Editor’s note: This confession contains information regarding WPP and AppNexus from the point of view and experience of a well-placed source, independent of Digiday’s confirmation. Both companies deny the details.
The rise of the programmatic ad buying was coupled with the emergence of agency trading desk models. There has been movement away from the original conception of trading desks, as clients and others have complained about a lack of transparency.
Having recently left the U.K. agency world, one media executive had an inside view of agencies as they developed their trading desk model and why it has drawn controversy. This executive, who asked to remain anonymous, explained some of the worries agencies have in adapting to the world of programmatic and why they are still trying to maintain their highly profitable trading desk operations.
We get that agencies fear disintermediation, but how are they responding?
Their reason for existence has always been their buying power. The main reason an advertiser works with an agency is for their negotiating power. Even if you’re an advertiser as big as Sky, Aegis will be able to buy TV cheaper than Sky can. The problem with biddable media for agencies is that buying power goes out of the window. So too, then, does their main competitive advantage. When all that’s left is their expertise, they’ve got less to differentiate themselves from the rest, and their valuations fall.
How is this strategy playing out in real life?
Xaxis is trying to make sure it gets the first look at all the major publishers’ inventory, so an advertiser gets the same reach they would get from an exchange, but they haven’t got to bid for it. They can then say to an advertiser, “Use us, because we’ll get Yahoo and AOL inventory cheaper than anybody else.” It all comes down to buying power.
You’re a Brit. Tell me how trading desks in the U.K. market differ from elsewhere.
We’re seeing agency groups lock down their clients’ digital media spend through un-transparent trading desks more here than anywhere else. That’s because the U.K. market is so centralized — a group of media agencies are often under the same roof. In the U.S., everyone is in different locations, so it’s harder to control deals happening elsewhere.
But agencies say they’re open to clients exploring alternatives to trading desks?
There’s no incentive to. Agency staff are threatened with the sack if they don’t recommend their clients put spend through their holding company trading desk. It’s the most profitable part of their business after all. Agencies have never really been media neutral — they’ve gone for more profitable options over higher performance in TV, print, radio before. Making a profit is OK as long as it’s not abused. With trading desks, it’s the same. The idea that Omnicom can build a objective consultancy business is laughable. They can’t get away from their conflict of interest. Who’s going to pay £10,000 ($15,000) to have them look at their requirements and recommend Accuen?
The arbitrage business model developed in response to squeezed margins. Though everyone has a right to make money, did you see some abuse of this model while you were there?
Some of the trading directors have a practice they call “hiding the turd.” The turd, at any agency, is a big pile of cash that they’ve acquired through slightly controversial means. What they have to do is hide that turd from everyone. They do this by having a pretty dashboard and a star account director who can ad-lib about marketing strategy. All the while, the trading director is shuffling money around.
Let’s hear an example.
The press reported recently that WPP invested $25 million in AppNexus, which meant they got a 15 percent stake in AppNexus. If you do the math on that, it values AppNexus at about $100 million. It’s actually worth over a billion dollars. I can assure you that WPP did not buy 15 percent of AppNexus for $25m. What they’ve actually been doing is getting equity for every pound Xaxis spent through AppNexus through a deal set up years ago. That story was designed to offload their ad server, Open AdStream, without looking bad and at the same time justifying how they suddenly had a big stake in AppNexus. That’s an example of “hiding a turd.”
[Editor’s note: Both WPP and AppNexus have denied that the above is the case. AppNexus emailed Digiday the following response: “AppNexus’s acquisition of Open AdStream (OAS) was a clean asset-for-equity transaction. In acquiring OAS, AppNexus absorbed a profitable business with over 300 global customers, as well as critical technology and roughly 100 talented professionals. In layman’s terms, OAS had considerable, tangible value, and AppNexus exchanged cash and equity to obtain that value. That is how acquisitions operate. The anonymous source behind this article has misinformed Digiday’s readers, who deserve facts and transparency rather than speculation and opacity.”]
Technology companies have also been accused of excessive margins and aggressive business tactics. Google has been suspected of bundling its ad tech products in a way similar to how agencies bundle their trading desks. It’s wrong to paint agencies as the bad guy here, surely?
This isn’t an attack on agencies. They add more value than many of the ad networks used to. I’m just trying to illustrate the reason why trading desks behave the way they do. I don’t think trying to maintain their buying power is a bad thing; that’s just one of the interesting dynamics of the advertising industry at the moment. It’s driving a lot of the headlines.