CAMPAIGN DIRECT: A client’s guide to overtrading

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

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.



Topics