Commentary
What Is Google Giving You For Your 31%?
- by Dave Morgan , Featured Contributor, June 25, 2020
An industry trade pub reported Tuesday that Google opened a window into its black box and blogged that it takes a 31% cut per $1 on display ads bought on its platform.
Surprised? I wasn’t — but wish I had been.
How can a fully automated software system take so much from so many so often — and deliver so little relative value? It’s sort of like Google is the interface provider on all dollar slot machines at all the casinos in the world. Its job is to make sure the wheels spin. It takes no risk in the transaction, since it controls all wheels on all machines, thus controls all coins and all clicks. Its business is just one of allocating the clicks to the coins.
Yep. And for that, it gets a 31% cut of the house.
Thirty-one percent seems like a lot. Is it? Here are some of my thoughts:
31% is just Google’s take, and only for one hop. Google’s take rate is just for initiating the programmatic transaction and serving the ad. But most programmatic ad buys end up going through a number of daisy-chained bids before they’re done. The first demand-side platform (DSP) might buy from one or more other DSPs (each adding their own markup), that then might buy from one or more sell-side platforms (SSP) (each adding their own markup) before the ad is delivered. Thus, at 31% per hop, it doesn’t take long for the “wheel spinners” to own most of the money.
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31% is just for the media and ad-serving, not targeting data, attribution or verification. Just so you know, a lot more people take their programmatic cuts too, not just Google and the other DSPs and SSPs. One or more of the DSPs might have a data fee added on. Another DSP, The Trade Desk, for example, has reported that much of its margin growth over the past year has been in the development of proprietary data that ad buyers pay for on top of their transaction fees. If those advertisers seek attribution and/or verification, more fees. All fully automated, of course, so very low on the incremental costs of the suppliers.
A lot more than TV. In the world of TV advertising, all-in buying fees tend to come in around 10%-15% of the transaction.
Yes, many agencies say that they are charging 3%, but we all know that’s a bit of a fiction. It doesn’t count all add-on fees, and obfuscates the fact that the buyer might have undisclosed principal or co-marketing positions in some of the media, data or services being provisioned. However, there’s rarely more than one “hop” in a TV transaction, so the 10%-15% tends to capture it all, and the measurement cost (Nielsen) probably only adds 3%-4%, and the cost is born by the seller.
Why disclose now? Google releasing this now makes a lot of sense, not that it was really that much of a mystery to anyone who lives in this industry. It’s rumored that state and federal antitrust authorities are looking at Google’s dominance in the sector, so better to pre-disclose now and control the press and the spin proactively rather than have it first come to light in a legal complaint.
This is a good thing. I applaud Google’s transparency here. As little value as Google adds, it probably adds more value per dollar for “wheel spinning” than any other spinners out there.
The more suppliers in this marketplace go transparent about what they are doing and how they make money, the better for advertisers and media owners to operate their businesses, and the more waste and fraud that will be eliminated.
What do you think? Is 31% the right number?
Dave, while I agree with you about the well known and wildly excessive "tech tax" for digital media, no major ad agency makes 15% for buying national network TV or cable. The most common fee is 1% for broadcast TV network and 3% for national cable and this includes just about everything, Nielsen, post buy monitoring, handling make goods, etc. The figures may vary slightly, but not even close to 10%, let alone 15%. As for the so far not proven---but possible in certain cases---situations where agencies kept some of the GRPs they bought for one client and sold them to another, etc. this is hardly a typical scenario, especially once the cat was let out of the bag about six years ago and advertiser media directors are on point to watch out for it.
Ed, for sure that total take rate of planning and buying agencies varies. But the small stated percentages are typically on top of FTE charges, with an increasing focus on flat fees and lots of add ons. And there is no question that all of the major ones now have big positions in inventory themselves; it is in their public filings. The best way to get the 10+% number is to look at the public financials of the agencies, where they break out the revenues and profits of their media agencies. Their SEC filiings show much, much bigger takes than anything close to 1%.
Dave, of course, the agencies charge for account handling, creative, etc. as well as media planning/buying, however if you went to one of the media agencies with your account handling, creative, etc. already in hand via a small boutique and asked the large media shop to place a $30 million broadcast network buy---as your small, mostly creative agency couldn't perform this function---- you would not be charged 10% or 15%. If they thought they might get away with it the large media shop might try for 3%but if you hired a consultant who knows about such things, the fee would be singificantly reduced or you'd go to another shop to make your network TV buy. Yes, national cable-by virtue of many more spots to keep track of and more channels to deal with, usually costs more than broadcast network---like 3% and sometimes a point more if a small budget is involved or there are unusual specs to deal with. Local market TV buys, which are highly fragmented due to the many markets sometimes involved plus the problems caused by inadequate local rating surveys, come in higher than national---usually somewhere between 3.5% and 5%, but that's the high water mark on TV media buying fees.
Very good points Ed. I used the number that is closest to their total take rate for planning, buying and managing all of the TV media operations to make it as apples to apples as possible with Google, and to be sure that there could be no argument that that total take in TV was anything close to what Google takes for display ads.
Either way, the digital tax continues to astound me.
As ever Dave, you are both enlightened and altogether too kind to the villain exposed. Programmatic display will go down in business history as the greatest and longest fraud ever perpetrated upon the shareholders and customers of the brands who dumped their budgets into its voracious black hole. Google, if there is any justice, will end on the gallows for having owned, managed and monetized its cynical operating system.
Good question. A. When you triple your impact with personalized, relevant messages in the "purchase moment", you should pay more. Digital platforms are getting closer. TV Networks and Cable are slipping further away.
If we knew, using non fraud laden clean data, that the impact was tripled, that would be something. Apart from self serving sales promotion, I don't think this has been shown. If it were true, tv really would be dead.
