Steve Barrett

From the editor of Media Week
Agencies' race to the bottom will only end in tears   

Have media agencies embarked on a destructive one-way journey to oblivion? Omnicom Media Group's EMEA chief executive Colin Gottlieb lays it on the line in this week's feature when he says the days of the traditional media buying commission system are numbered and remuneration models need to evolve rapidly if agencies are to survive.

 

For the simple fact is media agencies are engaged in a cut-throat "race to the bottom" - driven in many cases by their clients - whereby they are offering their services for such small margins that their whole business model is becoming untenable.

 

Take the recently concluded £300m Nokia global media planning and buying pitch. Incumbent MediaCom had the squeeze put on it by the Finnish mobile phone giant for months prior to the review, culminating in the WPP agency offering its "absolute best price" deal.

 

It is suggested those terms involved the agency working at cost, or even below cost. But the client still wanted to go ahead with its fishing exercise to see what else was on offer in the market. So MediaCom made the unusual decision not to pitch for the business - a brave one in the current economic climate.

 

If a multibillion-pound network such as MediaCom can't make money out of an account, you have to wonder who can - and what sort of service the client will receive. But, of course, there were several eager agencies happy to go for the business, which was eventually won by Carat.

 

I don't want to get into a WPP versus Aegis spat, and I'm sure Carat would say it has won the business fair and square and fully intends to make money out of it. But it is an example of what's going on in the market, illustrated by numerous similar pitches over the past 12 months involving all the major agency networks.

 

The danger, as also illustrated by our feature, is that the cut-throat nature of this race to the bottom forces agencies to rely on some of the less transparent ways of making money on accounts - and that is surely the reverse of what needs to happen if agency business models are to successfully evolve into more sustainable areas such as content and consultancy.

Published Jun 23 2009, 02:38 PM by Steve Barrett
 

All Comments

Alan Malarkey
  June 24, 2009

And it seems that nobody is willing to put an end to the "race to the bottom". You rightly cite the Nokia eg as one where Carat has undercut a WPP agency. Yet, if rumour is to be believed, the Vodafone global pitch has been agigated for by senior WPP people who argue that they can deliver a better deal than the likes of Carat in local markets. Where will it all end eh?

Martin Thomas
  June 24, 2009

I joined the media industry 10 years ago after 13 years in other marketing disciplines.  Why? Because media agencies were where the action was ... they were well on the way to becoming clients' most trusted business partners, they were investing iin tools and technologies, they believed increasingly in the value of consultancy over trading and they had a good feel for the nascent digital market.  What happened?  They got greedy (or rather the parent companies became too reliant on media driven income) and stopped investing in talent and tools.  Consequently, when clients started to put the squeeze on margins they were unable to make an intellectual or empirical case for the value they could add.   Difficult conversations with clients were postponed because there were always alternative ways to massage the figures.  

Colin Gottlieb has called the market correctly.  All of the agencies are caught in a race to the bottom.

John Dick
  June 26, 2009

The real issue is that many clients don't even know who is involved in their media buying and large chucks of their budgets are hived off by companies stating they have services when in actual fact it's outsourced.  In any other industry complete disclosure would be required however advertising for whatever reasons continues to operate in an apparently murky and unregulated manner.  There is no other industry that operates a commission structure such as ours.  Not to mention that media owners are the ones that drive innovation and development yet have to pay (sometimes over the odds) for the privilege of some one using their formats.  

Liam Mullins
  July 2, 2009

I am going to set up my own business painting and decorating.  The first thing I am going to do is always undercut any rival firms no matter what it takes, even if it means me making a loss.  

I have done a deal with a paint supplier that means if I buy all my paint from them I get a load of cash, its not the right paint or even the right colour sometimes, but its money in my back pocket.

Well technically it’s the clients money in my back pocket, but as long as they don't ask for it, I can add it to the bottom line.

Thinking about this in relation to media agencies and the pressure on revenues at present, if they/we can't negotiate a decent fee and remuneration structure from clients without these back handed deals and duplicity, what hope do we have when negotiating with their multimillion pound budget.

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