Proprietary/Inventory Media

What is proprietary media (a.k.a. inventory media, principal-based media)?

Proprietary media, also known as inventory media or principal-based media, is the term given to describe media that has been bought by a media agency from a media owner/vendor in its own name — i.e. without identifying a specific client/advertiser at the point of purchase.

In this transaction, the agency acts as principal at law and is therefore directly liable to the media owner/vendor for the cost of the media. This means that the agency is legally required to pay for the media, even if it’s not subsequently able to sell it on to an advertiser. There is, therefore, at least in theory, an element of risk involved in the agency entering into such a transaction.

So how is an agency able to buy media in its own name for onward resale?

Why does proprietary media exist?

Historically, agencies working in markets where they act as principal at law have described their ability to help media owners, particularly publicly listed ones with a looming financial reporting deadline, to meet their previously announced revenue and profit targets by buying up unsold media at a discount. This helps the media owner to achieve its targets, keeping investors happy and its share price buoyant, and enables the agency to buy media at below market rate to then sell on to its clients at a profit.

It’s neither in the interest of the media owner nor the media agency to disclose to the end client, or the wider marketplace, the price paid for the media. Media owners do not want the market to know that the average price of their media is actually lower than being widely reported. In turn, media agencies do not want their clients to know how much money they are making when reselling the media to them.

To keep this information confidential, media agencies amend their contracts with advertisers to remove the latter’s audit rights over proprietary media purchases. This means that when an advertiser sends a media compliance specialist, such as Financial Progression, in to the agency to check whether it has been charged correctly, the auditor can see the individual bookings (another group company is normally the vendor) and the price charged to the client, but not the actual price paid by the media agency. This is in stark contrast to media bought for the client under normal circumstances.

Furthermore, this media will have been previously unsold inventory, meaning that it is likely to be of lower quality (i.e. at less popular times of the day or night and on channels with smaller audiences (at least in the case of broadcast TV and radio)).

Why do clients buy proprietary media?

So why would an advertiser buy proprietary media from their media agency, which is likely to be of lower quality and over which it does not have any audit rights, rather than from the originating media owner/sales house when quality and cost can both be known?

The simple answer is price, combined with sales pressure. Agencies tell advertisers that proprietary media is available to them at a discount to the market price and reassure them that the quality of the media being bought is comparable to that being acquired under standard terms of business.

From discussions with our clients, they see the reduction in price, but are less clear about the quality. In addition, they face ethical dilemmas as to whether the agency is acting in their best interests in recommending the purchase of such media, and whether there is in fact a conflict of interest (how can they give us impartial advice if they have a financial interest in what they are recommending we buy?). They also worry about not having visibility of the actual cost of the media.

All of these concerns are valid. So what keeps clients buying proprietary media? From what we hear from our clients, it’s lower prices, combined with different individuals reaching different conclusions over the ethical dilemmas. At least that is the case for those clients who know that proprietary media is being used on their account, but that is a matter for another day!

Why do agencies keep selling proprietary media?

So what’s in it for media agencies? What’s the reason for the hard sell? Put simply, it’s all about the mathematics of the media business.

What follows is an illustration of how the maths works and is in no way intended to be representative of actual numbers and margins earned by media agencies. Nevertheless, the mechanics of the maths is important and the worked examples that follow illustrate what the financial incentive is for agencies.

Let’s say that I am an advertiser and, to keep the maths simple, I’m spending 100 million (euros, dollars or pounds) with my media agency on media bought in the standard way.

Agencies don’t work for free and so, in order to pay for their services, I’m paying them, again to keep the maths simple, a planning and buying commission of 10% of the price the media is sold to me for.

TABLE 1

My cost is therefore 110 million, of which 100 million goes to the media supply chain and 10 million to my agency. Put another way, the agency’s income is 10% of the media it buys for me.

So let’s now introduce proprietary media and make an assumption that I have agreed with my agency that it can supply me with proprietary media amounting to 10% of my media budget, in this case 10 million. Then let’s assume that the agency has been able to buy that proprietary media at a 50% discount (i.e. it has paid 5 million for it) and does not give me a discount when selling it to me.

TABLE 2

You’ll see that whereas in the first instance (Table 1) the agency earns 10 million on my 100 million investment, in the second instance (Table 2) it earns 15 million from my 100 million investment — despite the fact that only 10% of my budget is being used to buy proprietary media. That’s a 50% uplift in cash income for the agency in return for a 10% change in my buying behaviour.

Finally, let’s assume the agency gives me a 10% discount on the normal price of the proprietary media it has sold to me.

TABLE 3

Note in this example that with a 10% discount off the market price of the proprietary media sold to the client, the agency only reduces its income in percentage terms from 16% to 15%.

Whether these numbers are an accurate reflection of reality or not, the maths shows that a relatively small shift in buying behaviour from the advertiser’s perspective can have very large impact on the income of the agency, if they can buy the media at a substantial discount. Hence the incentive for agencies to encourage as many of their clients as possible towards proprietary media – it’s all about their income.

For you procurement professionals out there whose negotiation training has encompassed the story of the hunters and the wolves from Gavin Kennedy’s book Everything is Negotiable, based on the above maths, giving agencies even a small piece of elk meat will keep them coming back for more.

What do advertisers do about it?

Well that really is a question for you and your colleagues. In our opinion, it is a binary choice, you either buy proprietary media or you don’t. Certainly there is enough of a financial incentive for agencies to keep selling it to those who will buy it, and, for as long as there are those willing to buy it, agencies will keep selling it, because the financial incentives are too attractive to ignore.

In Summary

1. Proprietary media exists because it enables media owners to sell previously unsold media without affecting the perception of the market price of that media.
2. Agencies are incentivised to sell it because they can increase their income substantially if they can buy it cheaply enough.
3. Advertisers can see the benefit of lower prices, but worry about the quality and commercial visibility of the media being bought to showcase their brand(s).

If you’d like to chat about how to manage proprietary media on your account, or would like the Excel file containing the tables above so you can perform your own scenario planning and analysis, please email us.