I can't comment on the US typical financial arrangements, but advertising practices tend to be very similar around the world.
Using TV as an example, the invoice to the client may well show around 15% of the media spend goes to the agency. That invoice tends to be raised by the media agency, and 15% is a common rate. As pointed out that covers the TV planning and buying, post-analysis, any other bespoke "add-ons", plus the creative agency fee which the media agency rebates back to the creative agency.
A common split in Australia of the agency fee would be 3% to the media agency and the rest to the creative agency et. al. When you look at the holding company reports yiou tend to see the 15% (i.e. Dave's figure), but within that is Ed's 3% figure. Could that be the reason for the disparity.
Jon, I don't want to make this a big issue as I am in total agreement with Dave regarding the thrust of his initial post. However, let's take a look at agency fees as they have developed for a second. Long ago it was standard for the media to inflate their time and space rates to include a 15% commission fot the agencies. Which meant that the agency kept 15% and paid the rest to the media. That fee---15% of media billings---accounted for all of the agency services, the two largest being account handling and creative, plus market or ad impact research, media planning and buying. Typically a large agency netted about a 10- 15% pre tax profit on the 15% fee--or something like 1-2% of the amount spent by the client on media.
As media rate hikes and a growing economy drove ad spending up the agencies began to offer large advertisiers a "savings" on their 15% fees, in return for much larger billings---this being accomplished by handling client brands formerly serviced by rival shops. Once advertisers saw this kind of wheeling and dealing, they began to negotiate an overall reduction in agency fees and now, for the first time, the agencies started to absorb many of the independent media shops and consolidate them into the monster media agencies we know today. These service "creative" agencies owned by their conglomerates and their advertisers for media planning and/or buying but also handle media assignments for clients who are not otherwise associated with the conglomerate. As a result, there are specific fees for media planning---fairly low--- as well as for media buying---in the latter case on a medium by medium basis. I have listed these in my previous comments for TV. They cover all aspects of media buying forTV. There are no added charges.
The net result of going off the traditional fee system---the 15% general agency fee covering all services plus the agency's profit----has been a reduction in the percentage allocated to agency services. I have not seen a precise current tally but the total amount that an advertiser now pays for the whole agency service package, regardless of how the various account handling/creative and media assignments are split up among various shops, is probably around 10%. Of this, I'm guessing that media planning for traditional media probably comes to 2-3%, with variations depending on what forms of media are used. The remainder---6-8%--- goes for account handling and creative. If the normative percentage for media alone was 10% or higher, the advertiser would still have to pay an additional 6-8 % for account handling and creative, which would mean that instead of the traditional 15% fee of the past, the agency cost had increased to 16-18%. Barring unusual situations this simply isn't the case.
Thanks Ed.
A very different system in the US to AU.
Until the late '90s we had a commission system for TV. The networks rebated 10% to the agency. A $1m campaign would be invoiced as $900k to the agency. The advertiser would be invoiced for the $1m plus a 7.5% agency fee - $1,075,000.
This system was dismantled around 1996 or 1997 and agency/advertisers contracts determined all the service fees. This lead to the separation of creative and media into separate entities - often under the umbrella of the holding company. The immediate effect was 15% service fee to the advertiser - 3% media, 12% creative. Over time that has eroded. But the ratios are not that different though the methids are.
And then along came online. There were many more snouts in the trough clipping the ticket as much as they can, and with many of those snouts under the holding company. Nett result is that the proportion of the advertising budget that gets to 'touch' the consumer is a lot lower.
Just one more clarification. In my last post, I said that "media planning" probably costs 2-3%" but I meant media planning and buying, not just planning. Naturally if the client is only using spot TV, the fee would be higher while if the client is only using braodcast TV networks, it would be on the lower end.
Jack Wakshlag- Look at it this way, digital platforms have the ability to personalize ads; forexample, Hi Jack this is your( brand of ) beer you can enjoy durning the game this evening. Jack's LS two block away has it on ice for you. Do you want to pick it up or have it delivered. The opportunity for Michelob Light (your brand for this example) to reach you in the purchase moment is maybe one in a billion (E).
I know how it's supposed to work. If it was that easy, everyone would have moved their money long ago. But we know spiders and bots and click farms pretending to be a human look good too. If it was really better by 3:1 all the big time advertisers would know it, right? All their money would be spent this way.
Larry, a quick question. In the US what would that personalised ad cost - I've got little idea of US rates.
Jack, don't be mislead by those overall ad revenue stats that are promoted constantly. The big branding advertisers do not spend anything like a majority of their money on digital media, let alone FB. They spend something like 85% of their ad dollars on traditional media, mainly TV. Digital video is where the growth for digital has been among branding advertisers, but it's still a small, albeit growing piece of the pie. The bulk of digital ad dollars are for search, direct marketing, sales promotion and other non-branding functions and much of it is local in nature.
Yes, I agreed Ed. That makes the effectiveness argument even more muddied. It was hard enough to try to figure media allocation before. But now we have one, digital, that claims superiority in every respect. That they can accurately identify and target people who are ready to purchase a certain brand of beer, as stated earlier in this chain. This, of course, is wishful thinking and the smartrst and most data driven big advertisers haven't bought the line. Had they found the efficacy to be worth it, they would have moved most of their money to digital. For some this might make sense, but the quality of digital attribution data is far overstated.
Which industry trade publication reported that Google takes a 31% cut per $1 on display ads bought on its platform?
Globalization is a truly strange thing.
Matt, it was on Adexchanger ... here is one of the Google blog posts: https://blog.google/products/admanager/display-buying-share-revenue-publishers