Speaking at the Forum's annual general meeting in Sandton, Gauteng, this week, Muller said a sizeable percentage of advertising, marketing and media people believe the current practice of offering multiple rates on media rate cards was impractical and unsustainable, and that the industry should consider a strategy aimed at returning to the old net-rate system at the earliest possible date.
Advocates prefer the previous system because it offered a simple, universally accepted, mutually beneficial means of planning and purchasing space from media owners. In the old scenario, agencies, clients and owners each had their particular roles and responsibilities, and these did not complete or overlap with the others. "Agencies earned their commission, media owners got their margins and clients, in effect, received agency input 'for free'," Muller said. 'This meant that everyone shared in a win-win situation.
"More recently, however, media owners defied precedent and actively solicited direct client business. This meant the old system ceased to be a 'system' and turned into a something of an à la carte menu, with one set of rates for agencies and another for clients who dealt direct.
"The result," continued Muller, "was not only owner-agency conflict but also confusion among clients, who struggled to differentiate between 'discounts' and 'commission rebates'. Unsurprisingly, many clients opted for straight fee reductions rather than the more admin-intensive commission rebates, leaving agencies out in the cold and, for all practical purposes, placing a cap of 16.5% on commissions. Previously 16.5% had been the norm, not the ceiling."
But in their enthusiasm for discounted fees, Muller noted, clients may have overlooked two important issues pertaining to their relationships with agencies. Firstly, in the old net-rate dispensation, agencies effectively 'worked for clients' and 'got paid' by media owners, which meant clients got the benefit of agency input at no charge. Secondly, in the old system, agency remuneration was linked to a "media event", whereas now agencies are remunerated whether advertisements appear in the media or not. On both fronts, the new paradigm actually disadvantages clients rather than empowers them to take control over media purchasing costs.
Despite these drawbacks, Muller remarked, there remain strong incentives for clients to deal direct with media owners. Encouragements include the relatively high number of international ads that are 'downloadable' into the local market with little or no agency involvement. Ditto the number of international exposure patterns/models requiring only minimal local modification. Other reasons for dealing direct with media owners include erosion of confidence in the intellectual capital of agencies, and the commoditisation of media currency ("never mind the quality what's the price?").
Beyond these 'strategic' issues, Muller believed there were a number of financial and tax considerations which would hamper any industry-wide movement back to a net-rate scenario. These include loss of income to agencies, precipitated by rates reductions, and likely increases in agency commissions to offset reduced cashflows. An imponderable is whether or not the current 45-day payment cycle would remain in place, or would there be a free-for-all in terms of negotiating terms of settlement?
"There would almost certainly be a once-off tax implication," Muller continued, "as currently there is a moratorium in terms of GAAP tax practice. Fortunately the norm has been to allow for deferred tax, so the industry should be able to cover this anomaly.
"Perhaps the greatest obstacles in the way of a return to the previous regime are logistical," Muller concluded. "For the plan to work, all media owners would have to implement net rate cards simultaneously. There is no guarantee that this would be the case. The more likely event would be a staggered implementation, which would place current administration systems under considerable pressure. The question is: can we cope with the burden of multiple remuneration models, even temporarily? Or are the risks so great that net rate cards will never get off the ground."
C-Cubed Communications on behalf of AMF
