Is it time
to blow up the agency trading desk model? Maybe not. But changes are afoot as
the industry grapples with the long-term prospects of owning and maintaining
separate stand-alone businesses designed to deliver audience-based buying.
Following a recent leadership shake-up within its Mediabrands unit,
Interpublic executives were said to be mulling over the future of Cadreon, the
company's trading desk business. The discussions focused on whether the agency
holding company should decentralize its trading desk practices as programmatic
ad buying grows in importance, or continue to house them in a stand-alone
entity with its own profit and loss structure.
As it turns out, a
centralization strategy seems to have won out at IPG Mediabrands, at least in
the U.S. The company is expected to announce the formation of Magna North
America, a new entity that will house the holding company's various data and
platform assets. The move is being driven by an overarching goal at IPG to move
at least 50 percent of its buying to automated platforms over the next several
years.
Kristi Argyilan, most
recently chief transformation officer at UM, has been named president of Magna
North America. She'll report directly to Magna's worldwide CEO, Tim Spengler.
Included within Magna North
America are IPG's finance and technology divisions, the search agency Reprise,
the tech platform AMP and Cadreon, which was rumored to be on its death
bed. According to sources, some factions within IPG were looking to pull
audience-based, automated buying back within individual agencies rather than
within a centralized group.
But according to Matt
Seiler, CEO of Mediabrands, centralization should reduce competition within the
various IPG factions while providing more clarity.
"With Cadreon as a
separate business with its own revenue targets and its own P&L, and with
individual agencies saying, 'We can do it here,' we had an internal conflict.
We had built artificial boundaries that may have limited its growth. This
says, 'We only do it in one place. Through Cadreon within Magna.'
It's kind of dumb to have your operating units competing with each other,
so we're eliminating barriers," said Seiler.
While IPG's maneuvers are
specific to that company's unique issues and experiences, the same sorts of
conversations are being held across the industry as dollars swell, agency
territorial battles flare up and savvier clients continue to ask hard
questions. The agency trading desk is at a crossroads.
Here's the essence of the
debate: Should all of the company’s audience-based, real-time media buying be
conducted through a centralized group, or should buyers at Initiative, UM and
other IPG shops be able to handle that sort of thing going forward?
Underneath the debate may
be an acknowledgement that the party may soon be over (or is at least running
out of beer). Trading desks like Cadreon, VivaKi's Audience On Demand,
Omnicom’s Accuen, WPP’s Media Innovation Group and GroupM’s Xaxis were
established to help agencies take back the hefty margins they were ceding to ad
networks in the mid-2000s, while also looking to move the industry forward.
Profit-starved agencies have long seen trading desks as a major shot in the
arm.
But as more dollars are
spent programmatically, more clients are starting to ask questions. And
individual agencies are pushing to take more control of their own digital ad
buying.
Plus, many insiders report
that despite the high profit margins generated by trading desks (think 40
percent to 50 percent), not enough clients were using them. The thinking inside
Mediabrands and other agencies is that individual digital ad teams may be more
incentivized to spend client dollars in this fashion if they're given more
choice and control. The hope is that the cost of the technology employed by
trading desks could be spread across agencies.
"Most agencies want
the great profit margins," said an insider. "But they're afraid that
clients will call BS. The money essentially goes over the wall, and they don’t
know what happens to it."
Clients are starting to ask
about what happens over that wall. One tech vendor said this has started
impacting pitches and reviews. He described a recent conference call during
which a client grew exasperated with its agency, which was unable to provide
even basic details about where its ads were being run—since they were being
purchased via an agency trading desk.
For example, according to
sources, Kimberly-Clark has insisted that its digital agency of record,
Mindshare, handle all of its audience buying rather than Xaxis. AT&T has
made the same request of its GroupM shop MEC. Bob Arnold, Kellogg's global
digital strategy director, recently questioned the model at a Digiday conference.
