Andrew Meaden, GroupM regional head of trading in Asia-Pacific, says YES.
"Funky activation campaigns hardly make a ripple in sales across hundreds of cities. As a result, China is still largely a TV-based market, where client concerns are managing scale in a cost effective way. Managing TV cost is usually the primary driver behind consolidations and the first thing that any client will look at in a pitch. Unfortunately, once procurement departments have finished pushing on the TV costs, they will turn to the slender agency commissions and the squeeze will go on.
It's still possible for agencies to make money, but it's getting harder and there must be a bottom point. When we hit it, there could be a variety of scenarios. General agency trading activity may be taken over by large computers, while the rest of the agency concentrates on higher margin, value creation work. Some smaller agencies will get out of the trading game and leave it to the big boys who will use their consolidated leverage to get new trading income businesses, while, ideally, the remaining agencies will unite and only work for fair margins and won't undercut each other."
Elaine Ip, CEO Omnicom Media Group China, says YES.
"Agencies today are operating with total transparency. An agency's profitability does not rely on buying cost margins.
Delivering savings for clients and consolidating their spending is achievable. Consolidation itself means bigger bargaining power. Concentrating investments with fewer but stronger channels and media groups can help stretch clients' media dollars further.
Cross media platforms, cross city deals, better portfolio spending management, optimisation of investment splits across layers of TV/cross media platforms, optimisation across seasons, and so on, are all proven to be effective cost savings tactics.
Driving savings for clients in fact should have a positive rather than a negative impact on agency profitability, as agencies are remunerated by fees or commissions coupled with an incentive scheme that is designed to reward agencies for extra efficiency achieved."
Greg Paull, Principal at R3, says YES.
"The payment of media agencies in China is more of a mess than in almost any other country. Agencies under-cutting each other have met with clients under-paying and auditors over-consulting.
Agencies are unable to match more aggressive pricing, clients are forced into changing agencies more often and agencies have to supplement their income from media owners. It seems the only people winning in this are the pitch consultants and auditors.
Our research shows the commission rate of media agencies continues to fall so that today 30 per cent of marketers are paying less than two per cent.
Unlike other countries, in China, more media means more markets, more negotiations, more schedules, more post analysis, and more complexity that can't be automated. One of our clients has 85 people in their media agency on their account. Who's paying for them all?
Everyone needs to spend more time measuring the effectiveness of media. A media agency that can prove the brand and sales impact of their contribution has the leverage to be very profitable."
Darren Woolley, TrinityP3, says NO.
"With the constant downward pressure on agency costs and the highly competitive market place, media agency margins will become non existent. Does this mean media agencies will stop competing in China? No.
The size and global significance of the market place means that agency networks will invest and support accumulation of market share hoping to convert that into profits in the future. In the short term, agencies will look for ways of supporting their profitability, either by reducing possibly their largest cost - staff - with less experienced lower cost employees or increasing revenue through kick-backs, hidden commissions and non-media revenue from media proprietors.
Neither strategy is in the best interest of the client."
This article was originally published in the 1 July 2010 issue of Media.
