Fat agency bonus payments linked to discount and sales house pay linked
to share have created a TV market ripe for overtrading. Claire Beale
investigates
There are lies, damn lies and TV airtime deals. At least that’s how it
can seem every time the phrase ‘overtrading’ appears in the press.
Gossips and lawyers alike have been slavering over the latest spat -
between CIA Medianetwork and Laser Sales - and the TV airtime market
could be heading for meltdown.
Overdealing - basically defaulting on your promises - is not new. First
it was the broadcasters who overdealt (they still do, of course, but
it’s more manageable now). But for the past few years, it’s the agencies
that have failed to meet their deals (they always did, of course, but
now the ITV sales companies are big enough to make it a real issue).
A number of agencies are rumoured to have run up debts of millions of
pounds. But how does this happen, and should clients of these agencies
be concerned?
First, a simple guide to the way the TV market is dealt. The price of
ITV airtime is determined by a TV station’s revenue divided by its
audience. This gives a Station Average Price (SAP). Historically, media
buyers have sought to stand out from the pack by offering to secure for
their clients bigger discounts off this SAP than their competitors.
TV salesmen aren’t the sort of guys who’ll roll over and let you stroke
their beer bellies just because you wave a TV budget around. Not only
does your wad have to be big, it’s has to be bigger than the one you’re
giving the next person.
The greater share of a client’s TV budget you place with one TV sales
house, the greater discount you’ll get. This is a market where size is
important, so some agencies bundle all their clients’ TV budgets
together and promise the sales house a share of the total amount they’ve
got to play with - an agency deal.
Now let’s be clear on one thing: agency deals are potentially illegal.
The 1990 Broadcasting Act rules out practices which favour or show
prejudice against an individual advertiser, and also states that the
Independent Television Commission should ensure fair and effective
competition.
If anyone wanted to, it wouldn’t be too hard to prove that agency deals
contravened these stipulations. So the ITV companies, agencies and
clients wouldn’t dream of colluding in such practices, right? Wrong.
Many agencies do construct agency deals on behalf of their clients, and
many clients encourage it.
Illegal or not (and let’s face it, integrity is not the first word you
associate with TV trading), being part of an agency deal is not
necessarily bad news, at least not for those clients who keep a careful
check that money is being spent wisely.
An agency deal means that the client doesn’t have a direct relationship
with the broadcaster. This can be bad - because the performance of the
client’s deal is largely determined by the agency’s success. But it can
also offer protection for clients who need to pull their advertising or
re-weight their spend.
Then there’s the Goliath argument. Mike Tunnicliffe, CIA Medianetwork’s
managing director and the man trying to sort out his agency’s trading
problems, says: ‘With just three ITV sales points [Laser, TSMS and
Carlton] together taking pounds 1,662 million in revenue, individual
clients rarely stand a chance of negotiating on equal terms. Agency
deals mean that clients combine their spend to secure bigger discounts.’
Some clients in the deal might get more discount than others, and the
small clients might be riding on the back of the bigger clients, but the
idea is that all clients get a greater discount than if they were
negotiating on their own.
But can clients be sure that their money isn’t being diverted into TV
regions to secure an agency deal (and one which other clients may
benefit from more)?
Jim Marshall, the managing director of the Media Centre, advises his
clients to use an independent consultant to evaluate the Media Centre’s
performance. ‘Clients should be monitoring price, quality and delivery
in line with agreed objectives. Their deals should be matching their
marketing requirements.’
Not surprisingly, though, some agencies stand up and cry foul over the
very idea of agency deals and accusations abound of lying and cheating.
Those agencies that don’t negotiate agency deals may not do so because
their client base is too small, or their clients so large that they
actually conduct the negotiations themselves, such as Procter and
Gamble. Some, such as WCRS’s media director, Marc Mendoza, are opposed
for ethical reasons - ‘agency deals are not always in the client’s best
interests’.
David Cuff, the broadcast director of Initiative Media, agrees that
‘agency share deals are struck in the interests of the agency, the
client is shoe-horned into that’. He adds that the issue is even murkier
if your media buying agency is also handling your media planning (‘your
strategy could be determined by the agency’s buying deal’) and if your
agency is paid on a discount-related basis.
