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Media agencies are making a lot of noise about a controversial strategy to win new business.
The practice, called principal-based buying, is when a media agency buys media and then sells it back to agency clients at a higher rate, presenting a potential new income stream for the agency. While the strategy can take many different forms, it’s essentially a form of arbitrage.
The practice itself isn’t new: When Ad Age detailed the practice back in 2016, it noted that it was already commonly deployed in the digital media space. But this year, Madison Avenue firms like IPG have leaned in, prompting renewed concerns about a lack of transparency around the practice.
A study by K2 Intelligence on behalf of the Association of National Advertisers (ANA) published in 2016 found “numerous nontransparent business practices” between agencies and clients, including offers of rebates and marked-up media. The revelations in the report were so controversial that they eventually led to a Department of Justice investigation and “a wave of audits of media agency contracts and performance,” Ad Age reported.
Nearly a decade later, though, principal-based buying is still not widely understood across the industry. A study from the ANA published in May found that only about half of advertisers surveyed were “very familiar” with the practice, though in an anonymized case study of the practice detailed in the report, an agency “guaranteed a cost savings of approximately 15%.”
Some agencies are framing the practice as a competitive advantage. During IPG’s Q3 earnings call in late October, CEO Philippe Krakowsky told investors that the agency was looking to grow its principal-based media business to further diversify its offerings, noting that clients were beginning to grow more agreeable to the once-controversial practice.
“The recent shift in trading terms that have seen many clients accept and even embrace principal buying has clearly impacted our business,” he said, later noting that “it used to be [that] you don’t do this. Now it’s part of the decision matrix for many clients.”
Not everyone is convinced. In August, WPP CEO Mark Read criticized the practice during an earnings call, describing the offerings as “black-box media models” that are “not that transparent.”
“I’m not sure in the long run that they’re going to work in a market that’s transparent like America,” he said.
Publicis CEO Arthur Sadoun replied to Read’s comments in October, rejecting the characterization in an interview with Campaign and revealing that principal media makes up less than 1% of Publicis’s business in the US.
“What I can tell you very clearly is that we don’t operate black boxes, and I can safely say the same for our peers,” he said.
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