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Will Ofcom media-buying probe lift the lid on a can of worms?

April 6, 2011

Good luck to Ofcom as it attempts to prise the lid off the £3.5bn TV media-buying market and explore the wriggling multi-form life within. It really is a can of worms, and one most people in the business, most of the time, would prefer to keep firmly closed.

Their motives differ. Clients, despite the high-minded calls coming from their trade body ISBA for greater industry transparency, tend to find the subject stultifyingly boring. One indefensible reason for this is their personal unwillingness, or inability, to grasp the Byzantine complexities of the trading system. You might as well ask them to brush up their Latin as describe in detail the iniquities of media-owner  rebates. More pragmatically, they argue they have better things to do with their time – such as steering the strategy of their brands. Media negotiation is a matter for experts (on all sides) who understand the language, is it not? All you need to do is put a lesser amount on the table every year, screw down the terms with your agency even further, and get an auditor to establish that, at the year end, you have achieved still greater value for money (spuriously expressed in “media currency”  terms, not ROI) than the year before. If you haven’t, well maybe it’s time to fire your agency.

Media owners and agencies, on the other hand, are intimately aware of distortions in the system caused by such recondite issues as “pooled buying”, “agency deals” and “rebates”. And so they should be: these distortions, and the cloud-cover (or lack of transparency to the outsider and the regulator) that accompanies them, are what allow them to game the system.

Would a more open system be more effective than the present regime, for all its imperfections? Not necessarily. Better regulation does not inexorably lead to better business.

The fundamental criticism of the current system is that ads/spots end up going to the media owner who offers the best agency incentive rather the best fit for the client’s brand. The fundamental problem facing any reformer attempting to redress the balance is agency remuneration.

It might seem that media-buying agencies are in an incredibly powerful position. Indeed, in some ways they are. Ten buyers owned by six international agency groups – WPP, Publicis Groupe, Omnicom, IPG, Aegis and Havas – are responsible for about 80% of the money spent on UK commercial television. A comparable oligopoly dominates press, magazine and (under the guise of agency specialists), outdoor buying. The concentration of their market power is now, arguably, greater than that of the clients they serve, or the media owners they negotiate with.

Not surprisingly, these media buying groups are critical to the profitability of the agency groups that own them. As a recent article in The Guardian pointed out, something like £43bn a year passes through WPP alone (admittedly the largest global operator) on its way to media owners – which is more than the GDP of Ecuador. The treasury and cash-flow advantages cannot be overestimated. Equally, let’s not forget profitability. A media buying house on song has an operating margin of up to 25% which, given the scale of its operations, makes it the single most important component in any of the big agency groups.

But with power comes a surprising vulnerability. When agency network bosses promise their shareholders – as they do every year – enhanced performance, the first place they come looking for it is in their media-buying cash cows. Yet that profitability is built on foundations of sand. The days of 5% commission are long since gone; the equivalent of 2-2.5% would now be nearer the mark, as client procurement tightens the noose. And then there are complications, like a part of the deal being based on payment by results. The net result is greater reliance on financial compensation from the media owner: in effect, the use or abuse of market power to screw down the ratecard.

Most notorious of these Spanish practices is the discount, and the easiest way of looking at how it operates is with national newspapers. Agency media buyers are bonused on achieving a set reduction (10% for argument’s sake) not from the ratecard itself, but from the per page mean figure of all titles established in the last audit. Clearly it’s easier to negotiate a discount with a weaker player. The danger, from the client’s point of view, is that the ad ends up not in the title with the best audience profile or which boasts the most robust circulation, but in the title that has offered the best deal to the media buyer (which then collects its bonus). This market distortion has an ironic multiplying effect, given that most national newspapers are in the grip of structural circulation decline: the strong get punished, while the weak get weaker.

