The Art of Barter

Barter deals seem a perfect way for two companies to shift surplus products or airtime. But if that's really the case, why doesn't everyone admit they do it? Jeremy Lee reports. Barter advertising is a little bit like masturbation - you can guarantee that the majority are up to it, but no-one really wants to admit to it. It's a dirty little secret.

There's nothing new about the barter of goods between companies, but the extent to which it impacts on the advertising industry is greater than you might think. Because airtime is, like bananas or airline tickets, a commodity with a limited shelf life, it lends itself very well to such deals.

In its most familiar and simplest form, it is used by companies for organising conferences or trips abroad. If you are an avid watcher of daytime television, you may have noticed recently that the Maltese Tourist Board was dominating the ITV schedule. This was not part of a clever high-frequency strategy ad campaign but the completion of a barter deal between the organisation and the now-defunct Granada Enterprises, which was initiated to allow Granada to hold a sales conference on the island back in 2000.

It can be used in a less prosaic way. Unless you are an exceptionally dull person (or a finance director), it's unlikely that you've ever considered how your desk or your computer at work were paid for. But it's possible they were acquired as part of a long, and sometimes complicated, chain of events that started when a company had some surplus goods that it wanted to offload.

The mechanism can also be used to pay utility bills - when five launched, it used barter deals to pay for its heating and lighting, which it would otherwise have had to pay for in cash. Given the broadcaster's revenue stream at launch and its excess supply of airtime, barter was a sensible way of reducing its overheads.

Now for the complicated bit. Barter is, of course, the oldest and simplest way of trading, but barter advertising is somewhat more complicated. While the principle seems straightforward - exchanging surplus goods for something you require - the mechanics are less so.

There are two primary forms of barter (or corporate trading, as the specialists would rather we called it) that have an impact on the advertising arena.

The first is product barter, where one company exchanges surplus inventory for a product or service that it would otherwise have to purchase in cash.

This can be airtime or flights or golf trips or even, in one instance, an outside broadcast van.

The second is programme barter, which is less widespread and involves swapping airtime for TV programmes - the most famous example of this being Unilever's Wheel of Fortune programme, which was syndicated across Europe.

The product barter process is more complicated. A company with an underperforming or distressed asset (be it TV airtime, office space, equipment that will soon become obsolete or perishable foodstuffs) can realise greater value for it by exchanging it with a barter company than by simply liquidating the product by selling it off cheaply.

A barter company will acquire the product from the company by paying above the liquidation price but below the retail price on the company's books, in a combination of cash and trade credits. These trade credits can then be used to buy things from the barter company usually at cost price or above but still realise a greater value than that of the original distressed assets.

For example, a jeans manufacturer may have a warehouse full of jeans that have become unfashionable because of changes in consumer taste. Although they have a value on the jeans manufacturer's books of £10 million, they will have to be heavily discounted if the company wants to sell them, giving them a retail value of just £3 million.

The jeans manufacturer will then approach (or be approached by) the barter company, which will pay £8 million for the goods - £5 million in cash and the remainder in the form of trade credits, which can be used to purchase services from the barter company.

The barter company will then remarket the jeans, frequently to a developing market where fashions may be different (such as eastern Europe), for cash.

The jeans manufacturer will therefore have achieved a better result than if it had just sold the jeans off cheaply and can then use the trade credits to buy back something it might want.

So far, so good. But where does advertising come in to the equation?

Well, there are two ways. The first is that the company with the excess stock can be a broadcaster itself with surplus airtime; the second is that the client with the distress stock may want to use its trade credits to acquire airtime.

Most broadcasters are unwilling to go on the record about the barter deals that they have in place as it diminishes the perceived value of their airtime - no-one wants to admit to having a surplus amount that they cannot sell.

But the truth is that the vagaries of audience delivery, which sees audiences go up and down, means that all will sometimes be left with surplus airtime that does not fit their pre-dealt agency deals.

In such an instance, a broadcaster is left with three stark options.

It can try to sell the airtime off at an extremely cheap price, but this will obviously reduce its overall station price and is by no means a guaranteed way of off-loading it.

