Commentary

The Madison Avenue-Wall Street Industrial Complex -- Part Two: Transparency

by Joe Mandese , December 13, 2013

See yesterday’s RTBlog post for the overall concept of the "complex." The reason for today’s post was a comment made on the initial post by Morten Pedersen, Founder and Chairman of Glue 2020, who opined, “All true - except Wall Street offers much greater transparency than Madison Avenue. Scary really…”

As you might expect, I agree 100% with Pedersen, and have been ruminating on another idea for sometime, but don’t think I’ve ever actually written about it until now. And that is that it may be time for Madison Avenue to become as transparent as Wall Street.

Yes, I know that many in the programmatic marketplace will say that’s happening anyway, because of the free-flow of open market data that is being generated by exchanges, especially the kind of pure supply-and-demand data emanating from RTB. That’s true, but despite what we write about here at RTM Daily, it’s still just a tip of an iceberg -- a fraction of Madison Avenue’s total marketplace. And yes, it is growing rapidly. I’m not sure it will grow to half of all of Madison Avenue’s trading volume in the next couple of years the way Interpublic’s Magna unit predicts, but I do believe that over time, the vast majority of media buys will be made programmatically through exchanges of direct interfaces. And I’m hopeful that enough of the data from them will be made public so that we -- and I mean that in the royal sense of the entire industry, including the rest of the trade press we compete with -- can finally see what’s actually going on with the supply and demand of media.

That’s been my Don Quixote-like quest since I began covering media 30 years ago, and it’s exciting to see it’s finally coming to fruition, thanks to the emergence of scientific trading based on a rational market structure. The reason I’ve been so passionate about it, is I’m tired of being spun by opaque sources and contrived data all designed to create self-fulling outcomes about the media marketplace. You know, spin. Yes, Madison Avenue is incredibly good at that, but I don’t believe it’s good for Madison Avenue, or its clients. At least not anymore. Maybe in the early days when there were perhaps 50 advertisers and a dozen big agencies vying for a finite pool of prime-time avails from three TV networks that reached, well, everybody -- yeah, well, then you could have that kind of structured allocation marketplace based in which no one knew who was paying what, except for the supply-side. (You do know that the agencies and clients literally let the networks “count the house” before every upfront, by forcing them to register their budgets, right? I mean, who benefits from that?)

If that industrial behavior ever made sense, it certainly doesn’t today, for so many reasons, but mainly because there is just way too much inventory to be allocated like that, and because the relative value of that inventory is such a vast spectrum ranging across various brand and audience needs, not to mention business models, KPIs and objectives. It’s a spectrum as wide as branding to performance to commerce. It’s a spectrum as wide as, well, the world.

In the end, I suspect that the ad industry has clung on to opacity and closed market structures for a much more human reason than market logic. I think it’s because it just seems so much simpler to agencies and clients to think about their media options as narrow subsegments with rigid values based on historical pricing curves and benchmarks. I understand that, but it doesn’t make sense of far more significant reasons, and they are ones that have a greater impact on society overall. And that’s the reason I’m reacting to Pedersen’s comment on yesterday’s post. Because he’s right. And here’s why.

Advertising is more than an industry. It is part of the cultural framework for our free information society, and because of that, it needs to be regulated. And by that, I don’t mean the obvious parts that already are regulated like fraudulent ad claims, consumer disclosure rules, personal data privacy rules, youth targeting rules, and the ilk. Certainly, those things should be regulated to reasonable degrees. (And personally, I think “native” ad formats are going to become one of them, but that’s a post for another day.) No, the kind of regulation I’m talking about is the kind the government does for the financial industry: ensuring that the basic data influencing financial trading decisions are transparent and open for everyone to see. Never mind that technology like high-speed trading systems and proprietary data can enable the biggest investors to have an edge on the rest of the marketplace. That’s just free enterprise, and in theory, anyone who could muster those resources could compete with anyone else. It’s a level playing field. That’s not the case on Madison Avenue.

