What you need to know:

• Media agency holding companies are piling into arbitrage-driven principal media models, where they buy media, blend it with lower value stuff, and sell it at a mark-up. It’s powering profit margins, but distorting the market, say ex-UM global media chief turned Quad Media chief Joshua Lowcock, ex-Group M stalwart Dave Gaines, now CEO at Media by Mother, and former Omnicomer Nick Manning.
• Should anyone care that media 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. But Lowcock sees an “ugly” reckoning coming.
• Dave Gaines, says Mother 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.
• Ultimately, Gaines says media agencies are trying to replicate the global tech players by building trading platforms and products with media they own – or have bought through their principal media deals. “I don’t think it’s a GroupM solution, necessarily … it’s a WPP solution but if I were still there, I would strip all of the strategists, the planners, the analysts out and I would make the media plan the output of the creative agency and  leave the GroupM machine to do what it’s doing, which is trying to replicate those platform exchanges.”
• 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.
• Get the full, nuanced picture. Listen to the podcast.

Beware the bundle?

Publicis and Omnicom have powered global profits at least partly on the back of principal-based trading models, which, in simplest terms, see media agency holding groups buy media – or agree to buy it – from media owners and on sell it to their clients for a mark-up. They often bundle in data and tech too.

It effectively means they become media owners or a supplier of media – i.e. a principal rather than an agent on behalf of a client.

The arguments for principal-based trading are that agencies can make enough money to bundle in the services that client procurement departments aren’t willing to pay for, advertisers get the media they need, and media owners can trade off reduced control and squeezed rates for bulk deals that require lower sales resource to handle.

There are some strong counterarguments – but other major holdcos like WPP and IPG are pushing to catch-up, and are now openly talking about prioritising principal-based and proprietary trading models.

“We were on the wrong side of the outcome in defending a number of very significant media accounts,” IPG CEO Philippe Krakowsky last month told investors. “It’s worth reminding everyone that the decisive factor on those largest decisions was principal media and, specifically, the commercial terms enabled by principal media at scale.”

IPG’s biggest loss was Amazon, which announced Omnicom and WPP jointly in a global appointment.

Krakowsky added: “It’s important to highlight that our proposed combination with Omnicom will position us with greatly strengthened solutions for more competitive and better client outcomes.”

I.e. more firepower for principal-based dealmaking. “The opportunity is much greater than [that],” per Krakowsky, “which is not to say that this is not one of the opportunity areas”.

Lapsed pacifist

Joshua Lowcock was a senior IPG exec, until last year global chief media officer for UM before leaving to head media for US marketing agency Quad, where he’s bidding to disrupt “junk” data and arbitrage models.

While Madison and Wall analyst (and former GroupM business intelligence chief) Brian Wieser has pointed out that marketers “accept if not sometimes prefer” arbitrage models, Lowcock suggests that preference is borne of ignorance. Others disagree. Dave Gaines – former Australian boss of GroupM’s Maxus (now Wavemaker), and then WPP global head of media strategy out of NY before launching US indy Media by Mother – says some clients are knowingly complicit. “They are in on it,” per Gaines.

“I’m violently against principal-based trading,” Lowcock told Mi3. “I think it creates conflicted incentives and bad behaviours. I know the [Philippe Krakowsky] quote that you mentioned there – I think when people say, ‘clients accept’, it’s the industry’s cover up for the myriad sins the industry commits, whether that’s principal-based training or data.

“They allow it to happen because they don’t really understand the impact, the implications and how it’s happening to them, and therefore people think it’s been accepted,” per Lowcock.

“My biggest concern about all of it is it creates a model where clients devalue agency work. It creates a market where media partners and competition get stifled because those that are prepared to pay the incentive tax, pay the incentive tax. Those media partners, that don’t, don’t pay it – and therefore get shut out of deals. And I think clients don’t know the right questions to ask.”

Amazon effect

Amazon, for example, is arguably sophisticated enough to know the right questions to ask. But its ad business is heading towards $60bn, so is perhaps an outlier given it stands to benefit should clients at two holding groups start spending more on Amazon.com, or take up broader data and tech services.

Asked about the Amazon deal, Lowcock answers in broad terms, but – as someone who has recently given evidence in Google antitrust trials, and who choses his words carefully – the fact he repeats competition concerns is a strong signal to where he thinks, or hopes, things might ultimately be headed.

“We have to have an honest conversation about media agency rates and pricing. So what is the value of principal-based trading? The value of principal-based trading is agencies can make a margin somewhere outside of fee for service.

