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Parallels between the Financial Crisis and advertising media companies?

By Alex Realmuto

Are there parallels between the Financial Crisis and advertising media companies? March 12’s confrontational 4A’s panel discussion between heads of some of the largest media agency groups in the industry revealed striking similarities between the actions taken by bankers prior to 2008 and those of advertising media companies today. Comparisons can be drawn from several aspects, including:

  • A lack of transparency that has led to a self-serving agency model
  • Agencies’ push for media packages that improve margins, not client returns
  • The M&A model for growing agency holding companies that has resulted in a duplicity of jobs and a reduction in efficiency.

So, is the advertising media industry on course for an industry collapse that mirrors the Financial Crisis? No. At least not to the same degree. In 2010, Michael Lewis authored The Big Short: Inside the Doomsday Machine, which cataloged the build-up of the housing and credit bubble during the early 2000s, and the subsequent financial crisis that followed from 2007 to 2010. While the severity of the financial crisis had far larger macroeconomic global implications, parallels can be drawn from what contributed to The Great Recession and the current environment of advertising media and how it is bought, sold and tracked.

At the 4A’s Transformation conference in New Orleans on March 12, a heated and controversial discussion took place that brought into question the transparency of media in advertising and challenged how agencies prioritize their Clients’ goals – alluding to a more self-serving model that bolsters an agency’s bottom line as opposed to returns on client investments.

A major component of the financial crisis was the pooling of subprime mortgages which allowed for a reallocation of risk; different tranches of collateralized security were sold off to different investors. The risk averse investors (Client A) were able to buy the senior (least risky) tranches at the lowest returns and the more risk competent investors (Client B) were able to buy higher yielding, riskier pieces. What forced the financial crisis was that the risk averse investors thought they were buying AAA safe stuff (the highest rating) when in reality they were buying loans with an extremely high chance of default. This was due to a lack of transparency.

The lack of transparency that exists in media buying is following a similar path. As large holding companies purchase high volumes of media, they are able to package together subprime quality ad space in such a way that it appears to be AAA, when in reality it is of little value to the clients. Just as the ratings agencies lacked a familiarity with the complex subprime mortgage packages, when an agency provides its own proprietary metric for tracking advertising performance it becomes an obvious conflict of interest. As margins continue to wane, and advertising budgets continue to shift from print to digital, the model continues to evolve and isn’t yet optimized. Due to the quarterly reporting requirements of large publicly traded agencies (and their subsidiaries), the luxury of optimization is lost. Instead, agencies push media packages that improve margin instead of clients’ campaign returns.

To provide a client with the best possible media mix, an agency must look at the assignment from a holistic perspective. This requires vetting all potential media providers instead of simply looking at the media inventory an agency holds and selling it as a tranche, or packaged, media plan. This is the only way to provide the best and most cost-effective media vehicles for a client.

Beyond the media perspective, the holding company/ acquisition model also causes a strain on margin due to the duplicity of roles that occurs through mergers. “The industry has not done good job in terms of flattening out agency structures and fostering innovation from young people. As an industry we have to take organizational design more seriously,” said Aegis Americas, EMEA CEO Nigel Morris.

The lack of media transparency, coupled with the inefficiencies that are born though the M&A activity that has become commonplace over the past decade, drives to one main theme: a business that is no longer servicing the best interests of its clients. We find ourselves at a tipping point in the advertising industry; one with a bubble that may burst a la the financial crisis of 2007 or one that will quickly evolve and avoid an industry collapse. One thing is for sure though – the model is ripe for change. When conducting your next agency review – dig deep into the true motives of the agencies in question and include that piece into the decision making process.


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