And here’s why it should be -- because advertising is a significant part of the economic engine that underwrites the free and open flow of information in our society. It underwrites the flow of our most immediately important information -- news -- and it underwrites the most important highly structured information we have, the entertainment and information-based content that is the basis of our culture. Everything from “60 Minutes” to Twitter. And we all know what’s happen to the economics of that. It’s become highly distorted, jeopardizing the economic viability of critical components of the media industry, including some of our most valuable news sources. A Columbia Law Review study a couple of years ago, estimated that 90% of the news content published on the Internet emanates from conventional daily newspapers. But as soon as that information gets reported and disseminated online the monetary value of that information goes to zero -- or not much above it. That’s a big long-term problem for society, and I’m not sure I know the answer to it. My point is that the reason why Madison Avenue’s media trading should become openly regulated is that the decisions made to invest in one medium vs. another have huge implications beyond brand share. They influence how we all think, feel and behave.

I’m not saying the government should, like they do in other countries, regulate how advertising budgets should be allocated across those media options. I’m just saying there should be regulations requiring the data that is the basis for those trades to be open for everyone to see. Because we are all stakeholders in the outcomes of those trades.

The truth is the government has stepped in from time to time when it saw a potential threat to the free flow of open market data on media transactions. It’s done it twice that I’m aware of. Once in the early 1960s when Congress held hearings to review some questionable practices in the TV ratings business, which back in those days WERE the media industry’s trading data. The government decided back then not to regulate the industry, but a decree from the Department of Justice required the industry to self-regulate those practices and it formed the Broadcast Rating Council, which later became the Media Rating Council, which to this day is the closest thing we have to industry structured transparency in the advertising business. But all the MRC does is audit and accredit, and with the exception of recommending some best practices, it basically just reports on whether a media ratings service or methodology does what it says it does. That’s important, for sure, but it doesn’t go far enough for today’s super fragmented, high-speed media economy. We need open market data like we never did before. We need transparency.

The second time the government stepped in also involved the TV ratings business. It was when News Corp. went to war with Nielsen over the methods it used to measure African American and Hispanic American audiences, the kind that skewed high on some of Fox’s shows. A well orchestrated and highly publicized campaign by News Corp. leveraged public interest groups to convince Congress to hold another round of hearings in 2004, which once again did not lead to regulation, but put enough pressure on Nielsen that it yielded, and modified the way it treated minority audiences in its samples and ratings -- basically creating mathematical weights to adjust for not sampling them properly.

Part of the success of News Corp.’s campaign was that it convinced the public, the government and ultimately Nielsen that the kind of media investment decisions that were based on its ratings had a powerful influence over the economics of what media content got supported and what didn’t. In this case, News Corp. successfully argued that minority audiences needed to be better represented. But what about all the other special interests? I’m not going there, per se. I’m just saying that the whole thing should be transparent, rational and open for everyone to see and make their own judgement -- and if appropriate -- trades on.

10 comments about "The Madison Avenue-Wall Street Industrial Complex -- Part Two: Transparency".

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Morten Pedersen from GLUE2020, December 13, 2013 at 10:20 a.m.
Thanks for the piece. I agree with most. But what if clients HAVE to lower their transparency threshold in order to get the efficiencies that they are so hungry for? What if agencies more overtly and consistently say: "Sure, we can offer the space you want and need for 10% less cost - but we won't tell you what we've actually paid for the inventory". In other words, the people/corporations (who are still paying the bills) may actually NOT benefit financially from more transparency... I appreciate that this may not sit well with corporate America (yet), but it's everyday reality in the media business I operate in.
Reply

Joe Mandese from MediaPost Inc., December 13, 2013 at 10:28 a.m.

Morten, Good points, but that's another level of transparency. A good start, is that everyone can at least know what the relative price of media is. Needless to say, other business practices come into play when you start to negotiate on top of that (volume discounts, etc.). And in terms of commission structures, that's a business relationship between a client and its agent. I think there are all sorts of commission and fee structures on Wall Street too, and I don't know if, or how much of that is regulated. But the other part of what you're talking about -- the transparency of what the agency or trading desk paid vs. what it charges its client -- sometimes is regulated. Different countries have different regulations regulating AVBs, for example. And they're not always in favor of greater transparency. In Brazil, for example, the law actually stipulates that the agency cannot tell their client how much they paid for the buys. (Imagine that.) But at the very least, I think all advertisers and agencies should know what the cost of goods are in the open market. Whatever goes on between a client and its agent, should be a matter between them -- and any third-party auditors they hire to look at their books.

Morten Pedersen from GLUE2020, December 13, 2013 at 11:01 a.m.

