When were poster specialists set up?
The origins of the outdoor specialist market date back to the late 1960s, when outdoor advertising was a fragmented business owned by numerous companies scattered across the country.
Creating an outdoor campaign meant liaising with each of these firms individually, ratcheting up time and costs that resulted in media campaigns that penetrated local markets, but lacked national cohesion.
During the 1970s, three of the largest billboard owners merged to create what became British Posters - a group that grew to control more than 80% of the UK billboard market and was closed in 1982 after an investigation by the Monopolies and Mergers Commission (now the Competition Commission).
The next wave of outdoor media owners learned from the benefits of cohesive media planning, but rather than solely representing billboard owners, found their clients through partnerships with advertising agencies. With agencies reluctant to devote full-time staff and resources to the outdoor market, many outsourced outdoor planning to a new brand of independent specialists.
Who are the main players today?
The market leaders are Posterscope, owned by Aegis Media, and Kinetic, 50% backed by WPP and 50% owned by Kinetic's management team (see box, page 22). Together, the two are thought to command about 70% of the outdoor market. The third largest specialist is IPM, owned by Interpublic Group, which accounts for about 13% of the market. A number of independent players, including Gen Outdoor, make up the remainder.
What do they do?
The poster specialists are employed by media agencies to buy outdoor media on their clients' behalf and negotiate the best rates. This means that when out-of-home media space is on the media plan, the planning and buying is often subcontracted to the outdoor specialist, which has relationships with the media owners.
As the outdoor specialist effectively acts as a supplier to the media agency, clients are rarely privy to the exact financial deals agreed between the media agency and the outdoor specialist. Nor, in many cases, the negotiations taking place between outdoor specialists and the contractors.
Chris Marjoram, managing director of IPM, says: "We are continually astonished how little clients seem to know about how outdoor is a major source of income for agencies."
Isn't this just like any agency-supplier arrangement?
Technically, yes. For every pound advertisers spend on outdoor, 15% is paid to their media agency in commission and an extra 5% commission is paid to their specialist outdoor agency. Outdoor specialists have traditionally argued the medium needs these extra slices of commission to pay for field teams, mapping and to ensure the campaigns are properly posted.
So far, so straightforward. However, the business model is complicated by the significant, and not always fully disclosed, "sur-commissions" (commissions extra to the basic agency commission) that outdoor media owners pay the specialists as an incentive for putting their sites on the clients' media plans.
One senior outdoor industry source claims these additional rebates, or volume deals, are currently running at 10-12% on top of the official 15% and 5% agency commissions. He says: "This means that, in effect, Posterscope and Kinetic are not only paid for their planning and buying services by the client, but also by the outdoor media owners."
How significant a source of revenue is this?
The outdoor market has suffered in the recession, alongside the other sectors of the media industry. In Q1 2009, outdoor ad spend was down 14.78% year on year, while press, radio and TV were down 15.42%, 11.73% and 14.73% respectively (source: The Nielsen Company). Posterscope trading is about 16% down year on year, and the company is down 18% if the year to date is compared to the equivalent period in 2008 (source: Posterscope).
However, despite the tough market conditions, the poster specialists still make a significant contribution to agency groups' overall profits - one industry insider even describes the specialists' business models as a "gravy train" for agencies. He says: "Outdoor is where the media agency groups make their money these days."
His statement is supported by the most recent available accounts for Posterscope, which show that, in 2007, the company made operating profits of £10.1m (this excludes Meridian billings, but includes international airport billings). By comparison, Aegis Media's 2007 operating profit was £30m - meaning Posterscope contributed a third of the group's annual overall operating profit.
By comparison, Kinetic posted an estimated operating profit of £9.8m in 2008, while WPP's UK profits before interest and tax in the same period were £124.1m (sources: Companies House, WPP).
One head of an outdoor agency describes this model as a "symptom of the times". He says: "As long as clients keep driving agencies' fees down and making them work for less, they'll ultimately have to find other ways of making that revenue back. This issue is ultimately the fine line between whether making money through hidden commission is considered sneaky or a sharp business practice."
What are the implications of this system?
Some industry observers believe the relationships between outdoor specialists and media agencies have become so powerful that smaller outdoor specialists lose out on business and media buying is becoming less objective.
The head of one independent outdoor agency says: "With outdoor specialists offering huge incentives to the media agency, it almost certainly increases the chances of outdoor being put on the media plan. It boils down to whether agencies exist to serve their clients' interest or are working to a remit that is ultimately self-serving."
Michael Higgins, managing partner of Gen Outdoor, says his agency is unique in the out-of-home sector because it declines "all undisclosed sur-commissions available from the outdoor media owners". He says: "We do this because we feel accepting them would raise huge issues regarding our objectivity when it came to planning and buying campaigns for our clients."
