?
For my own thinking, I don’t see anything actually wrong with principal media. The analogy I give is a convenience store. Most of the time, we all have been to buy a drink or late night snack from a convenience store. You probably pay double what you’d pay versus a normal supermarket, but that’s okay. You’re paying for convenience.
To some degree, principal media is the convenience store of media. You have your media agency acting as the convenience store, helping you access inventory that you otherwise wouldn’t get to access. Principal-based media then becomes a route to access quality inventory at a pre-agreed price in many respects. This is a great model for many clients, particularly those who buy late into a media cycle.
The issue isn’t the markup itself but whether the practice is disclosed and used responsibly. Models that rely on constrained inventory at higher margins—like Groupon or retail convenience stores—are well-established and legitimate.
And I think there is an important aspect here as well.
Changing the upfronts model to buy inventory ahead of time that will be in-demand changes the structure of the agency model in a positive way. I’d love to see the media agency that provides it’s own media consumption forecasts across channels, programs and events so that it maximises cheap reach by buying early. I suspect a principally traded media incentive really helps media agencies accelerate that vision, invest in it and make a strong financial case to the markets about it.
So no, I don’t see an issue with trading principally.
Renumeration drives change
The ‘why’ on Principal Media is pretty obvious. For years, procurement has squeezed the % commissions. Agencies are conscious of their position as market makers — billings often dictate the ability to get a good media rate as well as win business — and so often have discounted to win an increase in billings as a loss leader for other business.
(This is not dissimilar to how creative agencies do award work basically at cost to win awards, which in turn wins them new business. The difference here is that the award work doesn’t devalue the core work across the board.)
This in turn has led to the destruction of % commission rates which has made it harder to service accounts profitably. I think both parties have a role to play here. Because the job of procurement is primarily price-driven, they have not evolved to be conscious of introducing other incentive models into the mix through their strategies.
If I were running procurement, for example, I’d ensure the agency was actually able to make a reasonable margin and employ the best people, as that would be the best ‘product’ I’d be able to ‘procure’. Because the history of the department comes from procuring goods, rather than people-based businesses, this has not yet come to fruition.
End-result: agencies need to find new ways to monetise as the original model isn’t working anymore due to structural economic challenges. Which means it’s time to find a much better model to run with.
Fundamental skills of media agencies
Agencies have often presented themselves as technology and data groups, but the reality of this is often quite different. Most agencies cannot hire solid technology talent for reasons of compensation, environment and incentives.
Compensation is obvious. Tech companies, supported by ESOP structures and VC-backed money, are able to pay astronomical amounts for tech talent that simply cannot be supported in the margin-driven environments that agencies exist in. Environment is simple — when your role is to bill for work rather than build products people love, it’s hard to attract engineering talent. And incentives is simple as well: when your primary financial incentive goes one way, it becomes very hard to build good products that conflict with those incentives.
That doesn’t stop agencies from being incredibly effective partners in their areas. Indeed, I suspect agencies have a much better handle on the human element of media than most. That’s a different skillset: knowing when to trade vs. how to build a platform, and I suspect that’s why The Trade Desk for example has become such a big business.
The Challenges of Principal Media
Principal media isn’t without risks, particularly around conflicts of interest. Agencies offering strategy and measurement services alongside principal trading face inherent contradictions. How can an agency be impartial in measurement when it profits from the media it trades?
To address this, agencies that engage in principal trading should:
Divest from measurement services. Measurement must remain independent to ensure trust and accountability.
Separate strategy from trading. Agencies should avoid owning the media planning process for principally-traded clients to prevent conflicts of interest unless there is an independent measurement system in place.
For pitch consultants, excluding agencies that trade principally from strategy or measurement work should be standard practice.
The Path Forward: Building a Better Industry
If principal media is the future, agencies will need to adapt by ceding control over certain functions like planning and measurement. This will be challenging but necessary to maintain industry integrity while pursuing profitability.
Principal media isn’t inherently bad. Done transparently, it offers agencies a lifeline and clients a path to quality inventory. But without clear boundaries and ethical practices, it risks eroding trust in an industry already rife with client-vendor trust issues.
The future of media agencies will depend on striking the right balance—and being honest with themselves about where the future of their business does and doesn’t lie.