What does a beleaguered media agency do when it finds that its survival kit is in really bad shape? It looks for something else that can take it out of the woods.
Over the last few years, Indian media agencies, battling the commission model which had almost stopped working for them, discovered new avenues of business that acted as a buffer first and then developed into life savers and soon became profit centres. A look at how media agencies played the field and changed the game.
Past is past
The story of the 15 per cent commission - which the media agency charged for planning and buying media for its client - model is now history. Though still prevalent, it has been reduced to 2 per cent - or even lower - in most cases.
If a media agency handles a brand with annual media spends worth Rs. 50 crore, the agency would earn Rs. 1 crore, as 2 per cent commission. Quite a decent income, one would say.
To continue with the story, to service that account, the agency would need a team of five people - two planners, one buyer and two operations persons. The two planners and the buyer would take away around Rs. 30 lakh (Rs. 10 lakh each) as annual salaries, while the two operations persons would cost the agency another Rs. 8 lakh. So, the agency would have to incur an expense of Rs. 38 lakh as salary for that single account. This is just one part of the total cost.
The agency would then spend another Rs. 35-40 lakh as overhead costs which include data, admin and rent. As a result, for a Rs. 50-crore client, the agency spent around Rs. 78 lakh, and earned a commission of Rs. 1 crore - a profit of Rs. 22 lakh. So, for an agency with a billing of Rs. 500 crore, the profits would only be Rs. 2 crore. Besides, the risk of delayed payment and defaulters always existed. One default payment could change the arithmetic of the business.
Gradually, agencies found some respite in the form of non-traditional verticals. Such units were backed by the requisite talent, scale and expertise be it digital, out-of-home (OOH), retail, activation, sports marketing or in-film placements.
Interestingly, these verticals contribute 30 per cent to a media agency's overall revenues. Agencies have also managed to increase profitability by 30-40 per cent.
The back story
Way back in the '90s, Roda Mehta (at Ogilvy) was the one who introduced media planning as a function to add value to the media department. Until then, it was just a back-end operation in a full service agency.
As the idea developed into a successful model, the media department evolved to become an independent profit centre. The value proposition in a media agency lay in its negotiation skills and how much of the client's money it could save. It worked quite well for many years. But, as time passed, there was a limit to which the media publisher would offer discounts. Small players were arm-twisted to provide further discounts, while the bigger media brands tried to be rigid on the discounts it offered.
There was hardly any differentiation between media agencies, and the commission rate started declining. "Depending heavily on the buying model alone wasn't good enough. There's only so much you can earn by making someone else lose," says Lynn de Souza, chairman and CEO, Lintas Media Group (LMG). Media agencies had to look for other ways and means to get on with life. Diversification followed.
All about skills
Agency heads are almost unanimous in their belief that such diversification had little to do with the declining agency commission. Instead they believe that agencies wanted to provide more value to clients for the money they spent.
The new verticals provided that opportunity. When media agencies go beyond traditional planning and buying, there is a creative element involved as well. Clients are ready to part with a consultancy fee separately for the additional value they provide.
As a senior media observer says, "If traditional media agency is process management, then the new media agency is project management, where you need different skill sets." Agencies are also of the opinion that the increasing media fragmentation forced them to change the gameplan. It led to marketers wanting to invest in newer areas.
Increasingly, people are spending more time out of home these days. Teenagers are hooked on to digital media. Everyone in a family seems to own a mobile phone. When the consumer is on the move, advertising and communication will shift to follow her wherever she goes.
Sam Balsara, chairman and managing director, Madison World, says, "Mass media is not enough to create a pull for a product. One has to touch or entice the consumer at every point possible, in order to complete the sale." As newer media options emerge, more specialised divisions will come up. Ten years ago, there were no malls, so activation wasn't that important. Now, activation is a catch phrase. Retail and mobile are huge.
The existing media landscape also changed and media agencies were forced to adapt, which they did willingly. OOH went beyond billboards. Interestingly, it has been the creative agency (post the splitting of the full service agency model in the '90s) that has always tom-tommed its specialised units. But, with time, clients demanded numbers across media platforms - just one creative thought in isolation wasn't sufficient.
Says Srikant Sastri, chairperson, VivaKi India, "It's about how I can reach 'X' number of people across multiple platforms with that idea, which is the domain of media agencies," he says. This, too, led to the shift of expectations on deliveries on various media, from creative to media agencies.
The benefits of specialist divisions are many. While it means more revenue, it also helps a media agency differentiate itself from the herd. And there are other advantages.