Although Marshall believes ‘most agency and sales house deals are done
in good faith, it’s just that circumstances can overtake you’, the
implication from some quarters is that when an agency overtrades, it is
because they have tried to cheat their way to a bigger discount.
There are several reasons why an agency might not meet the share of TV
spend it has agreed with a sales house.
Unforeseen circumstance
First, and most commonly, the unforeseen circumstance. Deals are struck
on expected levels of spend, but advertisers themselves may be forced to
defer campaigns, pull off certain regions or shift spend into areas
where they have a particular problem. So the money the agency was
anticipating spending with a sales house disappears, and the agency
defaults on its deal. The sales house may be sympathetic to the problem
if the agency comes clean. Or it may not.
Cock-up
In this scenario, the buyer doesn’t discover that the deal has been
missed until the TV companies’ official auditor unearths it. The failure
to monitor spend levels diligently is to blame. The sales houses can
take punitive action, though rolling the shortfall over to be
incorporated into the next annual deal is more likely. Clients, though,
should beware. Your agency may have escaped an immediate debt problem,
but can you be sure now that all the money you spend with that sales
house in future is necessary? Is it just being used to repay the debt?
Conspiracy
There are plenty of stories around which suggest that some agencies try
to fiddle their deals. In this conspiracy theory the agency deliberately
overpledges share points to achieve a discount and trading conditions
which their final investment doesn’t warrant.
But the ITV sales houses should take their share of the blame. According
to John Storey, the joint managing director of Media Audits: ‘It’s often
overly ambitious sales policy by competing media owners which drives the
trading imbalance.’
It’s not unknown for ITV salesmen to encourage agencies to spend a
greater proportion of their TV budgets outside the ITV arena, as long as
that particular ITV sales house nets a greater share of the ITV spend.
Sounds crazy - particularly in light of the lip-service paid recently to
greater co-operation within ITV. But the reality is that some ITV sales
people still earn their bonuses primarily on the share of ITV revenue
which they earn for their sales house. And get this: an agency can end
up spending, in real terms, more with a sales house than originally
pledged, but proportionately less than it has spent with the others, and
still get hauled over the coals for overtrading. This is about share,
not value.
It’s hardly surprising then that, as one TV buying director admits, ‘in
order to get a good deal, you have to promise more than 100 per cent’.
So the media buyer should be honest and decent, but also devious enough
to know the sort of dirty tricks which some salesmen are capable of.
These include massaging the SAP (something some agencies are not averse
to, either), by including items such as sponsorship revenue, to arrive
at an inflated figure off which they can then offer discounts.
One TV buyer also talks of going in to see verification of a TV
station’s SAP, being handed a certificate confirming the station’s
revenue, only to have the ITV salesman cough nervously, admit ‘sorry,
that’s not your certificate’ and hand over another with a different -
and higher - price.
Then there are the stories about TV companies paying agencies
‘consultancy fees’ which effectively secure a higher share of the
agency’s TV spend for that TV company.
And, more pertinently today, stories abound of TV sales houses failing
to meet deals on one station and offering agencies airtime on another of
their stations in return. Fine and dandy for the sales house, agency and
well-informed, consenting clients, but not for the TV stations which
find their airtime given away in return for money originally spent with
one of their rivals.
None of which stop the sales houses getting heavy with those agencies
that default on their deals. The sales operation has a few options when
it comes to handling agency overtrading.
Increasingly, the TV sales houses - often under pressure from owners for
whom TV airtime sales is a small part of the business - are taking firm
action.
This time it’s CIA in the firing line, but other agencies (the
majority?), are sighing with relief. As Storey says: ‘Soon someone will
push this overtrading too far, beyond the trading practice tolerance of
the media owners and the credulity of their larger clients. It could be
a nightmare for the whole industry.’
It’s time for the industry to grow up and develop a charter for a more
transparent trading system. Tunnicliffe notes: ‘The fact that the ITV
marketplace is so tightly controlled by just three sales houses means
that the element of competition has become much greater and the
negotiations much more acrimonious. Until we get some level of
transparency from both sides of the market we are going to see the
number of high-profile conflicts increasing. Our conflict will be
resolved shortly, but then who’s going to be next in the spotlight?’
