Principal media: Saviour or false messiah?

The discussions around principal media have grown steadily over the past 12 months.

It was less than a year ago I was penning explainers for Mumbrella in the wake of the ANA report on the evolution of principal-based media. As I noted, at the time, the evolution of the rebate into a new form was raising serious questions for marketers, but many were unaware that the rebates and value banks of old had evolved.

Now barely a day goes by when a client or agency doesn’t raise it. It’s become one of the most written-about topics in recent months both globally and increasingly locally. Then this week, at the Future of TV conference, the topic broke through in a way it hasn’t in years, when senior agency leaders Mark Coad, Amy Buchanan and Chris O’Keefe were asked about it on stage.

Principal media refers to the ‘non disclosed’ means by which holding groups are now trading on behalf of their clients. Now to be clear there’s nothing inherently wrong with the practice – if it’s disclosed to the client.

One thing that has been fascinating about this discussion is that it’s been framed as a battle between good and evil. I’m not sure that framing is entirely helpful. There are marketers out there who knowingly enter principal media arrangements fully aware of what they are and how they work and see benefits.

There are also many marketers who worry that they are being pushed into arrangements that are not transparent and where the benefits to them, as the client, are far more murky. This is what I think independent agency leader O’Keefe is referring to when he says principal media is “80% evil”. We should acknowledge the fear many CMOs have: that principal media are deals so good they really have to be kept secret from the advertisers who are funding them.

TrinityP3’s Stephen Wright

How principal media evolved

A quick refresher for those who might have forgotten: principal based media trading emerged from agency holding groups who established stand alone trading entities through which their media agencies purchase activity for clients.

These trading divisions would then broker favoured deals with media owners guaranteeing volumes of inventory across the group in exchange for additional commissions and incentives.

Advertisers opt in and agree to ‘non disclosure’ arrangements and a cloak of secrecy around pricing. The trading division, behind closed doors, then determined the mark up applied to the cost of the inventory and the subsequent price paid by the advertiser.

This is then marketed to the advertiser as a reduction on the price it would have to pay under a fully disclosed model. It’s positioned to advertisers as a win/win/win for the media owner, for the media agency and for the advertiser.

Extra commission/revenue for the media agency through the mark up it applies to the cost of heavily discounted inventory. A lower rate to the advertiser, lower certainly than it would have paid through a transparent model of trading. Plus the media owner gets (extra?) revenue. Note the question mark around the extra.

Sounds like a perfect plan, but there are an increasing pool of industry observers who are questioning whether the model really works for all concerned.

Nick Manning, who worked with the ANA in the US, has been the most vocal of these critics.

His observations, while global, have a direct bearing and relevance to the Australian market.

Looking at the Australian market, we need to look at the extent to which each of the three parties involved in principal media is currently benefiting.

Media owners

(Midjourney)

The main benefit for a media owner is straightforward – guaranteed revenues and/or share and hopefully extra income. But here’s the issue if nearly all of your competitors strike deals with the group as well: it becomes more about the threat of missing out if you don’t have a deal, than gaining any additional share or revenue. This is certainly the case with some of the arrangements TrinityP3 has been privy to.

In a market where the major players (particularly those with non-digital media assets) are struggling to hold onto revenue (amid the ongoing rise of the digital duopoly – Google and Meta), their hands have very much been forced.

Many major media players were forced to make significant redundancies in 2024.

This is no time for them to play hard ball with the agencies. Many of them are quietly lamenting their involvement, trapped by the new market mechanisms, receiving reduced revenue for their inventory while the trading divisions report record profits.

An added frustration for them is that their inventory now carries higher levels of embedded commission at a time when price and performance is under increasing scrutiny. Now, I’m not sure most media owners see themselves as winners from principal media.

Rather they are now more unwilling participants on a merry-go-round. Strapped to the horse and forced to smile as the ride goes up and down. One senior media sales figure remarked to me recently: “All I’ve done effectively is lock myself in to reduced pricing, now my only option is to say no to a new deal and see business bleed to my competitors. The agencies have massive coercive control over where spend goes – and more importantly doesn’t go. You need rock solid advertiser support to stay on the schedule when the agency is trying to steer it away.”

Advertisers

Cheaper inventory and better value is the promise they often succumb to. And yes the rates advertisers receive are typically lower than those which their agency partners are able to purchase trading transparently.

The question remains however as to how the extra commission and value is divided between agency and advertiser. What goes on beneath ‘the cloak of secrecy’ is a closely guarded secret but a comprehensive study in 2024 by the ANA in the US revealed pricing margins added by agencies in a typical range of 30% to 90% above the price paid to the media owner. No matter how you cut it, that’s a healthy margin.

The higher end of this range would hold true for Australia but the lower end would be less aggressive. Of the mark up on pricing TrinityP3 sees returns to advertiser in the order of 5%, significantly lower than the margin taken by the trading division. Anecdotal evidence suggests the ratio of agency to advertiser benefits starts at 3:1 and goes upwards as high as 10:1.

TrinityP3 has seen mark up margins of over 50% with less than 5% being returned to the client. I am very happy for any of the holdco trading divisions to refute these numbers and provide anonymised evidence to the contrary, but the record profits reported by the holding groups from their trading divisions suggests otherwise…

So yes advertisers are winners but they are winners with a small ‘w.’ They are much smaller winners than the agencies. This ‘small w’ winner position is latched onto by advocates for principal media and positioned as the market embracing the practice, but TrinityP3 sees it more as a transient tolerance than long term endorsement. Marketers are happy to bank a small win and not make waves, given the multitude of other challenges they face.

It is also worth noting that in-house procurement are also beginning to take notice and the notion of an agency self determining their fee under a cloak of secrecy often doesn’t sit well with them.

We need to recognise that agency revenue now comprises of two revenue streams:

1. Transparent fees and charges (aka the traditional advertising fee model)

2. Undisclosed commissions earned from principal based trading or other associated practices

For some agencies and groups the latter can now be as much the former. Hard to understand the value of the relationship without knowing how much you are paying your agency. Procurement is hard wired to have clarity on how much they pay and what they receive in return.

Media agencies

And lastly we have the media agencies, and the holdcos which sit above them. In many ways, the reports of trading division profitability and the growing focus they have in talking to the financial markets about principal media say it all.

We are also seeing clients quietly reacting to this. While some may say the practice is not widespread here the reality is over the last 18 months TrinityP3 has seen a massive increase in the ‘in housing’ of digital.

After the initial flurry of banks and telcos in-housing their digital ten years ago it’s been quiet for some time. There has been a quiet revolution, driven in part because of concerns about the arbitrage that is, or is perceived to be, happening around digital.

Managing a tech stack is also now a lot less complicated and costly.

Several clients with whom TrinityP3 has worked have reported savings of 30% to 40% across some areas of digital inventory once they took it back in-house..

Of course, once digital is lost to an agency in-house team it is likely never coming back. Principal media is a business model on which some holdcos are doubling down on (at least globally) but it risks increasingly seeing them marginalised to operate across the circa 30 percent of advertiser inventory that remains in non-digital.

A saviour or a false messiah?

Amid the debate about whether it is evil, principal media is being championed by some as a short term saviour for the holdco business model. I wonder if that’s in fact wrong and actually we’ll come to see it as a false messiah that is seriously undermining trust and confidence in the agency model and their long term business base and profitability.

Stephen Wright is Global Media Business Director at leading marketing management consultancy TrinityP3

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