Principles Vs. Principals: How Digital Platforms Have Shifted Liability

GroupM's decision late last week to pull out of the media-buying review for Facebook's massive advertising account may shed light on an even bigger story that has been increasingly plaguing advertising agencies: the increasing risk and liability of doing business with big digital media platforms.

In this case, the business was a media-buying account review -- and the deal-breaker for GroupM, according to sources who spoke to The Wall Street Journal, was that Facebook wants its agency to accept greater liability -- something agencies are loath to do in general, but especially when the exposure is as much as $1 billion, which is what Facebook's media account is said to be worth.

Why the remaining shortlisted agencies -- Dentsu, Havas and Publicis -- would is anybody's guess, but the world of digital media has increasingly been placing more of the onus of risk on agencies and away from the big media platforms.

That's something that a number of agencies began discussing with MediaPost during 2020 when a number of clients were facing defaults and/or bankruptcies due to the stress of the COVID-19 pandemic, and in many cases, their agencies were left holding the bag.

That's exactly what happened to one fairly large independent agency who was told by a bankruptcy court that they needed to pay creditors for media buys that were already made and paid to Google, which revealed an even more startling fact: that unlike most conventional media suppliers, big digital media platforms like Google and Facebook treat ad agencies not as agents for their clients' media buys, but as principals who have sole liability for them.

As we looked into that story, we learned there were many reasons why digital media platforms diverged from the ad industry's long-standing standard for so-called "sequential liability," which only makes an agency liable for media payments once a client has released its media-buying funds to the agency.

One reason is that the big digital platforms often do business directly with their customers -- mostly long-tail businesses that may or may not even use an ad agency -- buying directly through their automated, self-serve interfaces, in many cases simply using a credit card.

But we were also told about another even more insidious practice that evolved during the early days of digital media-buying, when in order to benefit from rebates, commissions and discounts paid back to they agency, many of Madison Avenue's biggest shops agreed to be treated as principals, not agents for the ad buys.

Those decisions may or may not have made sense in the earliest days of digital ad buys, when the new rules were still being written, and when digital media suppliers were working hard to incentivize agencies to buy them. But decades later, after the Association of National Advertisers' exposed some of these opaque rebate practices, and as many big clients have required greater transparency and/or the return of those funds, the original "deal with the devil" doesn't look as advantageous as it once was. We were even told, but had not fully confirmed, that some of the big agency holding company media-buying divisions have been trying to renegotiate their terms with the big digital media suppliers in order to become treated as agents -- not principals -- once again.

GroupM's decision to pull out of Facebook's review over increased liability and risk terms, suggests they may not have been successful.

Big media shops aside, the issue has been especially devastating for smaller and mid-size agencies, especially independents, who may or may not have even benefited from the cozier side of those terms, but who have since been treated as principals for liability reasons.

That, in turn, has forced many smaller agencies to require their clients to pay upfront, removing much of the ad industry's traditional "float" on payments to the media, but as the example we cited at the beginning of this column shows, that hasn't necessarily protected them from the rulings of bankruptcy courts looking to recovery assets for creditors.

At the height of ad industry's mini-fiscal crisis in the third quarter of 2020, MediaPost asked Advertiser Perceptions to field a survey asking both advertisers and agencies what their current views were on solvency, defaults, bankruptcies, risk, media payments and liability and what we found was that perceptions of the current industry standard are far from the kind of "sequential liability" advocated by the ANA, the 4As, and other ad trade groups.

More than three-quarters (77%) of ad execs said the media treat the agency as a principal "always" or "occasionally," while only 1% said that never happens.

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