IPM, which is audited as part of Interpublic Group, also prides itself on financial transparency. Marjoram says: "Any client that wants to come and inspect our volume deals is free to do that. Outdoor media owners know that any money they pay us is audited, and clients respect the fact that they know where their money goes."
So is it sneaky or sharp business practice?
Some people believe clients are unaware the poster specialists receive rebates from the media owners, which the clients are arguably entitled to, and so fail to raise the issue with their agency.
However, others believe clients expect their agency to get the best deal possible and accept the system as long as the agency is upfront about what it is doing. Barry Sayer, chief executive of Clear Channel, says: "Clients should negotiate deals they feel offer value and sit comfortably with their budget. If I'm happy with what my supplier is offering and the rates meet my budget, why would I dig behind the mechanics of their business?"
Clear Channel is clear that "aggressive trading" ultimately works in the client's favour and that concerns should be raised by the client with their media agency. Sayer adds: "The industry has grown up from the days when trade bodies would provide prescribed ways of dealing. Prices are working to the advantage of buyers, and are at their lowest levels in years."
David Ellison, marketing director at client trade body ISBA, says the group has talked to its members about developing a framework that offers the "greatest possible transparency". He adds: "Transparency in the remuneration system has been discussed this year and our members are pleased with the progress that has been made to date."
What are the pressures on the present trading model?
The outdoor industry has enjoyed eight years of growth, but the recession has exposed the sector's weak spots. Annie Rickard, chief executive of Posterscope, says: "The outdoor industry built the roof while the sun was shining, but now the rain has come, there are a few leaks that need attending to."
Just as media agencies are being forced to evolve their business plans, the poster specialists must re-examine their trading models in the light of technological developments and changes in consumer behaviour. Rickard says: "People are out and about more and making more decisions on the move - for example, with the rise of smartphones, more people are searching, even purchasing, while they are out-of-home. We still trade on a cost-per-panel basis and, if this continues, we will erode the value of the medium. The outdoor industry's trading model is out of date and we need to find a better way of demonstrating value."
So what needs to be done?
The launch of the expanded version of Postar's measurement system in Q1 2010, which will track 20% more travel, could give the industry the credibility to start trading in a new way. The starting point could be a move from trading on a cost-per-panel to a cost-per-thousand (CPM) basis, assessed on "likelihood to see".
Once this new trading system has been established, the industry could introduce CPMs based on demographics, interaction or even, eventually, transactions.
There are also calls to introduce a "benchmark price" across all outdoor media formats, managed by an independent body such as Postar or the Outdoor Advertising Association.
Rickard imagines this system working as a "stock market for outdoor" that would publish the weekly average price each outdoor format traded at, and so give advertisers more confidence.
She also believes there should be more data available to auditors, so they have the opportunity to assess creativity and value, rather than just cost.
She concludes: "There needs to be more industry-wide data and collaboration between all parties involved. At the moment, it's as though we are all marking our own homework."
How outdoor media is traded: Agencies' specialist out-of-home divisions
Aegis-owned Posterscope, a market leader and rival to WPP's Kinetic, buys outdoor media for the Aegis media agencies, including Carat and Vizeum. Posterscope also handles the outdoor buying for ZenithOptimedia, as well as Omnicom Media Group's UK agencies: PHD, OMD and Manning Gottlieb OMD.
Havas Media draws together Havas' global networks including Arena BLM, which it acquired last year, and MPG. Havas Media does not assign its outdoor buying to one specialist across the group. Arena BLM has worked with Kinetic on numerous campaigns, including Westfield London shopping centre, while MPG has a long-standing relationship with Posterscope.
Interpublic owns IPM, the UK's third-largest outdoor specialist, which accounts for about 13% of the country's specialist market. In the UK, IPM handles outdoor planning and buying for the clients of IPG agencies Initiative and Universal McCann, as well as providing outdoor media directly to certain clients, such as BSkyB.
There have been many murmurings of Omnicom venturing to launch its own outdoor media specialist, or setting up a joint venture with Publicis Groupe. For the time being, PHD and its sister Omnicom shops OMD and Manning Gottlieb OMD have retained buying arrangements with Posterscope, adding weight to the Aegis firm's offering.
ZenithOptimedia is served by Posterscope, although Starcom MediaVest Group uses Kinetic. The deal feels unfinished to some observers, who believe Publicis may consolidate its outdoor buying arrangements into one agency. The theory gathered weight when it emerged that umbrella trading arm VivaKi plans to launch an outdoor specialist agency in markets across Europe.
Kinetic, which is half-owned by WPP, buys outdoor media for WPP's portfolio of GroupM agencies, including MediaCom, Mindshare, Mediaedge:cia and Maxus, in more than 42 countries. Kinetic launched in 2005 as a merger between Poster Publicity and WPP's Portland Outdoor and has annual global billings of $4.4bn.
When were poster specialists set up?