The Agency Conflict: To Arb Or Not To Arb

The word arbitrage is a dirty word in the media buying space – but the margins have always been very good by being the middle-man in a trade between a buyer and seller. Ad networks have been the masters of this domain for fifteen years. Agencies have looked on with envy as these small lean operations made huge money arb-ing their buy-side clients. The arrival of buying tools like DSPs/ ATDs has allowed agencies to enter the arb game. But there are some issues around this practice. Yesterday’s piece in Digiday highlights the conflict of interest for an ad agency making a margin on the media while acting as the client agent – and worst still forcing spend through buying desks at the expense of other third parties. Is this really helping the client? Should the agency be double or triple dipping – with fees, ad server costs and margin? The article has opened a can of worms in terms of how ATDs are operating. But these pieces are always too US-focused. Let’s look at this type strategy from a European perspective, examining how agencies in Europe might run their ATDs in the best way for their clients.
Is Arbing The Client Really A Crime?
The reality is that this already happens in Europe. There are a number of large agencies in Germany operating ad networks – where they make margin on media bought on behalf of advertisers. Do the clients know this? Of course they do? The rationale here is that the agency can buy the media cheaper because the margins made by the owned-and-operated ad network are much, much lower than other German third party buyers. But as the automated market takes hold in Germany this type of practice will become less appealing to advertisers. More transparency on price and inventory will be the requirements for any buy over the next twenty-four months. So what’s wrong with a fixed fee? Why don’t ATDs just charge a standard 15% – 20% fee on top of the media buy? This type of trading isn’t easy – and the ATD will still be offering the transparency that other third party “black box” solutions will never be able to. It’s seems pretty logical to offer this in as an add-on service. How difficult would this be to sell into advertisers?
You Can Only Use Our ATD For Exchange Buys
Industry people seem stunned at this type of strategy. While not an open practice, I have heard from several UK exchange buyers that one large holding company is stipulating in client T&C’s that all dynamic/exchange buys must go through its ATD. This is smart move from the agency – looking at moving all buys through the buying portal. But what about the client? Sure, there is always the threat of bid inflation by having multiple exchange buyers on a plan – but only if they are using the same DSP. The thinking here from the agencies perspective: inventory providers can plug into their ATD and they can optimise on behalf of the client. But this all gets complicated when they are actively arb-ing the advertiser. The agency should be working in the best interest of the advertiser – not ripping them off with hidden fees. But if the agency is being open on fees I see nothing wrong with the idea of an agency buying portal.
Don’t #*&! Off Clients By Being Greedy
The advent of the agency trading desk was about offering the kind of price and inventory transparency to advertisers that traditional third party media buyers were never able to. It is a certainly a big evolution. But the idea of replacing one black box solution with another is not going to sit well with advertisers. Some won’t care. They just want you to hit KPIs and deliver against brand safe content – so they can enjoy the easy life. The smart ones will strip everything out – and want to know where media spend is being allocated. And if there is a big chunk going to an ATD, the clients have the right to ask about how much of THEIR advertising budget much was spent on buying from the source. They won’t care about “special sauce” BS; they’ll want to know how much margin did their agent make in selling media back to them.
I think the DigiDay piece was interesting from the whole arbitrage perspective – not knowing how much mark-up is made on media bought and sold by an ATD. My feeling is prop trading desks are a legitimate strategy for agencies as long as they are transparent on pricing. If they are going down the road of making big margins at the expense of the client, then the client is within its right to shop around for more transparent offerings – or better yet bring it all in-house.