Having scale, talent and width helps during pitches. A classic benefit of the evolution of media planning into communications planning is that any of these units can be a door to an array of the agency's services for clients. Ashish Bhasin, chairman, Aegis Media India, says, "We often pitch for one media, but land up offering some of its other services to clients who need it. At other times, clients have been forthright in asking for 'package deals' - having a retail offering thrown in for good measure, along with OOH."
Levi's and Britannia were Madison's PR clients first, and then became its media clients. "We have a strong history in PR, and used to host all the events and press launches for Cinthol products. One fine day, P&G approached us to do some work. That is how we landed up handling media for Cinthol," reveals Balsara.
He goes on to add, "At times, clients have come and told us, they will give us outdoor if we also give them, say, retail. Media agencies do have a tendency to ape each other and offer this and that, but clients are intelligent. They know who's for real."
Even within specialist units, there are those that are more viable than the others. Digital, OOH and activation are considered more profitable because these areas need creative solutions and clients are ready to pay a premium for it.
Overall digital spends in India are pegged at 4 per cent of the total media spend pie. In a media agency, the digital unit, on an average, contributes 20-30 per cent in terms of revenue. Aegis Media, reveals Bhasin, has launched two separate digital units, Isobar and iProspect (the latter is a specialist in search engine optimisation). The media agency plays a role in creating customers for its clients through OOH and activation, now slotted as earned media for which the client is ready to pay extra. Conjuring up new divisions for this is not a breeze considering the fact that standalone specialists such as independent digital agencies and activation companies are doing the job, too.
and the not-so-hot
There are certain specialised areas that don't go down too well with agencies or clients. Rural marketing or activation is one such. It is challenging because local vendors dominate - there are hardly one or two national players. But, this could change soon.
As Balsara puts it, "Rural marketing calls for huge investment and few brands are willing to make it." In the case of Madison, Balsara spotted potential in the South-based agency Anugraha, 15 years ago, and bought it over, converting it into a rural marketing agency. However, he admits, that the problem with rural marketing is that a client doesn't get the kind of return on investment (RoI) he wants.
Getting the right kind of models, practices and revenue setups took time. CVL Srinivas, chairman, Starcom MediaVest Group, says, "A few years ago, we didn't even know how many people would be needed for a rural unit. It was a challenging task to figure out the correct methodology to identify a viable business model."
Recently, LMG let go of a large client from its rural marketing unit, as it was leading to enormous manpower and execution costs. "Smaller clients, if they do it right, are much more profitable. If you do it wrong, it backfires," says de Souza.
TV production is another area that some media agencies ventured into, only to withdraw later. In Madison's case, it produced the popular TV show, Shaanti. However, as they discovered later, such an exercise can prove tricky. Issues like 'conflict of interest' crop up where an agency is suspected of selling ad slots on its own show to clients.
Celebrity management and in-film placements, although present as divisions in media agencies, aren't particularly hot favourites, either. "Such 'glamorous' arenas are less suited to a corporate set-up like a media agency." GroupM was quick to shut down its celebrity management division after handling a few celebrities.
Meenakshi Madhvani, managing partner, Spatial Access Solutions, feels that agencies are becoming more reactive than proactive. Instead of just responding to a client's need, they should take the lead. Some agencies have done that. GroupM did it for Deccan Chargers, the IPL franchisee. Says Vikram Sakhuja, CEO, GroupM, South Asia, "We handled activities that went beyond the vanilla delivery of advertising to help the brand achieve salience."
Recently, LMG started a division called Limelight, to provide solutions in broadcast, digital, print and OOH. "While paid media still retains its value, the focus will shift to owned and earned media," says de Souza. Similarly, SMG's LiquidThread embeds brands across entertainment screens through content.
Clients are demanding more. "More media pitches are happening these days. It is proof that clients are investing in specialised offerings. But the ability to negotiate well will continue to be important in pitches," muses Vishnu Mohan, CEO, Havas Media, Asia-Pacific.
Fixed and variable remuneration models co-exist in media agencies. But with new divisions, there are many clients who will prefer to work on a zero-fee basis. In such a case, the agency gets paid for its deliverables. There are times when agencies are paid for their strategic inputs, at others for execution. Then, of course, there is the golden chance for being remunerated for both.
Things will keep changing. There will be other obstacles that will present themselves to media agencies. It is up to them to show the dexterity to get around the difficulty. Having done it once, there is no reason why they can't keep doing it.