Joe, The problem is that we are not operating in an open market. We are operating in a free market where the price is NOT the same for everyone (otherwise, why would a client's price points change during a pitch for exactly the same inventory). Re auditors: agency groups work with a double or triple book "systems" + they play the percentage game. How are they going to tell the relative price if they can't even find out where to look? A good theoretical exercise and a tick in the box though... And regarding success of markets who've tried to regulate: Brazil is a unique market like few others where media vendor mostly dictates price (anything but open), France tried with the Loi Sapin with some success, and Russia has now gone back to what 99% of the rest of the world does i.e. inventory management where the agency (not the vendor) determines the price the client pays. I think the media business is, and always will be, a case where each client is on their own. This is an industry that has been built from scratch in 50 years on the principle of a true free market spirit. No regulator is going to take that away as long as it pays dividend - programmatic or not.

Arthur Petrou from Athena Media, December 13, 2013 at 11:05 a.m.

Let me take a more jaundiced approach towards your "Madison Avenue-Wall Street industrial complex", particularly as regards efficiency. There was an excellent article in Barron's about the purchase of Tumblr by Yahoo. The point was that there exists an ecosystem among the venture capitalist funds in Silicon Valley, Silicon Alley, Williamsburg, and elsewhere and the start-up entrepreneurs who can physically share breakfast with them. The VC's are uniquely capable of telling the start-up entrepreneurs, not what works in the real world, but what venture capitalists want to see in a start-up, essential for the second and third rounds of financings, as actual profits, now even revenue, are superfluous. And the same VC's are very aware of and know what the analysts on Wall Street want to hear, not only because an IPO is one possible exit, but, selling to Yahoo, Google, Microsoft, and Amazon--all publicly traded--are also an exit. As most of these start-ups have no earnings to add, it is the "narrative" that can drive up the stock price of Yahoo which is important, certainly not the non-existent earnings of Tumblr. The IPO of Twitter shows where huge sums of money value actually minimal effectiveness. I believe a similar article on Twitter for Barron's pointed out that the re-tweets of branded tweets--which are supposed to become a major source of revenue for Twitter--are less than 1%--not much improved over junk-mail response rates in the age of "snail-mail". And yet, Wall Street and venture capitalists have set a premium on just those sorts of revenue, as opposed to old fashioned revenue., not any elusive "efficiency". Truly--you must know the narrative in order to succeed.

And yet--none of this is new. As any economic historian will tell you, the railroads were never profitable during the Gilded Age in the last part of the 19th Century. Railroad barons--made their money speculating in railroad stocks and bonds on Wall Street--not actually running a profitable and efficient railroad and making money from it in the form of salaries, bonuses or dividends.

Joe Mandese from MediaPost Inc., December 13, 2013 at 11:10 a.m.

Well, there are some knowns, and I think we should start with those. We know, for example, what the actual "win" rates are for display ads bidded for in RTB exchanges. We could start by organizing and disclosing those as an industry. We won't know what all the mark-ups and cuts are in the process between a publisher submitting that inventory and the advertiser paying for it (but according to LUMA, it's about 55% of the price paid). But at least we'd know what the gross cost of media is, and that's a starting point.

There are other ways to get at the net cost of media, but I don't think that could be regulated. But I don't think it has to be. I think it's good enough to start with transparency on the cost of goods, and let clients, agents and middlemen figure out their own business practices. It's still a free market.

Joe Mandese from MediaPost Inc., December 13, 2013 at 11:20 a.m.

@Arthur Petrou: I agree with you too. And I think it is one of the least understood and potentially damaging elements of the new "complex," because it is fostering short-term business opportunities (ie. exits) that may not be in the best long-term interest of anyone (not society, not advertisers, agencies, media, and probably not even the ventures). In a way, it's like the short-term brand thinking that occurred when Madison Avenue began shifting away from long-term branding toward short-term performance KPIs. It just fostered a near-term reality of the next quarter, or at most, a couple quarters out. And this also coincided, not coincidentally, with the shortening of CMO turnover. It's all just short-term thinking fostered by the economy of speed. I think what's going on with the venture capital/media industry is that -- on steroids. It's ALL about the exit, not the long-term (or dare I say, societal) value of the enterprise. Just how much of a return on equity can we get on it, so we can roll it into the next play. I've written about this anecdote before, but it hit home for me a couple years ago when VivaKi's Rishad Tobaccowala was moderating a panel of VCs and asked them what they were looking for when they backed a start-up. I expected them to say something like "return on equity," profits, users, anything, but the one word answer a top VC from Redpoint Ventures gave scared the crap out of me: "Disruption." I know that was probably VC code for something else, but no matter what you mean by it, disruption is not practical long-term economic model for any industry, or society. JMHO.

