Client/Agency Relationships were once predicated on the concept of a principal-agent relationship, where the agency had a fiduciary duty to act in their clients’ best interest. When this concept was the accepted practice, most Client/ Agency agreements reinforced this expectation.
Principal-agent relationships helped instill a level of trust among client stakeholders creating strong partnerships between advertisers and their agencies that spanned years, if not decades. Unfortunately, over time, certain agency practices began to erode that trust.
The shift began with agency holding companies pledging funds entrusted to them by advertisers to select media sellers to earn rebates that were based upon the holding companies aggregate spend across their client portfolio, and funneling work to affiliates without competitively bidding their services. Then came principal media buying, an arbitrage process whereby the agency or their affiliates would purchase media and resell it to clients at a higher rate, earning non-disclosed mark-ups that were often unauthorized by its clients. In these scenarios, agencies act as principals, rather than agents, often prioritizing their own financial interests at the expense of their clients.
Recognizing the growing use of principal media among agencies, the Association of National Advertisers (ANA) conducted an in-depth analysis of this practice titled “Acceleration of Principal-Media.” As part of its study, the ANA identified key characteristics of principal media, including the following:
- The agency or its affiliate is not an agent of the client. The agency is the reseller of the media or other service.
- Clients are often unaware of where or how the agency acquired the inventory.
- The agency is delivering media where the actual price (if any) is not disclosed, and the agency markup is not known.
- Advertisers have limited audit rights. Notably, clients are not allowed access to associated vendor invoices.
None of these characteristics are particularly confidence-inspiring, even if an agency secures the client’s permission to engage in principal media buying. So why would an advertiser even consider authorizing this practice? The key selling point is typically the ability to reduce costs on select commodity-like media.
Some believe that this approach can play a role in an advertiser’s arsenal if they enter these arrangements with a modicum of knowledge and with the requisite controls in place to mitigate the attendant risks. However, the ANA’s study found that more than half of the survey respondents were only “somewhat familiar” or “not familiar” with the practice. Further, in our contract compliance auditing practice, we find that most advertisers lack the appropriate contract language or controls to safeguard or vouch their advertising investments in principal media buys.
One might reasonably ask: “Is principal media buying ever acceptable, even with the appropriate controls in place?” The inability of advertisers to audit principal media performance, the lack of transparency regarding agency costs and profits, and the limited ability to vouch for the quality of the inventory could be reasons enough to forgo the use of principal media. More importantly, advertisers will never know whether their agency’s principal media recommendations are genuinely in their best interest or driven by the agency’s profit motives.
Absent full cost transparency, audit rights, agreed upon mark-ups, and pre-approval rights for principal media advertisers should rightly favor a principal-agent relationship, with clear accountability and alignment on the agency’s duties and responsibilities as a fiduciary of the client versus the pursuit of illusory efficiencies.
“Media arbitrage or principal media involves the manipulation of price differences in different locations on the same inventory to achieve a riskless benefit to the principal.”