Why the advertising and media industry might be heading for its Lehman moment
In 2008 the global financial services industry collapsed, costing thousands of jobs, wiping out millions of savers and destroying countless billions in shareholder value. We saw the demise of the global economy as a result of inflated leverage and murky processes deeply embedded at the root of the banking system. Now we may be approaching our 'Lehman moment' in the advertising and media industries.
The then – a look back to the 2008 financial crash
A quick economic history lesson – as aptly described in Michael Lewis’s The Big Short, synthetic Collateralised Debt Obligations (CDOs) pulled the global financial system down. Once described by Warren Buffet as “weapons of financial mass destruction”, fundamentally, synthetic CDOs were bets placed on the outcomes of other bets, piling up risk upon risk; as bets got larger, risk accumulated, and the bubble grew larger and larger. The danger being that bets (trades) were made and value exchanged, predicated on financial assets (“instruments”) that were – in real terms – a fraction of the value people perceived them to be.
At the bottom of the pile was a simple bet based on a real thing – a mortgage, which is just a bet that someone can repay an interest-bearing loan over a fixed period of time. These bets were lumped together with other mortgages in big groups to form an investment grade bond “rubber stamped” by the ratings agencies – the CDO. The effect of the layering of all these bets was that $1 of a real mortgage loan was in fact worth $20 in the financial system. The financial services industry uses the fancy phrase “leverage” to describe these bets, but it’s the same thing. Thus, when one mortgage loan went bad for $100,000, it actually meant $2,000,000 was destroyed in the system because of all the losing bets stacked above it.
Ratings agencies (the likes of Fitch, Standard & Poor) were supposed to be the independent companies policing the industry, marshalling for quality control of these bets, but they turned out to be conflicted, or worse, most of the time gave poor advice.
The now – stark parallels with ad land
The layering of arbitrage business models within primarily, but not exclusively, the current model of advertising and media trading, will have the same effect to the marketing services industry. For example, $1 worth of real ad impressions genuinely generated by a publisher in fact represents $4 of media spend at the top of the chain with this increased perceived value being generated by the advertiser.
As such, for every 1,000 impressions lost by a real digital publisher to social platforms and the rising tide of Facebook and Google (the digital guopoly) costs the system $4. With 75% of that being extracted by the supply chain – with most of that taken by the media agency – between the advertiser and the publisher, we could see a rapid collapse of all of the intermediaries who are relying on these forms of revenues to feed their businesses.
That’s not all. The digital advertising – or adtech – industry is in real pain as the slice of the pie left to others by the digital duopoly shrinks. The duopoly are consuming 100% of the growth in the market. Don’t take my word for it, just marvel as the shareholders of adtech businesses race to exit at almost any price regardless of public or private ownership. With the voracious value chain above them, digital media-owners are under increasing pressure to kick-back revenues from a shrinking advertising market and, conversely, the intermediaries are gauging a shrinking pond.
This is not sustainable. The cracks in digital media are destabilising everyone above them in the value chain and we may see a rapid reversal of profitability for the entire chain. If your business is built on arbitraging the value of media inventory, as many media agencies are now, you could be looking at a 2008-style collapse just around the corner.
The early warning signs of a collapse are already manifesting, with competition from consultancies, board room ructions and rumours of mergers all growing in the last few months.
Indeed, Sir Martin Sorrell’s resignation this weekend with full “retirement rights” may, in the not too distant future, be seen as the final, expert chess move of our industry’s GrandMaster.
However, this CAN be avoided. The economics within the current ad model are clearly flawed, fractious and the result of opaque, archaic practices. Though as deep as the issues are within the industry, the areas to tackle are clear – rebuilding transparency, regaining trust within the system and a disclosed revenue model. The hidden rebates destroying rates of return for advertisers and publishers are a symptom of murky trading practices preserved by an over-centralised industry. I believe this can be avoided. New innovations – like blockchain technologies – mean new infrastructures, or trading environments, which are more open, transparent and in which control is held by all parties and not the select few.
Independent platforms offer a more democratic, level playing field for the future which is what my team and I are seeking to achieve with our platform, Fenestra. Trading transparency will inevitably enter our industry and those who disclose all forms of income will attract more clients and prosper.
In 2010, Michael Burry wrote an op-ed for the New York Times arguing that anyone who was paying attention to the global economy from 2005 onwards should have seen the warning signs and excoriating former Fed chair Alan Greenspan for not noticing or warning the market. If ad land doesn’t act to tackle the fundamental weakness at the heart of the media supply chain, the same will be true.
Ashley MacKenzie, CEO and founder of Fenestra