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Madison and Wall: From The Archives, April 2023 Edition
A review of current news with historical context from past reports on retail media (2019), ad tech and agency disintermediation (2012) and the consequences of a worsening corporate reputation for Fox
I've written thousands of reports and articles for publication in my various roles over the years at Interpublic's Magna Global, Simulmedia, Pivotal Research and GroupM. As someone who once replaced an individual who started his career in advertising in 1948, I have tremendous appreciation for how a review of historical matters can provide insights on the present and the future. Consequently, I am regularly reviewing some of my own historical documents to potentially find new insights and also to remind myself about how the industry evolved as it did.
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Retail Media and The Robinson-Patman Act
First up this month is an extract from my initiation on Amazon published in January 2019. While I wasn’t the only analyst aware of the massive opportunity ahead for the company in the advertising industry, I might have been the only one covering it solely because of that opportunity. Alas, it was only a few weeks after publishing this that I left Wall Street for my role at GroupM, so there weren’t many follow-on reports of this nature. Nonetheless, the optimism I expressed turned out to be well-founded: I forecast $38 billion in ad revenue in 2023, a figure the company actually managed to generate a year ahead of my expectations.
That report was on my mind last week because of a Politico article referencing the resurrection of the Robinson-Patman Act, which has consequences on the commercial relationships between manufacturers and retailers. As the article noted, the Act, which is a US law from the 1930s and is focused on ensuring that manufacturers essentially treat similar retailers equally, has been largely dormant for 20 years, which explains why few people in the advertising industry I talked to in 2018 were aware of it when I worked on my Amazon initiation.
I was made aware of this law over the course of the year or two prior to the initiation as I explored the question of whether or not budgets for trade sales and advertising would converge, which was key to the optimism that some observers had around the growth opportunity for retail media. At the time I was told that many manufacturers were finding ways to encourage sales and marketing teams to work together, although operational restrictions that were vestiges of the Robinson-Patman Act were still in effect in most places. As it was explained to me, with a strict application of Robinson-Patman, if a trade sales team worked too closely with the marketing team and made a deal with a retailer to commit to a media budget as part of the commercial relationship, the trade sales team would need to make a similar media buy with other comparable retailers, even if the alternative media offerings were sub-par. With such interpretations, trade sales would generally be incented to buy media from a retailer when it made sense in context of their goals while marketing would do the same only when it made sense in context of theirs.
To the extent that marketers trade and sales teams have been working closer together in recent years, if Robinson-Patman is going to be enforced more aggressively going forward that may contain opportunities that could follow from a more comprehensive merging of trade sales and marketing budgets.
On the other hand, if the growth we have seen to date in retail media – which GroupM now estimates grew by 13% (to $111 billion in ad revenue) in 2022 at a global level, and by a similar 15% (to $33 billion) in the United States – occurred with Robinson-Patman restrictions largely in place, then I don’t think there will be any reason to believe that retail media advertising will decelerate any more than it is already expected to in the near term.
DSPs and Agency Disintermediation
Earlier in March there was a fantastically reported piece by Insider’s Lara O’Reilly on Mediamath, which was once a leading DSP and is now rebuilding its position as one of many among a second tier of companies focused on this product offering.
I think the article is essential reading for anyone who looks to understand venture-funded ad tech companies in general because of how it shows how close some companies get to their desired exits without actually completing them, and because of how it describes the historical relationships ad tech companies had with marketers and agencies. As the article correctly noted, “In contrast (to The Trade Desk), MediaMath focused on marketers, betting that they would bring their programmatic ad buying in-house — a big topic of debate at the time. MediaMath placed the wrong bet. Most marketers continued to delegate the actual trading to their agencies.”
MediaMath wasn’t alone in this view. However, I never understood why there was so much persistent negativity about the advertising agency business model among the investment community and by many industry participants. “Middle-men” serve a valuable role in many industries, especially those which involve a lot of complexity and a lot of subjective decision-making. I would argue that agency doomsdayers put too much faith in the idea that advertising could be turned into an empirically pure science, when so much of it is and will forever remain a subjective art. More data won’t make much of a difference in this regard: torture data long enough and it will tell you anything you want it to.
I outlined some of my thoughts on the disintermediation topic in my January 2012 initiation of coverage on the agencies (extract link here), with this line a critical one: “as marketers have come to face more and more choices for their marketing strategies, they increasingly rely upon external and ostensibly neutral partners – such as agencies – to both filter ideas and support the socialization of initiatives or process changes across the broader organization.” Neutrality has always been somewhat subjective. In many countries around the world, agencies are paid by media owners or otherwise have principal-based trading operations. But at least the conflicts-of-interest are well-enough understood, unlike with ad tech companies. And the conflicts are nowhere near as pure as they are with publishers or media owners. The bigger point sustaining the role of agencies is the notion that they help socialize ideas for marketers, and that they remain focused on providing services, which continue to remain the critical function for agencies.
Fox, Dominion Voting Systems And The Consequences Of Corporate Reputation Damage
Finally for now, one topic that’s been frequently – and importantly – in the news recently relates to the lawsuit between Dominion Voting Systems and Fox Corporation given their upcoming defamation trial and recent reporting on the internal deliberations at Fox in relation to the 2020 US election.
Fox and its sibling News Corp. are very familiar with controversy, and also to billion dollar-plus payouts for legal matters associated with the production of news. It’s been little noticed that Fox has continued to record expenses related to the consequences of “phone hacking, illegal data access and inappropriate payments to public officials that occurred at subsidiaries” prior to 2011 at News Corp’s UK-based (and now shuttered) News of The World. On my estimates, those expenses – which continue to be recorded with every passing quarter in Fox’s quarterly securities filings, because Fox indemnified News Corp – have by now amounted to nearly $1.2 billion, including $82 million in the most recent quarter.
I didn’t write about those events as an analyst, as the hacking issue arose before I was covering the sector as an analyst, and the drip-drip-drip of the indemnity payments didn’t seem like much in any one quarter (although clearly it has turned out to be quite significant).
However, there were other scandals I did try to analyze or otherwise put into context for the business such as the exit of Bill O’Reilly in April 2017. As I tried to focus on the consequences for the stock, there was never a meaningful threat to consider in relation to advertiser boycotts because the business was primarily dependent on subscription revenues. Lawsuits were similarly a non-risk, because any payouts would be viewed as “one-time” in nature (even if, as we now know, they weren’t) and would thus be excluded from consensus estimates for income and earnings per share metrics. And besides, if things did get really bad because of his continuing presence an O’Reilly departure probably wouldn’t make much of a difference, given the strength of the Fox platform. As I told Bloomberg around that time “you could probably put a monkey in the seat and as long as it spouted appropriately conservative views there would be decent ratings.”
Indeed, the bigger issue for Fox would be whether the company would be constrained in its future corporate actions. In this context, the risks as I saw them were around Fox’s interest in buying all of UK-based satellite TV service Sky – which Fox’s Rupert Murdoch essentially founded and controlled – given the need to pass a “fit and proper” ownership test that the UK’s media regulator would apply. While Fox did ultimately pass the test, the fact that the company’s fitness was called into question causing it to face serious risks with respect to executing on its strategic preferences, it’s nonetheless a good reminder that consequences more meaningful than monetary payments can follow for a company when it suffers from meaningful reputational damage, regardless of the specific outcome in court.
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