Murkier still is the incentive, a media-owner inducement which is often offered in addition to the negotiated discount. It may come in the form of cash, or free insertions/airtime. Strictly speaking, it should be remitted to the client, although that is far from always the case. Airtime barter may be illegal in the UK, but it is often difficult to audit who has used this extra airtime/pagination and for what purpose. An extreme example of what can go wrong when the client and senior agency management let their eye slide off the ball is provided by the Aleksander Ruzicka affair. Ruzicka was the president of Aegis’ German operation; but he is now spending 11 years in jail. The reason? He and several co-conspirators clandestinely siphoned TV airtime credits, which should have been remitted to the client Danone, into their own television sales house – where they were sold on for their own profit.

However, many clients are milder than Danone, which eventually decided to extract its pound of flesh in court: they simply take the view that incentives are a perk of the job, and would rather not know what is going on. They are not necessarily wrong to do so. As long as the system broadly delivers value, why worry about its flaws? Besides, it’s often difficult to determine the difference between what, from a media owner’s perspective, is simply a “loyalty payment” lubricating the wheels of business and an unvarnished bribe. The belief seems to be that the auditing system will expose any systematic skew in buying behaviour, and therefore acts as an effective suppressant of corruption.

As it happens, Ofcom’s terms of reference do not seem to encompass the principle of the discount. Siobhan Walsh, who is leading the 6-month investigation, will instead concentrate on whether pooled buying by the big operators (“share deals”) restricts choice for planners (who select the best audience profile for their client) and shuts out the smaller buying specialist.

The danger is that the investigation finds sufficient cause for concern to warrant involving the Competition Commission. Who knows what worms will crawl out if the CC launches a full TV ad market review? Nor, I suspect, will the repercussions be restricted to the TV market.

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Vince hands BSkyB to Murdoch on a platter

December 21, 2010

It would appear the Scourge of Capitalism (aka business secretary Vince Cable) was bent on doing exactly what I earlier predicted. That is, committing a gross act of hypocrisy – in the clandestine manner of the bankers he so despises – by rigging the market to get the result he wanted.

This is the only reasonable interpretation of his unguarded remarks to two Telegraph undercover reporters about “declaring war on Mr Murdoch”. He is of course referring to his supposedly impartial role in adjudicating the acceptability of NewsCorp’s bid for the 61% of BSkyB it does not already own. For the avoidance of doubt the guileless minister of the crown went on to explain to the two reporters – posing as constituents: “I have blocked it [the bid] using the powers that I have got and they are legal powers that I have got…”.

Actually, that last bit is a tad premature. Ofcom is not supposed to report back on whether there is a prima facie case for referral to the Competition Commission until December 31st. But Vince was clearly confident that he had Ofcom in his pocket and could press ahead with a referral on the public interest grounds of an infringement of “media plurality”. The beauty of such grounds is that they reside entirely in the realm of political value judgement rather than the rigorously factual analysis of any threat to competition. And given that Cable would have had the final word, Murdoch & Co were clearly going to be thwarted.

No longer. Vince is off the case (indeed, he is off any adjudication of media competition cases from now on), although he has narrowly managed to retain his job. And culture media and sport secretary Jeremy Hunt will take his place. As a Tory, Hunt does not carry Cable’s Lib Dem ideological baggage; and if he does harbour any personal animosity towards the Murdoch clan it has so far remained scrupulously off the record.

Which is just as well. In the circumstances he will find it politically excruciating to deliver the thumbs down. The European Commission has just waved through the bid on competition grounds. That leaves the public interest argument. But this, too, is looking increasingly shaky when assessed on any fair-minded basis – as it will have to be in the wake of Cablegate. The legal precedent was set when the last government forcibly caused BSkyB to divest most of its 18% stakeholding in ITV. Ironically, the stated grounds were that NewsCorp’s then 39% holding in BSkyB posed a threat to UK media plurality. If you’re already a threat to media plurality when you hold a controlling 39% interest in a company, how is owning the rest of the shares going to make a material difference?

As political fiascos go, this is a corker. The Scourge of Capitalism has ended up performing a humiliating act of public self-flagellation. In the process, he has damaged Ofcom’s independence and almost certainly brought about the result he most feared: the strengthening of Rupert Murdoch’s commercial interests.