“If you can make a margin outside of fee for service, then you can downplay the amount of fees you charge clients, so is the – air quotes – ‘prowess’ that they have actually misrepresenting of the actual real price of servicing the business? Because you’re making margin elsewhere, and it creates an uneven and uncompetitive playing field for anyone who doesn’t participate in the principle based trading game.”

Lowcock makes the point more explicitly.

“It distorts the market because it entrenches the incumbent players who can pay the agencies the rebates or participate in principal-based trading. And it distorts the market because it prohibits competition of people that aren’t participating in principal-based trading equitably competing for client business, because you can’t zero rate your fee.”

‘Bucketloads of junk food’

Proponents of principal-based models would argue that nobody is forcing anybody to sign-up to those structures, likewise nobody is forcing other agencies and groups not to offer those models, and that in the end, why does it matter if clients are getting media that does the job?

“It’s not doing the job because clients are not getting the media that they should be getting that drives the ultimate business performance. They’re getting the media that drives the agency’s bottom line,” per Lowcock.

“Let’s pretend I’m a nutritionist. You say to me, ‘Hey, I really need a nutritionist, but I can’t afford to pay your fees’. You say, ‘Don’t worry, I’ll do this deal: You let me buy all your groceries for you, I’ll supply you the food. I’ll make the margin on the food, and I’ll give you free nutrition advice. It’ll all be good’.

“Then I go out and and see what deals I can do. What’s the most cost effective thing for me to buy? Bucket-loads of junk food. So I roll up to your house and say, ‘Here’s all the food that’s good for you’. You’ll look at me and go, ‘Well, I’m not sure about this’…”

Unfortunately, per Lowcock, media clients “don’t have the sophistication to say ‘I’m not sure about this’. So you start eating the junk food. You get big, fat and happy on the junk food, thinking you’re getting a great deal on a free nutritionist. I’m making good money on selling you junk food – and then every day you get poison, and you don’t get what you’re looking for,” says Lowcock.

“That’s what happens with principal-based trading. You don’t get the media that you expect. You’re not going to get the business performance you expect. If there’s a partner or a media or a data offering that you need to actually be more effective, and it’s not something an agency can make a margin on, it will not be on your plan.”

Hidden income?

Lowcock thinks clients – and perhaps holdco staffers – are kept in the dark about the scale of principal media as a profit centre.

“In reality, it’s creative accounting structures and offshore operations to hide where the principal-based trading goes, so if clients are – air quotes –‘sophisticated’ enough to conduct an audit, they won’t discover the reality of what’s happening.

“A rank and file person at an agency can stand up and say ‘No, we’re not making hidden margin’, because they’re probably not aware of it, and they’re probably not doing it in their business unit.

“But somewhere in the myriad of complexity of a holding company, I can tell you it’s occurring – and a big, large armoured vehicle with boatloads of cash is pulling up somewhere and unloading it into a holding company,” says Lowcock.

In truth, he says, “It’s probably more electronically transferred.”

‘In on it’ and retail media

Media by Mother’s Dave Gaines describes principal-based trading models as “financially engineering the way money flows through pipes”. It’s “purposely” not something his agency does, but Gaines says the situation is getting worse.

At risk of “getting fired”, Gaines suggests there are two issues at play:

“Sometimes the clients are in on it, and I think there is a struggle with attribution in the US – the scale and size of the market makes organisations quite predisposed to quite siloed organisations … it is very difficult to work with a client organisation and get all of the data that you need to tell you how media is working.” As such, it’s “surprisingly hard to get people to align on success outcomes.”

Of the clients that are potentially “in on it,” Gaines points to the retail market, especially those launching media businesses.

“Retail media was the term du jour last year and a lot of those clients are looking to capture as much advertising revenue as they can from alleged traffic that runs through their website. So they’re selling themselves as media owners as well.  

“We don’t get near these clients because they’re very big,” says Gaines.

“I probably sound like I’m backing the holding companies here but… Eons ago, if you pitched for a large media company [as a holdco], there was an expectation that you’re going to have to skew slightly the money spent within that media platform in order that you capture that brand as a client. Now you’ve got retailers saying, ‘Hi, I’ve got a website here. I’ve got all of this traffic, and you will send X per cent of your billings through my website, in order that we get to capture some of that advertising revenue as well’.

“There was a retail company last year that IPO’d in the USA. Thirty per cent of their revenue was from advertising – free cash – because they pushed their agencies to just send billings through,” says Gaines. “There’s only so much objectivity available to you if your ability to be able to plan objectively is encumbered by your clients.”

