The financial challenges and risks of programmatic digital advertising
The theory was that technology would enable advertisers to target their customers better, allow them to reach audiences more efficiently and effectively, minimize waste, and improve performance.
Fifteen years ago, the digital media supply chain and financial transactions across it were straightforward and transparent. Between an advertiser and its customers was a media agency and a publisher, sometimes with the addition of either a sales house or an ad network. Media was planned and bought by people.
What a difference 15 years makes. Today, there are many more links in the media supply chain between agencies and publishers, including trading desks – run either by the agency or independently – demand- and supply-side platforms, dynamic creative optimisation tools, exchanges, and data management platforms.
To handle the sheer volume and complexity of the digital media ecosystem, media is increasingly traded programmatically. This means making more extensive use of technology to help with the decision-making and delivery of digital ads.
The theory was that technology would enable advertisers to target their customers better, allow them to reach audiences more efficiently and effectively, minimize waste, and improve performance. In reality, however, the explosion in advertising and marketing technology has made media trading much more complex, more opaque, and less accountable.
This makes it very much harder for brands to establish cause and effect in their marketing investments. What’s more, every new link in the supply chain means that more of an advertiser’s budget is allocated to what is known as “non-working media”, eroding value every step of the way.
Economic pressures on media agency holding companies – encouraged to increase both profitability and share price by their shareholders – have made matters worse for advertisers and their budgets. At a time when brands have been reducing their fees, agency holding companies have looked for (and found) innovative ways to generate increased revenue.
Five years ago, agencies started to offer trading solutions, with each holding company introducing white-labelled versions of existing, independent demand-side platforms. They called them Agency Trading Desks (or ATDs).
The principle behind ATDs was that advertisers would be able to use them to buy media traded programmatically, while charging their clients additionally for the service. At the same time, they would benefit from the savings that the consolidated buying power of agency holding companies could bring. The reality wasn’t quite as clean and simple, as we have found in many client audits and as the U.S. Association of National Advertisers (ANA) identified in its ground-breaking research study in 2016.
Often, it transpires, ATDs were in fact selling media inventory to advertisers that should – by rights – have been theirs for free in the first place. Often it was media inventory given by publishers and platforms to agency holding groups as a media benefit or rebate because of the volume of spend the agency groups were giving them each year.
The trouble was, many advertisers had failed to negotiate adequate contracts with their media agencies. Because their contracts didn’t stipulate it, they weren’t receiving a proportionate share of media benefits their agencies had earned by spending their clients’ money. So, the agency holding companies were holding onto it and then reselling it as if it were inventory they had bought themselves. You could call it ‘double bubble’.
The growth of investment in media space bought programmatically is showing no signs of slowing down. Between 2017 and 2019, global spend on programmatic increased from $57.5bn to $84.9bn, representing almost a fifth of all ad spend.
With the performance of programmatic yet to be conclusively established, the only real winners in the rise and rise of programmatic are the agency holding companies, whose interests are compromised between what’s best for their clients and what makes them more money.
Advertisers and their finance teams should be aware that if their agencies categorise media bought using an ATD as either “inventory media” or “proprietary media”, the agency is not obliged to tell them the net cost at which they bought it. They are only obliged to reveal the price at which the ATD ‘sold’ it to the agency. What’s more, this type of trade is often explicitly excluded from auditing.
Inventory and proprietary media is also now a description used to apply to media in other channels, too – including TV, radio, and print. The same restrictions apply here, too, meaning that an increasing proportion of total media spend is becoming non-transparent and non-auditable by advertisers.
There are four things we advise that advertisers – and particularly those working in finance, client-side – should do to address these issues.
- Work in partnership with their colleagues in legal, marketing, and procurement to ensure that the contracts they sign with their agencies do not allow for inventory or proprietary media.
- If there is justification for using inventory or proprietary media, advertisers should cap the volume of spend to limit the risk of these non-transparent trades.
- Ensure that legal and marketing establish the correct approval mechanism is in place for signing-off all media investments. This will limit the number of people in the business who can approve non-transparent media.
- Work with a specialist audit firm, expert in media, to quantify the current risks and highlight those issues and clauses in the contract which put financial transparency at risk.
To read the full article on the Accountancy today website, please click here.
First featured 14/11/19.