• by Joe Mandese  @mp_joemandese, September 7, 2023

In one of the strongest indicators that recessionary concerns are impacting the ad economy, new data shows payments for media buys to digital media -- historically the most liquid of all media buys -- are growing increasingly late, and in many cases, underpaid.

The data, part of OAREX Capital Markets' semi-annual "Digital Media & Advertising Payments Report," shows the percentage of payments made late began to spike in the first half of this year -- especially by ad agencies (vs. programmatic intermediaries) -- and OAREX's analysts expect the trend to continue into the near future due to recessionary effects and pressures on demand-side cash flow.

The report comes as the American Association of Advertising Agencies (4A's) also released a report ("The Ripple Effects of Extending Payment Terms") calling on its members to resit client pressure to extend the terms of payments to the media, as well as their own agency fees and production costs.

The 4A's report reveals that agency cash flow is tightening and credit costs are rising as clients demand longer payment cycles beyond the 30-day norm for paying media. A recent Association of National Advertisers report referenced in the 4A's study found the average terms for clients paying overall fees to their agencies had risen to 58.1 days as of 2020.

"The situation worsens when clients ask agencies to fund media in addition to agency fees," the 4A's report notes, adding: "With the current interest rate environment, this is more prevalent than expected."

The 4A's report estimates that based on available industry data, the borrowing costs for media agencies extending payments to 90 days and 120 days is $12 billion and $18 billion, respectively (see chart below).

OAREX has only been tracking late digital-media ad payments since 2018, and explicitly for ad agencies since 2020, so its analysts say it doesn't have a track record to compare previous recessionary cycles, including the last big one in 2008 and 2009, when the ad industry fell into a protracted recession following the financial industry crisis.

While the OAREX data only pertains to digital ad-buy payments to the media, Executive Vice President Nick Carrabbia says it likely is an indicator for the rest of the media-buying marketplace.

“It’s manifesting in all data sets that we have, so I don’t see why it wouldn’t manifest there as well," he tells MediaPost.

Carrabbia said it's too early to tell whether the increasing late-payment cycles are a leading or lagging indicator for the advertising economy, but he cites macroeconomic factors suggesting the trend could be protracted as interest rates rise and borrowing costs increase for ad agencies, as well as the demand-side of the programmatic marketplace.

"Our view is that the [Federal Reserve] has done a lot to combat inflation, but they still have more work to do, and so we can expect credit to continue tightening," Carrabbia notes, adding: "And the correlation between digital media’s performance and a growth-minded economy has a lot of overlap. They are highly correlated."

Carrabbia notes that the first-half spike in late payments and underpayments to digital media included other extenuating factors that go beyond tightening cash flow for ad agencies -- especially the bankruptcy of a major DSP (demand-side platform) MediaMath, and the fact that payments for some of its earlier programmatic media buys just began showing up in the first quarter, albeit at pennies on the dollar, as creditors worked their way through the bankruptcy court.

Carrabbia predicts that the bulk of the offsets associated with MediaMath's creditor payments likely will show up in OAREX's next semiannual report covering the second half of this year, and while he couldn't estimate how significant they will be, he said they likely won't be insignificant.

"MediaMath was the OG DSP, and while they weren't what they used to be, I wouldn't call them small," he says, adding: "We haven’t directly purchased on MediaMath invoices for some time, but we’ve seen offsets of upwards of 18% on other SSPs or other intermediaries that had MediaMath within their waterfall."