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Media agency holding company CEOs are openly acknowledging the importance of arbitrage-based principal trading to their business models – and it’s spreading rapidly out of digital display into TV, audio, digital out of home, connected TVs and beyond. Former UM Global Chief Media Officer Joshua Lowcock, who left the IPG-owned media agency network last year to head up media at US group Quad, is bleak on the distorting market effects of holding companies buying media for themselves and on-selling to advertiser clients with handsome mark-ups – often in ‘bundled’ products which blend a small quota of quality inventory with the tonnage more in low value, low quality ad placements. “Both agencies and clients have built themselves a prison that they can’t get out of,” says Lowcock.And agencies resisting principal models are increasingly disadvantaged – they risk being dragged into “financial engineering” too. Per Lowcock, “somewhere in the myriad of complexity of a holding company, I can tell you it’s occurring and a large armoured vehicle with boatloads of cash is pulling up somewhere and unloading it into a holding company … well, it’s probably more electronically transferred.”Should anyone care that agencies are finding ways to make money that procurement-driven clients are in effect incentivising by refusing to pay fees for service – especially if the media bought and on-sold arguably does the job?”It’s not doing the job because clients are not getting the media that they should be getting to drive the ultimate business performance,” Lowcock argues. “They’re getting the media that drives the agency’s bottom line,” per Lowcock. He describes it as a nutritionist advising a diet of “junk food”, with clients at risk of morbid obesity.Indy shop Media by Mother, headed by former GroupM exec Dave Gaines, says he doesn’t do principal media deals or arbitrage but “it’s surprisingly hard to get people to align on business success outcomes” versus the short-term allure of trading off not paying media agency fees for the hidden costs in mark-ups and tech and data fees typically wrapped into principal media agreements. Moreover, Gaines says retail media is making the situation worse with retailers becoming media owners and seeking their own preferential deals. While traditional media owners complain about principal media trading eating their margin and agency mark-ups making them appear expensive, Gaines says the truth is, “a lot of the big TV networks don’t like to have to deal directly with clients. They’re happy to offload a lot of this media inventory because then they haven’t got to worry about selling it”.Either way, few owners will complain publicly for fear of retribution, i.e. being cut out of group spend, per Nick Manning, non-executive chairman of Media Marketing Compliance and adviser to peak US advertiser body the ANA. Manning sees principal media’s rise leading holdcos to becoming just the same as the walled gardens whose business models they are trying to emulate.”They’re all building AI tools that will do creative production, media distribution and analytics together in one in one box. It will be a black box, and clients won’t be able to tell a lot about what’s going on in there, but it will be an arbitrage-led model.”Quad’s Lowcock says he’s happy to tell any finance, procurement, marketing, legal and internal auditing department “all the answers” as to what goes on and how to fix it – and does just that in this podcast.