En passant, he has also damaged The Telegraph – one of his allies in the Murdoch matter, if no other; although Cable can hardly be blamed for that. The Telegraph deliberately suppressed Cable’s anti-Murdoch comments, presumably on the grounds that they harmed its commercial interests. Only because some nameless Assangeite felt that editorial integrity had been inexcusably compromised did the scoop come into the capable hands of BBC business editor Robert Peston.

I bet they’re laughing up their sleeves at Osterley Park and Wapping. I can’t say I blame them.


BSkyB loses pay TV battle but wins the war

March 31, 2010

So, BSkyB has lost the battle over what price it charges rivals Virgin Media, BT and Top Up TV to transmit Sky Sports, after the regulator Ofcom imposed a swingeing cut of nearly 24% on wholesale prices paid for Sky Sports 1 and 2.

You wouldn’t think so, though, to judge by BSkyB’s share price which, in early trading this morning, soared 3%. Now why would that be?

Most of the answer is succinctly supplied by Gavin Patterson, head of BT Retail – quoted in The Guardian:

“Ofcom should have gone much further than it did. They have dropped movie channels, which should have been included. They should have included all Sky Sports channels, not just two [and] the wholesale price for the two sports channels is higher than the regulator had previously suggested.” Deconstructed, from BSkyB’s point of view: ‘Phew! It could have been a lot worse.’

One other thing. Ofcom has given the go-ahead to BSkyB’s Picnic project, as a quid pro quo to accepting its wholesale prices ruling. Picnic, which stalled some time ago after running into trouble with the regulator, would enable BSkyB to replace its three Freeview free-to-air channels, Sky News, Sky3 and Sky Sports News, with a potentially lucrative pay TV proposition.

No wonder the City is chortling. BSkyB, however, seems less happy. It has immediately lodged an appeal against the Ofcom ruling. Which, given the lengthy legal prevarification involved, will make its rivals even more irate.

For more on the background to the pay TV dispute, look here.


Ofcom ‘double standards’ in BT pension investigation

December 4, 2009

If I were Jeremy Darroch, chief executive of BSkyB, I would be incandescent at Ofcom giving BT a sympathetic hearing over its proposal to cane consumers with extra broadband charges so it can stuff its depleted pension fund.

Here’s why.  Ofcom appears to be operating a set of dual standards when it comes to regulatory investigation. On the one hand, it is perfectly prepared to consider lowering the wholesale prices that BSkyB charges its rivals for pay-TV programme rights. Principal beneficiaries? Virgin Media, Top Up TV and, er, BT Vision.

On the other hand, it is equally prepared to consider raising wholesale prices when such an action would benefit BT. As for example, with the line rental charged by BT wholesale subsidiary Openreach to third party broadband customers, such as TalkTalk  – and BSkyB. Ofcom says it wants to benefit the end-user of pay-TV by lowering prices; yet contradictorily it implies end-users generally may have to carry the passed-on burden of raised broadband tariff prices should BT’s pension stuffing be deemed ‘in the public interest’.

There’s more. The ostensible reason for an investigation into the pay-TV market is that BSkyB operates a complex monopoly, which may need to be moderated by introducing an independent pricing structure monitored by Ofcom. Wait a minute, though. Doesn’t BT also operate a complex monopoly – in the supply of broadband (copper-wire-based) infrastructure? And isn’t Ofcom opening itself to the charge of propping up that monopoly if it let’s BT’s proposal through?

The crux of the BT rationale is that it provides a vital public service, at a loss. In other words, it has had to run a pension deficit as a result of conditions (the regulatory framework; the rising longevity of its employees etc) beyond its reasonable control.

Yet it is far from evident that these are the only, or even the major, preconditions which have led to BT’s pension deficit. After all, isn’t this the same BT that for some years declined to pay money into its pension fund, to the more or less exclusive benefit of shareholders? And which wilfully embarked on a high-risk global expansion strategy that eventually boomeranged on all its stakeholders disastrously?

Ofcom, which has no doubt employed entirely objective criteria in investigating these separate yet related issues, nonetheless risks accusations of conflict of interest if it finds in favour of BT. All the more so because it has now become a football in the increasingly acrimonious war between HMG and Rupert Murdoch. If the NewsCorp-backed Tories get in next year, Ofcom will most likely find itself history.


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