For its part, Procter &
Gamble has shifted such buying to Audience Science over its agency partners'
own tech. And according to sources, Ford, Citibank and Unilever have also opted
out of their agencies' trading desks.
"We are starting to
hear from more and more clients that their ad spending is totally opaque
because it's centralized via a trading desk," said Audience Science's
Emily Riley. "That's not kosher for most clients. Big CPG brands are just
not going to stand for it."
Especially when the dollars
get serious. Early on, trading desk budgets were mostly nabbing experimental
budgets. Now, they can account for 10 percent of a brand's budget. At
MediaBrands, the goal is to shift programmatic buying to 20 percent or 30
percent. It's going to be hard for many clients to stomach that much money
flowing through trading desks, especially if they think they're paying some
sort of markup.
"It's straight up
arbitrage in their faces," said one former trading desk exec.
Naturally, many top agency
executives disagree with that assessment and remain bullish on the
model. "Our strategy for trading desks is clear," said Rob
Norman, CEO of GroupM. "Xaxis is our audience-buying company. It works on
a business model that enables it to access and apply all available client and other
data securely to all available inventory, including inventory not available in
ad exchanges. We think that's important. We believe performance against
benchmarks should be the sole judge of the success or failure of Xaxis."
In fact, if any trading
desk is succeeding, insiders say it's Xaxis. Some estimate that the company is
generating $300 million to $400 million a year—with a healthy cut sent to
GroupM. On the flip side, Cadreon struggled to tally close to $30 million,
sources said.
Seiler balked at that
assessment. "Let me dispel the myth on Cadreon not doing as well as
the other guys," he said. "Cadreon is not about arbitrage. That's
different than other places. There is concern out there in the marketplace
with companies like Xaxis because there is arbitrage going on, a 'clients
served second' kind of thing. A lot of agency groups say they are
structured around their clients' needs. That's not true. Kinda sorta isn't
enough. You have to be transparent, or you're not."
As for the Kimberly-Clark
decision regarding Xaxis, Norman said, "Some clients prefer that we work
with third parties they have selected, and we train our people to work with
them in the most effective way for the advertiser. In the case of
Kimberly-Clark, that partnership is operated inside Mindshare."
Regardless, ad tech vendors are starting to build their products
to work more nimbly in a future where they have more clients, not just a select
few trading desk partners. "Brands aren't dumb," said one vendor.
"There hasn’t been enough spend to matter. But with this shift to
programmatic premium, the money gets real. Clients are going to expect you to
act like an agent, not an ad network."
The bigger question is, has
the trading desk model ever worked for agencies? Proponents typically brag
about the hundreds or thousands of campaigns they have for clients via their
trading desks to date. But one former agency insider threw cold water on those
claims.
According to some former
agency executives, most global agencies have 500 to 700 clients. So even if a
few dozen clients are using a trading desk platform, each running multiple
campaigns, that's a drop in the bucket. "It’s actually been quite hard to
get more clients on board," the insider said.
Why? Trading desks simply
don't pay off for certain clients, who either rely on low-cost cost per
acquisition tactics or are very concerned about site environment.
And even for clients that
do test trading desks, they're not always immediately effective. "It takes
a long time for an algorithm to learn and an enormous amount of volume needs to
be captured," said an insider. "It may take eight to nine months and
that’s hard for clients to stomach."
There's also the cost of
technology—never an agency sweet spot. One exec estimated that trading desks
can cost $7 million to $10 million just to develop, and constantly need to be
maintained. "It’s a sinkhole," she said.
That cost is a great
argument for stand-alone agencies to take over audience buying. Another is
simple long-term relevancy. "To me, if agencies don't start owning the
process, they’ll start sending brand agencies to the nursing home," said
one agency exec.
Of course, many dismiss
this way of thinking. Operating trading desks requires experts. "They are
here to stay," said PubMatic co-founder, CEO Rajeev Goel. "Overall,
the model works. And it takes a real expertise and skill."