The truth remains that overtrading is a market reality which suits the
majority of participants. Clients have little to fear if they know
what’s going on. And you can be sure that those that don’t are paying
for the rest to do very nicely, thank you.
The CIA story
CIA is by no means the only media company to have run into trouble
meeting its TV deals.BBJ, Zenith, TMD Carat, the Media Centre - many of
the big buying points and TV sales houses (most famously MAS in 1993)
have encountered hiccups in their trading over the years. Will CIA be
the ultimate example used to warn other agencies off not meeting on
their deals? Here’s the story to date:
1996 CIA runs into difficulties meeting its deals and by spring 1996
ITV’s auditors begin going through agencies’ records. A problem emerges
between CIA and Laser Sales over how both parties have interpreted their
contract.
August 1996 The Sunday Telegraph prints what the market has been
gossiping about for weeks - that CIA is said to be in hock for up to
pounds 4 million - a figure which has been disputed by CIA throughout.
Legal advice is sought by the parties involved.
September 1996 Chris Ingram, CIA’s chief executive, says that the
overtrading problems are a normal part of TV deals.
October 1996 Laser Sales starts ongoing negotiations to hand its CIA
debts over to its broadcasters.
The move is seen as a step closer to full legal action against CIA.
Next? The matter could go to court - and many of CIA’s rivals hope that
it will. Or an agreement could be reached which sees the money paid back
over time. The decision is likely to hang on how confident the TV
companies are that legal action won’t unearth any of their own less-
than-honourable dealings.
Can we learn from the US market?
Overtrading just doesn’t happen in the US, where the Station Average
Price system doesn’t exist and deals are negotiated on behalf of
specific clients.
Steve King, chief operating officer of Zenith in the US, says that the
American market has several key differences which ensure that trading
problems don’t arise. First, about 80 per cent of TV spend is committed
upfront, so that the TV companies have a clearer idea of their total
revenue and advertisers know their spend patterns. ‘Commitments are made
and they are met, and that’s that,’ King says.
And the airtime trading mechanism is different - in the US market there
are more varied ways of negotiating and dealing. The SAP currency
doesn’t exist. Instead prices are decided individually - rather than on
a benchmark station figure - based on specific client requirements. King
explains that this makes for less of a commodity market, and there’s not
the same sort of drive for discounts.
There’s also a closer relationship between the TV companies and the
advertisers. Because many deals go well beyond the 30-second spot to
incorporate sponsorship, and so on, clients are more closely involved in
the whole dealing process, and they spend more time discussing value-
added options rather than purely price.
Then there’s the issue of transparency. ‘You couldn’t for one moment
contemplate not meeting your deals,’ King says. ‘Dealing here is based
more on people’s credibility and their relationships with the people on
the other side of the table.’
He adds that Americans are amazed that in a country like the UK, where
advertising is so sophisticated, agencies should still be reduced to
absurd tactics to secure good deals.
Five questions all clients should ask
Does my agency run an organised and disciplined TV department?
Yes: A reputable agency will give its clients right of audit, even
supply transmission certificates, copies of invoices, voucher copies and
so on.
No: Then you could end up paying for their mistakes.
Am I part of an agency deal?
Yes: Ask about the terms and conditions. Ensure that in TV areas where
you are spending more, you’re doing so because it suits your objectives,
not the agency deal.
No: Check that the company you use is not paying a premium so that other
companies who do conduct agency deals can receive a discount.
Am I getting the discounts promised to me?
Yes: You’re doing well. But are you getting more or less of a discount
than other advertisers in your agency deal?
No: If a TV station fails to deliver, it owes you cash or ratings.
Pursue it, because your agency may ‘forget’ to pass it to you. The only
real way to be sure is rigorous auditing.
Is my TV deal portable if I decide to change agencies?
Yes: Fine, you can up sticks, move on and work with your current TV
trading arrangements.
No: Your agency deal might lock you into a shop which may no longer suit
you. If you review your account, you may have to renegotiate deals with
the TV companies.
Does my agency act as a consultant for any particular TV station or
sales house?
Yes: Does the relationship extend beyond payment for consultancy advice
given? Is the money paid by the TV company perhaps in return for a
greater share of TV budgets?
No: Don’t worry - unless they’re making money out of you in other ways
to make up for not getting this sort of income.
