InsightThe best industry thinking and M&M insight

Feature

You are at risk

The market is clinging on to hopes of a smooth recovery, but every single part of the industry remains at risk. The industry has a lot of clearing up to do, a lot of promises to make good, and a lot more challenges to come.

June is the month that the industry has earmarked as the start of the recovery proper. But the bad news is that everyone in the media food chain, big and small, remains at risk, and are still in for an uncomfortable ride.

As a media agency ‘uncomfortable’ means it might be near impossible to keep good on the promises made in 2009; as a media owner it means spending the next 12 months fighting over media pricing; as a client it means probable disillusionment along the way.

Pre-Lehmann Brothers, the media landscape already nursed a broken and poorly patched-up model. Remuneration was a mess and the role of media agencies had become blurred.

How agencies went about winning business is a sensitive topic. Unsurprisingly, few want to own up to the rumours of over-promising that took place. “People know that they have made promises against the realms of possibility,” says one senior agency head. “There are several cases where you wonder how they are going to deliver what they promised. Agencies need to get more backbone.”

If deals come unstuck, agencies could quite rightly end up in court, but the lengths they will go to before that happens will put them under pressure for the long-term. From a client’s point of view, what is likely to suffer most is quality. The sole emphasis on cost meant that planning and strategy took a back seat last year. Add to that severe cuts to agency headcount – frequently on the comms planning side– and clients are likely to getwhat they paid for. One insider says:“Who cares if you got the media really cheaply when the campaign has no thought behind it?”

If things continue as they are, we are seeing the next phase in the protracted death of the media agency identity. The increasing number of holding company deals pays testament to this, as it is the holding companies that can absorb poorer margins for specific clients. Not all of it will be returned through economies of scale. With price the ongoing concern, agencies have only themselves to blame when they gripe about the commoditisation of media, and a marketplace with only five big players is in nobody’s best interest.

To use the analogy of someone who prefers not to be named: “Media agencies are like alcoholics; they know they need to change, want to change, are unwilling to change and near impossible to work with.” So how does a client work with a media agency nursing a lifelong hangover and bad credit?

AT WHAT COST BUSINESS?

Advertisers are no different from anyone running a business. Last year they were looking for cost savings and media was often high on the hit list. Yet agency reaction was still surprising. One consultant refers to a recent pan-European pitch in which his client gave the agencies a number and asked them to come back with the closest offer.

He and his client were shocked with the figures the agencies gave. Strong clients can still emerge winners, but the small to mid-sized clients on an agency’s existing roster might not be so lucky. Agencies are likely to be working in overdrive to meet the demands of their headlinegrabbing clients at their expense. “I am certain that the smaller clients will suffer,” says Tom Denford, founding partner of independent ID Comms. “If you are a smaller client with a big agency right now you need to ensure that you are getting what you have been promised. The agencies are going to be occupied with making sure they meet the needs of the big clients.”

LOOKING FOR BEST VALUE

It is not only smaller clients at risk but also those that did not jump on the reviewing bandwagon, reveals one senior agency head: “I’m concerned for the ones that don’t review their business and look for best value. If you are a big stable advertiser that sticks around, you are just not being offered the best value. It is the advertisers who review that are being fought over tooth and nail.”

The pressure on agencies to guarantee prices from last year will undoubtedly be pushed on to media owners. “You can’t squeeze more out of media owners,” argues EMM International’s Stephen White. “Why should they help the agencies?” 

But media owners are in a quandary. If they say no they risk losing business, but a yes could mean the difference between going bust and staying afloat. The media owners that benefit from the scale of the agency deals have a vested interest in the agencies’ survival, and there have already been anecdotes of agencies threatening to pull all their business from a media owner if they do not negotiate better deals.

The turmoil in the Spanish market is a case in point, where limited choice and artificially high prices in TV are by no means the medium’s saviour. Instead, the situation is directing more spend – some would say at long last – into digital.

“Heavy discounting is a dangerous road to go down,” explains Ben Hughes, global commercial director and deputy chief executive,  Financial Times. “There was plenty of crazy discounting going on and you have to make a choice [as a media owner] about how you value your business. You would have to ask those who do it what affect it has on their business. I suspect it is not a good one.” Those that did cut their prices drastically last year have a huge task ahead of them to raise them again.

Some clients will view last year’s positions as the new norm, arguing that their eyes have been opened to the relative costs of TV. Traditional players might only have averted disaster because potential replacements, such as online video, don’t have enough metrics or a firmer business model to warrant the risk just yet.

Media owners are likely to be more aggressive in approaching clients direct. “Media agencies threatening to pull spend from a media owner will only make more of them open to doing more direct client deals, which clients want as they will have a more transparent process,” argues Denford. But it doesn’t come without risk. Pan-regional players such as  Greece, Macedonia, Kosovo and, potentially, Portugal face financial woes and media is not going to be top of the creditors’ lists

When there are budget targets to be met, commissions to earn and clients to win, it’s all to easy to offer more than you can afford. But right now the industry is playing with fire. There is an arrogance – or at least dogged hope – that everything will turn out alright, and companies will disappear if they take a risk too far.

2009 in numbers

33%: The percentage by which media
deals across Europe fell
1.4bn: Havas’ 2009 revenue, down 8.5%
15.3%: Omnicom’s year-on-year
decline in net income in Q4
€82: Bertlesman’s net loss, the first time it did not make a profit in 30 years
5.3%: Interpublic Group’s revenue dip

2010 in numbers

2,500: Number of job shed by AOL
$441m: Havas’ Q1 revenue, up 1.5%
0.7%: Drop in net income for Omnicom for Q1
$60m: IPG’s continued loss, despite fortunes improving
60%: Percentage of marketers whoare looking to invest in social media

Source: M&M Global Agency Map, trading statements

Martina Lacey, London