Second, it can attempt to dump the airtime on to an agency's existing deal by over-delivering on the agency's clients' ad campaigns, but this will only work if the agency doesn't mind (and they generally will, as this throws the advertising plans into disarray).

The third option is to approach a barter company and try to convert this surplus airtime into products or services that it might otherwise have to pay for.

The barter company, working with its client's agency, will acquire the airtime at less than market rate but above what would normally be achieved if it were sold off at a deep discount, using a combination of cash and trade credits.

The TV company therefore sees some value restored to its otherwise underperforming airtime.

For example, GMTV had some surplus airtime that was over and above what was required to fulfil its agency deals. The barter company had a client, the Egg Council, that had a surplus stock of eggs that it needed to get rid of before they went rotten and a barter deal was arranged.

The barter company paid for the eggs using a combination of cash and trade credits, which were then used to run an ad campaign on GMTV. The eggs that were given to the barter company were then quickly sold off elsewhere while GMTV had cash and trade credits for airtime that previously had little value.

Therefore, GMTV saw incremental revenue and the Egg Council converted its excess supply of eggs into an ad campaign while not damaging the price of eggs by swamping the market with its spares.

In the case of office furniture, the broadcaster can then approach the barter company who will redeem the credits for the desks and chairs, usually at an above-market rate.

"In the times when you've got excess supply, they are good business models," Paul Curtis, the managing director of Viacom Brand Solutions, says. But Matt Shreeve, the head of agency sales at Channel 4, is less convinced.

"It has benefits for advertisers because it looks like a brilliant deal, but Channel 4's view is that it is an inferior way of trading than getting just cash."

So where does the barter company make its money? Well, for them the deals are like investing in the futures market. The barter specialists, who see themselves as financial services companies, take a leverage position on each transaction they make.

The system relies on there being surplus capacity at each link of the chain or a premium charge for those services it acquires where there is none.

Corporate hospitality lends itself well to the barter business and media agencies and broadcasters frequently use barter for events, such as golf trips or for work conferences.

In these instances, the barter company will have a deal with the hotel because hotels usually have a surplus of rooms, as they are rarely fully booked. The barter company will pay cash and credits for rooms, thereby restoring some value and allowing the hotel to redeem the credits for things it might otherwise have to pay for, for example decorating.

The barter company will then be able to offer these hotel rooms to the media companies at market price using airtime, which in itself becomes a trade credit.

The second way that it impacts on advertising is when a client that already has trade credits wants to run an ad campaign. Through its agency, it can approach a broadcaster offering cash and trade credits as payment for the campaign. For example, a brewery might have accrued £2 million-worth of trade credits from a barter company after selling some of its distress stock to the company for a total of £8 million, with the rest made up in cash.

The brewer can then, via its media agency, approach the broadcaster wanting to run a £5 million advertising campaign using £1 million of its trade credits and £4 million cash. The broadcaster then accepts the cash and the credit, which it can later use at the barter company to buy a service.

It sounds like a complicated system but in effect the barter company is a massive clearing house with its own economy of goods and services.

Given the nature of the system, barter is not without risk.

Barter dealing was extremely popular in the UK four years ago, but confidence was shaken in the system when one of the players - MRI - folded, leaving several media owners sitting with massive trade credits that had been acquired after they had exchanged airtime with the company.

When MRI's pool of advertisers collapsed, these trade credits became worthless. Since then, though, the companies have cleaned up their acts and there is a greater understanding of the process.

The biggest and most well-known barter company is Active International, which globally trades $1 billion in barter advertising.

According to Anthony Wheble, the managing director of Active International in the UK, the UK market is still in its infancy, and he admits that it was rocked by the collapse of MRI but claims that already his company is profitable.

Indeed, it is getting involved in areas that you might find surprising - the next time that a media owner takes you out for lunch at one of Aldo Zilli's chain of restaurants, it may be on the back of a barter arrangement.

Zilli has an excess supply of covers that need filling up so Active has issued a credit card to the media owners so that they can spend any trade credits that they have accrued from airtime deals at the restaurants.

But it's unlikely your host will tell you as much.

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