Unfortunate conflict of evidence

Traditional media owners complain that they are getting squeezed and their inventory made to look expensive if they are bundled into repackaged deals at a high mark-up. That’s the case with some of Australia’s TV networks, which have privately expressed dismay that some groups are blending in some BVOD with lower value CTV, calling it ‘TVOD’ and charging clients $90 CPMs, a circa 100 per cent mark-up on BVOD, and much higher on CTV.

Speaking from a US perspective, Gaines thinks it cuts both ways.

“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.

“Speaking to one of the TV networks recently, they were saying ‘it’s becoming difficult if clients come to us building their own in-house media teams wanting to buy media directly with us; we can’t make the same margins because now we have to put sales resource into it’,” says Gaines.

“So this thing has got many, many layers to it. The agencies get beaten up about it … they’re the focal point, but there’s lots of other factors that are part of this.”

Quod’s Lowcock is more forthright.

Media owners, he says, “loathe and abhor” having to do principal deals. “They tolerate it because holding companies use principal-based trading as a gating mechanism for doing business. So if you speak out against it and give an indication you’re not going to support it, I guarantee you won’t be an – air quote – ‘preferred partner’ next year.”

Media owners: Asymmetric warfare

Nick Manning, who founded the London-based UK-based media agency that became MG OMG – the largest in the Omnicom Group – agrees.

“The media owners do not like to say anything about it… because they don’t want to piss off their largest customers, the big holding companies. Of course they don’t like it but the media vendors are pretty whipped into having to go along with this, and they’re not in control of their own inventory,” says Manning.

“But it does have an advantage to them, especially in the UK, where they do group trading deals: you can pretty much have six negotiations and do 70 per cent of your inventory.

“So there is some advantage to it, but in the end, it’s asymmetric warfare,” he adds.

“The media vendors are fragmented, but the agency groups aren’t. So they’re over-reliant upon the custom of the big buying groups. The big buying groups can therefore dictate terms and say, ‘We’re now going to do principal-based media. We will tell you what is going to be principal-based media and what isn’t. We’ll tell you that on a monthly basis, and we’ll decide how your infantry gets carved up’,” says Manning, who also co-authored the ANA’s scoping document for its most recent dive into programmatic supply chain transparency, or lack thereof.

“It’s certainly different in the biddable media world [i.e. programmatic digital media]. But in the end, the same principle applies, which is the agency groups find ways of dealing with all of the media channels in different ways, where they can buy on an inventory basis, making an arbitrage mark-up.”

Australia cleaner?

Asked if the Australian market is any exception to what’s happening in the US and other regions in terms of bundling both media and product, Quad’s Lowcock, an Australian expat with a recent global view via UM, suggests not.

“Every market likes to think it’s unique and special, its own little snowflake. The principal-based trading practices are broadly common across markets. The way the financial rebates are paid back to agencies, though, is structured differently by market,” he says.

“The principal-based trading practice of buying media and reselling it at a higher cost, is somewhat consistent across market. The bundling of quality inventory with, let’s say, ‘not quality’ inventory – blending media together to give clients illusion of better rates and making margin on lower value inventory mixed into the mix – that’s becoming increasingly prevalent in the US. All I will say is everybody’s heading in the same trajectory.”

Prisoners of our own device

“Once you get on the slippery slope to principal-based trading … they all end up following the same pattern of worse and worse behaviours,” Lowcock suggests.

He thinks that creates a doom spiral.

“Both agencies and clients have built themselves a prison that they can’t get out of. The prison for agencies is they need principal-based trading because they’ve devalued their services so much that they don’t know any other way to make money,” Lowcock says.

“On the client side, they’ve built a prison through procurement departments, which is, ‘we don’t need to pay agency fees, because we can get it all covered through a principal-based trading deal’.”

The only way out is to “issue a mea culpa and admit ‘I made a bad decision here’; that we are going to have to pay fees, or we are going to have to make money a different way,” says Lowcock.

“No one’s going to go back to Wall Street or their board and do that unless they’ve got their resignation letter in hand and a job to go to next week.”

Which likely means the big advertisers and the big agency groups are locked in.

“At the Fortune 500 side of town, or like Publicis called out, the top 50 global advertisers that they want to target, principal-based trading will continue to be rife and will continue to flourish,” says Lowcock.

“I think at every level beyond that, people are wising up. They still see their agencies as partners who want to collaborate and grow their business, they want to work with someone that they can trust.”

