The answer to the principal media question is governance

I don’t know if you’ve noticed, but everyone in our industry seems to be talking about the same thing.

Flawed structures. Misaligned incentives. Conflicts of interest.

Whether it’s Henry Innis highlighting the structural conflicts embedded within some DSP models, Jen Davidson arguing that media planning is inherently compromised when agency profits vary depending on what gets executed or the Association of National Advertisers (ANA) cautioning marketers in their latest report, The Continued Acceleration of Principal Media, everyone is pointing to the same underlying issue.

Trust is under pressure.

Having recently stepped away from a media agency leadership role, I’m now in a position to reflect on a topic I believe remains under-examined by many marketers, the structural shift in how some media agencies operate, and what that means for objectivity. This is not a reflection of my experience at PHD.

Media agencies present themselves as unbiased trusted advisors to their clients, but what happens if clients can no longer rely on the objectivity of their agencies?

What happens if those recommendations are compromised with what is most lucrative for the media agency taking precedence over what’s best for the client?

Some marketers have not yet fully grasped the fundamental change in some agency business models that has taken place since the emergence of principal media post the transparency crisis of 2016.

To represent or to resell?

The ANA defines principal media as the practice of media agencies purchasing media inventory themselves and reselling it to clients, rather than acting solely as agents. These transactions typically include undisclosed margins.

In the traditional model, the agency acts as an agent, purchasing media on behalf of the client at cost. In the principal media model, the agency acts as a principal, purchasing media and reselling it to the client at an undisclosed margin.

This model introduces a structural conflict of interest that didn’t previously exist.

An analogy based on food

Recommended, but by whom?

Let me illustrate the problem with a simple analogy:

Imagine you’re a foodie travelling to a new city. You hire a local expert to curate a list of the best places to eat.

Now imagine you discover that several of the recommended venues are either owned by that expert — or financially reward them for sending you there.

Can you trust the recommendations?

No, the local expert’s objectivity has been compromised by the conflict of interest. It doesn’t matter if their places are genuinely good, the recommendation can no longer be considered objective.

This is the principal media problem.

Nothing to see here

Media agencies will argue there is no problem, if they are willing to discuss principal media at all.

They will say appropriate disclosures are made, that the client knows they make a margin, but they typically won’t tell you what the margin is.

They will say clients opt in to principal media programs and that it’s not compulsory, but they won’t agree that many clients don’t fully understand what they are signing up for.

When it comes to the bosses of the media agencies who run principal media programs I’m reminded of Upton Sinclair’s famous quote:

“It is difficult to get a person to understand something when their salary depends on them not understanding it”

While agencies may struggle to see the conflict, it’s increasingly visible to everyone else.

What is less visible to marketers are the potential trade-offs involved in participating in principal media programs. The financial upside can be attractive, but it can be at the cost of transparency, objectivity, and ultimately performance.

A governance lens changes everything

In most parts of the corporate world, conflicts of interest are managed through governance.

The Australian Institute of Company Directors is clear: where a conflict exists, it must be disclosed, and the conflicted party should recuse themselves from discussions and decision-making.

Apply that standard to principal media.

If an agency is both recommending and selling media inventory, the conflict doesn’t just affect principal media — it influences media planning itself.

Indeed, some market participants are arguing the conflict is so great that media planning and media buying should be separated.

Jen Davidson argues for separation in her article, while Henry Innis correctly points out in his article that regulators in financial markets have required separation where similar conflicts exist.

Another example is the Australian wealth business.

The 2018 Banking Royal Commission found vertically integrated wealth businesses were frequently bad for customers. Financial advisors purportedly providing independent advice to help everyday Australians build financial security were instead found to be regularly in breach of their ‘best interests’ duty by funnelling their customers into their own employers’ products.

The solution isn’t separation

While I can see the merit of separation, in a world of seemingly continuous downward pressure on agency fees, I don’t consider it commercially practical.

I also can’t see regulators stepping in to protect media market participants. It’s one thing to regulate financial advice for everyday Australians, it’s altogether another to protect marketers from conflicts of interest in their supply chain.

The solution to the conflict isn’t separation. The solution is stronger governance of media investment: better structures, better controls and better oversight.

The ANA made this explicit recommendation in its Programmatic Media Supply Chain Transparency Study:

• Advertisers are responsible for more active stewardship of their media investments
• Advertisers need to “lean in” and be more active stewards of their media investments rather than delegating that entirely to their agencies
• Advertisers which outsource their media management without active internal stewardship do so at their own risk

In practical terms, this means one of two things:

• Employ a dedicated Head of Media to take responsibility for stronger media governance
• Or seek a neutral and independent expert view to provide the same level of oversight

Too often marketers and procurement are focussed on the financial benefits of principal media programs without fully exploring and understanding what it might be costing them. That needs to change.

Strong media governance doesn’t solve the conflict, but it is the most practical solution we have to better managing it.