Arthur Petrou from Athena Media, December 13, 2013 at 4:48 p.m.

Joe--I fear you are right to be afraid. American has always had capitalism. But what form it takes has changed over time. Once upon a time, when modern venture capital was personified in this country by Jock Whitney and Averill Harriman during the Depression, they invested in Pan-American Airways, Columbia Broadcasting System, and the Selznick movie studio--all with the idea of building companies that would last as long as their fathers' legacies. While publicly traded companies, now, look quarter to quarter, and the CEO will seek a sale so that he can trouser $50 million while the rest of the work force is let go; and leveraged buyout groups will "dividend" out their entire investment with 18 months of the initial acquisition while the company is still saddled with even more debt; venture capital was the last hold out for "the long term". Not any more. I have no idea if Facebook was the first start-up to do it, but certainly the biggest whereby the initial investors would sell a substantial part of their stake to other venture capitalists for enormous sums before an IPO or a strategic acquirer came along and everyone could exit all together. When I started in private equity in the 1980's, the idea that anyone could "sell-out" before a "liquidity event" allowed everyone to sell out was unthinkable. If you died or left the company, you could "sell" or liquidate your shares before a "liquidity event" , but rarely at a price that resulted in a good return. No more.

William Lederer from iSOCRATES, December 13, 2013 at 4:53 p.m.

As one of very few firms seeking to be wholly transparent with buyers and sellers of digital media, MediaCrossing salutes those fostering this conversation.

Too bad so many advertisers and publishers who are most disadvantaged by the current paradigm are not as appalled and vocal as the ad tech journalism and analyst community that sees the same challenge we at MediaCrossing do and are now writing about it.

Until Advertisers are as demanding about how their money is being spent and the return they are getting for their investment and until publishers require end-to-end visibility on the resale of their inventory, there is little reason to believe the ecosystem will be as demanding as we are on the subject of transparency.

Going back to the Wall Street parallels, the same environment existed for decades until greater market competition arrived and, much later, regulation. Greater efficiency, transparency, quality, and liquidity(the last two topics Joe has not yet covered but should) on Wall Street came from innovative startups who acted as catalysts driving change or outright closure of entrenched, conflicted middlemen who bore little risk and failed to attack their longstanding business models.

Importantly, with transparency Wall Street has necessarily created the commodification and commoditization of tradeable assets and services. Is our industry really ready to handle the fallout of what we seek? The Wall Street-Madison Avenue Industrial Complex(WSMAIC) cannot rationalize itself without breaking a few eggs. Will you be holding the shell or the skillet? The souffles that will result should find a ready market...ultimately.

Paula Lynn from Who Else Unlimited, December 13, 2013 at 8:45 p.m.

Arthur Petrou: The scariest part of you being so right is that is isn't just the media and technology companies in the ivory towers of the 1%, it is all the corporations. From where does the money come, who loses and why isn't it be reinvested and redistributed back into the population for more growth ? Has capitalism morphed into another economic complexity ? Is that the point of capitalism ? Can a more regulated capitalism be more productive ? A less broad investment society keeps progress and ingenuity boggled down without funding. Patent trolls and longer term patents also contribute to the system you describe and keep the capitalism for the few.

Nick Manning from Ebiquity, December 14, 2013 at 5:07 a.m.

Joe, you will hopefully recall that Ebiquity have been trying to get the issue of transparency in digital trading onto people's radar at the time that the world's regulatory authorities have been reviewing 'Publicom'. We have client experience that shows that the lack of transparency is leading to a loss in effectiveness of some 50% in some instances, which can't be good for the industry (but is good for the stockholders in the big holding companies) and is sure as hell not good for the media vendors. We can't understand why this issue isn't receiving the attention it deserves, apart from the fact that advertisers are feeling increasingly powerless as a result of the consolidation of the buy-side. Please keep up the campaign.