Now look what you made me do

Beyond the blue chips, Lowcock is hopeful that the tide will turn, and agencies will again become agents. But that hinges on advertisers moving from “wising up” to acting up.

“You need to see advertisers demand full transparency on principal-based trading and buying. What full transparency means is, ‘Dear agency, give me a list of every company that you have a principal-based trading deal with, list out every partner and list out everyone that said no and has walked away from that. Then every year, I’m going to go through and audit my media plans and work out what I asked for, what you recommended, and where there’s a disconnect,” per Lowcock.

“That will open everyone’s eyes. Sooner or later, someone’s going to do that, and it’s going to be an ugly day for agencies – but the brand that does that will actually reshape the market.”

What would that show?

“What it will show is clients don’t get what they ask for, what they expect or what’s going to work best for them. And then they’ll start changing agencies, and agencies will have to reinvent their models,” Lowcock suggests.

“They’ve talked about – all the agencies – pivoting to be data and tech companies. They’re pivoting to be data and tech companies because they’re trying to find a different way to hide principal-based trading by arbitraging on tech fees and principal-based trading on owned media assets.”

‘Zero sum arbitrage game’

According to Nick Manning, the alternative is that clients will end up the losers. But he appreciates why they are buying into principal models, gaining access to technology tools and data for no fees, and at face value maximising working media prioritised by procurement.

“The packaging is very, very convincing, saying things like ‘No fee, we don’t need a fee from you at all. We basically earn our money from the media owners’. And why should a client worry about that? They can say, ‘We’ll give you extended payment terms, 180 days… So the packaging is very impressive. And a lot of clients like that,” says Manning.

“But in the end, it’s a zero sum game. There’s only one way this can go, and that’s downwards, until the AI tools come along that basically institutionalise this way of working, so that you end up with, essentially, a walled garden owned by the holding company in the same way that you’ve got [big tech] walled gardens.

“So the end game – and they’re all doing it, all the holding companies are building AI tools that will do creative production, media distribution and analytics together in one box – will be a black box. And clients won’t be able to tell a lot about what’s going on in there,” says Manning. “But it will be an arbitrage-led model.”

Who gives a crap?

Ultimately, do clients care?

While the likes of P&G have taken everything in-house in major markets since its 2017 ‘’murky at best, fraudulent at worst’ moment, it’s an outlier in scale terms.

Nick Manning’s been banging the drum for years, advising the ANA, pointing out the issues with opaque supply chains, questionable models and incentives amid industry “omerta” – and yet principal trading models are powering holdco revenue and margin growth.

The argument from the likes of Brian Wieser, holdco bosses and many others is that arbitrage must be working on some level for marketers and their employer brands. There are even calls in some quarters for a 2025 Principal Media Conference where all sides of the equation come together and talk openly about its benefits – which seems both laughable and, in equal measure, highly likely to actually happen.

Manning last week spoke at the World Federation of Advertisers conference in Brussels about principal media and its impacts and has subsequently claimed “some very good feedback” from those global advertisers.

“But the reality is everybody is struggling. They’re struggling with macroeconomic factors. They’re struggling with geopolitical factors. They’re struggling with AI, inflation, talent shortages – you name it. Everyone’s got a plate full of stuff, and they look at some of the things that we talk about and go, ‘You know what? I agree it’s a problem, but it’s not my biggest problem, and it’s something I don’t need to sort right now’.

“’Or, frankly, I’d much rather sweep it under the carpet and not talk about it at all. And by the way, even if I try to [address] that, somebody from procurement is going to come along and say, ‘Don’t swim in my lane, please’.

“So we’re just being hyper realistic and very honest about all this, because I think honesty is a pretty good place to start from.”

Fixes for those that care

For any marketers, procurement, finance, legal and auditing departments that do want to better understand what they are signing up to and how to fix it, Lowcock has a short answer, and a slightly longer one.

“I could be cheeky and say the only thing they need to know is how to find me on the internet, and I’ll tell them all the answers,” per Lowcock.

“Finance should be asking the question. They should be looking at the financial results of holding companies and asking, ‘if they’re making this margin on principle based trading, what’s actually happening to what are we missing out on? What’s the impact on our bottom line?’

What procurement should be asking is – and procurement woke up to programmatic and asked for disclosed margin on programmatic – they should ask for a breakdown on the principal-based trades of every partner the agency is using, and an annual report on what that is by every client and plan throughout the year.

“On the marketing side of things, they should be meeting with media partners on a regular basis and asking a media partner why they’re not on a plan. And if they’re not on a plan, is it because they’re not part of an agency’s principal-based trading deal?

