Principal Media: Explained

Dan Meier 08 July, 2024 

The use of principal media is growing, according to the ANA, with 41 percent of marketers expecting to use principal media over the next year. But where the rise of a practice might usually correspond with increased understanding of that area, there appears to be a knowledge gap around what principal media actually entails. The same ANA survey found that 39 percent of marketers are only somewhat familiar with the practice, and 13 percent entirely unfamiliar. And with 24 percent of its practitioners expecting to increase the use of principal media over the next year, advertisers are looking to better understand how it works – and what it means for the role of the agency.

The Basics

Broadly speaking, principal media is where agencies buy inventory from media owners at discounted rates, then sell the media onto their clients at a markup. The practice stems from budgetary pressures being placed on agencies, who have seen their fees reduced over time. This has prompted agency holding groups to seek efficiencies, one of which is the idea of trading as a principal, rather than acting as an agent. And because this represents a shift from the traditional agency role, principal trading has sparked criticism from some corners of the industry.

Regardless, principal-based trading has become standard practice for most agencies. Holding companies will generally have a principal unit that buys ad inventory from media owners, often by buying in bulk at reduced rates, or by committing to a certain investment in a media owner’s inventory over an agreed time period, again at discounted rates.

The agency can offer this inventory to its clients as an optional inclusion on their media plans. If the client agrees to its use, media planners can brief out the principal unit just as they do the search team, social, programmatic and so on. The principal unit would make calculations and forecasts based on the available spend, KPIs, targeting parameters and hygiene factors in place for the campaign. The buyer can then add this inventory to the media plan.

The Technical Detail

While broadly characterised by the agency acting as a principal, the practice comes in several forms. Brian Wieser, principal of consultancy Madison and Wall, identifies six types of principal media trading models:

  • Agent as re-seller/sales house: media owners may not sell all of their advertising time, and contract it out to a third-party/agency
  • Ad network: an agency may have a subsidiary that has digital ad network capabilities, which acts independently to help marketers satisfy their media performance goals
  • Managed services: somewhere between an ad network and an agency, the managed service works with the marketer to determine their goals, and then buys inventory that balances those goals with compensation for the agency
  • Cost-focus arbitrage: one of the newer forms of principal trading is when an agency buys commodified inventory, to sell it to a marketer for a lower price than they might otherwise pay for similar inventory
  • Barter/asset trade: an agency facilitates non-cash deals for a client to accomplish their marketing goals, perhaps by trading the client’s assets for media inventory that the agency possesses
  • Content production: agencies may produce or co-produce programming, and package that content with an advertisers’ product placements and conventional ad units

Although these different models vary in setup, it is worth noting that in each case the client’s money is not used to purchase this media. It is the agency that is buying the inventory, and while it could be argued that a holding company is funded by its advertisers, the funds in question belong to the holding company. The distinction is useful for dispelling the notion that agencies are taking a speculative gamble using its client’s money.

The agencies are indeed speculating when they buy media as a principal, which means there are risks associated with the practice. But principal investments are made by a separate unit with its own money. Essentially the principal buyers act as stock traders for ad inventory, assessing the future prospects of media, and buying inventory that they forecast to increase in value.

The Pros and Cons

While the use of principal media has come under fire in light of the ANA report, supporters of the practice argue it benefits the agency, the client and the media owner. For the agency, principal trading saves money by securing media at reduced rates. The ANA report highlighted that agencies have seen their fees reduced by clients, but those clients still expect the same results and standards of delivery. Agencies therefore need to lower their media costs, and principal trading provides cheaper inventory.

Some proponents of principal media therefore accuse client-side critics of having their cake and eating it; clients are continually pressurising the agency’s resources through lower compensation, and then complaining about the solution, without which their KPIs would not be met. As one source tells VideoWeek: “If you pay peanuts, you get monkeys.”

And clients are benefiting from the practice too, according to its advocates, as their KPIs are still met without having to up their agency fees. Clients would be unable to access this cheaper inventory themselves, given the risks associated with this type of trading and the financial restrictions on marketing departments. Even agencies are bound by capital restrictions that effectively prohibit principal trading, hence its delivery by a principal unit that is not beholden to the same audit rights.

And for the media owners, principal trading allows them to secure long-term commitments for their ad inventory. Advocates for principal media argue this has a positive impact on the supply market at a time when publishers are struggling for ad revenues. If an agency can guarantee sale of their inventory for the year ahead, the publisher can cover its costs and meets the targets required for its own financial sustainability.

However, critics would ask why this inventory is going cheap in the first place. Nick Manning, co-founder of Manning Gottlieb (now MG OMD), has been one of the most vocal critics of principal media. He argues that media owners are unlikely to withhold their most premium inventory for opted-in clients, since this would presumably limit the market for that media.

And rather than increasing demand, the practice could be having a negative impact on the sell-side, if media owners are pressured into discounting their inventory. Manning argues this would be particularly damaging for smaller and minority media owners without the audience base required to monetise their content via paywalls.

He further suggests agencies are incentivised to push principal media to their clients, and possibly sanctioned if they do no meet certain quotas.

This points to the principal concern around the practice, the potential conflict of interest it promotes. As one respondent in the ANA report puts it: “I don’t know if my agency is recommending principal media because it’s the best media for me, or the best media for them.” Although the agency is not directly using the client’s money, the holding company does not have to disclose the margin it made on principal media deals, contributing to a lack of transparency that advertisers (and the wider industry) are keen to resolve.

The practice represents a shift for the role of the media agency, from that of an agent to something more akin to a media network or even a sales house. Defenders of principal media maintain that this allows them to take risks on behalf of their clients, while critics say this “black box” makes it harder to prove agencies are acting as true agents for their clients.

Whichever way you slice it, the ANA’s findings reveal a lack of knowledge about a growing practice, and both sides agree that clients should regularly update and study their contracts closely to ensure principal media is clearly addressed. The ANA recommends that large enough brands employ a Chief Media Officer able to scrutinise their media with more specialised knowledge than a Chief Marketing Officer. And on the agency side, media planners should provide a clear business case detailing why principal media is recommended.

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