“If it’s a legal department, I’d be asking questions about what complex legal structures has the holding company put in place that you’re hiding from me? So don’t end it at the agency you’re doing business with. I’d ask at every level of the holding company, are you hiding these deals?

“For internal auditing, I’d do what I always say that you should do, which is you should audit your clients on a regular basis. You should pull log files in every digital activation spend and review those log files on an audited basis – like we do for our clients every 30 days.”

If advertisers did start taking that approach en masse, could the industry cope?

“I believe the industry will adjust. Because the industry has had to adjust [and] do the correction on hidden margin on programmatic,” per Lowcock. “One client will eventually wake up and force the adjustment on the industry.”

Strategic flip required

Nick Manning is also optimistic the tide can be turned – and thinks it would create better growth and profit outcomes for both brands and agencies. But it would require a full flip of the current model – investing in strategic capability over platform-led approaches.

“[Advertisers] should put two thirds of their fee into the upstream channel strategy part of the equation,” suggests Manning.

“They should hire the smartest communication strategists who understand creativity, media, data and technology, analytics, etcetera, who also understand how brands work, how markets work, how consumers work, who are able to craft very, very smart pan-channel plans that can then be activated through automated means, including obviously programmatic and AI.

“The third element is completely transparent contracts on data and technology to make sure that all the models that they’re using for this are also accurate and get the right data inputs. So 65 per cent into upstream communications strategy, 30 per cent into activation and trading, and 5 per cent of the fee should go to contract compliance and probity in governance,” he adds.

“That is the opposite to the way the market works at the moment. If you reverse that and you build effectiveness into your comms strategy, including the creative messaging side of it, you start to really change the industry round from being buying-led to communication strategy-led,” says Manning.

“That will fix an awful lot of the problems that we’ve got – and you wouldn’t need to agree to any principal-based trading in that context.”

Skin for the win

Media by Mother’s Dave Gaines agrees, though says landing the lion’s share of a media budget would require industry to do a far better job of articulating its value – and delivering on it.

“We have got to hold ourselves accountable to a better professional standard. At the moment, we are platform services, and we used to be professional services –  that’s a big hole.,” says Gaines.

He has a simpler fix: negotiate a fee based on a client’s actual growth.

“If I was a client, the questions are very straightforward: ‘As a media agency, is part of the way that you manage your margin related to media inventory?’ If the answer is yes, that’s a very simple way of understanding principal media.

“Question two is, ‘Are you prepared to have a percentage of your fee tied to accountable business outcomes, not media outcomes?’

“If you can crack those two things, principal media becomes less of an issue, because you’ve created a value exchange which is tied directly to the growth of your business,” says Gaines – provided businesses can nail attribution.

Supply and demand

For the meantime, while Gaines states principal trading is distorting the market, he says the holdcos are just emulating what has turned the major platforms into moneymaking machines.

“49 per cent of the money in the [advertising] world goes to Alphabet, Meta and Amazon. Those companies are technology and data operations, and they own all of their media inventory,” says Gaines.

“All of the big holding companies are effectively trying to replicate that model. They’re just trying to mirror those three large companies in order that they can compete and big clients, certainly in the US when you pitch, they come looking for those kind of things.”

Media by Mother last year pitched for “five very, very large pieces of business, going in with clear strategy, ways to grow the business, open to being held accountable for outcomes,” says Gaines.

“But in a lot of cases, the customers are looking for these technology and data solutions. Alphabet, Meta and Amazon have reshaped the way that media is delivered. They’re looking for those [solutions] from holding companies.”

 Swiss solution: creative agencies take back media strategy, planning

Which gets Gaines to his take on a neutral, impartial industry solution – move media planning and strategy back to creative agencies, similar to but not the same as before holding company owners split them up in the 1990s and turned each into competing profit units. 

When asked what he would do now if still at GroupM, Gaines says: “I suspect what they’re trying to do is bring talent like Brian Lesser [GroupM global CEO] back and … build that operational data and technology model to mirror the platform exchanges. I don’t think it’s a GroupM solution, necessarily. It’s a WPP solution but if I were still there, I would strip all of the strategists, the planners, the analysts, out, and I would make the media plan the output of the creative agency. I would leave the GroupM machine to do what it’s doing, which is trying to replicate those platform exchanges.”

In Gaines worldview, creative agencies housing strategy and media planning is the only way “you’re ever going to have objective planning and be accountable to outcomes for clients if your buying, your activation model, is going to be based on slightly opaque algorithms and use of data.”